Ch. 6 Flashcards
Define: basis
Total cost to acquire an asset
A yield has gone from 3.44% to 3.53%. What is the amount of the increase?
9 bps
What is the formula for calculating current yield?
Annual interest / current market price
If interest rates are falling, bond prices are _____
Rising
On a discount bond, which yield is the highest?
YTM is always the highest. Remember, NY, CY, then YTM (lowest to highest)
For a buyer to be eligible for a stock’s cash dividend, the purchase must be made prior to the _____ date
Ex-dividend
When is a due-bill required?
If a trade occurs before the ex-dividend date but the seller delivers after the record date
What is the formula for calculating a stock’s current yield?
Annual dividend / current share price
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
T/F: For trades involving bonds, confirmations must disclose the yield computation used (YTM, YTC)
True
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)
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
At what rate are short-term capital gains taxed?
Ordinary income rate
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
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
For a gain to be considered long term, the asset must be held for _____
More than 1 year
What yield would be disclosed for a bond purchased at a discount?
YTM (highest interest rate on discount bond)
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield (NY)
If a bond has a basis of 5.68%, what is its YTM?
5.68%- basis and YTM are synonymous
Assuming regular way settlement, if a trade occurs before the ex-dividend date, the ____ receives the dividend
Buyer
The _____ date is the date on which a dividend is authorized by the company.
Declaration date
Does the receipt of a stock dividend create a taxable event?
No, not until the stock is sold
As a bond’s price falls, its current yield will _____
Rise
A bond has a 4% coupon and inflation is 1%. What is the bond’s inflated-adjusted rate of return?
3%
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?
5%
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
