Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

CFP Extra > Investment > Flashcards

Investment Flashcards

1
Q

Convertible bonds

A

Hybrid
Pay interest
Can convert to specific number of shares of common stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

GNMA

A

DIR risk
Buys insured mortgages from
banks and put into pools
US gov guaranteed
Taxes at all levels

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

CMO

A

Mortgage payments equals cash flow and received in different tranches

Multi class pass thru

A-Z Tranches with Z tranche riskiest and 0 coupon

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

TIPS

A

Protects against inflation
Marketable
Sold at $1k
Taxes annually on appreciation phantom income

2nd interest will be calculated using CPI adjusted price (par * 1/2 CPI) plus par

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

STRIPS

A

zero coupon treasury securities
Discount treated as taxable income
Produce phantom income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Bond features

A

Callable: issuer has right to redeem bond at predetermined price at a date prior to maturity
Usually called if bond interest rates FALL since issued. Issuer can then sell new bonds to replace old ones at lower interest rates.
Investors are protected for at least 10 years.

Put: permits holder to sell the bond back to the issuer
Issuer must redeem at a specific date for par.
Do this if interest rates go UP

Put and convertibility features decrease bonds yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

LEAPS

A

Matures up to 2 years and hedge against indices

Buyer will be taxed at long term rates if held contract for a year and a day. If exercised the buyer need to hold the shares for more than 12 mins for LTCG.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Futures terminology

A

Spot price: current market price of commodity

Open interest: # of futures contracts trading at any given day

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Negatively correlated to markets

A

Collectibles and natural resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Preferred stock

A

Both equity and debt
Stated dividend rate
Doesn’t mature
Corp, pension and low bracket individuals most likely to buy
Risker than bonds longer duration
Little growth

Warrants can be attached adding long term value

Rights can be attached adding short term value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

REIT

A

Invests in real estate, short term construction loans and mortgages
Marketable
There are non public ones that’s aren’t liquid or marketable

Use for tax deferred accounts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Mortgage REIT

A

Make loans to finance construction
Higher default and purchasing power risks

Inflation is bad for these REITS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Taxation of REITs

A

75% of all REIT income must come from real estate and 15% can come from equities
Then if 90% of all REIT net investment income is distributed only pay tax on non distributed portion

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Real Estate LPs (RELPS)

A

Non publicly traded
Illiquid
Passive loss rules
Last about 10-20 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Real estate mortgage conduits (REMIC)

A

Limited life and self liquidating
Invests in real estate, mortgages or securities
Large range of risks
Pass through income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

UITS

A

No day trading
Unmanaged
Handled by independent trustee
Passive stately
Securities rarely sold
Self liquidate
Redeemed at NAV trade on secondary market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Closed end funds

A

Publicly traded
No new issues
Limited shares
Sold in open market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Modern portfolio theory

A

Seeks to quantify relationship between risk and return
Investors should be compensated for risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Capital market line

A

Marco view
Relationship between variability of returns and risks
Diversified portfolio lies on the line
Inefficient portfolios fall below CML
Can’t be used on single security or undiversified port
Intersection on CML is called risk free or 100% Tbills

Point b is the optimal risky portfolio all risky assets or the tangent of the CML and the Markowitz efficient frontier

Point A less risky

Point c 100% risky

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Efficient Market Frontier

A

Evaluate portfolios based on expected returns and risk
Efficient portfolio =lower risk for given level of return or higher return for any given risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Security market line (SML)

A

Micro view
Relationship between risk and return for an individual asset doesn’t matter if portfolio is diversified

Use beta

Market risk premium is (Erm -rf) it is the slope of SML

stock risk premium is (Erm-rf)B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Anomalies to efficient market

A

P/e effect: stock with low P/E ratios perform better than ones with high

Small firm effect: stock with small firms perform better than large

January effect: stocks decline at year end and rebound in January

Neglected firm: unknown stocks perform better than popular ones

Value line phenomenon: stocks rated 1 outperform those rates 5

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Duration

A

Measure the weighted average maturity of bonds cash flow on PV

risk averse: bonds with short durations
Aggressive: long durations

Interest rates increase buy HIGH coupon with short maturities to shorten duration

Interest rates FALL buy LOW coupon with long maturities to lengthen duration

Calculate duration: shortcut look at the maturity and if it is coupon laying look for a number close to the maturity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Convexity

A

Degree to which duration changes
Largest for low coupon, long maturity and low YTM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Immunization
Passive investment strategy to safeguard against interest rate volatility A portfolio is immunized if the average duration of the bonds in the portfolio is equal to a pre selected time horizon
26
ADR
Americans buying foreign shares in US form
27
Fundamental analysis
Economic research to predict economy interest rates, GDP, inflation, unemployment and inventories
28
Top down (fundamental analysis)
Looks at trend in select industries and then companies that will benefit from trends
29
Bottom up (fundamental analysis)
Searches for individual stock with great performance before considering economic trends. The individual will do well even if the industry does not.
30
Technical analysis
Use of charts and computers programs to ID and project price trends
31
Resistance (technical analysis)
The price ceiling at which analysts note persistent selling of security Sellers expected to enter market in sufficient numbers to lower price. When stock breaks through a resistance level it will go on to new high prices = bullish
32
Support (technical analysis)
Security tends to stop falling because there is more demand than supply. It becomes a temporary price floor. If it continues to drop through the support level the outcome is bearish.
33
Dow theory (technical analysis)
Aggregate measure of securities prices and doesn’t predict direction of changes in individual stock prices. Shows the direction of overall market.
34
Baron’s confidence index (technical analysis)
The differential between the returns on quality bonds and bonds of lesser quality will forecast future price movements.
35
Dividends
Date of record: first business day after ex dividend Ex dividend: ppl must buy shares a day before ex dividend date to get the dividend
36
Stock spilt
Make ownership more affordable Increases number of shares and lowers price Ex: 3 for 2 stock spilt New share count: (Number of shares * 3) divided by 2 New price: (price *3) divided by 2
37
Reverse stock spilt
Reduces number of outstanding sutras price increases
38
Laddered bonds
Bonds are purchased with different maturity dates. As each bond matures a new longer term one is purchased.
39
Bond bullets
Only intermediate bonds
40
Bond barbells
Half short half long requires rebalancing
41
Margin
Options and mutual funds CAN’T be bought on margin
42
Arbitrage pricing theory
Movements are NOT explained by risk or return. If unexpected value is 0 factors have no effect If factor is 0 it is expected or anticipated
43
Black Sholes options valid model
5 Variables: Price of stock Strike price Time remaining Interest rate Volatility of stock Call = increase in exercise price decrease in value Put = increase in exercise price increase in value All other variables have a direct relationship with both
44
Liquidity
Transaction speed and stability of price Can’t lose money Includes savings accounts, money market accounts and treasury bills
45
Marketability
Only transaction speed Cash and cash equivalents aren’t marketable because they are NOT redeemed or sold
46
Normal distribution
Mean value = return Symmetric
47
Log normal distribution
Upper limit limited Positively skewed
48
Correlation coefficient
Movements of stocks in same portfolio are similar or not within specific range positive 1 to negative 1 Correlation coefficient is pij in covariants formula Max risk is 1.0 = Add risks and divide by number of risks to get to risk of portfolio or average Less than max but positive= needs to be less than the formula above Negative = pick a number near zero
49
Covariance
How 2 stocks are related or how price movements of one is related to another
50
Coefficient of variation
Relative variability used to compare with investments with widely varying risks Higher the greater the relative risk Risk per unit of expected return Standard deviation divided by the average mean
51
Brokered CDS
issuer by a commercial bank rather than a savings institution SUBJECT to interest rate risk, reinvestment and market Regular CDS are subject to reinvestment and market risk
52
Current yield
Annual interest in dollars divided by bonds market price
53
Bonds market price
Annual interest in dollars divided by current yield
54
Guaranteed investment contracts (GICS)
Similar to CDs but they are issues by insurance companies Subject to default risk
55
Black scholes option valuation model
Considers five variables to value the option of a non-dividend paying stock (think call up) 1. Exercise price (non direct relationship) 2. Time remaining to expiration 3. Interest rate 4. Volatility of underlying stock 5. Price of underlying stock All variables have a direct up relationship for calls except the exercise price
56
Call options
The greater the volatility the higher the price of a call option
57
Devaluation
Is the lowering of the value of currency relative to currencies of one or more other nations. Can occur from rise in value of other currencies relative the the currency of a particular country.
58
Revaluation
Refers to an increase in currency’s value
59
Risk adjusted return
To standardize risk divide a specific funds realized return by its beta coefficient
60
Geometric mean or time weight return
Percentages 1+gain(loss) multiple by next years 1+gain(loss) and keep multiplying Evaluate performance of manager Then use the number above put into FV PV= -1 N= number of years I/YR = solve
61
Dollar weighted return
Also called the IRR Cash flow Type in all cash flow select IRR on calculator If quarterly payments multiple IRR by 4
62
Return on equity
EPS divided by common equity per share or book value ( take book value divided by shares outstanding)
63
Dividend payout ratio
Common dividends per share / EPS
64
Yankee bonds
Dollar denominated bond issues in us by foreign banks and corporations
65
Original issue tax exempt OID
No phantom income Tax exempt
66
Investment income
Interest Dividends (if elects not to use reduced rates) Royalties Short term gains
67
Home office deductions
Suspends unless you are self employed and satisfy the qualifying rules. Deduction is calculated by taking the gross income minus expenses for business. Whatever amount that is you can deduct home office expense up to that amount no more can’t create a loss
68
Meals and entertainment expense
Business meals are 50% deductible 1. Salaried employee: can be reimbursed for full expense anything not reimbursed can’t be deducted on personal return. Corporate tho can deduct 50% 2. Corporation pays for 100% of event but CANT deduct expense on corporate return 3. The self employed person must pay 100% of expense but can only deduct 50% of meals on schedule C. Tickets to sporting and cultural events are no longer deductible
69
Straddle
Buy a call buy a put Believes that there will be future price movements but unsure of direction
70
Collar
Sells a call and buys a pit at a lower amount Owns stock hedging against decline
71
Holding period return timing
If time period is greater than a year annualized return is overstated If time period is less than a year than annualized return is understated
72
How to reduce overall portfolio risk
Look at portfolio and determine which fund makes up smallest piece of portfolio. If that fund is different from the rest of the funds you would had to it. Add to the lowest correlation coefficient fund to reduce overall portfolio risk.
73
Disqualified ISO
Creates deduction for employer and doesn’t count for AMT.
74
Real return
Spread between interest rates and inflation
75
Munis and raising top marginal income tax bracket
This would create a demand for minus because they are tax exempt. Greater demand would push price up and municipalities could then issued new bonds with lower coupons.
76
Not considered compensations
ISOs unless disqualify and deferred compensation
77
Owning foreign bonds
What will increase price: Devalue of the dollar Decline in US interest rates (weaker dollar) Increase in foreign currency
78
Uneven cash flow
Difficult to determine what discount rate to use
79
Tactical allocation
Changing market conditions justify changes to portfolio
80
P/E valuation model formula
Future earnings * P/E
81
Dividend growth rate with multiple growths
Use the final growth rate when using the formula
82
Estimating duration
Callable bonds: take the years to call and pick the next lowest number Regular: take the years to maturity and pick the next lowest number
83
Mortgage rate
SOFR Secured overnight financing rate

CFP Extra (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions