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FINA 411: Portfolio Management > class 1: intro > Flashcards

class 1: intro Flashcards

1
Q

do pension funds pay taxes?

A

nah bruv

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2
Q

do pension funds have a finite life?

A

nah bruv

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3
Q

investment process

A
  1. understand the client
  2. asset allocation
  3. security selection
  4. Portfolio execution
  5. perfomance evaluation
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4
Q

asset class

A

a group of assets that:

have similar features

have similar behavior

are subject to same laws and regulations

are investable (easily buy them and easily sell them)

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5
Q

asset classes

A

money market

fixed income

equites

alternatives

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6
Q

money markets

A

any marketable instrument that has a maturity of less than a year

not to seek profits usually

to park money

for safekeeping

just to play it safe

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7
Q

money market instruments

A

treasury bills

CDs

commercial paper

bankers acceptances

repos and reverses

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8
Q

fixed income class (bonds) instruments

A

bonds

debentures

mortgages

other

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9
Q

difference between bonds and debentures

A

debentures have no claim to assets in case of bankruptcy

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10
Q

fixed income (definition)

A

should be the core of our portfolio

cash flow

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11
Q

equities

A

where we make additional money

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12
Q

equities sectors

A

financials

energy

industrials

technology

consumer staples

consumer discretionary

health

utilities

(2 extra)

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13
Q

alternative investments

A

real estate

private equity

commodities

hedge funds

infrastructure

etc

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14
Q

why invest in alternatives?

A

to make super super profits

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15
Q

Capital markets

A

include longer-term and riskier securities

much more diverse than those found within the money market

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16
Q

the two so-called derivative markets

A

options and futures

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17
Q

Treasury bills (T-bills)

A

the most marketable of all Canadian money market instruments

represent the simplest form of borrowing: the government raises money by selling bills to the public

Investors buy the bills at a discount from the stated maturity value

–> At the bill’s maturity, the holder receives from the government a payment equal to its face value

can only be bought through competitive auction

highly liquid

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18
Q

because T bills can only be bought through competitive auction, what are dinger buyers face

A

they may bid too high and overpay for the bills

they may bid too low and be shut out of the auction

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19
Q

who is the primary purchaser of t bills

A

chartered banks

investment dealers

the Bank of Canada (as part of its monetary policy)

individuals who obtain them on the secondary market from a government securities dealer

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20
Q

A certificate of deposit (CD)

A

a time deposit with a chartered bank

may not be withdrawn on demand

The bank pays interest and principal to the depositor only at the end of the fixed term of the deposit

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21
Q

a similar time deposit to CDs but for smaller amounts

A

guaranteed investment certificate (GIC)

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22
Q

bearer deposit notes (BDNs)

A

time deposit sold to another investor if the owner needs to cash in the deposit before its maturity date

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23
Q

commercial paper

A

short-term unsecured debt notes

issues by large, well-known companies

Very often backed by a bank line of credit, which gives the borrower access to cash that can be used (if needed) to pay off the paper at maturity

maturities range up to one year

considered to be a fairly safe asset

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24
Q

why are commercial papers considered to be a fairly safe asset?

A

because a firm’s condition presumably can be monitored and predicted over a term as short as one month

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25
Q

A bankers’ acceptance

A

starts as an order to a bank by a bank’s customer to pay a sum of money at a future date

–> typically within six months

–> similar to a postdated cheque

second only to T-bills in terms of default security

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26
Q

why are bankers’ acceptances considered very safe assets

A

because traders can substitute the bank’s credit standing for their own

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27
Q

Eurodollars

A

U.S. dollar–denominated deposits at foreign banks or foreign branches of American banks

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28
Q

repurchase agreements (repos or RPs)

A

a form of short-term, usually overnight, borrowing

The dealer sells government securities to an institutional investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price

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29
Q

A term repo

A

same as repurchase agreements but the term of the implicit loan can be 30 days or more

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30
Q

why are repurchase agreements (repos or RPs) considered very safe assets?

A

because the loans are backed by the government securities

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31
Q

reverse repos

A

the mirror image of a repo

the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price on a future date

32
Q

federal funds

A

Funds in the bank’s reserve account

33
Q

which banks usually have a shortage of federal funds

A

primarily big banks in New York and other financial centers

34
Q

In the federal funds market, what do banks with excess funds do?

A

they lend to those with a shortage

–> usually overnight transactions

–> arranged at a rate of interest called the federal funds rate

35
Q

Brokers’ Call Loans

A

Individuals who buy stocks on margin borrow part of the funds to pay for the stocks from their broker

–> The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests it

36
Q

The LIBOR Market (London Interbank Offered Rate)

A

the rate at which large banks in London are willing to lend money among themselves

37
Q

what do we use for t bill yields?

A

the bond equivalent yield

38
Q

how do we find the bond equivalent yield?

A

Rbey = ((1000 - P)/P) · 365/n

39
Q

effective annual yield

A

The compound interest annualized rate of return

((1000 - P)/P)^2 - 1

40
Q

the bank discount yield

A

The quoted yields for U.S. T-bills

a 360-day year and the par value of 1,000 in the denominator instead of P

d = ((1000 - P)/1000) · 360/n

41
Q

how can we find the bond equivalent yield from the bank discount yield

A

Rbey = (365 · d) / (360 - (d · n))

d: the discount yield

42
Q

The bond market

A

composed of longer-term borrowing instruments than those that trade in the money market

said to make up the fixed-income capital market, because most of them promise either a fixed stream of income or a stream of income determined according to a specific formula

43
Q

how does the Canadian government mainly borrow funds ?

A

Canada Savings Bonds (CSBs) or Canada Premium Bonds (CPBs)

Government of Canada bonds

44
Q

Canada Savings Bonds (CSBs) or Canada Premium Bonds (CPBs)

A

nonmarketable securities

ssued every year starting November 1, with a sale period of a few months

perfectly liquid, since they can be cashed any time prior to maturity at face value plus accrued interest

45
Q

Government of Canada bonds

A

longer-term marketable debt securities

have varying maturities at issue date, ranging up to 40 years

considered part of the money market when their term becomes less than three years

46
Q

The yield to maturity

A

calculated by determining the semiannual yield and then doubling it

the yield is quoted on an annual percentage rate (APR) basis, rather than as an effective annual yield

also called the bond equivalent yield

47
Q

current yield

A

payment / P

48
Q

Provincial and Municipal Bonds

A

similar in their characteristics to federal government issues, with a variety of maturities and coupon rates, and are available to investors at any given time

considered extremely safe assets, even though not as safe as comparable Canada bonds

a small yield spread can be observed in the figure between Canada bonds and provincial bonds, as well as between the bonds of the various provinces

49
Q

are U.S. municipal bonds exempt from federal income tax?

A

yeee

50
Q

Corporate bonds

A

enable private firms to borrow money directly from the public

similar in structure to government issues

–> typically pay semiannual coupons over their lives and return the face value to the bondholder at maturity

differ most importantly from government bonds in degree of risk

–> Default risk is a real consideration in the purchase of corporate bonds,

51
Q

debentures

A

unsecured bonds

52
Q

subordinated debentures

A

have a lower-priority claim to the firm’s assets in the event of bankruptcy

53
Q

Callable bonds

A

give the firm the option to repurchase the bond from the holder at a stipulated call price

54
Q

Retractable and extendible bonds

A

give the holder the option, respectively, to redeem the bonds earlier and later than the stated maturity date

55
Q

Convertible bonds

A

give the bondholder the option to convert each bond into a stipulated number of shares of stock

56
Q

A Eurobond

A

a bond denominated in a currency other than that of the country in which it is issued

For example, a dollar-denominated bond sold in Britain would be called a Eurodollar bond

57
Q

Home mortgages

A

usually written with a long-term (25-to-30-year maturity) amortization of the principal

renewable at one-to-five-year intervals, at which point their interest rates may be renegotiated

58
Q

why do Fixed-rate mortgages pose difficulties to banks in years of increasing interest rates?

A

because of the mismatching of the maturities of assets and liabilities

hold long-term assets such as fixed-rate mort- gages

–> Hence, they suffer losses when interest rates increase: the rates they pay on deposits increase while their mortgage income remains fixed

–> The five-year renewal period helps to alleviate this problem

59
Q

the variable-rate mortgage

A

require the borrower to pay an interest rate that varies with some measure of the current market interest rate

60
Q

A mortgage-backed security (MBS)

A

either an ownership claim in a pool of mortgages or an obligation secured by such a pool

represent securitization of mortgage loans

61
Q

why are mortgage backed securities called pass throughs?

A

cause originator can sell it to someone else and he will give him the payments he receives

62
Q

Common stocks

A

also known as equity securities or equities

represent ownership shares in a corporation

entitles its owner to one vote on any matters of corpo- rate governance that are put to a vote at the corporation’s annual meeting, as well as to a share in the financial benefits of ownership

63
Q

restricted shares

A

no voting rights, or only restricted voting rights, but otherwise participates fully in the financial benefits of share ownership

64
Q

A corporation whose stock is not publicly traded is said to be what?

A

is said to be closely held

65
Q

The two most important characteristics of common stock

A

residual claim and limited liability features

66
Q

residual claim

A

shareholders are last in line of all those who have a claim on the assets and income of the corporation

67
Q

limited liability

A

the greatest amount shareholders can lose in event of failure of the corporation is their original investment

68
Q

board lots

A

bundles of stocks that are bought in one transaction

69
Q

Preferred stock

A

has features similar to those of both equity and debt

–> promises to pay to its holder a fixed amount of income every year

–> similar to an infinite-maturity bond, that is, a perpetuity

–> does not convey voting power regarding the management of the firm

–> an equity investment, however, in the sense that failure to pay the dividend does not precipitate corporate bankruptcy

–> preferred dividends are usually cumulative; that is, unpaid dividends cumulate and must be paid in full before any dividends may be paid to holders of common stock

—-> dividends they are not tax-deductible expenses for the firm

70
Q

Income trusts

A

instruments with debt and equity features

holds an underlying asset or group of assets that generate income, most of which is distributed to unitholders

–> a variation on the structure of an REIT or a royalty trust

71
Q

Depository Receipts (ADRs)

A

certificates traded in U.S. markets that represent ownership in shares of a foreign company

most common way for U.S. investors to invest in and trade the shares of foreign corporations

72
Q

Toronto Stock Exchange Indices

A

Canada’s best-known stock market indicator

contains over 270 of the largest securities (in terms of market value) traded on the TSX, regardless of industry group, but excluding control blocks composed of more than 20 percent of outstanding shares

a market-value-weighted index based on a very broad set of companies

The percentage increase in the total market value from one day to the next represents the increase in the index

73
Q

index funds

A

shares of mutual funds that invests in all stocks in an index

74
Q

Dow Jones Averages

A

price- weighted average

30 large blue-chip corporations

75
Q

The ultimate U.S. equity index so far computed

A

the Wilshire 5000 index

FINA 411: Portfolio Management (13 decks)

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