Ch. 6 Flashcards by Adam Gravitt

Define: basis

Total cost to acquire an asset

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A yield has gone from 3.44% to 3.53%. What is the amount of the increase?

9 bps

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What is the formula for calculating current yield?

Annual interest / current market price

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If interest rates are falling, bond prices are _____

Rising

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On a discount bond, which yield is the highest?

YTM is always the highest. Remember, NY, CY, then YTM (lowest to highest)

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For a buyer to be eligible for a stock’s cash dividend, the purchase must be made prior to the _____ date

Ex-dividend

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When is a due-bill required?

If a trade occurs before the ex-dividend date but the seller delivers after the record date

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What is the formula for calculating a stock’s current yield?

Annual dividend / current share price

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An investor buys 100 shares at $10 and gets a $0.50 dividend. If the shares are sold at $12, what is the total return?

25%: (12 + .5 - 10)/10

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T/F: For trades involving bonds, confirmations must disclose the yield computation used (YTM, YTC)

True

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On a premium bond, which yield is the highest?

NY: For a premium bond, highest to lowest maturity is (NY, CY, YTM) (reverse of discount bond)

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Rank in order, from highest to lowest, the (3) yields on a bond priced at a premium.

Nominal Yield (NY), Current Yield (CY), Yield-to-Maturity YTM

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At what rate are short-term capital gains taxed?

Ordinary income rate

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An investor buys 100 shares at $10. If the company declares a 10% stock dividend, what is the new basis per share?

$9.09: 1000 (100 x $10) / (100 + (100 x 10%))= $9.09

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A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond.

Since this a premium bond, YTM is less than CY, which is 10% (120 (12% x 1000) / 1,200).

Premium bond (highest to lowest): NY, CY, YTM

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For a gain to be considered long term, the asset must be held for _____

More than 1 year

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What yield would be disclosed for a bond purchased at a discount?

YTM (highest interest rate on discount bond)

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What are two synonymous terms for a bond’s interest rate?

Coupon rate and nominal yield (NY)

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If a bond has a basis of 5.68%, what is its YTM?

5.68%- basis and YTM are synonymous

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Assuming regular way settlement, if a trade occurs before the ex-dividend date, the ____ receives the dividend

Buyer

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The _____ date is the date on which a dividend is authorized by the company.

Declaration date

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Does the receipt of a stock dividend create a taxable event?

No, not until the stock is sold

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As a bond’s price falls, its current yield will _____

Rise

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A bond has a 4% coupon and inflation is 1%. What is the bond’s inflated-adjusted rate of return?

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By what date must a buyer own stock to be entitled to a dividend or stock split?

The record date

What is the formula for calculating inflation adjusted return?

Actual rate of return - inflation rate

T/F: The nominal yield includes the premium or discount on a bond purchase?

False, it includes only the annual interest payment

If using a cash settlement, what is the last possible date to purchase a security and still be entitled to the dividend

The record date

What is the current yield on a 10% coupon bond selling at 90?

100/900 = 11.1%

T/F: T-bonds are often used to represent the risk free

False, T-bills due to shorter maturity

In chronological order, list the dates that are related to a cash dividend.

Declaration, ex-dividend, record, payment

Of what information must buyers of callable bonds be made aware?

The call dates and prices

What is the current yield for a 10% coupon bond that's selling at 100?

10%= 100/1000

An investor buys 100 shares at $25, receives an $0.80 dividend and sells at $23. What is the total return?

-4.8%= ($25-$23+$0.80)/$25

What can be determined if given the following bond information? 7% bond due 6/1/20xx, yielding 8.7%

$70 interest and is a discount bond (YTM is greater than NY)

What is the current yield for a 10% coupon bond that's selling at $110.

9.09%= 100/1100

The ex-dividend date occurs ____ business days ____ to the record date

1 business day before the record date

What yield would be disclosed for a bond purchased at a premium and callable at par?

Yield to Call

What is the tax consequence for an investor who receives a stock dividend?

Cost basis must be adjusted

The ____ date is the date by which stock must be owned to receive the dividend.

Record date

Rank in order, from highest to lowest, the (3) yields on a bond priced at a discount

YTM, CY, NY

T/F: The issuing corporation determines the declaration, record and ex-dividend dates.

False; exchange rules determine the ex-dividend date based on the corporations determination of the record date

What is the maximum tax rate for long-term capital gains?

20%

What does YTM take into account that current yield does not?

Discount/premium made or lost at maturity, reinvestment risk at YTM, and time value of money

What yield would be disclosed for a bond purchased at a premium and callable at a premium?

Lower of YTM or YTC.

When discussing a bond, YTM may also be referred to as:

Basis

What is the formula for calculating a bond's current yield?

Coupon rate / current price

As a bond's price rises, its current yield will ____

Fall

What does one basis point represent as a percentage?

.01%

____ return measures how much an investment returns in relation to the risk that was assumed to attain it

Risk-adjusted

The ex-dividend date is ____ business days prior to the record date.

One

What is the current yield on a 4% coupon bond selling at 50?

8%= 40/500

T/F: when interest rates go up, bond prices go up, and when interest rates go down, bond prices go down

False

If a bond has an 8% coupon and inflation is 3%, what is the bond's inflation adjusted rate of return?

If a stock is trading at $50 and pays a $0.25 quarterly dividend, what is its current yield?

2%= (.25 x 4)/50

IF a bond is trading at $1,200 and has a 6% coupon, how much interest will it pay per year?

$60; remember coupon rate and its annual interest payments stay the same regardless bond price

What generates a capital gain or loss?

Sale of an asset greater / less than its basis

ABC sets a record date of Oct. 19. Would a buyer of ABC on Oct. 18 be entitled to the dividend?

No, investor must own (trade settles) before record date. Settling trade would take (2) days

If an asset was held for one year or less prior to its sale, any gain or loss would be ____-term

Short-term

If a stock is sold before the ex-dividend date but not delivered by the record date, what must be attached?

A due bill

Assuming regular way settlement, if a trade occurs on or after the ex-dividend date, the ____ receives the dividend

Seller