Investment: In Class 27 Aug

Question 1

Running yield

Answer 1

The part of the total Return not making up capital appreciation

Question 2

Institutional investors

Answer 2

Institutions or firms that have large sums of capital to invest - ex. Pension funds, Equity funds.

Question 3

Reasons for residential property not being popular with institutional investors

Answer 3

• Political interference (Governmental restrictions)

- Administration associated with large amounts of residential properties (difficult to administer)

Question 4

Risk of the void

Answer 4

Difficulty to find replacements for property tenants. Thus a period of no income.

Question 5

Default risk

Answer 5

Tenants being unable to pay their property rent.

Question 6

Return and risk characteristics of properties

Answer 6

• Security: void, default, political risk
• Deterioration, obsolescence
• stepped income stream, long-term real returns
• expected return higher than that on index-linked government bonds
• running yield between equities and conventional bonds
• can provide high utility to the investor
• long term volatility of capital values but short term stability due to infrequent valuations
• high dealing and management costs
• possibility for investment characteristics to be changed (redevelopment)
• unmarketable: large unit size, indivisibility, uniqueness
• subjective valuations

Question 7

Main properties susceptible to deterioration

Answer 7

• Industrial properties (use of rapidly deteriorating materials - prefab & quick construction)
• Residential properties

Question 8

Issue of subjective valuations

Answer 8

Property valuation is very much based on opinion, not on the market (such as shares).

Question 9

Rank property running yield

Answer 9

Between equities and conventional bonds.

Question 10

Rank expected return on property investment

Answer 10

Higher than that on index-linked government bonds.

Question 11

Direct investment disadvantages

Answer 11

• Size
• Diversification
• Lack for marketability
• Valuation
• Need for expertise

Question 12

Indirect investment

Answer 12

Refers to pooled investments - pooling multiple investors together (such as with property unit trusts) in order to overcome investment disadvantages.

Question 13

Derivatives

Answer 13

A financial instrument whose value is dependent on the value of another underlying asset.
Can be thought of as a contract between two parties to trade an underlying asset at a date in the future.

Question 14

Forwards and Futures

Answer 14

A contract to buy (or sell) an asset on an agreed price in the future.

Question 15

Types of properties

Answer 15

• Offices
• Shopping Centres
• Industrial
• Agricultural
• Residential

Question 16

Futures contract

Answer 16

Standardized, exchange traded contract

Question 17

Long position

Answer 17

The buyer of the underlying asset involved in a forward or future.

Question 18

Short position

Answer 18

The seller of an underlying asset involved in a forward or future.

Question 19

Options

Answer 19

An option is the right (but not the obligation) to buy or sell an asset.

Question 20

Two types of options

Answer 20

• Call option

- Put option

Question 21

Forward contract

Answer 21

Non-standardized, over-the-counter contract

Question 22

Call option

Answer 22

Gives the buyer the right to buy from the poison writer.

Question 23

Difference between options and futures&forwards

Answer 23

• Premium involved in options (not in futures & forwards)
• An option is a right (not an obligation) to buy/sell
• a future/forward contract is an obligation to buy/sell

Question 24

Long position

Answer 24

The buyer of the call option

Question 25

Short position

Answer 25

Seller of the option

The option writer

Question 26

Option price

Answer 26

Intrinsic value - Time value (highest when option is “at the money” and at inception of the option)

Question 27

“At the money”

Answer 27

A situation where an options strike price is identical to the price of the underlying security.

Question 28

Put option

Answer 28

Gives the buyer the right to sell to the option righter.