CTP Review Flashcards
Why do bank prefer fee compensation over balance compensation?
- Deposit balances increase the liabilities on the bank’s B/S
- Fees from deposit services are considered low-risk source of earnings
Dividend Capture
ST investment strategy in US.
A company may exclude from taxable income 70-80% of dividends received from stock owned in another corporation. Must’ve owned stock for 46 of 91 days starting 45 days prior to ex-dividend date.
Quantitative assessment to risk
- quantify materiality / exposure level
- quantify estimated timing of risk
- quantify risk drivers that cause risk to materialize
- quantify probability for losses due to exposure
- quantify benchmark for mitigation strategies (cost vs benefit)
Qualitative assessment to risk
Qualitative assessment should determine how fundamental processes contribute to risks and identify possible solutions
T/F: The higher the proportion of fixed costs, the higher the company’s operating leverage.
True
T/F: Operating leverage refers to the degree to which fixed costs comprise the cost structure.
True
Higher Fixed Costs = Higher Operating Leverage
True
Operating Leverage
Measures fixed costs as a % of total costs. Used to evaluate Break Even Point.
ISDA = International Swaps and Derivatives Association
An ISDA Master Agreement consists of:
general terms and conditions and a Schedule. The Schedule specifies details for the standard terms.
T/F: When an ISDA Master Agreement is signed it governs all past and future transactions entered into between the parties.
It is an open-ended agreement.
True
4 basic types of Market Risk
- Equity Price risk
- Interest Rate risk
- FX risk
- Commodity Price risk
Which Market Risks are also Financial Risks
- Interest Rate risk
- FX risk
- Commodity Price risk
(NOT equity risk)
Financial Risk = impact from unexpected changes in interest rates, FX rates, or commodity prices
Optimal Dividend Policy accomplishes…
- maximizes shareholder value
- sufficient retention of funds for asset expansion
- provides investors info about future earnings AKA Dividend Signaling
define Underwriting
Act of purchasing all or part of a block of securities issued by a company.
In a full U/W, a syndicate of investment banks owns the entire issue.
The investment banks assume price and market risks by purchasing all/part of a block of securities issued, so the U/W fee pays for that.
Sales of bonds on a Best-Efforts Basis =
NO UNDERWRITING
The investment bank helps place shares through a group of brokerage firms.
The issuer (company) pays a fee directly to the investment bank as compensation for advising them and marketing the issue.
