Investment Flashcards
What is Unsystematic Risk?
Known as Diversifiable Risk, may also be referred to a Non-systematic Risk.
- Business Risk: Refers to the nature of the firm’s operations (i.e., possibility of loss due to new technology)
- Financial Risk: Refers to how the firm finances its assets (i.e., the possibility of loss due to heavy debt financing)
What is Systematic Risk?
Also known as Non-Diversifiable Risk.
- This part of risk is inescapable because no matter how well an investor diversifies, the risk of the overall market cannot be avoided.
What are the Types of Systematic Risk?
- Purchasing Power Risk: Loss of purchasing power through inflation.
- Reinvestment Risk: Risk that proceeds available for reinvestment must be reinvested at a lower interest rate than the instrument that generated the proceeds.
- Interest Rate Risk: The risk that a change in interest rates will cause the market value of the fixed income security to fall.
- Market Risk: Risk of the overall market
- Exchange Rate Risk: Risk associated with changed in the value of the currency.
Study Hint: Remember P.R.I.M.E.
FDIC Insured Amounts (per bank/per type of account)
- Individual: $250k
- Joint (per owner): $250K
- Trust (per beneficiary): $250k
- IRA/Keogh: $250k
The Yield Ladder
Discounted Bonds (Yields Higher than coupon)
Yield to Call
Yield to Maturity
Current Yield
Nominal Yield (Annual Coupon Rate)
Current Yield
Yield to Maturity
Yield to Call Premium Bonds (yields lower than coupon)
What are the provisions of EE Bonds?
- Non-marketable, Non-transferrable, can’t be used for collateral
- Sold at Face Value
- Interest Rate based on 10 yr Treasury Note Yields
- Fixed Interest Rate that is in effect at the time of purchase
- Subject to federal taxation when redeemed, unless used as education bonds
- Not subject to state or local taxes
What are the provisions of I bonds?
- Non-marketable, non-transferrable, can’t be used for collateral
- Sold at Face Value
- Interest Rate is composed of two parts:
- A Fixed Base Rate (remains the same for the life of the bond)
- An Inflation Adjustment (adjusted every 6 months)
- Subject to federal taxation when redeemed (unless used as education bonds)
- Not subject to state or local taxation
What are the Types of Municipal Securities?
- General Obligation Bonds (GO Bonds): Backed by the full faith, credit and taxing power of the issuer. GO Bonds are generally considered the safest types of municipal credit.
- Revenue Bonds: Backed by a specific sources of revenue to which the full faith and credit of the issuer is NOT pledged. Because revenue bonds are backed by a single source of funds (like toll roads, hospitals, power plants, etc.), they have a greater credit risk than GO Bonds. As such, they trade at higher yields.
- Insured Municipal Bonds: The insurers pay timely interest and principal when the issuer is in default. Municipal bond insurers are AMBAC and MBIA.
What do Indenture Agreements Cover?
- Form of Bond
- Amount of Issue
- Property Pledged
- Protective covenant, including any provision for a sinking fund
- Working Capital and Current Ratio
- Redemption Rights
What are the Risks of Corporate and Municipal Bonds?
- Default: A creditor may seize the collateral and sell it to recoup the principal
- Reinvestment: As payments are received from an investment, interest rates may fall. When the funds are reinvested the investor receives a lower yield.
- Interest Rate: Rising interest rates may cause bond prices to fall
- Purchasing Power: Inflation may lower the value of bond interest payments and principal repayment, thereby forcing bond prices to fall.
Study Hint: Remember: D.R.I.P.
What are the Risks of Government Bonds?
RIP only! No default or credit risk.
What are the market values to define
Market Capitalizations of Companies?
- Large: > $10 billion
- Mid: $2-10 billion
- Small: < $2 billion
- Micro: < $300 million
American Depository Receipt (ADR)
- Bank issued certificates that represent shares in a foreign company for trade on American stock exchange
- Prices of ADRs quoted in US dollars
- Dividends paid in US dollars
- Dividends declared in foreign currency
- Attain diversification and risk reduction due to lower correlation of foreign securities with US securities.
What is the NOI calculation for Improved Land/Real Estate?
Improved land is normally income producing.
Income properties include residential rental, commercial and industrial properties. The intrinsic value of a real estate property can be computed using a Net Operating Income (NOI) calculation.
Gross Rental Receipts plus Non-rental Income (laundry, etc.) equals Potential Gross Income (PGI) minus Vacancy and collection losses minus Operating Expenses (excludes interest and depreciation) = Net Operating Income (NOI)
What are General Definitions for Options?
- Intrinsic Value is the minimum price the option will command as an option. It is the difference betwen the market price and exercise price of the stock.
- Exercise Price is the price at which the stock can be purchased or sold on exercise of the option.
- Premium is the market price of an option. As the option approaches its expiration date the market price of the option (Premium) approaches its Intrinsic Value Time. Premium is the amount the market prices of an option exceeds its intrinsic value.
Study Hint: IV + TV = Premium
What is the Taxability of Call Options?
At the Time of Purchase: Non-deductible Capital Expenditure
To the Writer Due to Lapse: Premium received is a short-term gain
To the Writer Due to Exercise: Premium received is added to sale price (can be long term gain if underlying security was held more than 12 months, otherwise short term). Covered Call.
To the Holder: If the option is NOT exercised, then the option is considered sold (it expires) and it is a short-term loss. The option period is 9 months or less.
