Investment Flashcards

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1
Q

Which is a bond rating company: GNMA, S&P, A.M. Best, BRC, FNMA

A

S&P

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2
Q

Characteristics of an I bond.

A

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.

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3
Q

When is an issuing corporation most likely to call its bonds?

A

When the bonds are selling at a significant premium.

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4
Q

Dealing with an accrued interest question.

A
  1. Report a total of $200 (7/1 semi) or $400 (FY) received in form 1099.
  2. Subtract the accrued interest paid to seller of bond.
  3. Taxable interest is the difference above. Basis for the bond is premium/discount sold price and the accrued interest.
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5
Q

Tax implication of a TIPS

A

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).

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6
Q

Examples of mangage-backed securities. Are they pass-through security?

A

GNMA, FNMA, Freddie Mac.
Yes

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7
Q

Will STRIP distribute interest during the holding period?

A

No

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8
Q

Do ADRs satisfy the requirements for”qualified foreign corporation” to get the 0% to 20% qualified dividend rate?

A

Generally

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9
Q

Which reflects a disadvantage of an ETF? Liquidity, sales load, tax inefficiency, market price (volatility)?

A

Market price (volatility)

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10
Q

Which investment vehicles are classified as investment companies under the investment company act of 1940?

A

Open-ended fund, mutual funds, close-ended funds, UITs, variable annuity.

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11
Q

Which type of entities would be most likely to buy preferred stock paying high dividends?

A

Pension plan, individual in a 12% bracket, regular C corporation with excess funds to invest.

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12
Q

What type of entities would most likely purchase a mortgage REIT?

A

A Sep because of its tax-deferred capabilities.

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13
Q

Which investments can always be purchased at NAV?

A

No-load balanced mutual fund.

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14
Q

Which investment (limited partnership, a municipal bond, gov. Bond, a S&P index fund) is most suitable for growth and tax efficiency?

A

S&P index fund

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15
Q

Taxation for a stock and a call (selling it).

A

Treated separately for tax purposes. Lt gains and St gains can’t be netted together.

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16
Q

Are futures contracts considered a security under the Securities act of 1933?

A

No

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17
Q

Liquid investments? ETF, cd, government bond fund, technology mutual fund, money market mutual fund.

A

Cd and money market mutual fund

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18
Q

Beta as an indicator for portfolio selection.

A

Beta alone is generally not a motivating reason to select a particular fund

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19
Q

What factors go into the markowitz model?

A

Standard donation as a nk measurement (coranance, correlation coefficient, and return). It doesn’t include beta.

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20
Q

When does company want to issue new bonds?

A

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.

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21
Q

T-bills vs. T-bonds differences.

A

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.

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22
Q

Bond with a put feature.

A

Allows its holders to redeem at specified internals before maturity at face value. More useful when inflation is causing an increase in interest rate.

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23
Q

No-load funds.

A

They have no sales charges; continuous offering and redemption of shares, the shares sell and redeemed at nav.

24
Q

Which REIT provides both leverage and a good hedge inflation?

A

Equity REIT (not mortgage)

25
Q

Can HPR be calculated even if the shares are not sold?

A

Yes

26
Q

If country A expects the currency of country B to be devalued. What would they do?

A

Buy country A’s currency futures and sell County B’s currency futures.

27
Q

Differences between t-bill and t-note.

A

Risk, typical buyer, denominations that are issued, and cash flows.

28
Q

Investments in a 529 plan.

A

Not GNMA (likely to trigger kiddie tax). Good option is target-date fund.

29
Q

Lowest correlation to the US common stock fund?

A

An emerging market fund.

30
Q

Impact of a negative correlation coefficient to the portfolio.

A

Reduce portfolio risk and make beta negative.

31
Q

Is duration positively correlated or directly related to a bond’s yield to maturity?

A

Positively correlated.

32
Q

Types of probability distributions.

A

Normal, triangular, uniform, and lognormal.

33
Q

Dow theory

A

Its a method that is presumed to identify the top of the bull market and the bottom of a bear market.

34
Q

When is financial ratio considered the most useful?

A

Using several ratios with the same industry overtime.

35
Q

Are options marginable?

A

No, therefore the full amount of the option premium cost-must be paid in cash when you deposit in your margin account.

36
Q

Highest correlation between two securities.

A

Preferred stock and bonds (both are fixed income)

37
Q

Marketable securities? Savings/checking accounts, money market, treasury bonds, common stock, mutual funds.

A

Treasury bonds and common stock.

38
Q

True/false: A portfolios beta is the weighted average of each security in the portfolio multiplied by its beta.

A

True

39
Q

Impact of an addition to a portfolio with the same expected return, higher St, and lower correlation

A

No change in portfolio expected return and reduced portfolio risk.

40
Q

Biggest mistake made in calculating a dollar-weighted return?

A

Reinvestment rates.

41
Q

Normal yield curve flattening. Short-term interest increasing. Long-term rules inched up. Inflation rates just jumped. What to do?

A

Short long-term bonds since increasing rates could reduce long-term’S bond value (and even short-term).

42
Q

The point of tangency.

A

At that point, the portfolio includes a proportionate percentages of all possible risky assets, not just all stocks and bonds or all treasuries.

43
Q

An investor believes in EMH, how should they invest?

A

Passive investment

44
Q

Risk level of saying out of the money.

A

Risk aggressive

45
Q

Are government bonds considered current assets?

A

Yes

46
Q

Dow theory

A

Active strategy. Rejects mat and SMH. Technical analysis. Uses both Dow Jones - industrial index and Dow Jones transportation index.

47
Q

Dow Jones

A

Price-weighted average. 30 industrial stocks. Narrowest measure.

48
Q

S&P 500

A

Float weighted. Broad measure of NYSE.

49
Q

Russell 200

A

Popular capitalization weighted. Smallest 2000 stocks.

50
Q

Wiltshire 500

A

Value weighted. Broadest measure.

51
Q

Value line

A

Equally weighted

52
Q

The Fed. Reserve regulates the use of leverage on which investment?

A

Common stock. Margining the purchase of mutual funds is prohibited by the sec.

53
Q

Ideal investment for an GMA account.

A

Zero-coupon bonds with short/intermediate duration.

54
Q

What should investors do during market declines?

A

Behavioral finance indicates investors will not do anything.

55
Q

Are CDs, money market fund, and treasury bill marketable?

A

No they can easily be transferred to cash.

56
Q

Is tax-exempt OID subject to phantom income taxation?

A

No tax exempt zeros are not subject to phantom income.