Chapter 11 Flashcards
Ch 11 Investment Vehicles
For a discount bond, what is the order of yields from highest to lowest?
YTC, Yield-to-maturity, current yield, nominal yield
For a premium bond, what is the order of yields from highest to lowest?
Nominal yield, current yield, yield-to-maturity, YTC
How is a bond’s nominal yield (coupon rate) calculated?
Annual interest payment / bond’s par value
What is the typical selling method for fixed-income securities?
Sold with a markup, rather than a commission
What is an option’s intrinsic value?
The amount by which it’s in-the-money
When do call options have intrinsic value?
When the market price of the underlying stock is UP above the call’s strike price
What does it mean for a call to be out-of-the-money?
The call’s strike price is above the stock’s market price
When do put options have intrinsic value?
When the market price of the underlying stock is DOWN below the put’s strike price
What right do investors have when they buy puts?
The right to sell stock at a preset price until the expiration date
What is a currency’s price referred to as?
The spot rate
What is a swap in financial terms?
A customizable derivative used to hedge against risk
What is a credit default swap (CDS)?
A type of credit derivative providing insurance to fixed-income investors against issuer default
How does a short stock position get protected?
With a long call
How does a long stock position get protected?
By a long put
What determines the cash value of a variable life insurance policy?
The performance of the subaccounts within the separate account
What affects a variable annuitant’s payments?
The AIR and the performance of the separate account
What does an equity-indexed annuity’s return compare?
The index value on two particular dates
What is the floor of an equity-indexed annuity?
Zero (its return cannot fall below zero)
Who are universal life policies suitable for?
Investors who want to vary their premium payments
Who are whole life policies suitable for?
Conservative investors seeking guaranteed cash value
How does a real estate limited partnership treat losses and gains?
Passes through both losses and gains to its partners
What is the difference between a real estate limited partnership and an REIT regarding losses?
An REIT doesn’t pass through losses to its shareholders
What are blind pools or non-traded REITs known for?
They don’t always invest in real estate
What is the formula for calculating a fund’s net asset value (NAV)?
(Fund Assets – Fund Liabilities) / Fund Shares Outstanding
Can closed-end fund shares be sold at a premium or discount?
Yes, to their net asset value (NAV)
What do gold exchange-traded funds (ETF) provide?
Returns that are uncorrelated with other types of investments
What effect do leveraged exchange-traded funds (ETFs) have on gains and losses?
They increase the gains and losses due to the fund’s leverage factor
What are precious metals?
Gold, silver, platinum, and palladium, but NOT copper
What is the difference between soft and hard commodities?
Soft commodities are grown, hard commodities are mined/extracted
What obligations do both the buyer and seller of a futures contract have?
Both have obligations
What are structured products?
Debt instruments offering a rate of return linked to an underlying security or basket of securities
What is the conversion ratio formula?
Par Value / Conversion Price
What is the formula for NAV?
(Assets - Liabilities) / Shares Outstanding
What is the Breakeven on Long stock plus Long put?
Cost of Stock + Put premium
What is the Total Profit on a Futures trade?
(Sale Price - Purchase Price) x contract size
