ChFC HS 328 Flashcards
1
Q
P/E Ratio
A
Price per Share / Earnings per Share = P/E ratio
2
Q
Vo represent’ s
A
Vo = today’s Value
3
Q
What is the formula to find d1 when your given do?
A
d1 = do (1 + g)
4
Q
What is d1?
A
next year’s dividend;
5
Q
What is do?
A
current dividend; clues i.e. the dividend just paid was….
6
Q
What is the formula to find Do when your given D1?
A
do = d1 (1 - g)
7
Q
Write Gordon’s Growth Model formula
A
Vo = d1 / (R - g)
8
Q
a type of AI (alternative investment) Examples of Collectibles?
A
coins, stamps, art, oriental rugs, they have a active market, the existence of a Demand Curve
9
Q
a type of AI (alternative investment) Examples of Non-Collectibles?
A
race horses, sport teams, unique items, jewelry (based on style not metal), Broadway shows, vineyards, the existence of a Demand Curve
10
Q
a type of AI (alternative investment) Examples of Natural Resources?
A
timber, oil and gas right’s,
11
Q
What is unique to AI for Natural Resources?
A
a depletion allowance of 15% on oil; tax advantage only applies to minerals NOT timper
12
Q
What a three types Economic Indicators?
A
Leading, Lagging and co-Incidence indicators
13
Q
What are the 4 Business Cycles?
A
Trough, Expansion, Peak, Contraction (Recession)
14
Q
How many Leading Indicators are there? examples
A
10 indicators i.e. stock market, S&P 500, Leading Credit Index, Building Permits, Avg. weekly hours manufacturing,
15
Q
Which Economic indicator gives us a current statues?
A
co-Incidence Indicator
16
Q
How many Co-Incident Indicators are their?
A
4 i.e.
17
Q
What is a problems / issue with Leading Indicators?
A
False Signals
18
Q
How many Lagging Indicators are their? examples
A
7
19
Q
Who controls Fiscal Policy?
A
Congress and the President
20
Q
What are the two forms of Fiscal Policy? (tools)
A
Government Spending and Government Income (Tax revenue)
21
Q
Who controls Monetary Policy?
A
The Federal Reserve (the Fed)
22
Q
How are members selected?
A
by appointment; they serve at the pleasure of the President
23
Q
What is one of the goals of Monetary Policy?
A
control the rate at which the money supply expands or contracts
24
Q
What tools does Monetary policy provide to the Fed? (The Fed’s Policy Tools)
A
Open-market operations (sales of securities-daily) Discount rate (decreasing signals greater willingness to grant loans by making them cheaper; done Occasionally) Reserve requirement (Increasing the required percentage reduces the amount of deposits that a given reserve base can support - extremely infrequent)
25
Reserve Requirements set by the Fed do NOT apply to __________, ________ .
credit unions, savings and loans
26
When a concern of a run on the bank would occur would the Fed increase or decrease the reserve requirement?
increase the reserve requirement
27
Where can a Bank borrow from to meet the Federal Reserve Bank?
other member banks or the Fed itself
28
What is the price a bank is charged when borrowing from the Fed as it pertains to Monetary Policy? (to meet the reserve requirement)
the discount rate
29
What is the price a bank is charged when borrowing from another member bank as it pertains to Monetary Policy? (to meet the reserve requirement)
the fed funds rate (this is usually slightly higher then the discount rate)
30
What is the Fed's intended outcome from changing the Discount Rate? Increase or Decrease
increasing the rate will reduce the banks willingness to borrow money from the fed; and vice versa
31
What is the Fed's intended outcome from changing the Reserve Requirement? Increase or Decrease
increases in the reserve requirement percentage potentially reduces a banks lending practices and vice versa
32
What is a primary goal of Fiscal and Monetary Policy?
Price Stability
33
How is Price Stability measured?
CPI (consumer price index)
34
What happens in a time of Inflation?
cost goes up
35
What happens in a time of Disinflation?
cost goes up but has slowed from where it was
36
What is the target inflation rate the Fed shoots for?
3% (typically a economy does not do well in a 1% to 2% inflation period)
37
What is Deflation? typically during economic contraction
costs goes down, (including home values etc.)
38
What is Stagflation?
it is the worst of everything, deflation during economy stagnation
39
Another Goal of Fiscal and Monetary Policy is ___ .
Full Employment (< 5% is considered full employment); or the Environmental, or Higher Living Standars
40
What is an effect from Full Employment?
the employer will need to pay higher wages (wage pressure)
41
Wage Pressure can be a indicator of what?
inflation (the fed may step in and change interest Rates)
42
Two primary goals of Fiscal and Monetary Policy are?
The two primary goals are price stability and full employment
43
What are some secondary goals for Fiscal and Monetary Policy?
Exchange Rate (balance of trade), Higher Standard of Living, Economic Growth, Environment Protection
44
What are some problems with Fiscal and Monetary Policies?
Takes time for impact to occur; subject to political intervention;
45
What are Micro Analysis Ratios used to look at a Firm?
Liquidity, Activity, Debt and Profitability
46
What is listed on the Left side of a firms Balance sheet?
Assets
47
What are considered current assets? how long?
assets that will be utilized in less than a year
48
What items are included in Current Assets?
cash (dollar for dollar), AR ( Account receivables; not dollar for dollar not everyone pays), Inventory (not dollar for dollar)
49
Run through a Income Statement ledger? the pecking order of flows
Net Sales - cost of Goods Sold = Gross Profit (income) - cash - depreciation expenses = EBIT (earnings before interest and taxes) - Interest Payments = Taxable Income - Taxes = Net Profit (or Income)
50
What two documents will you use to start your Ratio Analysis?
Income Statement and the Balance Sheet
51
What is the Current Liquidity Ratio formula?
Current Liquidity = current assets / current liabilities
52
Is a large Liquidity Ratio good or Bad?
Good (less than 1 is very bad)
53
What is the Quick Ratio (ACID Test) Formula?
Quick Ratio = (current assets - inventory) / current liabilities (think about the banana farmer)
54
What could a high Current Liquidity Ratio and a low Quick Ratio?
to much inventory
55
What do Activity Ratios examine?
examines the quality or effectiveness of a particular assets
56
How many Activity Ratios are used?
4 (Inventory Turnover Ratio, Average Collection Period Ratio , Total Asset Turnover Ratio , Fixed Asset Turnover Ratio
57
What is the Inventory Turnover Ratio formula?
Inventory Turnover Ratio = cost of goods sold / average yearly inventory
58
What is the Average Collection Period Ratio formula?
Average Collection Period Ratio = net accounts receivables / daily sales
59
What is the Total Asset Turnover Ratio formula?
Total Asset Turnover Ratio = net Sales / total assets (the larger the number the better)
60
What is the Fixed Asset Turnover Ratio formula?
Fixed Asset Turnover Ratio = net sales / net fixed assets
61
What do Debt Ratios measure?
measure the impact of debt on a business and its profitability
62
How many Debt Ratios are their?
2
63
What is the Debt - Asset Ratio formula?
Debt - Assets Ratio = total debt / total assets
64
What is the Equity Multiplier Ratio formula?
Equity Multiplier Ratio = total assets / total equity
65
How many Profitability Ratios are there?
2 basis types
66
What is the Return on Equity Ratio (ROE) formula?
Return on Equity Ratio = net income / equity
67
What is the DuPont System?
ROE - ROA (Equity Multiplier)
68
What is the Return on Assets Ratio (ROA) formula?
Return on Assets Ratio = net income / total assets
69
What is an example of a Savings Bond?
Series EE (pure discount instrument) or Series I (Inflation adjusted yield)
70
What a the Debt Instrument is covered on the exam?
CD's traditional NOT brokerage CD's
71
Characteristic of Money Market Debt Securities?
highly liquid, yields move together, available in large denominations
72
How long are T-Bills for? (Treasury Bills)
less than one year
73
How long is a T-Note? (Treasury Note)
> than one year < ten years
74
Characteristic of Commercial Paper?
max maturity is 9 mts. (270 days) issued by large corporations
75
Characteristic of Negotiable CD's?
minimum of > 1MM; mature < 1 Year; trading ceases when within 14 days of maturity; FDIC covered on first $250K;
76
Characteristic of Banker's Acceptance?
two name paper (liability of both parties) this obligation becomes a banker's acceptance once it is accepted (guaranteed) by the bank pg 8.10
77
Characteristic of Eurodollar Deposits?
are Dollar-denominated liabilities of banks usually located outside of the US pg 8.10
78
What does BAN's stand for?
Bond Anticipation Notes (to start a project ie construction)
79
What does RAN's stand for?
Revenue Anticipation Notes (i.e. stadium ticket sales)
80
What does TAN's stand for?
Tax Anticipation Notes (school districts)
81
What is the Prime Rate?
used to price loans pg 8.12
82
What is the Federal Fund Rate?
used to borrow from member banks to meet reserve requirements
83
What is the Discount Rate?
the rate the Fed charges member banks
84
What is LIBOR used for (London InterBank Offered Rate)?
used to price loans
85
What are two types of Intermediated and Long-Term Debt Instrument?
T-Notes issued with maturities from 1 to 10 years and T-Bonds issued with maturities greater than 10 years
86
How are Treasury Notes and Bond Quoted?
32nds (any thing after : is divided by 32) i.e. 110:02 is 2/32 = 0.0625 added to 110 = 110.0625
87
What are the two types of Municipal Bonds?
Revenue Bonds and General Obligation Bonds (General Obligation Bonds are the safer of the two)
88
What kinds of Bonds have Collateral?
```
Mortgage Bonds (equipment or real estate i.e. plants)
Equipment Trust Certificates (rolling stock as collateral i.e. trains, plans, automobiles, buses)
Collateral Trust Bonds (Securities as collateral i.e. stocks)
```
89
```
Mortgage Bonds (plants, equipment or real estate)
Equipment Trust Certificates (rolling stock as collateral i.e. trains, plans, automobiles, buses)
Collateral Trust Bonds (Securities as collateral i.e. stock) are all examples of......
```
these are all types of Collateral Bonds
90
What is the best account type to hold a Zero - Coupon Bond?
qualified accounts i.e. IRAs
91
What can Convertible Bonds convert to?
into shares of stock
92
Why are Income Bonds scary?
issued by companies in bankruptcy, may never pay
93
What are Callable Bonds?
have a callable date that the issuer can call the bond back to re-finance their debt
94
How are Serial Bonds (only issued by Municipals) paid?
they are paid sequentially
95
What are Sinking Fund provision on a bond?
the company is setting profits as side to make sure funds are available at the time the Bonds Mature
96
What is an investment grade bond rating?
any rating above BBB i.e. AAA
97
What is another name for a Junk Bond?
High Yield Bond
98
What are the two most common Corporate Bankruptcy fillings?
Chapter XI (11) (reorganization) and Chapter VII (7) (liquidation)
99
What is the term Securitization mean?
involves taking assets that were not easily traded in a secondary market (poor marketability) and structuring a marketable security or group of securities from them.
100
How are Mortgage Backed Securities sold?
they are sole in Tranches
101
What is par value at maturity of a Bond?
$1,000
102
How to calculate a Coupon Rate on a Bond?
Annual Interest payment / by Par Value
103
```
Sample Problem: What is the Price of the Bond today if held to maturity? What is PV of the bond?
Term to Maturity: 6 years
Coupon Rate: 2.5% annual
Par: $1,000
Discount Rate: 4%
```
keystrokes: Shift , C ALL;
6 N , 4 I/YR, 25 PMT, 1000 FV, PV
Display -921.37
Note: coupon rate gives you the payment amount for the year; and PAR is your FV if held to maturity
104
```
Sample Problem: What is the Price of the Bond today if
held to maturity?
Term to Maturity: 29 years
Coupon Rate: 6% annual
Par: $1,000
Discount Rate: 5%
```
keystrokes: Shift , C ALL;
29 N , 5 I/YR, 60 PMT, 1000 FV, PV
Display -1,151.410
Note: coupon rate gives you the payment amount for the year; and PAR is your FV if held to maturity
105
If the Coupon Rate of a Bond is Greater than the Discount Rate the Bond would be priced at a _____ of Par?
a premium of Par i.e. $1,010.00
106
```
Sample Problem: What is the Price of the Bond today if
held to maturity?
Term to Maturity: 29 years
Coupon Rate: 6% semi-annual
Par: $1,000
Discount Rate: 5%
```
keystrokes: Shift , C ALL;
58 N , 2.5 I/YR, 30 PMT, 1000 FV, PV
Display -1,152.24
Note: coupon rate gives you the payment amount for the year so you need to divided it by 2 to get the semi-annual payment amount; then you will also need to take HALF of the Discount Rate also and double the number of periods; and PAR is your FV if held to maturity;
107
```
Sample Problem: What is the Price of the Bond today if
held to maturity?
Term to Maturity: 25 years
Coupon Rate: $40 annually
Par: $1,000
Discount Rate: 5%
```
keystrokes: Shift , C ALL;
25 N , 5 I/YR, 40 PMT, 1000 FV, PV
Display -859.06
Note: coupon rate gives you the payment amount for the year; and PAR is your FV if held to maturity
108
```
Sample Problem: What is the YTM for a Bond if....? What is the I/YR?
Term to Maturity: 6 years
Coupon Rate: $40 annually
Par: $1,000
Current Price: $950
```
keystrokes: Shift , C ALL;
6 N , 40 PMT, 950 +/-PV, 1000 FV, I/YR
Display 4.98 (4.98%)
Note: the money going into the bond is coming out of your wallet and should be a negative number, the future value is coming back into your wallet will be a positive
109
Sample Problem: What is the YTM for a Bond if....? What is the I/YR?
Term to Maturity: 6 years
Coupon Rate: $40 per year, Paid Semi-annually
Par: $1,000
Current Price: $950
Callable: in 3yrs at $1,040
keystrokes: Shift , C ALL;
12 N , 20 PMT, 950+/-PV, 1000 FV, I/YR times 2
Display -4.97 (4.97%)
Note: coupon rate gives you the payment amount for the year so you need to divided it by 2 to get the semi-annual payment amount; then you will also need to take HALF of the Discount Rate also and double the number of periods; and PAR is your FV if held to maturity;
110
Sample Problem: What is the YTM for a Bond if....? What is the I/YR?
Term to Maturity: 6 years
Coupon Rate: $40 per year, Paid Semi-annually
Par: $1,000
Current Price: $950
Callable: in 3yrs at $1,040
keystrokes: Shift , C ALL;
12 N , 20 PMT, 950+/-PV, 1000 FV, I/YR times 2
Display -4.97 (4.97%)
Note: coupon rate gives you the payment amount for the year so you need to divided it by 2 to get the semi-annual payment amount; then you will also need to take HALF of the Discount Rate also and double the number of periods; then double the I/YR
111
```
Sample Problem: What is the YTM for a Bond if....?
Term to Maturity: 20 years
Coupon Rate: $60 per year, annually
Par: $1,000
Current Price: $1,050
```
keystrokes: Shift , C ALL;
20 N , 60 PMT, 1050 +/-PV, 1000 FV, I/YR
Display 5.58 (5.58%)
Note: the money going into the bond is coming out of your wallet and should be a negative number, the future value is coming back into your wallet will be a positive
112
```
Sample Problem: What is the YTC for a Bond if....?
Term to Maturity: 6 years
Coupon Rate: $40 per year, annually
Par: $1,000
Current Price: $950
Callable: in 3yrs @$1,040
```
keystrokes: Shift , C ALL;
3 N , 40 PMT, 950 +/-PV, 1040 FV, I/YR
Display 7.152 (7.15%)
Note: the money going into the bond is coming out of your wallet and should be a negative number, the future value is coming back into your wallet will be a positive
113
A longer maturity bond has what effect on the bonds volatility?
Longer Maturity = more volatile bond
114
What effect does a low coupon have on the volatility of a bond?
Lower Coupon Rate = more volatile bond
115
What effect does the yield to maturity have on the volatility of a bond?
Lower YTM = more volatile bond
116
Where do Options trade?
OCC Options Clearing Corp.
117
What is the basic terminology for a Future Contract spot market?
Spot Market: market for immediate delivery of some commodity, such as wheat or Government Bonds or Corn
118
What kind of contract style are future contracts?
standardized contracts
119
What is the name of the exchange for Futures? or Commodity Exchanges?
Chicago Board of Exchange CBOE
120
True or False: Fundamental analysis rests on the premise that a security has an intrinsic value that is based on the firm's financial situation and prospects.
True
121
True or False: The fact that business cycles have approximately the same duration each time helps in the forecasting of the overall economy.
False: There is no stability in the timing of the business cycle.
122
True or False: Stock prices are an example of a leading economic indicator.
True
123
True or False: The unemployment rate refers to the percentage of the labor force that is out of work and actively seeking employment.
True: typically full employment is an unemployment rate under 5%
124
True or False: Increases in either government spending or tax collection should stimulate the economy.
False: Although increases in government spending are believed to stimulate the economy (spur growth), tax increases have a restraining effect on the level of economic activity.
125
True or False: The only goals of monetary and fiscal policy are full employment and price stability.
False: There are multiple secondary goals that are considered when setting monetary and fiscal policy.
126
True or False: An increase in the discount rate signals a restrictive monetary policy.
True
127
True or False: If the open-market operations are resulting in a net purchase of securities, the Fed has an expansionary monetary policy.
False
128
True or False: The percentage numbers used to compute required reserves at banks range from 0 percent on the initial balances up to 10 percent on the uppermost balances.
True
129
True or False: Monetary policy is set by the Treasury Department.
False. The Federal Reserve Board controls monetary policy.
130
True or False: A goal of full employment means an acceptable level of unemployment.
True
131
True or False: Reductions in the reserve requirement would enable banks to increase their loans.
True
132
True or False: Changes in the Federal Reserve Board's discount rate are used to signal changes in monetary policy.
True
133
True or False: The federal funds rate is the rate charged by the Fed when it lends reserves to banks.
False. The federal funds rate is the rate that banks charge each other for the overnight use (loan) of funds. The rate the Fed charges is called the discount rate.
134
True or False: Fiscal policy attempts to influence the level of economic activity by changing reserve requirements and the use of open-market operations.
False. The tools of fiscal policy are changes in tax rates and the level of government spending. Reserve requirements and open-market operations are the tools of monetary policy.
135
True or False: The primary economic goals of monetary policy conflict with the primary goals of fiscal policy.
False. The primary goals of both monetary policy and fiscal policy are the same—full employment and price stability.
136
True or False: The Fed prefers to exercise its influence through open-market operations rather than in changes in the reserve requirements.
True
137
True or False: The actual goal of price stability implies that individual prices remain the same throughout the year.
False. Price stability is the absence of either a rising or falling trend in overall prices. It is desirable to have the price level (average) remain stable, while individual prices fluctuate to reflect changing supply and demand conditions for individual goods and services.
138
True or False: An increase in required reserves signals a restrictive monetary policy.
True
139
True or False: The retained earnings account represents a safety stock of cash for a firm.
True
140
True or False: The basic balance sheet equation is as follows: Assets + liabilities = net worth.
False. The basic balance sheet equation is as follows: Assets = liabilities + net worth.
141
True or False: The quick ratio is used to assess the capital structure of the firm's balance sheet.
False. The quick ratio of cash plus accounts receivable divided by current liabilities is used to assess the firm's liquidity.
142
True or False: An increase in the debt ratio is most commonly associated with a reduction in the return on equity.
False. Consider the Du Pont formula (ROE = ROA x equity multiplier). Now, let’s assume the firm increases its debt ratio by selling bonds and using the proceeds to buy back it common stock. This will result in an increase in the equity multiplier, because the denominator is smaller, and a reduction in the ROA, as the payment of more interest expenses reduces the net income. In most cases, the effect of the increase in the multiplier far outweighs the reduction in the ROA. This means that an increase in the debt ratio is usually associated with an increase in the ROE. The firm’s financial risk is increased, however.
143
True or False: The best ways to analyze a ratio is to look at its trend over time or to compare it to an industry average.
True
144
True or False: The more volatile a company's earnings, the less concern one should have about a high debt ratio.
False: Volatile earnings means there may be periods when a company cannot cover its interest or principal payments.
145
Options: What is the impact (effect) of time i.e. for a option contract? the longer the time to maturity the ___ valuable
Time to Maturity: (speculative value) the more time the more valuable the contract which will be reflected in the premium
146
Options: 5 Variables in Black-Scholes Model are.........
Time to Maturity; Interest Rates; Price of Underlying Stock; Variability; Exercise Price;
147
Options: How long are most option contracts?
9 months
148
Options: How long are LEAPS?
options with up to 5 years to expiration for Indexed Option contacts or 3 years for Option Contracts with underlying stock
149
Options: When you exercise an Index Options you will receive what ______ instead of shares?
CASH
150
Conversion Bonds: What is the formula for the Conversion Value of a convertible bond?
Conversion Value = Conversion Ratio x Price per share of Common Stock
151
Conversion Bonds: What is the formula for the Conversion Premium of a convertible bond?
Conversion Premium = Market Price of the Bond - Conversion Value
152
Futures: What is a Scalper in the Future Traders?
more frequent then a day trader i.e. own it for minutes
153
Futures: What is a Hedgers in the Future Traders?
these are people that need to lock in a price or availability of the product; think about the farmer he lock in the price of his crop,
154
Futures: What is a Position Traders in the Future Traders?
these investor will hold the position for a number of days
155
Futures: What is a Arbitrageurs in the Future Traders?
these investors are looking at differences between the exchanges to make a profit (price anomalies)
156
Futures: What is a Speculator in the Future Traders?
investors are just trying to turn a profit may hold for seconds maybe minutes at most
157
REITS: REITs assemble and manage portfolios of real estate and real estate loans.
By law, at least ____ percent of REIT assets must be invested in real estate, and no less than
75 percent of income must be derived from real estate
75
158
REITS: In addition, to be recognized as
a conduit and thus avoid taxation, REITs must pay out at least ______ percent of their income
annually.
90
159
REITS: Based on investment objectives, REITs fall into one of three general categories:
* Equity REITs invest in properties that produce income or have growth potential, i.e. office buildings, apartments, shopping malls, and hotels
* Mortgage REITs are in the business of making both construction loans and mortgage loans.
* Hybrid REITs are a combination of equity and mortgage REITs.
160
REITS: _________ REITs are the most popular type with investors who want to participate in the
growth of real estate values
Equity
161
What does ROA stand for?
Rate on Assets
162
What does ROE stand for?
Rate on Equity
163
What doe NPM stand for?
Net Profit Margin
164
What do the ROA and ROE measure?
a firms operational efficiency which translates into a company's profitability
165
What are 2 primary reason to trade Future contracts?
Hedging and Speculation
166
What is an example of a spot market we us everyday?
| you pay and received the commodity on the spot
Gas at the gas station, food at the grocery store
167
In some cases both parties in a futures contract may agree to a later delivery and later payment of the item such a transaction is referred to as a ___________ _________.
Forward Contract (think of the example of ordering a new car...future payment future
168
How many Futures exchanges are their currently in the US?
10 exchanges
169
How is the dominant organization in the trade trading of futures contracts?
the CME group that own the Chicago Mercantile Exchange
170
Types of Professional Future Market Traders are? 5 types
Hedgers; Scalpers; Day Trades; Position Trades; Arbitrageurs
171
The CML Capital Market Line cannot evaluate the Performance of a _______ stock.
Single
172
Nor can we use the CML to evaluate the performance of a portfolio that lacks _____ diversification.
Full
173
A ________________ is a group of
investment bankers who share the risk and return of a public offering. The number of
members in the ____________ is related to the size of the new offering.
syndicate
174
At some point in the
process of a public offering, the investment banker or syndicate will publish an ad about
the offering, known as a ____________ . This ad gives details about the issue and lists the
underwriters involved in the deal in the order of their importance. Sometimes the ______________is published after the issue has been sold.
tombstone
175
To initiate a public offering, the issuing firm and its investment banker compose a registration
statement. This is SEC for review. During the review period, the investment banker may distribute this registration
statement in an effort to drum up initial interest in the offering. Because the front
page of the statement contains a paragraph in red ink indicating that the company is not
attempting to sell its shares before the SEC approves the registration, the statement is
known as a _____ ________. ________ ___________are sometimes revised several times before the issue
is ready for sale to the public.
red herring
176
Most offerings are done on a basis ____ ________, which means that the investment
banker buys the offering from the firm and resells it to the investors.
firm-commitment
177
Sometimes the underwriting is taken on a _____ ______basis,
| in which case the investment banker acts as an agent for the issuing firm
best-effort
178
Once an issue has been sold in the primary market, all subsequent trades are between
investors and define what is called the _______ __________. It is the _______ _________that
most people think about when the stock market is mentioned.
secondary market
179
The term ______ / ______ describes an individual or a company that is licensed to buy
investment products for or sell them to clients. A _____ acting only as a ______ buys and sells securities on behalf of investors. ________ implement their customers' trading instructions and act as the customer's agent. A _______, in contrast, trades for his
or her own accounts and makes markets by advertising a willingness to buy and sell
broker/dealer; broker; broker; brokers; dealer
180
To be in the securities business, an individual must be affiliated with a broker/dealer as a _______ ______ .
registered representative
181
Investment bankers generally agree to sell a new issue on a best-effort basis? True or False
False. New issues are more often done as firm commitments.
182
The most basic function that brokers and their firms perform is to link investors to the securities markets.
True or False
True
183
A syndicate of investment bankers is a nefarious organization. True or False
False. Syndicates are assembled to facilitate the sale of large offerings in the primary market.
184
A specialist is charged by an exchange to make a market in a security. True or False
True
185
Churning is the practice of reducing commissions for special customers. True or False
False. Churning is the practice of placing trades for the primary purpose of generating commission income for the broker.
186
Money market instruments are traded in the OTC market. True or False
True pg 1.9 The OTC market remains the primary market for bond trading. Commercial paper, large
CDs, municipal bonds, and other money market instruments trade in similar OTC markets.
187
The three major costs of executing a trade are commissions, bid-ask spread, and price impact. True or False
True
188
Specialists maintain an inventory of their assigned stocks and buy for and sell from that inventory.
True or False
True
189
A specialist is charged with managing the auction activity in a security. True or False
True
190
The third market involves arrangements for direct trading between institutions. True or False
False. The third market involves OTC trading of listed stocks. Arrangements for direct trading between institutions are referred to as the fourth market.
191
A stock could trade simultaneously on the NYSE, a regional exchange, and in the OTC market. True or False
True
192
Alternative trading systems (ATSs) control the third market. True or False
False. Alternative trading systems (ATSs) are the organizations that operate the fourth market, not the third. The fourth market is an informal arrangement for direct trading between institutions. The fourth market provides its institutional participants with an
even less costly way of trading.
193
Security market commission rates are fixed by agreement among the brokerage firms. True or False
False. Since May 1975, each brokerage firm has set its own commission rate schedule.
194
Bid-ask spreads tend to be a larger percentage of the price for higher-priced and more actively traded stocks.
True or False
False. Spreads tend to be a smaller percentage of the price for higher-priced and for more actively traded stocks.
195
A limit order ensures a transaction will occur because it requires an immediate execution at the best available price. True or False
False. A limit-order transaction must await an acceptable price because this type of order is executable only at the limit price or better. Some limit orders are never executed. A market order requires immediate execution.
196
A stop-limit order activates a limit order when the market reaches the stop level. True or False
True
197
The total commission on a trade that takes several days to be executed would be less than that on the same number of trades involving the same number of shares that take place during only one trading day. True or
False
False. The total commission on such a stretched-out trade would appreciably exceed that on the same number of trades for the same number of shares on a single day, as the former would all be treated as separate trades and the latter would be treated as one trade.
198
An all-or-nothing order must be either executed immediately or canceled. True or False
False. An all-or-nothing order can be executed only when sufficient volume is available because the order must trade as a unit. However, the order does not have to be executed immediately; it can wait until sufficient volume exists for a single transaction. The type of order that must be either executed immediately or canceled is a fill-or-kill order.
199
Most trading is done with stop-loss or stop-limit orders.
| True or False
False. The vast majority of trading is done with market and limit orders.
200
A limit order might not result in a trade and therefore might not generate a commission for the broker.
True or False
True
201
Investors who sell short can invest the proceeds of the sale as they see fit. True or False
False. The proceeds from a short sale are left with the brokerage firm as collateral, along with additional collateral. This gain may be reduced somewhat as the short seller must pay any dividends that accrue on the borrowed stock. Moreover, the short sale proceeds and an additional percentage (margin) of the sale price must be left in a non-interest-bearing
account at the brokerage house.
202
A popular strategy for people who want to place large buy orders at bargain prices is to first place a series of short sale orders to drive a stock's price down and then to place the buy orders. True or False
False
203
Margined securities must be left on deposit with the shareholder's brokerage house. True or False
True
204
The SIPC protects brokerage customers against losses due to market fluctuations. True or False
False. The SIPC protects brokerage customers against losses of securities, not losses on securities.
205
SIPC coverage is based on account title. True or False
True
206
SIPC coverage applies only to U.S. citizens. True or False
False. It applies to anyone holding an account at a covered brokerage firm, regardless of nationality or where they live.
207
The cash account is a Type 1 account and the margin account is a Type 2 account. True or False
True
208
It is the clearing firm that holds the customer's securities. True or False
True
209
SIPC insurance coverage does not apply to cash left on deposit in a brokerage account for the primary purpose of earning interest income. True or False
True
210
A portfolio turnover ratio has as the numerator the smaller of purchases or sales during a period. True or
False
True
211
The introducing firm employs the individual broker, who takes the customer's order and
sees that the order is executed. The __________ firm holds the customer's cash and securities
and sends out statements describing the assets it holds "on deposit" for the customer
clearing firm
212
SIPC coverage also includes protection against unauthorized trading in a customer's
account. This coverage can include unauthorized trading by persons associated with the
introducing firm and may be available even if the clearing firm is still solvent. True or False
True
213
True or False SIPC does not protect commodity futures contracts (unless held in a special portfolio margining account), or foreign exchange trades, or investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.
True
214
When computing the price of a bond that pays interest semiannually, one uses the semiannual coupon payment, one-half the discount rate, and double the number of time periods. True or False
True
215
For all discount bonds, the coupon rate will be greater than the current yield. True or False
True
216
When computing the realized compound yield to maturity (RCYTM), if the reinvestment rate equals the yield to maturity, the RCYTM will also equal the yield to maturity. True or False
True or it could be more????
217
Most money market Securities have relatively High minimum denominations of a hundred thousand or more true or false
True
218
T-bills are sold initially at or near par value and pay semiannual coupon true or false
False t-bills are pure discount instruments. t-notes and T bonds are sold at par and pay interest on a semi-annual basis
219
once a banker's acceptance is created it trades like other money market securities. True or False
TRUE
220
The FED funds rate is the interest rate that Banks charge other member banks for what are typically overnight loans true or false.
True. This can be loans to meet the FED Reserve requirement
221
the FED sets the prime rate true or false
False each bank has a committee that sets its own prime rate
222
US Treasury bonds are issued with maturities from 1 to 10 years true or false
False notes not Bonds have maturities of one to 10 years bonds have initial maturities of greater than 10 years
223
A repurchase agreement typically involves the sale of government bonds with an agreement as to when and at what price they will be repurchased. true or false
True
224
Euro dollar deposits are Euro denomination deposits at US Banks true or false
Faults eurodollar deposits are dollar-denominated deposits at Banks outside the United States
225
Series EE bonds are pure discount instruments issued by the treasury true or false
True
226
Chapter 11 bankruptcy filing is always less serious than chapter 7 filing true or false
True
227
Bonds assigned one of the top four rating categories from a bond rating agency are referred to as investment-grade bonds true or false
True
228
Death put allows the executor of an estate to redeem these bonds at par value upon the death of the owner. True or false
True
229
Closed-end mortgage bonds are less risky than opening mortgage bonds true or false
True
230
If the holding period return relative (HPRR) is less than 1 what do you know about the holding period return (HPR)?
That the holding period return (HPR) had a negative return and the investor lost money because remember you add one to the holding. Return to receive the holding period return relative so if that number is less than 1 you began with a negative number for your return
231
Describe the 4 step process when computing the Geometric Mena Return?
1) convert PPRs to PPRRs (add one)
2) multiply PPRRs together (for the HPRR)
3) compute the T-Root (Yx on calculator)
4) subtract 1
232
When all PPRs are identical the GMR and the AMR will be equal. true or false
True i e 5% return the first year 5% return the second year 5% return the third year
233
If the PPR's are not identical then the GMR will always be ______ than the AMR
Less
234
If your returns are unequal then the AMR will be higher than the GMR. True or False
True
235
Is Inflation Risk part of Systematic Risk? True Or False
True (yes think of your purchasing power)
236
If you use the GMR formula to calculate Annual Rate of Return what step do you skip in the calculation?
Step 3 (you do not compute the T-Root)
237
Can you diversity to remove market Risk? True or False
False Market Risk is also known as systematic risk, you cannot diversity it away
238
a margin call is issued whenever the market value of an account is less than the loan balance divided by one minus the maintenance margin rate? true or false
```
True
Loan = {MV x (1 - MMR)} example
40,000 = {50,000 x (1-.25)}
40,000 = {50,000 x 0.75}
margin call
```
239
Qualified dividends are taxed typically at what percentage rate
15%
240
Qualified dividends are taxed at what percentage rate
Marginal tax rate typically 15%
241
how are ordinary dividends taxed as
ordinary income + possible 3.8% Medicare tax
242
A capital distribution is itself tax-free but may have other tax consequences true or false
true
243
If you're asked to calculate the cumulative rate of return use the holding period return formula. true or false
True
244
why would you go short a stock index future contract?
To hedge an existing stock portfolio, if you anticipate a General market decline and you want to profit from the decline,
245
What is the reason you would go long a stock index future contract?
To take a position for monies you will recieve later. Are you just antipate the stock market is going to have a large jump up and you want to take advantage of that growth
246
Is the Dow Jones Industrial Average a price-weighted index or evaluated one?
It is a price-weighted index
247
Will price-weighted indices show substantial decline when a stock split occurs in one of the index?
No because price-weighted indexes make an adjustment such as altering the denominator to accommodate for stock splits.
248
The Trynore ratio is also called the reward to volatility ratio true or false
True
249
the Sharpe ratio is also known as the
Reward to variability ratio
250
Which ratio is the most complex of the risk- adjustment processe to compute and explain?
The information ratio is the most complex
251
The efficient market hypothesis is a statement of fact true or false
False it is a hypothesis, it is a Theory. You can only seek exceptions
252
The weak form of the effective Market hypothesis states that the history of prices is of no value in assessing future changes in stock prices true or false
True. What the weak form is about
253
true or false
| the semi-strong form of the efficient market hypothesis refutes technical analysis but support fundamental analysis
false because if you believe the semi strong form you are rejecting technical analysis and your rejecting fundamental analysis
254
Semi-strong form states current stock prices fully reflect all public information, future returns are unrelated to any analysis based on Public Information. Therefore would they believe fundamental analysis would provide a superior return true or false
No, they would not believe fundamental analysis of a company would provide Superior results as they believe all public information is already built into a stocks price
255
The strong form believes insider-trading does not result in Superior returns because the current stock price fully reflects all information, both public and non public information including Insider information true or false
True
256
Filter rules attempt to capture the momentum factor that technical analyst claim are important.
Is the most efficient filter rules between 5% to 10% range?
No the optimal filter is less than 1% unfortunatley the commission cost would quickly eliminate the benefit.
257
Tests of serial correlation coefficients have provided mixed results true or false
true the earliest test said serial correlations were essentially zero later test as suggested they may in fact be positive
258
Tests you can run on the weak form of the efficient market hypothesis include serial correlation, runs, and filter rules. true or false?
True
259
What does a Serial correlation coefficient compare?
It compares returns for each day to returns from the previous day as related to stock price movemetns i.e. stock trends, movement in the same direction on consecutive days
260
Momentum is the tendency of a stock price to continue to rise or fall true or false?
True
261
technical analysis: what are the three troubling features of technical analysis?
First: Several interpretations of a particular technical tool or chart are possible creating different assessments and recommendations
Second: if a technical tool becomes truly successful and made public once adopted by market participants it will often prove to be self-defeating.
Third: technical analysis implies a form of predestination meaning that would happens between now and tomorrow is in material
262
Volume changes are moderately accurate predictor of future price changes in market, True or False
False, there are no known test that show a relationship between the volume a stock trades in and the subsequent price change
263
What are the three forms of the efficient market hypothesis?
Weak, semi - strong, and strong
264
True or false the week form says that trading data such as pass prices cannot be used to beat the market
True
265
Explain why the semi-strong form says publicly available information cannot be used to beat the market
Because it states that the market price includes all publicly available information as of the last trade price
266
The strong form says Insider information cannot be used to beat the market
True because the market according to that the rate would already have that information built into the price
267
Serial correlation and run tests examine the relationship between _______________ on consecutive days evidence is mixed as to their significance
price changes
268
An anomaly is a strategy that allows an investor to consistently __________ the market on a risk-adjusted basis.
outperform
269
What are some of the anomalies that have been tested against the semi - strong and strong efficient market hypothesis?
Tests include "the small firm effect", dogs of the Dow, January indicators, day of the week effect, additions and deletions to the S&P 500 and evidence of insider trading.
270
Evidence of insider trading test indicates that CEOs and directors appear to have a better predictor of subsequent performance than those of Vice Presidents or beneficial owners true or false
True
271
The Barons confidence index is a___________ investor sentiment indicator
Sophisticated
272
The Barron's confidence index looks at Bond investors. True or false
True
273
Flow of funds indicators attempt to provide some indication of where ________ is going or where it might be go.
CASH
274
What are two types of technical Market indicators?
MARKET INDICATORS are Odd-lot activity and Barron's Confidence Index (remeber looks at the bond market)
275
What is the most common time period for moving averages?
200 day
276
Breadth of market indicators attempt to look at how the __________ market is doing relative to the common market indices.
Entire
277
the best-known pattern in a bar chart is the?
Head and Shoulders pattern
278
Typical point and figure charts show XXXs and OOOs. What do XXXs represent? What do OOOs represent?
XXXs represent increase in price and OOOs indicate a decrease.
279
What do point in figure charts ignore completely?
Time
280
What type of Head and Shoulder Pattern is it bearish indicator and what type is a bullish indicator?
Normal head and shoulder pattern is bearish, an inverted head and soulder pattern is bullish
281
A proxy can only be voted in favor of existing management? True or False
False
282
A large positive value for the covariance means the two Securities move in the same direction or in tandem correct?
Correct
283
A low covariance number, near zero mean that there is no relation to the movement of two securities true or false?
True
284
A large negative covariance value means the Securities move opposite of each other true or false?
True
285
Remember correlation coefficients identify linear relationships between two prices not the existence of any relationship. true or false
true
