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CFP Prep - Nipa > Investment Mgt > Flashcards

Investment Mgt Flashcards

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1
Q

Options - Buyers rights

A

A Contract that gives buyers rights and seller obligations.

Buyer can choose to buy or sell 100 shares of underlying securities up and until the Expiration Date at the Strike Price.

For this right, buyer pays a premium/price

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2
Q

Options - Seller’s obligations

A

Seller is obligated to sell or buy 100 shares of the underlying security when called upon up and until the expiration date at the strike price.

For this obligation, the seller receives a premium/price

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3
Q

Yield Curve

A

Normally, The lender expects to charge higher interest rate for long-term loans; The longer the term of the loan, the higher the interest rate
Inverted curve indicates recession

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4
Q

Bond Price and Interest Rates/Yields

A

Inversely related = As Yields (market rate/value) go up, bond prices go down and vice versa.

Think of seesaw

Premium = Bond price higher than $1000
Discount = bond price lower than $1000

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5
Q

Nominal Yield (Bond)

A

Nominal Yield = Coupon Rate

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6
Q

Current Yield (Bond)

A

Annual Coupon Payments / Current market price of the bond

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7
Q

Duration

A

Weighted average of the present values of the future cash flows of a bond or bond portfolio

amount of time (in years) it takes for a bond investor to get their money back (aka effective maturity)

Higher Coupon & Shorter Maturity = Low Duration (get your money back sooner)

Lower Coupon & longer maturity = high duration (get your money back later)

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8
Q

Par Value of Bond

A

$1000

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9
Q

Yield to Worst

A

Investment decisions should be on Yield to Worst

YTW is lesser of YTM and YTC

(not always, but typically)
When Bond is selling at premium ( > $1000), the YTW = YTC
When Bond is selling at discount ( < $1000), the YTW = YTM

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10
Q

Interest rate coloration to bond duration

A

bond duration is longer in high interest rate environment

bond duration is shorter in low interest rate environment

For zero coupon bond, the duration = maturity term

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11
Q

Duration match to time horizon vs. maturity horize

A

Match the duration of fixed income portfolio to an investor’s time horizon (NOT maturity)

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12
Q

Options - Characteristics

A

Contract between buyer and seller to either buy or sell lots of shares.

Options contracts can be used to hedge existing stock positions or to speculate on stock without having a long position in the stock.

All contracts will stipulate an exercise price and an expiration date.

All contracts cover 100 shares of the underlying stock.

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13
Q

Options - In the Money

A

Call contract is in the money when Market Price is greater than (raises above) Strike/Exercise Price.

Put contract is in the money when Market Price is less than (falls below) Strike/Exercise Price.

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14
Q

Options - Out of the Money

A

Call contract is out of money when Market Price is less than Strike/Exercise Price
Put contract is out of money when Market Price is greater than Strike/Exercise Price

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15
Q

When is a put options contract in the money

A

Market Price is less than (falls below) Strike/Exercise Price.

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16
Q

when is call contract in the money

A

Market Price is greater than (raises above) Strike/Exercise Price.

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16
Q

When is put contract out of the money

A

Market Price is greater than Strike/Exercise Price

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17
Q

when is call contract out of the money

A

Market Price is less than Strike/Exercise Price

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18
Q

Intrinsic Value for Call Options (COME) Call Option

A

= Market Value - Exercise Price

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19
Q

Intrinsic Value for Put Options (POEM) Put Option

A

= Exercise Price - Market Value

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20
Q

Options - At the Money

A

When Market Price = Strike Price

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21
Q

Options intrinsic value amount

A

Lowest can be 0
(CANNOT be negative)

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22
Q

Options - Call

A

contract to buy options (Call to Buy)

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23
Q

Options - Put

A

contract to sell options (Put to sell)

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24
Q

Covered call writing

A

Long/own the underlying stocks ans want to generate income while expecting the share price to increase. Sell/short a call contract

Used to generate income for the portfolio.

Only considered covered if you own enough shares to cover all contracts sold.

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25
Q

Naked call writing

A

Does not long/own the underlying stock AND sells/shorts the call contract (at an exercise price)

Since you don’t have the stock and have to buy them to fullfill the call contract, the stock price can be unknown and more than the exercise prices (I.e. Seller/Writer bears UNLIMITED risk.)

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26
Q

Options - Cost Basis

A

Options Cost basis = cost of purchasing the stocks of the underlying security + when the options contract gets exercised, the last premium gets added to cost basis

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27
Q

Protective Put

A

Own/Long the stock and buy/long the put contract

used for portfolio insurance/protection.

28
Q

Collar (Zero-cost collar)

A

Long the stock - long the put - short the call

The put is used to protect against a stock price decrease, and the call premium is used to offset the cost of the put.

29
Q

Spread

A

Involves purchasing and selling the same type of contract.
Benefit from stability (i.e., minimum moves in the underlying stock’s price).

30
Q

Straddle

A

Inverse of Collar (play both sides of the field)

Long a put and a call on the same underlying stock with the same expiration date and strike price.

Used to capitalize on volatility regardless of the direction.

31
Q

Market Risk Premium (MRP)

A

AKA equity risk premium (ERP)

Rm - Rf

32
Q

CAPM

A

Ri = Rf + ((Rm - Rf) x Beta)

Ri = Rf + (Market Risk Premium x Beta)

CAPM = Ri = Rf + Stock Risk Premium

33
Q

Stock Risk Premium

A

(Rm−Rf) βi
= Market Risk Premium x Beta

34
Q

Taxation of TIPS Bond Ladder

A

TIPS held in taxable account create “phantom income” on increases to par value. Traditionally Semi-annual interest payments on TIPS are subject to federal income tax

35
Q

Taxation of Bonds

A

Phantom income applies to the spread between the purchase price and par value of zero-coupon bonds

36
Q

Taxation of Money Market Funds

A

MM Mutual fund reinvested dividends are considered income, subject to taxation

37
Q

I-Bonds and Taxation of I-Bonds

A

I-Bonds offer investors the opportunity to pay taxes annually, upon sale or defer taxation until maturity.

38
Q

What are the minimum margin equity standards?

A

Min fed stock initial margin requirements = 50%
Mid fed maintenance margin requirements = 25%

39
Q

Total Premium of Options

A

IV + Time Premium

IV cannot be less than 0

40
Q

COME

A

IV of Call Options = MP - EP

41
Q

POEM

A

IV of Put Options = EP - MP

42
Q

At what price will I receive a margin call?

A

Use the Margin Call Price Formula to calculate the margin call price. When the stock price falls below the margin call price amount, you will received a margin call

(1 - initial margin %) /
(1 - maintenance margin %)

x Initial Purchase Purchase Price

43
Q

Spot Price (Futures)

A

Spot price is what the current market value of the item is in today’s market

44
Q

Long Position

A

Anyone who owns something is said to be “long”

(e.g., a farmer growing corn is long corn).

45
Q

Short Position

A

Anyone who has to buy something is said to be “short”

(e.g. a construction company that needs to build is short lumber).

46
Q

Short Hedge

A

anyone who is long (owns something) needs a short hedge.

Selling a futures contract establishes a short hedge.

47
Q

Long Hedge

A

Long Hedge: anyone who is short (needs to buy) needs a long hedge.

Buying a futures contract established a long hedge.

48
Q

Forward Contract

A

Are NOT standardized and carry counter party risk

49
Q

What futures position should you take if you think price in the future will be higher than today ?

A

Take a long position

50
Q

What futures position should you take if you think price in the future will be higher than today ?

A

Take a short position

51
Q

Most effective options strategies when you expect a big rise in the stock price

A

Protective call OR Covered Put

Protective call = Buy the call contract/right to buy the stock for the stock for which you expect the stock prices to go up (ie. EP will be lower than MP = Buy low)

Covered Put = Sell a put contract / agree to buy stock

52
Q

NPV

A

used to evaluate the cash flows associated with CAPITAL PROJECTS AND EXPENDITURES

NPV is superior

NPV >= 0 (positive) - go for it (actual return > Er)
NPV < 0; avoid it (actual return < Er)

If the NPV and the IRR suggest two different investment projects, select the project with a higher positive NPV.

53
Q

Wash Sale

A

occurs when a taxpayer realizes a LOSS on the sale of a security and acquires a “substantially identical” security within a 61-day period.

T -30 < T0 > T+30

if a wash sale is triggered, a client’s tax return will be affected.

54
Q

Wash Sale - Substantially Identical

A

Bonds: Investor purchases back the same exact bond or bond fund

Convertible bond – can convert to stock which is the same stock that was sold for a loss.

Purchase of a call option that can be exercised into the same stock that was sold for a loss.

(Selling a call no problem; fixed income secs are also no problem typically)

55
Q

Wash sale ramifications

A

Loss on sold security will be disallowed.

The disallowed loss will be added to the basis of the new securities purchased.

Eventually you will be allowed to use the loss when the new (replacement) securities are sold (via the higher cost basis).

56
Q

Current Ratio - Improvement or NOT

A

Current Assets / Current Liabilities

current ratio increasing = good (going higher/up because liabilities/denominator is decreasing compare to Assets/numerator)

57
Q

Debt Ratio - Improvement or NOT

A

Total Debt / Total Assets

Debt ratio is decreasing = good (going down/low, It’s improving (because total assets are growing compare to total debts or debts are decreasing compare to assets)

58
Q

Accredited Investors - Financial Criteria

A

Net worth over $1M, excluding primary residence (individually or with spouse or partner) OR

Income over $200K (individually) or $300K (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.

59
Q

Accredited Investors - Prof. Criteria

A

Pros with Series 7, 65, or 82 license
Director, Executives, General partners of the company selling the securities
Any “family client” of a “family office” that qualifies as an accredited investor,
“knowledgeable employee” of the fund

60
Q

Leading indicators

A

tend to rise and fall in advance of the economy

Avg weekly hours of production workers (manufacturing)
Initial claims for unemployment insurance
Manufacturers’ new orders
% of companies reporting slower deliveries
New orders of non-defense capital goods
New private housing starts
Yield curve
S&P 500
Money supply (M2) growth rate
Index of consumer expectation

61
Q

Coincident indicators

A

tend to change at the same time as the economy

Employees on non-agricultural payrolls
Personal income less transfer payments
Industrial production
Manufacturing and trade sales

62
Q

Lagging indicators

A

tend to follow or lag economic performance

Avg duration of unemployment
Ratio of trade inventories to sales
Change in index of labor cost per unit of output
Average prime rate
Commercial and industrial loans outstanding
Ratio of consumer installment credit outstanding to personal income
Change in CPI

63
Q

Benchmarks

A

LGR US Stocks = S&P 500
LGR US Stocks & Bonds = Vanguard balanced
SML US Stocks = Russell 2000
US Bonds = Barclays Cap
All Pub US Companies = Wilshire 5000
Cash = 3-month T-Bill
Commodities = Deutsche Bank Liquid Commodity
Pub REITS = Down Jones US Select REIT

Stocks in Dev. non-US = EAFE
Stocks in Emg. non-US = MCSI ME

64
Q

Real Estate Investment Trusts (REITs)

A

are closed-end investment companies that:
invest in real estate instead of financial assets and,
serve as a conduit for earnings on investments in real estate or loans secured by real estate.

65
Q

REIT Earnings

A

REITs pass earnings on to their shareholders.

As long as 90% of REIT taxable income is distributed to shareholders annually, that income is free from taxation for the REIT.

At least 75% of a REIT’s assets and income must be derived from real estate equity or mortgages.

66
Q

Mortgage REITs

A

Real Estate Mortgage Investment Conduits (REMICs)

allow investors to receive a stream of income from the mortgage payments.

67
Q

Equity REITs

A

offer investors the potential growth of their investments through realized capital gains, as well as the pass-through from rental income.

68
Q
A

CFP Prep - Nipa (10 decks)

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