Investment Planning (2024)

Question 1

American Depository Receipts (ADR)

Answer 1

Allow US investors to buy foreign country stock denominated in dollars. They do not eliminate currency exchange rate .

Question 2

Ex-Dividend Date

Answer 2

The date which the current dividend no longer accompanies the stock

Question 3

Treasury Shares

Answer 3

Shares that have been repurchased by the corporation .

Question 4

Preemptive rights

Answer 4

Allows the shareholder to purchase additional shares to retain the same percent ownership they had prior the secondary offering 

Question 5

Conversion ratio (convertible bonds)

Answer 5

Par/conversion price.  to determine how many shares are available upon conversion.

Question 6

Conversion value ((convertible bond)

Answer 6

Conversion value = (par / conversion price) x price of stock.

Conversion price =par / shares

Question 7

Coefficient of variation (risk per unit of return)

Answer 7

Coefficient of variation = standard deviation/expected return.

 The lowest coefficient of variation is the most attractive 

Question 8

Red herring

Answer 8

Preliminary prospectus issued by the managing house of an offering. Called this because of the red lettering notifying, prospective investors of its status as a prospectus without prices included.

Question 9

Bottom up analysis 

Answer 9

Bottom up analysts are looking for the next big, but as yet, undiscovered stock that will break onto the scene. They start with the company, then the industry, and finally the economic climate. 
They research specific companies that are chosen as investments based on their end outstanding investment possibilities 

Question 10

Top down analysis

Answer 10

Top down analyst start with the economic climate, move to the industry and then the company. 

Question 11

Top- down style managers

Answer 11

Group rotation, managers, and market timers .

Question 12

Bottom up equity managers

Answer 12

Value managers and technicians 

Question 13

Odd lot theory

Answer 13

Odd lot purchase levels indicate the number of small investors in the market.

Odd theory states small investors are always wrong. If odd purchases are falling relative to odd sales, it indicates small investors think the market will fall. Since they are always wrong, it would indicate arise in the market is coming. 

Question 14

1245 property tax treatment

Answer 14

1245 is personal property used in a trade or business held greater than a year.

Basis = purchase price – appreciation

1245 recapture applies to depreciation. Tax at ordinary income.

Rest of gain is 1231 gain. Tax as long-term capital game as all 1231 property is held greater than a year. 

Question 15

1250 property tax treatment

Answer 15

Section 12 for 50 property is depreciable real estate used in a business or trade held greater than one year.

Basis = purchase price – depreciation

Straight line depreciation is 1250 recapture tax at 25%.

Access depreciation (accelerated depreciation) tax, ordinary income .

Rest is 1231 gain taxed as long-term gain because all 1231 is held greater than year

Question 16

Ordinary income assets

Answer 16

-Literary compositions in the hands of the author
-note receivable from a trader business
-Stock in a trade held for sale to customers in the ordinary course of business

• these are not section 1231 assets

Question 17

Preferred stock

Answer 17

Preferred stock is more risky than bond because bonds are legal obligation have higher priority and bankruptcy proceedings.

Dividends are set at issue by the board as a percent of par value and do not change .

Changes interest rate, directly impact preferred stock, and there is no relief on preferred stock because most cannot be held to maturity (as most are issued without a maturity date)

It’s market fluctuations are greater than the long-term bond market fluctuations

It is more risky than debt

If dividends are not paid in a given cycle, they cannot be paid to anyone else until they are paid to preferred shareholders. This is called the cumulative feature.

Convertibility is when the preferred chair holder has the option of accruing a certain number shares and then converting them to common stock

Preferred stocks are non-voting shares M
Participating preferred socks is when there are additional or extra dividends declared, the preferred shareholders have the right to share in the profits

Question 18

Riding the yield curve
(investment strategy)

Answer 18

Refers to the purchase of debt instruments in anticipation of fluctuations, and the rates of return on both long and short term instruments.

Rising rates of interest require repositioning a portfolio in advance, the rise in order to avoid significant price drops.

These moves based on anticipated changes in the yield curve.

Question 19

Relationship between bond coupon rate and volatility

Answer 19

The lower the coupon right, the more volatile (price)

Duration is the best indicator for evaluating a bond sensitivity to interest-rate risk because it measures interest rate and reinvestment rate changes .

Question 20

Zero coupon bond duration

Answer 20

A zero coupon bond duration is always its maturity

Coupon bonds with the same time to maturity as a zero-coupon bond will always have a shorter duration

Question 21

Immunization (Duration)

Answer 21

The average weighted duration of the portfolio rather than the duration of each Pacific bond is used for successful portfolio immunization

Question 22

Entire contract clause

Answer 22

The policy and the application attached make up the insurance agreement

Question 23

Unit investment trust

Answer 23

Passive management of the portfolios

Self liquidating investments, usually holding bonds. (can also hold equities)

No additions to investments are made once the trust has been structured

Question 24

Closed-End Funds

Answer 24

Only sell a limited number of shares

Offer no price guarantees, and do not always sell at net asset value (NAV). Generally sell it either a premium or discount to par value. When purchased at a discount, they afford investors and opportunity to realize upside capital Appreciation.

Traded on the secondary markets

Actively managed

Question 25

Investment company fees

Answer 25

12b-1 fees: Fee is charged based on the average daily fund assets and used principally to meet marketing expenses. Used for marketing and distribution costs

Management fees: legal, accounting and analysis fees are paid through this

Commissions: paid using either a front load or a back load

Question 26

Open-End Funds

Answer 26

Both passively and actively managed

Traded directly with the fund, not on the secondary market

Question 27

Dividend Reinvestment Plan (DRIP)

Answer 27

 program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock (bought directly from the company on the dividend payment date

Typically come from the companies own reserve, they are not marketable through stock exchanges. Shares must be redeemed directly through the company also.

Dividends paid on a mutual fund, our taxable, even when reinvested

Question 28

What does a stock dividend signal to investors?

Answer 28

The firm is retaining capital for growth related activities.

Often taken as a favorable sign.

Question 29

Ladder bond strategy

Answer 29

Primary reason to implement is to lower overall interest rate risk.

Question 30

How was the slope of the SML determined?

Answer 30

By the market risk premium.

Portfolios below the line are overvalued, because security is not providing the amount of return that it should be yielding if correctly priced.

Portfolios above the line are undervalued because they yielding more than they should be according to CAPM.

Question 31

Markowitz efficient frontier

Answer 31

Shows all portfolios that offer the highest rate of return for given degree of risk or the lowest degree of risk for a given rate of return