Crunch Time : Chapter 11 Flashcards
What is the highest yield for a discount bond?
Yield-to-maturity
For a discount bond, the yield-to-maturity is the highest yield, followed by the current yield and then the nominal yield.
What is the highest yield for a premium bond?
Nominal yield
For a premium bond, the nominal yield is the highest, followed by the current yield and then the yield-to-maturity.
How is a bond’s nominal yield (coupon rate) calculated?
Annual interest payment ÷ Bond’s par value
Example: $70 annual interest ÷ $1,000 = .07 or 7%.
How are fixed-income securities typically sold?
With a markup
Fixed-income securities, such as bonds, are usually sold with a markup rather than a commission.
What is an option’s intrinsic value?
Amount by which it’s in-the-money
Intrinsic value indicates how much an option is worth if exercised immediately.
When do call options have intrinsic value?
When the market price is above the strike price
Calls have intrinsic value if the market price of the underlying stock is UP above the call’s strike price.
What defines a call option as out-of-the-money?
When the strike price is above the market price
Calls are considered out-of-the-money if the market price is not UP above the strike price.
When do put options have intrinsic value?
When the market price is below the strike price
Puts have intrinsic value if the market price of the underlying stock is DOWN below the put’s strike price.
What rights do investors have when they buy puts?
Right to sell stock at a preset price until expiration
Investors who buy puts can sell stock at a predetermined price until the option’s expiry.
What is the spot rate in currency trading?
Currency’s price in the spot market
The spot rate is the current price at which a currency can be bought or sold.
What is a swap in financial terms?
A customizable derivative used to hedge against risk
Swaps can help manage risk but may increase overall costs for investors.
What is a credit default swap (CDS)?
Type of credit derivative providing insurance against issuer default
A CDS shifts the risk to an insurance company or seller in exchange for a fee.
How does a short stock position get protected?
With a long call
A long stock position can be protected by a long put.
What determines the cash value of a variable life insurance policy?
Performance of the subaccounts within the separate account
The cash value is linked to the performance of investment options chosen by the policyholder.
What influences payments for a variable annuitant?
AIR and performance of the separate account
AIR stands for Assumed Interest Rate.
How is the return of an equity-indexed annuity calculated?
Based on point-to-point comparison of index values
This compares the index value on two specific dates.
What is the floor of an equity-indexed annuity?
Zero
The return of an equity-indexed annuity cannot fall below zero.
Who are universal life policies suitable for?
Investors who want to vary their premium payments
Universal life policies offer flexible premiums and death benefits.
What type of investors are whole life policies suitable for?
Conservative investors seeking guaranteed cash value
Whole life policies provide lifelong coverage and fixed premiums.
How does a real estate limited partnership handle losses and gains?
Passes through both to its partners
Unlike REITs, which do not pass through losses to shareholders.
What are blind pools or non-traded REITs known for?
Not always investing in real estate
Blind pools may have varied investment strategies.
What is the formula for calculating a fund’s net asset value (NAV)?
(Fund Assets – Fund Liabilities) / Fund Shares Outstanding
NAV represents the per-share value of a fund.
What can closed-end fund shares be sold at?
A premium or discount to their net asset value (NAV)
Market conditions can affect the trading price of closed-end funds.
What do gold exchange-traded funds (ETFs) provide?
Returns uncorrelated with other types of investments
Gold ETFs can serve as a hedge against market volatility.
What effect do leveraged exchange-traded funds (ETFs) have on gains and losses?
Increase both due to leverage factor
Leveraged ETFs can amplify returns and risks.
What are precious metals?
Gold, silver, platinum, and palladium
Copper is not considered a precious metal.
What is the difference between soft and hard commodities?
Soft commodities are grown; hard commodities are mined/extracted
This distinction affects how these commodities are produced and traded.
What obligations do both the buyer and seller of a futures contract have?
Both have contractual obligations to fulfill
Futures contracts require delivery of the asset or cash settlement.
What are structured products?
Debt instruments linked to an underlying security or basket of securities
They often provide returns based on the performance of the underlying asset.
