Investment Planning Flashcards
What is Unsystematic Risk?
Diversifiable
- Business risk
- Financial risk
What is Systematic Risk?
NOT diversifiable
No matter how well difersified, risk of the overall market cannot be avoided.
Types of systematic risk (P.R.I.M.E.)
- Purchasing power risk: inflation
- Reinvestment risk: reinvested funds invested at lower rate
- Interest rate risk: Rise in rates causes value of fixed income assets to fall
- Market risk: risk of the overall market
- Exchange rate risk: risk associated with changes in currency value.
FDIC Insured Amounts (per bank/type of account)
Individual: $250k
Joint: $250k
Trust (per bene): $250k
IRA/Keogh: $250k
EE Bonds
- Non-marketable, nontransferable, can’t be used for collateral
- Sold @ Face value
- Interest rate based on 10yr treasury note yields
- Fixed interest rate that’s in effect at the time of purchase
- Subject to federal taxation when redeemed (unless used as education bonds)
- Not subject to state or local taxes
I Bonds
- Non-marketable, nontransferable, cannot be used for collateral
- Sold @ Face value
- interest rate composed of:
- fixed based rate (same for life of bond)
- inflation adjustment (adj every 6 months)
- Subject to federal taxation when redeemed (unless used for education)
- Not subject to state or local taxes
What is a GO bond?
General Obligation bond.
- Backed by full faith, credit, taxing power of issuer.
- Generally considered safest type of municipal credit
What is a revenue bond?
- Backed by specific source of revenue (ex: toll road, hospital, nuclear power plant)
- Full faith and credit NOT pledged by issuer
- Greater credit risk than GO bonds, thus higher yielding
What are insurer municipal bonds?
Insurers pay timely interest and principal when issuer is in default.
Municipal bond insurers:
- AMBAC (American Muni Bond Assurance Corp)
- MBIA (Muni Bond Insurance Association Corp)
What does an indenture agreement cover?
- Form of bond
- Amount of issue
- Property pledged
- Protective covenant, including any provision for a sinking fund
- Working capital and current ratio
- Redemption rights, call, put or conversion provisions
Corporate and Municipal Bonds (D.R.I.P.)
- Default risk: A creditor may seize the collateral and sell it to recoup the principal
- Reinvestment risk: Funds reinvested at lower rate
- Interest rate risk: Rising rates may cause bond prices to fall
- Purchasing power risk: bond interest may not keep up with inflation
Government bonds (R.I.P.)
No: default risk
Yes: Reinvestment risk, interest rate risk, purchasing power risk
Company market caps
Large: >$10B
Mid: $2-10B
Small:
American Depository Receipt (ADR)
- Prices of ADRs quoted in US dollars
- Dividends paid in US dollars
- Dividends declared in foreign currency
Attain diversification and risk reduction due to lower correlation of foreign securities with US securities
Real Estate (land - improved) NOI
Improved land is normally income producing. Income properties include residential rental, commercial and industrial.
Intrinsic value of real estate property can be computed using NOI computation:
Gross rental receipts \+ Nonrental income (laundry, etc) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Potential gross income (PGI) - Vacancy and collection losses - Operating expenses (excluding depreciation and interest) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ = Net Operating Income
