Investment Planning 17%

Question 1

Dividend Discount Model Definition

Answer 1

Shows constant growth and values a company’s stock by discounting the future stream of cash flows.

Question 2

Dividend Discount Model (on Formula Sheet) Explained

Answer 2

V= D1/(r-g) Where r= Required return rate g= growth rate D1= Next period’s dividend

Question 3

Calculate next period’s dividend for Dividend Discount rate

Answer 3

D1= D0(1+g) D0= current dividend

Question 4

in CAPM (rm-rf) is considered:

Answer 4

the market risk premium

Question 5

What does CAPM calculate

Answer 5

Required or Expected Rate of Return

Question 6

Expected rate of return Formula (on Formula Sheet) Explained

Answer 6

r= (D0(1+g)/P) + g (P is market price of stock)

Question 7

What do you need to calculate CAPM

Answer 7

rf, Beta, rm (return of the market)

Question 8

How to tell if a stock is over or under valued

Answer 8

Intrinsic Value = Dividend Discount Model

Question 9

These bonds are considered to be owned by whoever possesses them:

Answer 9

Bearer bonds

Question 10

Debenture is -

Answer 10

Unsecure corporate debt

Question 11

Treasury Bills VS Treasury Notes

Answer 11

1 year or less, 2-10 years

Question 12

Equipment trust certificate example

Answer 12

An airline is considering issuing bonds to finance eight new airplanes that will be delivered in 6 months, which type of bond will the airline use

Question 13

Callable bond concerns:

Answer 13

The uncertainty about the amount of payments made to the bondholders
The reinvestment risk faced by the bond investors

Question 14

An increasing inflation rate can have a negative effect on the value of common stock and bonds due to:

Answer 14

An increase in the investor’s required rate of return.

Question 15

Which of the following elements of risk in mortgage-backed securities can be difficult to determine?

Answer 15

Actual maturity is not known with certainty & actual cash flows are not known with certainty.

Question 16

Lower coupon and longer maturity make bonds more

Answer 16

Volatile

Question 17

Standard and Poor’s Ratings of AAA-BBB for bonds

Answer 17

Investment Grade Good Bonds

Question 18

Standard and Poor’s Ratings of BB and below

Answer 18

Junk bonds

Question 19

Original Issue Discount (OID)

Answer 19

Zero Coupon Bond, difference between maturity value and the original issue discount price is known as the OID, issued at a discount to par value, bondholder must receive income (pay taxes) if no income received)

Question 20

Treasury Security Risk

Answer 20

Has purchasing power risk, not default risk

Question 21

Unsystematic risk

Answer 21

Diversifiable, can be eliminated through adequate and strategic diversification

Question 22

Undiversifiable Risk

Answer 22

Market risk, Interest Rate Risk, Purchasing power risk

Question 23

Mortgage-backed securities have

Answer 23

Purchasing power risk, interest rate and prepayment risk

Question 24

What is a measure of systematic, non-diversifiable risk

Answer 24

Beta

Question 25

Rational investors will form portfolios and eliminate what risk?

Answer 25

unsystematic

Question 26

Can eliminate what risk using buy and hold strategy with regard to fixed income securities

Answer 26

Eliminate Interest rate risk

Question 27

Financial Risk

Answer 27

Amount of leveraging or use of borrowed funds a firm utilizes to structure its investments and finance its assets

Question 28

Who sets margin requirements for all security transactions

Answer 28

Federal Reserve

Question 29

Required Equity

Answer 29

Current price X Maintenace margin

Question 30

Payout Ratio Explained

Answer 30

The percentage of net income paid out as dividends and a measure of a company’s earnings retention philosophy

Question 31

Firm Commitment

Answer 31

For underwriting - the investment banker agrees to purchase the entire issue and resell the securities to the public

Question 32

When evaluating the return of two investment managers, the performance measurement approach generally used is the

Answer 32

Time Weighted

Question 33

Your client will only invest in securities backed by the full faith, credit and taxing power of the US government. Which of the following should she consider for her portfolio

Answer 33

Government National Mortgage Association Certificates (Ginnie Maes) GNMAs and Treasury issues

Question 34

A yield curve normally upward sloping because

Answer 34

Long-term bonds are, by their nature, more risky than short term bonds

Question 34

The bond investment strategy of “riding the yield curve” involves:

Answer 34

Investing either short-term or long-term to take advantage of anticipated interest rate changes

Question 35

A yield curve can be described as a curve that:

Answer 35

Shows the term structure of interest rates on government debt

Question 36

Which one of the following factors would be the strongest indication that interest rates might rise?

Answer 36

Selling of dollar denominated assets by foreign investors

Question 37

Whenever there is a cash dividend issued on an underlying stock, the price (or premium) for a call option available on the stock tend to be:

Answer 37

lower - cash dividends will generally tend to drive the price of the underlying security lower and along with it, the call option prices

Question 38

Short Selling

Answer 38

selling first at a higher price, in hopes of purchasing the stock back at a lower price

Question 39

Maintenance Margin

Answer 39

The minimum amount of equity requiried before a margin call

Question 40

10k

Answer 40

an annual report of financial statements filed with the SEC - audited

Question 41

10Q

Answer 41

quarterly report that is filed with the SEC not audited

Question 42

Annual Report

Answer 42

Contains a message from the chairman of the board on the progress in the pass year and outlook for the coming year, sent directly to shareholders

Question 43

Market Order

Answer 43

timing and speed execution are more important than price

a market order is most appropriate for stocks that are traded a lot

Question 44

Limit Order

Answer 44

the price at which the trade is executed is more important than the timing

-appropriate for stocks that are extremely volatile and not frequently traded

Question 45

Stop Order

Answer 45

The price hits a certain level and turns to a market order

To sell means that once the stop order price is reached, the stock is sold at the price or possibly less because it has become a market order

Risk- investor may receive significantly less if market moves too quickly

Question 46

Stop-Limit or Stop Loss Limit Order

Answer 46

The investor sets two prices:
* the first price in the stop-loss price, once the price is reached the order turns to a limit order