Investment Flashcards
Which is a bond rating company: GNMA, S&P, A.M. Best, BRC, FNMA
S&P
Characteristics of an I bond.
Earn interest for up to 30 years, accrue earnings based on a fixed rate of return and the semiannual inflation rate, the special tax benefits available for education savings with series ee also apply to series I bond, the difference between the purchase price and the redemption value is taxable interest.
When is an issuing corporation most likely to call its bonds?
When the bonds are selling at a significant premium.
Dealing with an accrued interest question.
- Report a total of $200 (7/1 semi) or $400 (FY) received in form 1099.
- Subtract the accrued interest paid to seller of bond.
- Taxable interest is the difference above. Basis for the bond is premium/discount sold price and the accrued interest.
Tax implication of a TIPS
Interest is taxable to the holder when received (no change in basis). Any increase in the inflation adjusted principal amount is treated as OID (taxable).
Examples of mangage-backed securities. Are they pass-through security?
GNMA, FNMA, Freddie Mac.
Yes
Will STRIP distribute interest during the holding period?
No
Do ADRs satisfy the requirements for”qualified foreign corporation” to get the 0% to 20% qualified dividend rate?
Generally
Which reflects a disadvantage of an ETF? Liquidity, sales load, tax inefficiency, market price (volatility)?
Market price (volatility)
Which investment vehicles are classified as investment companies under the investment company act of 1940?
Open-ended fund, mutual funds, close-ended funds, UITs, variable annuity.
Which type of entities would be most likely to buy preferred stock paying high dividends?
Pension plan, individual in a 12% bracket, regular C corporation with excess funds to invest.
What type of entities would most likely purchase a mortgage REIT?
A Sep because of its tax-deferred capabilities.
Which investments can always be purchased at NAV?
No-load balanced mutual fund.
Which investment (limited partnership, a municipal bond, gov. Bond, a S&P index fund) is most suitable for growth and tax efficiency?
S&P index fund
Taxation for a stock and a call (selling it).
Treated separately for tax purposes. Lt gains and St gains can’t be netted together.
Are futures contracts considered a security under the Securities act of 1933?
No
Liquid investments? ETF, cd, government bond fund, technology mutual fund, money market mutual fund.
Cd and money market mutual fund
Beta as an indicator for portfolio selection.
Beta alone is generally not a motivating reason to select a particular fund
What factors go into the markowitz model?
Standard donation as a nk measurement (coranance, correlation coefficient, and return). It doesn’t include beta.
When does company want to issue new bonds?
They want to sell new bonds before interest rate rises ( when the previous bonds are selling at a premium or interest rates have fallen). Also when interest rates are expected to rise.
T-bills vs. T-bonds differences.
Maturities (ST vs. LT), risk level ( less ir risk vs. more ir risk), callability (not callable vs. callable) interest paid ( sold at discount vs. Semiannual interest) interest on both is taxed at the federal level only.
Bond with a put feature.
Allows its holders to redeem at specified internals before maturity at face value. More useful when inflation is causing an increase in interest rate.
No-load funds.
They have no sales charges; continuous offering and redemption of shares, the shares sell and redeemed at nav.
Which REIT provides both leverage and a good hedge inflation?
Equity REIT (not mortgage)
Can HPR be calculated even if the shares are not sold?
Yes
If country A expects the currency of country B to be devalued. What would they do?
Buy country A’s currency futures and sell County B’s currency futures.
Differences between t-bill and t-note.
Risk, typical buyer, denominations that are issued, and cash flows.
Investments in a 529 plan.
Not GNMA (likely to trigger kiddie tax). Good option is target-date fund.
Lowest correlation to the US common stock fund?
An emerging market fund.
Impact of a negative correlation coefficient to the portfolio.
Reduce portfolio risk and make beta negative.
Is duration positively correlated or directly related to a bond’s yield to maturity?
Positively correlated.
Types of probability distributions.
Normal, triangular, uniform, and lognormal.
Dow theory
Its a method that is presumed to identify the top of the bull market and the bottom of a bear market.
When is financial ratio considered the most useful?
Using several ratios with the same industry overtime.
Are options marginable?
No, therefore the full amount of the option premium cost-must be paid in cash when you deposit in your margin account.
Highest correlation between two securities.
Preferred stock and bonds (both are fixed income)
Marketable securities? Savings/checking accounts, money market, treasury bonds, common stock, mutual funds.
Treasury bonds and common stock.
True/false: A portfolios beta is the weighted average of each security in the portfolio multiplied by its beta.
True
Impact of an addition to a portfolio with the same expected return, higher St, and lower correlation
No change in portfolio expected return and reduced portfolio risk.
Biggest mistake made in calculating a dollar-weighted return?
Reinvestment rates.
Normal yield curve flattening. Short-term interest increasing. Long-term rules inched up. Inflation rates just jumped. What to do?
Short long-term bonds since increasing rates could reduce long-term’S bond value (and even short-term).
The point of tangency.
At that point, the portfolio includes a proportionate percentages of all possible risky assets, not just all stocks and bonds or all treasuries.
An investor believes in EMH, how should they invest?
Passive investment
Risk level of saying out of the money.
Risk aggressive
Are government bonds considered current assets?
Yes
Dow theory
Active strategy. Rejects mat and SMH. Technical analysis. Uses both Dow Jones - industrial index and Dow Jones transportation index.
Dow Jones
Price-weighted average. 30 industrial stocks. Narrowest measure.
S&P 500
Float weighted. Broad measure of NYSE.
Russell 200
Popular capitalization weighted. Smallest 2000 stocks.
Wiltshire 500
Value weighted. Broadest measure.
Value line
Equally weighted
The Fed. Reserve regulates the use of leverage on which investment?
Common stock. Margining the purchase of mutual funds is prohibited by the sec.
Ideal investment for an GMA account.
Zero-coupon bonds with short/intermediate duration.
What should investors do during market declines?
Behavioral finance indicates investors will not do anything.
Are CDs, money market fund, and treasury bill marketable?
No they can easily be transferred to cash.
Is tax-exempt OID subject to phantom income taxation?
No tax exempt zeros are not subject to phantom income.
