Investment Planning

Question 1

Yield Curve

Answer 1

Plots the rates of fixed income securities from very short to 30 years.

Under normal economic conditions, short term rates are lower than long-term rates

Function of both business cycle and fed policy

Question 2

Upward Sloping Yield Curve

Answer 2

Positive, normal

Short term rates are lower than long-term rates

Question 3

Flat Yield Curve

Answer 3

Rates of short and long-term are similar

Question 4

Downward Sloping Yield Curve

Answer 4

Negative, inverted

Short-term rates are higher than long-term rates

Usually a sign of looming recession

Question 5

Valuation of Bonds

Answer 5

A function of bonds coupon payments (PMT key),
Market rate (i key),
Time remaining to maturity (n key)
Maturity or Par Value (always assume $1,000 and use FV key)

Semi-Annual Compounding

Question 6

Nominal Yield

Answer 6

Stated or coupon yield

Question 7

Current Yield

Answer 7

The annual income paid divided by current market price of the bond.

Annual income paid/current market price

Either priced above (premium) or below (discount) of par value (always assume $1,000)

Question 8

Duration

Answer 8

The weighted avg of the present values of future cash flows of a bond

Used to estimate the sensitivity of a bond to changes in rates

The longer the duration the lower the coupon, the more sensitive to rate changes

The shorter the duration and higher the coupon, the less sensitive to changes in rates.

Always stated in years

Question 9

Yield to Worst

Answer 9

Is the lower of YTM and YTC

Question 10

CY is sooner than YTM which is sooner than YTC

Question 11

What is the Multi-Staged Dividend Discount Model?

Answer 11

A formula used in situations whwere a dividend paying security has a temporary expected growth rate that changes to a stabilized rate for constant growth.

Forumulas
D1=(D0 x (1+g))
D2=(Do x (1+g))
D3=(Do x (1+g))

Step 2: Calculate the stock valuation based on the new constant dividend rate…

V = D1 / r-g

Question 12

Margin

Answer 12

The process of pledging securities in your brokerage acct for a loan from your brokerage firm.

Question 13

Minimum Federal stock Initial Margin Requirements

Answer 13

50%

Question 14

Minimum Federal Maintenance Margin Requirements

Answer 14

25%

Question 15

Covered Call WRiting

Answer 15

Long the underlying stock - short the call

• only considered covered if you own enough shares to cover all contracts sold.
• used to generate income

Question 16

Naked Call Writing

Answer 16

Does NOT own the underlying stock - short the call

• Writer bears UNLIMITED risk

Question 17

Protective Put

Answer 17

Long the stock - long the put

• This is PORTFOLIO INSURANCE

Question 18

Collar (Zero Cost Collar)

Answer 18

Long the stock - long the put - short the call

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

Question 19

Spot Price (of a futures contract)

Answer 19

Current market value of an item in today’s market

Question 20

Long Position (futures)

Answer 20

Anyone who owns something (farmer growing corn)

Question 21

Short Position (futures)

Answer 21

Anyone who has to buy something (contruction company needing lumber)

Question 22

Short Hedge (futures contracts)

Answer 22

Anyone who is long needs a short hedge.

Selling a futures contract creates a short hedge

Question 23

Net Present Value (NPV)

Answer 23

Used to evaluate the cash flows associated with capital projects and expenditures.

If positive result = investor should undertake investment

if negative = investor should avoid

if zero = investor should undertake the investment.

Question 24

Internal Rate of Return (IRR)

Answer 24

Allows planner to compare the computed rate to the required rate of return.

Question 25

Wash Sale

Answer 25

If a wash sale is triggered, a client cannot deduct losses from sales of trades or stock.

Time period is 30 days prior and 30 days after. Total time is 61 days.

Disallowed loss will be added to the basis of the new security purchased.

Question 26

Gross Profit Margin Ratio

Answer 26

Gross Profit / Sales

Question 27

Operating Profit Margin Ratio

Answer 27

Operating Income / Revenue

Question 28

Return on Assets Ratio (ROA)

Answer 28

EAT / Total Assets

Question 29

Return on Equity (ROE)

Answer 29

EAT / Equity