Investment Planning Flashcards

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1
Q

2 steps to time value of money problems

A

1) Draw timeline, 2) Write TVM variables in order of my calc (N, I, PV, PMT, FV)

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2
Q

How to do quarterly or anything but annual periods

A

Quarterly compounding Nx4, i divided by 4.

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3
Q

How to determine future value when payment and compounding periods differ

A

NEED TO LEARN HOW TO SOLVE
CAREFUL AS EXAMPLE IN BOOK IS UNCLEAR
Use the nominal rate based on the number of payments per year

To get nominal rate need to use the annual effective interest rate based on the frequency of compounding.

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4
Q

How to calc IRR?

A

Discount rate when NPV =O
Use to decide the break even discount rate
Requires any returns be reinvested at the discount rate (can’t be done with bonds for example)

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5
Q

What to do when the investment and expense are growing at two different rates when calculating NPV type problems

A

Use the inflation adjusted rate of return

((1+Rn)/(1+inflation)) -1] x100

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6
Q

When a mortgage interest rate is shown what is the assumed period

A

Annual. So if calc monthly payment need to convert to monthly both N and i

Careful this is unclear. For multiple choice try monthly and annual

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7
Q

How to calc interest paid in a current or future year or any period on a mortgage or loan

A

Put number of periods you want interest for and then hit amortization. To get principal paid in that time us x<>y

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8
Q

NPV formula and when to accept project

A

NPV=PV of future cash flows - cost or initial investment

Do project if NPV is 0 or positive

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9
Q

Difference between annuity due and ordinary annuity and what types of payments is each used for.

A

Annuity due begins on t=0. The calc must be in begin mode and is used for education payments, retirement income and rent payments

Ordinary t=1calc in end mode. For debt payments like mortgage and car

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10
Q

Form ADV - Part 1

A

• This form contains the investment business, ownership, clients, employees, business practices, affiliations, disciplinary events of the adviser or its employees..
• A Registered Investment Advisor (RIA) must electronically file ADV Part 1 and Schedule I annually, withi days of their fiscal year end.

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11
Q

Form ADV - Part 2

A

advisor’s compensation, fees, education, investment objectives, conflicts of interest, and the background of advisory personnel.
* A Registered Investment Advisor (RIA) must promptly update the ADV Part 2 if any information becomes materially inaccurate. Otherwise the changes may be made annually.

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12
Q

Adv part 3

A

ContainsForm CRS (Customer Relationship Summary).
* Provides a retail investor succinct information about the relationship and service the firm offers including fees, costs, specified conflicts of interest, standard of conduct, and disciplinary history among other things.

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13
Q

Exceptions from registering with sec

A

TABLEs are incidental! -> Teachers, Accountants, Brokers, Lawyers, and Engineers.

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14
Q

Exemptions from registering with SEC

A

Exam Tip
Remember that “VIPs are SaFE from exemptions” -> Venture capital, Insurance companies, Private funds less than $150 million, home State, Eoreign advisors, and securities not on a national Exchange

Exam Tip
I
Make sure you distinguish between exceptions to registration and exemptions from registration. The examiners could easily ask, “Which of the following is an exemption?” and then provide you with three exceptions and an exemption.
Always keep in mind, an exception or exemption does not exempt anyone from the anti-fraud provisions of the Uniform Securities Act of 1956.

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15
Q

Federal Perkins Loan Program.

A

NEED BASED (very low EFC) ,expired 2017.

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16
Q

Federal Pell Grant.
Stafford Loans (also known as Federal Direct Loans)
. Subsidized versus Unsubsidized).

A
  1. Federal Pell Grant. NEED BASED grant,and cannot have a bachlor or professional degree to qualify from the US Department of Education.

Stafford loans
subsidized has interest paid during school is need based, unsub is not

Available to undergrad and graduate students.

Stafford Loans are not appropriate if the parents intend to repay the loans.

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17
Q

Parent Loans for Undergraduate Students (PLUS).
Grad PLUS loan for Graduate Students (PLUS Direct)

A
  1. The PLUS loan is a loan for parents to pay for their children’s undergrad studies.
    The PLUS loan is NOT need based but depends on the parent’s credit score.
    PLUS loans are not subsidized
    PLUS loans are appropriate for parents who can afford to make a loan payment, but may not have saved anything for education.

Grad PLUS loan for Graduate Students (PLUS Direct)
A graduate or professional student enrolled at least half-time at an eligible school in a program Icading to a graduate or professional degrec or certificate.
Dependent on student credit score.
Maximum PLUS loan amount you can borrow is the cost of attendance minus any other financial assistance you reccive.
Begin making payments six months after you graduate, leave school, or drop below half-time enrollment.
Interest accrues as you go, you can pay it as you go or let it be added to your balance.

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18
Q

How to find an effective annual interest rate when compounded n times per year

A

5% interest with quarterly compounding has an effective annual yield of (1 + . 05/4)^4

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19
Q

How to calculate holding period return

A

(Selling Price - Purchase Price +/- Cashflows)

Divided by
Purchase Price or Equity Invested

The examiners will typically not give you a straight holding period return because it is very straight forward.
Items that make the computation more difficult include:
Dividends received - make sure to add them to the numerator.
Margin interest paid - make sure to subtract from the numerator.
Taxes paid - only do this if the question asks for the after-tax gain or loss. The taxes will be computed based on the dividends received and any capital gains on the sale (short-term versus long-term). Taxes, like margin interest, are subtracted from the numerator.
Purchased the securities on margin - in the numerator make sure to subtract any interest paid. Also, in the numerator you will include the total cost of the securities as a subtraction from the sales proceeds.
In the denominator you only include your equity in the trade.

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20
Q

What does 60% margin mean?

A

I borrowed 40%

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21
Q

What is the difference between time and dollar weighted returns

A

Dollar weighted is for total cash flows (investor return)

Time weighted is for single share return (the cash flow of a single share (ignores any share repurchase net of dividends)

21
Q

How do mutual funds report their returns

A

On a time weighted basis

22
Q

APT (Arbitrage pricing theory)

A

multi-factor pricing model that is sensitive to factors (inflation, risk premium, etc)–but standard dev and beta of a stock are not inputs (they are just features of the stock)

23
Q

Efficient market hypothesis choices

A

Weak
Price reflects: Historical Price Data, so to predict future price use Fundamental Analysis & Inside Information

Semi-Strong
Price reflects: Public Information so to predict future price use inside information

Strong
price reflects All Information so no way to get advantage. Index fund investors believe this (or are don’t have ability to get inside or do funamental analysis).

The above says technical analysis is useless

24
Q

Relationship between required rate of stock returns, dividends and stock price

A

Stockprice and required rate of return are inversely related

stock price and dividend are directly related

Exam Tip
If the required rate of return decreases, the stock price will increase.
If the dividend is expected to increase, the stock price will increase.
If the required rate of return increases, the stock price will decrease.
If the dividend is expected to decrease, the stock price will decrease.

25
Q

What is the dividend payout ratio formula

A

Common stock dividend divided by EPS

26
Q

Non-marketable US treasury security issues

A

Means they cannot be easily bought or sold

Series E or EE; Series I (i for inflation adjusted)

27
Q

Marketable US treasury securities

A

T-Bills (less than 1 year maturity)
Notes (2-10 years maturity)
Bonds (10+ year maturity)

28
Q

Coupon rate on a bond

A

The interst rate it pays

Par value is the final value of the bond (For TIPS (treasury inflation protected securities)) the par value changes with inflation (to change the coupon / interest rate paid)

29
Q
A
30
Q

Government bonds not backed by the us government

A

Agency Bonds are not backed by the US government.

Exception to the rule - GMA bonds are backed by the US government.

31
Q

Fixed income risks

A

Corporate Bond Risk
1. Reinvestment Rate Risk.
1. Interest Rate Risk.
1. Purchasing Power Risk.
* Default Risk.

US Government Bond Risk
1. Reinvestment Rate Risk.
1. Interest Rate Risk.
1. Purchasing Power Risk.

32
Q

What is coupon rate?
What is par value?

A

Coupon Rate
• Coupon rate is the periodic interest payment received by a bond holder.
• The actual dollar amount of the coupon payment is entered as a payment on a financial calculator.
• For example: A bond with a 10% coupon pays $50 semiannually ($1,000 par x 0. 10 coupon divide by 2). That is
10% of the $1,000 par value or $100, paid semiannually at $50 eachtime. Keystroke = PMT

Length of Time to Maturity


The length of time to maturity is the time remaining until the bond holder receives the par value.
The length of time to maturity can be described as the “Number of periods” to maturity, or that the loan will be outstanding.
For a bond paying semiannually, there will be 2 periods per year; quarterly payments will have 4 periods per
year; and monthly, there will be 12 periods per year. Keystroke = N

Par Value
• Par value is the principal amount which is $1,000 on bond issues, unless stated otherwise.
The par value is the amount that will be repaid to bond investors at the end of the loan period. Keystroke = FV

33
Q

Current yield of a bond equation

A

CY = coupon payment / price of bond

34
Q

How to calculate YTM (yield to maturity) on a bond

A

Use time value of money solving for i with the FV= par (usually 100) and don’t forget to adjust N and i if semi-annual coupon payment (multiple N by 2) and i by 2

PMT is par times the coupon rate

Always assume semi-annual compounding

35
Q

How to calculate YTC

A

Yield to call is the same calc as YTM, but N is about the time to call (again, N is typically 2x the years as bonds are semi-annual). Don’t forget to multiply i by 2

36
Q

If a bond’s coupon rate is higher than current yield it is at a premium and is it the YTM higher than YTC or note

A

Premium

YTM is lower than YTC.

Call moms cell now.

YTC, YTM, CY, NY

37
Q

When shopping, if you see a discount

A

Call Mom’s cell now

Highest to lowest: YTC, YTM, CY, NY. Premium is opposite

38
Q

When purchasing a bond, what happens to accrued interest between actual bond payments

A

the buyer pays the seller the accrued interest (but can deduct on their 1099)

39
Q

Duration vs interest rate changes on bonds

A

If expect interest rates to go up, get shorter duration.

The bigger duration of a bond the more sensitive to interest rate cahnges

40
Q

Conversion value formula

A

CV = Par x Price of common stock / Conversion price

41
Q

Bond duration key facts

A

D DURATION
ruration is the weighted average maturity of all cash flows.
The bigger the duration, the more price sensitive or volatile the bond is to interest rate changes.
Duration is the moment in time the investor is immunized from interest rate risk and reinvestment rate risk.
Modified Duration is a bond’s price sensitivity to changes in interest rates.

Exam Tip
There is a direct relationship between duration and the term of a bond. As term increases or decreases, duration will increase or decrease. There is an inverse relationship between the coupon rate/yield to maturity and duration. Remember, coupon rate and yield to maturity are INterest rates and there is an INverse relationship. The IN should help keep it straight.
H
- A bond portfolio should have a duration equal to the investor’s time horizon to be effectively immunized.

42
Q

How to calc net operating income

A

Exam Tip
Make a flashcard for calculating Net Operating Income. Simply take net income and add back depreciation and financing activities. I

43
Q

Convert 100 basis points to decmils

A

.01 or 1%

44
Q

How to calculate the new price of a bond when interest rate changes

A

1) Calc YTM
2) Calc Duration with big formula
3) Calc delta P with formula

45
Q

When is a bond selling at a premium

A

A bond is selling at a premium if it is selling above PAR ( Par is almost always 1000)

46
Q

What is convexity

A

Convexity measures the difference between duration’s estimate of a bond’s price change and the actual price change of a bond.

47
Q

What is a debenture

A

Debentures are unsecured corporate debt.

short-term promissory notes would be “commercial paper.”

48
Q

Bond volatility comparison maturity and coupon

A

The lower the coupon, the more volatile the bond.

The longer the maturity, the more volatile the bond. The greater the volatility, the greater the risk to the investor.

49
Q

Features of a tax exempt original issue discount bond

A

tax-exempt Original Issue Discount (OID)
The bond basis increases at a set rate each year.
The difference between maturity value and the original issue discount price is known as the OID.
The bond’s earnings are treated as exempt interest income.
The bond was issued at a discount to its par value.

50
Q

What is a red herring?

A

A preliminary prospectus issued by the managing house of an offering.

The red herring is so called because of the red lettering notifying prospective investors of its status as a prospectus without prices included.

51
Q

What are the following and what is each’s duration:

Treasury bills
Commercial paper
Bankers acceptances
Treasury notes
Agency issues

A

Treasury bills are short duration and backed by the full faith and credit of the United States government. Treasury bills have 4, 8, 13, 17, 26 and 52-week durations. They are least volatile.

Commercial Paper is a money market instrument with a 270-day maturity.

Bankers Acceptances are money market instruments durations less than or equal to 12 months.

Treasury notes have maturities of 2,3,5,7, or 10 years.

Agency issues are not backed by the full faith of the federal government (though in practicality they may be) and are slightly more volatile and pay a higher yield.