CH13-ST investing and borrowing Flashcards
An investment report should illustrate the composition of a portfolio according to: (3 things)
- Maturity distribution
- Quality ratings
- Security classes
The purchase price an INVESTOR would pay for a T-bill is based on ____?
Ask Discount
What is a Bid Discount on a T-bill?
The discount at which the DEALER will purchase the T-bill
Both Bid and Ask Quotes are based on a ### day year basis?
360 day year basis because they are given in terms of a discount
What is the key difference in the determination of a Money Market Yield (MMY) and the Bond Equivalent Yield (BEY)?
MMY is based on 360-day year, while the BEY is based on a 365-day year.
i.e. Day-Count Convention
What is holding period yield and how calculated?
HPY=return earned by investor during the period the investment is held.
HPY=(Cash Rx’d at Maturity - Amount Invested) / Amount Invested
How to convert MMY to BEY?
MMY * (365/360) = BEY
How to convert BEY to MMY?
BEY * (360/365) = MMY
What is nominal yield?
Coupon rate of a bond.
What is Yield Curve?
Plot of yields to maturity on the same investment instrument as of a specific date
What type of yield quoting convention is needed to compare investments held for different time periods?
An annualized return, like BEY or MMY
BEY is based on 365
MMY is based on 360
How to find discount rate when given:
$100,000 182-day T-bill sold for $96,982
FIRST:
Dollar Discount = Par Value - Purchase Price
SECOND:
Discount Rate = (Dollar Discount / Par Value) * (360 / Days to Maturity)
100,000 - 96,982 = 3,018 Dollar Discount
(3,018 / 100k) * (360 / 182) = 0.05969 = 5.97%
inverted yield curve means
Downward sloping
Investors prefer LT securities
Issuers prefer ST borrowing
Expect recession
Any organization’s investment reporting should illustrate the composition of a portfolio according to:
- maturity distribution
- quality ratings
- security classes
T/F: third-party custodians are often required for investors using outsourced investment management
True
Keeping securities at the institution from which they were purchased is considered somewhat more risky than using a fee-based, third-party custodian because there may be a potential for fraud
Define Active Investment Strategy
AKA Total Return Strategy: pursues enhanced returns by capturing capital gains that may arise on longer-dated maturities
pg404
Define Buy and Hold Strategy for investments
goal of capital preservation by purchasing securities that can be held to maturity, eliminating price risk.
pg404
Define Tax Based Strategy for investments
goal of minimizing income taxes on investment return
pg405
What is the most important tool an investment manager possess to protect the organization from investment risks?
Diversification
4 Diversification approaches for investments:
- Allocate by asset type or among a variety of investment management firms
- Hold a percentage of foreign instruments so the company can minimize the impact of specific currency movements
- Limit investments in issues from the same organization
- Limit investment from specific issuers and/or instruments in order to limit concentration risk
Define Price Risk
an INCREASE in interest RATES causes the bond value to decrease if SOLD PRIOR to maturity
- investor demand decreases
- a component of interest rate risk
Define Reinvestment Risk
after market interest rates drop, the proceeds from a maturing investment will be reinvested at a lower rate.
-a component of interest rate risk
exposure horizon within an investment policy is a function of
organization’s risk philosophy and the total interest rate exposure already present
Portfolio performance should be evaluated against ______
benchmarks based on permitted investment vehicles, such as:
US Treasury securities,
30-day commercial paper,
market segment indices
