Investment Planning Flashcards
Yield Curve
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
Upward Sloping Yield Curve
Positive, normal
Short term rates are lower than long-term rates
Flat Yield Curve
Rates of short and long-term are similar
Downward Sloping Yield Curve
Negative, inverted
Short-term rates are higher than long-term rates
Usually a sign of looming recession
Valuation of Bonds
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
Nominal Yield
Stated or coupon yield
Current Yield
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)
Duration
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
Yield to Worst
Is the lower of YTM and YTC
CY is sooner than YTM which is sooner than YTC
What is the Multi-Staged Dividend Discount Model?
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
Margin
The process of pledging securities in your brokerage acct for a loan from your brokerage firm.
Minimum Federal stock Initial Margin Requirements
50%
Minimum Federal Maintenance Margin Requirements
25%
Covered Call WRiting
Long the underlying stock - short the call
- only considered covered if you own enough shares to cover all contracts sold.
- used to generate income
Naked Call Writing
Does NOT own the underlying stock - short the call
- Writer bears UNLIMITED risk
Protective Put
Long the stock - long the put
- This is PORTFOLIO INSURANCE
Collar (Zero Cost Collar)
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.
Spot Price (of a futures contract)
Current market value of an item in today’s market
Long Position (futures)
Anyone who owns something (farmer growing corn)
Short Position (futures)
Anyone who has to buy something (contruction company needing lumber)
Short Hedge (futures contracts)
Anyone who is long needs a short hedge.
Selling a futures contract creates a short hedge
Net Present Value (NPV)
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.
Internal Rate of Return (IRR)
Allows planner to compare the computed rate to the required rate of return.
Wash Sale
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.
Gross Profit Margin Ratio
Gross Profit / Sales
Operating Profit Margin Ratio
Operating Income / Revenue
Return on Assets Ratio (ROA)
EAT / Total Assets
Return on Equity (ROE)
EAT / Equity
