Investment Planning Flashcards
Bond Swaps
Bonds are sold and different bonds are purchased to gain better tax treatment, yields, maturity, or trade profits.
Substitution swap: Different Yields
Pure-yield pickup swap: low yield for high yield.
Rate Anticipation Swap: lock into a loss for taxes.
Jesnen’s Ratio
Also known as Alpha (a) is an absolute measure of performance between a managed portfolio and and unmanaged portfolio and between different portfolio managers.
Investment Policy Statement
Document that creates a structure for making sound investment decisions. Includes risk/return objectives, determines constraints, establishes goals for measuring performance, and reduces professional liability.
Price to Earning Ratio (P/E)
Used to determine the value of stock. The dividend is compared to the earnings.
Current Yield / After Tax Yield
Current yield is the coupon component of a bond divided by the price of the bond.
After tax yield is the current yield times 1 minus the marginal tax rate.
Zero Coupon Bonds
A zero-coupon bond, also known as an accrual bond, does not pay interest but instead trades at a deep discount, rendering a profit at maturity.
Imputed interest is calculated and taxes are paid annually.
Wash Sale Rules
Selling stock and rebuying it or a similar stock within 30 days to harvest losses; not allowed.
Margin / Margin Call
Buying securities with borrowed money; amplifies gains or losses. The federal reserve set an initial margin requirement at 50% but firms can increase it.
The margin ratio of 1 minus the initial margin, divided by 1 minus the maintenance margin, times the original price of the stock.
Increase equity in the account by either selling assets or depositing cash.
January Effect / Weekday Effect
The efficient market theory that securities perform better in January or throughout the week and should be purchased on Monday and sold on Friday.
Technical Analysis
Theory that market prices are determined by supply and demand and that gains can be found by examining past trends.
Efficient Market Hypothesis Forms
Weak: Market isn’t efficient, fundamental analysis can predict gains.
Semi-Strong: Market is somewhat efficient, private information can predict gains.
Strong: Market is completely efficient, no amount of analysis can predict gains.
Fundamental Analysis
Theory that market prices are determined by company fundamentals and that gains can be found by examining their balance sheets and earnings reports.
Options
A derivative that gives someone the right to trade an asset for a predetermined price in exchange for a premium payment.
Buying calls (long) earns the right to buy an asset at a lower price. Selling calls (short) commits to selling the asset to the buyer at the agreed price.
Buying puts earns the right to sell an asset at a higher price. Selling puts commits to buying the asset from the buyer at the agreed price.
Options with value are in-the-money, no value are out-of -the-money.
Dollar Cost Averaging
Investments are purchased regularly over time at a predetermined amount. This reduces market risk.
Dividend Reinvestment Plans (DRIPS)
Using paid dividends to purchase more shares of stock.
Bond Ladder / Barbell
Ladders are a series of bonds that have their maturities spread out over a longer period of time.
Barbells are a series of bonds with short and long term (few middle term) to offset fluctuating interest rates.
Best Kinds of Assets for Tax Deferred Accounts
Best Kinds of Assets for Taxable Accounts
Tax Deferred: High-income assets, zero coupon bonds, stocks with high short-term appreciation, and TIPS.
Taxable: Municipal Bonds, T-Bills, T-Notes, bonds, growth stocks with high long-term appreciation.
Time-weighted vs. Dollar Weighted Returns
Time-weighted looks at the return of cash flows for multiple periods and averages the results, used by investment managers. Good for uneven cash flows.
Dollar-weighted looks at the internal rate of return of all cash inflows and outflows for a given period, used by investors.
Coefficient of Determination / Covariance / Correlation Coefficient
Also known as R-squared, CoD indicates systematic risk while 1 minus R-squared indicates unsystematic risk.
Covariance is the degree to which any two variables move together over time.
Correlation Coefficient measures the relationship of returns between two stocks. +1 indicates identical movements, -1 indicates opposite movements.
Collateralized Mortgage Obligations (CMO)
Mortgage derivatives split into tranches that pay from the top down. Highest tranches are the least risky while lower tranches accept greater risk for more return potential.
Warrants
Company issued rights to purchase that company’s equities within a certain time frame at a specific price.
Exercised warrants increase the number of outstanding shares and lowers prices.
Systematic / Unsystematic Risk
Systematic Risk effects the entire market and cannot be avoided through diversification.
Unsystematic risks only affect a particular business or industry and can be avoided through diversification.
Marketability Risk / Liquidity Risk
Marketability Risk is the relative ease with which a security may be bought or sold.
Liquidity Risk is the relative ease with which a security can be sold at a fair price without the risk of loss.
Mortgage Pass-Through Securities
A self-amortizing pool of mortgages that pay principle and interest and usually outperform government securities by 20%.
Exchange Traded Funds / Index Securities
Exchange Traded Funds are passively-managed portfolios that closely reflect an underlying benchmark index.
Index funds are similar but try to copy the performance of a particular index.
High Yield Corporate Bonds / Convertible Bonds
High Yield Corporate Bonds, known as Junk Bonds, are low-quality bonds that have higher yields, usually rated below BBB.
Convertible bonds give the holder the right to convert the bonds into shares of common stock.
Commercial Paper / Banker’s Acceptances / Repurchase Agreements
Commercial paper is the unsecured, short-term promissory notes issued by corporations with a maturity of less than 270 days.
Banker’s Acceptances are short-term promissory notes issued by banks for international trade.
Repurchase Agreements, or repos, are short-term securities in which the seller pledges to buy it back at a higher price on a specific date.
Stock Split / Stock Dividend
Stock splits increase the number of shares a company has outstanding and each owner now owns more based on the split multiple.
Stock dividends are payments of additional stock paid by a company.
Splits and dividends do not increase the value of the stock, merely the number of shares outstanding.
Six Types of Common Stock
Blue Chip, Income, Growth, Cyclical, Interest-sensitive, and Defensive
