Investment Planning 17% Flashcards
Dividend Discount Model Definition
Shows constant growth and values a company’s stock by discounting the future stream of cash flows.
Dividend Discount Model (on Formula Sheet) Explained
V= D1/(r-g) Where r= Required return rate g= growth rate D1= Next period’s dividend
Calculate next period’s dividend for Dividend Discount rate
D1= D0(1+g) D0= current dividend
in CAPM (rm-rf) is considered:
the market risk premium
What does CAPM calculate
Required or Expected Rate of Return
Expected rate of return Formula (on Formula Sheet) Explained
r= (D0(1+g)/P) + g (P is market price of stock)
What do you need to calculate CAPM
rf, Beta, rm (return of the market)
How to tell if a stock is over or under valued
Intrinsic Value = Dividend Discount Model
These bonds are considered to be owned by whoever possesses them:
Bearer bonds
Debenture is -
Unsecure corporate debt
Treasury Bills VS Treasury Notes
1 year or less, 2-10 years
Equipment trust certificate example
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
Callable bond concerns:
The uncertainty about the amount of payments made to the bondholders
The reinvestment risk faced by the bond investors
An increasing inflation rate can have a negative effect on the value of common stock and bonds due to:
An increase in the investor’s required rate of return.
Which of the following elements of risk in mortgage-backed securities can be difficult to determine?
Actual maturity is not known with certainty & actual cash flows are not known with certainty.
Lower coupon and longer maturity make bonds more
Volatile
Standard and Poor’s Ratings of AAA-BBB for bonds
Investment Grade Good Bonds
Standard and Poor’s Ratings of BB and below
Junk bonds
Original Issue Discount (OID)
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)
Treasury Security Risk
Has purchasing power risk, not default risk
Unsystematic risk
Diversifiable, can be eliminated through adequate and strategic diversification
Undiversifiable Risk
Market risk, Interest Rate Risk, Purchasing power risk
Mortgage-backed securities have
Purchasing power risk, interest rate and prepayment risk
What is a measure of systematic, non-diversifiable risk
Beta
Rational investors will form portfolios and eliminate what risk?
unsystematic
Can eliminate what risk using buy and hold strategy with regard to fixed income securities
Eliminate Interest rate risk
Financial Risk
Amount of leveraging or use of borrowed funds a firm utilizes to structure its investments and finance its assets
Who sets margin requirements for all security transactions
Federal Reserve
Required Equity
Current price X Maintenace margin
Payout Ratio Explained
The percentage of net income paid out as dividends and a measure of a company’s earnings retention philosophy
Firm Commitment
For underwriting - the investment banker agrees to purchase the entire issue and resell the securities to the public
When evaluating the return of two investment managers, the performance measurement approach generally used is the
Time Weighted
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
Government National Mortgage Association Certificates (Ginnie Maes) GNMAs and Treasury issues
A yield curve normally upward sloping because
Long-term bonds are, by their nature, more risky than short term bonds
The bond investment strategy of “riding the yield curve” involves:
Investing either short-term or long-term to take advantage of anticipated interest rate changes
A yield curve can be described as a curve that:
Shows the term structure of interest rates on government debt
Which one of the following factors would be the strongest indication that interest rates might rise?
Selling of dollar denominated assets by foreign investors
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:
lower - cash dividends will generally tend to drive the price of the underlying security lower and along with it, the call option prices
Short Selling
selling first at a higher price, in hopes of purchasing the stock back at a lower price
Maintenance Margin
The minimum amount of equity requiried before a margin call
10k
an annual report of financial statements filed with the SEC - audited
10Q
quarterly report that is filed with the SEC not audited
Annual Report
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
Market Order
timing and speed execution are more important than price
a market order is most appropriate for stocks that are traded a lot
Limit Order
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
Stop Order
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
Stop-Limit or Stop Loss Limit Order
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
