Chapter 3 - Investment Companies And Life Insurance Products Flashcards
What is an investment company?
Investments in and the issuance of securities - also know as packaged securities
What are face amount certificates?
Debt Securities backed by real property or debt securities
Unit Investment Trust
Holding Co. that purchases pool of securities and holds until set termination date - unmanaged fund
What is the purpose of a mutual fund?
It allows safistacated investment management that investors would no be able to achieve on their own, diversification against unsystematic risk (risk specific to a company or industry - does not face entire market). Benefit from professional management
Explain the structure of a mutual fund?
Similar to other publicly owned companies - CEO with VPs, CFO, COO, Board of Directors - set objectives and policies but do not management the portfolio. The Board choices IA, custodian, Transfer agent and establishes policy. Board is elected by shareholders. 40% of Board must be “uninterested” persons, not related. Advisors are responsible for implementing the Boards and Directors objectives. They are on an annual contract that is approved by the Board. IA must be registered under 1940 Act and earns a commission on a % of the AUM. IA identifies the day-to-day trading and the tax positions of shareholders
What is a transfer agent?
Issues new shares to shareholders in a mutual fund and cancels shares that are redeemed. Distributes income to shareholders, sends reports, conducts transactions if necessary. Custodian may also be the transfer agent
Explain underwriters role in a mutual fund offering
Sponsor mutual funds - market and sell shares to the public directly or through B/Ds. Prepare sales literature. Recover costs through sales charge. Does not hold inventory. Mutual fund company sells shares to underwriter at the net asset value (NAV). Underwriter adds the sales charge to the NAV. Mutual funds that market and sell their shares are called “no-load” funds. Mutual funds recover their sales and marketing cost through the 12b-1 fees tied to the sale of the mutual fund, which can’t exceed 0.25 bps to be named “no load”.
How mutual funds categorized?
Equity Stock Funds, Fixed-Income, Bond Funds, Money market funds
Explain equity mutual funds?
Invest in equity securities (common stock)
- ) Growth
- ) Income
- ) Growth & Income
OR aka 1.) Growth, 2.) Equity 3.) Blend
Growth Funds: Stocks of growing companies -these companies usually reinvestment in expansion, acquisition, R&D - pay low dividends, usually expensive, high PE Ratio b/c future potential earnings are high, investors look for capital appreciation, LT investment horizons, don’t look for regular income
Income Funds: Buy stocks of well established companies that pay dividends. Appropriate for investors with investment horizon for a year
Both: Growth & Income - bridges needs for future growth and current dividends mix of bond.
Value Funds: Invest in stocks are trading for less than they are worth, depressed share price, low PE ratio, high dividend yield, more conservative than growth, invest in stocks with low or no growth potential.Betting on the stock price rising
Blend: growth and value funds combo: appeal to investors looking for capital appreciation, dividends, diversification
International funds: LT capital appreciation likely, some income
Sector Mutual Funds: specific sector of economy or industry - not usually diversified - more volatility
What do fundamental analysis examine?
Historic financial statements looking for trends. Growing income? Stable Expends? Profit Margins. How is the company financed? Current Ratio and Quick Ratio show the company can meet short term obligations? (Numbers below 1 are worrisome) D/E Ratio? High D/E Ration requires capital investment but good cash flow. EPS compared to industry. Higher is better. PE comparable? Higher PE means the market thinks there are good growth, but may also be over valued. Low PE suggest their is trouble on the horizon, or under valued buy the market. Price to Book comparable? High PB market believes in it, lower than 1 may be undervalued.
Explain technical analysis valuation?
Uses historical trading information about a security to identify patterns and trends.
- ) Support - lower price of securities trading range (usually does not drop this low)
- ) Resistance - the upper price of the securities trading range (usually does not get this high)
- ) Trending - highs and lows in certain direction
- ) Reversal - Trends changes direction
Explain DCF analysis
The valuation that a company’s stock price can be calculated from projected free cash flow. Used for companies that have predictable future cash flows. DCF analysis the forecasted to their present value to yield a valuation of the business. Business valuation is divided by the number of outstanding shares to yield an a value of the stock. If dealing with debt, subtract the debt from cash to arrive at net debt then subtract net debt from the valuation to value the equity. Then divide equity by number of shares to arrive at per share value.
Explain Gordon Growth Model?
Value of Business = Annual FCF/ Discount Rate - Growth Rate
Cost of Capital = Discount Rate
