Investment Strategies - Review Questions Flashcards
Which of the following interest rate environments are beneficial for the buyer of a collar?
Choose the best answer.
1) Rates go above cap
2) Rates remain between cap and floor
3) Rates go below floor
1) Rates go above cap
A collar is beneficial when the rate goes above the cap.
One characteristic of a company dividend reinvestment plan (DRIP) is:
1) The IRS exemption for investors for dividends (constructive receipt rule)
2) The high average cost in implementing the plan
3) The market timing benefits of the strategy
4) The minimal cost to the company in raising capital
4) The minimal cost to the company in raising capital
No such IRS exemption exists, and this is a taxable event. Setup costs are minimal with this strategy. Market timers are active investors. A DRIP strategy is a passive strategy.
To immunize a bond portfolio over a specific investment horizon, an investor should do which of the following?
1) Match the average-weighted maturity of the portfolio to the investment horizon.
2) Match the average-weighted duration of the bond portfolio to the investment horizon.
3) Match the maturity of each bond to the investment horizon.
4) Match the duration of each bond to the investment horizon.
Match the average-weighted duration of the bond portfolio to the investment horizon.
This is the definition of the immunization of a portfolio.
Which combination of the following statements about bond swaps is (are) true?
1) Rate anticipation swaps are based on forecasts of interest rate changes.
2) Tax swaps are made in order to substitute capital gains for current yield.
3) Yield pickup swaps are designed to change the cash flow of the portfolio by exchanging similar bonds that
have different coupon rates.
4) Substitution swaps are designed to take advantage of a perceived yield differential between bonds that are
similar with respect to coupons, maturities, ratings, and industry.
(1), (3) and (4)
(1) and (3) only
(2) and (4) only
(4) only
(1), (3) and (4)
In a substitution swap, one bond is exchanged for another bond that has the same characteristics, but with a better yield. The statement about rate anticipation swaps is also correct. In that situation. the bond investor seeks to benefit by or avoid the disadvantage of an expected change in interest rates. The statement in (3) is also correct. In this strategy, an investor may exchange a long-term security for a short-term security if short-term rates are higher than long-term rates. (2) is incorrect. In a tax swap, the objective is to reduce capital gains taxes. The investor sells bonds for a loss and buys bonds of similar quality and maturity with the proceeds. The realized loss helps to lower capital gains.
John began purchasing shares of MRL stock mutual fund several years ago. He has utilized a dollar-cost averaging strategy by investing $1,200 each year for four years. The following data show John’s purchases:
Year Fund Price
1 $15.25
2 $17.56
3 $12.85
4 $17.45
What is the average cost per share?
1) $16.23
2) $14.58
3) $15.52
4) $16.98
3) $15.52
Year $ Investment Divided by Fund Price = # of Shares
1 $1,200 $15.25 78.69
2 $1,200 $17.56 68.34
3 $1,200 $12.85 93.39
4 $1,200 $17.45 68.77
Total $4,800 309.19
$4,800 / 309.19=$15.52
A client has a cash need at the end of 10 years. Which of the following investments might initially immunize the portfolio?
A 12-year maturity coupon bond
A 10-year maturity coupon Treasury-note
A series of treasury bills
(1), (2), and (3)
(1) only
(1) and (2) only
(2) only
(1) only
The immunization of a portfolio involves matching the portfolio’s duration with the duration of the investor’s cash needs. A 10-year maturity coupon Treasury note would have a duration of less than seven years. A series of Treasury bills would have a very short duration. A 12-year maturity coupon bond will have a duration of less than twelve years, perhaps something in the range of 10 years.
The current market environment has been very strong for a number of years. Current indicators seem to show this growth is beginning to slow. Select the order of the business cycle beginning with the next phase.
I) Expansion
II) Peak
III) Contraction
IV) Trough
Choose the best answer.
I, II, III, IV
III, IV, I, II
II, IV, I, III
IV, III, II, I
III, IV, I, II
The economy is moving out of Peak and into contraction, then into trough. This will begin a new cycle into expansion.
Based on the following information, identify the phase of the market cycle:
Interest Rates: Increasing
Credit Access/ Availability: Growing availability
Credit Spreads: Tight
Employment: Slowing Growth
Choose the best answer.
Expansion
Peak
Recession
Trough
Peak
In the Peak cycle, interest rates begin to increase, and credit grows. Credit spreads still remain tight reflecting strong company fundamentals. The growth in the Expansion cycle begins to fade in employment numbers.
The following three focus areas are primarily considered social investment (The S in ESG), except:
Choose the best answer.
Human Rights Policy Investing
Customer and Supply Chain Relationships
Impact or Charitable Reach
Natural Resource Driven
Natural Resource Driven
While Natural Resource Investing is based inside the ESG framework, the strategy is largely focused on the environmental, rather than social aspects.
Which statements concerning Environmental, Social, and Governance focused investments are accurate? (Check all that apply.)
1) Environmental investing means removing companies that have negative impacts on their environments.
2) Good Corporate Governance is only focused on the ethics of the board of directors.
3) Good investing should focus on companies that find the lowest cost of labor, regardless of what that looks
like.
4) Positive ESG screening means searching for companies that create positive impacts on the world from an
ESG perspective.
1) Environmental investing means removing companies that have negative impacts on their environments.
4) Positive ESG screening means searching for companies that create positive impacts on the world from an ESG perspective.
Both 1 & 4 are accurate statements. Positive screens search for good companies and negative screens look to eliminate companies that are causing potential harm from an ESG lens. Good corporate governance should be achieved throughout the entire company and supplier relationships and worker conditions continue to be a focus for ESG investment (and beyond).
