Investment Vehicles Flashcards
What are preemptive rights for common stock holders?
The right to maintain their proportional ownership in the company by purchasing additional shares of common stock before new shares are offered to the public.
Declaration date vs. Ex-Dividend date vs. Record date
Ex: On March 1, XYZ corp announces a dividend of $0.50 per share, payable on April 15, with an ex-dividend date of March 15 and a record date of March 17.
Preferred stocks: pros and cons
Pros: Fixed dividends, priority in dividend payments, lower volatility
Cons: Limited growth, no voting rights
What are American Depository Receipts (ADRs)?
A way for US investors to own shares in a foreign company. Ex: BABA on NYSE
Bills vs. Notes vs. Bonds vs. TIPS vs. Yankee Bond vs. Brady Bond
TIPS: inflation adjusted bonds, adjusted semi-annually, coupon rate stays the same but the principal is adjusted, adjusted based on CPI
What is a demand deposit?
Checking account
What is open end management?
- Mutual funds
- Keeps issuing more shares and destroy old ones
- Actively managed
- NAV = (value of all stocks in the pool - expenses) / outstanding shares
- NAV is calculated once a day after the market closes
- Fees = NAV + sales charge (max 8.5%)
What’s the max sales charge on a mutual fund?
8.5%
What is closed end management?
- The shares are issued once, then they are traded on the secondary market
- Actively managed
- These stocks can be traded throughout the day
- NAV is calculated once a day
- Price you pay = market price
What is Unit Investment Trusts (U.I.T)?
- Only issued once (like mutual fund)
- Not actively managed (you know exactly what’s in it and it won’t change)
- Have a termination date
- Lower management fees
ETF vs. Closed End Management
- Tracks an index
- Lower management fees
Futures vs. Forwards
Forwards are not standardized. You don’t trade forwards on exchange. It’s between institutions.
What is a hedge fund?
- Hedge fund focuses on using a pool of money to generate short term profits (David’s fund)
- Loosely regulated … so they can do options, derivatives, margin calls, and etc
Equity Linked Notes (ELN)
A bond that’s linked to an index
Draw the 3x3 table for annuities
Are all annuities tax deferred?
Yes
Death benefit for variable annuity?
Greater of current value of the account or the amount invested
What are 3 ways to buy annuities?
Deferred annuity: you pay lump sum and decide when to receive
Periodic: invest recurringly
Immediate: deposit a lump sum and start receiving in 60 days
What are 3 payout options for annuities?
life/straight/pure life: until death
Life with period certain: if you die before the period, beneficiary gets it
Joint life with last survivor: 2 or more people
What if I want to withdraw my annuities before 59.5? Penalty?
Ex: 100k, 40 in contribution, 60 in earnings.
Before 59.5: 10% penalty on 60k
After 59.5: no penalty
Level vs Whole life vs Universal vs Variable vs Variable Universal
Which one is more volatile? Long term bonds or short term bonds?
Long term bonds
What’s more volatile? Bonds with higher coupon rates or lower?
Lower
How do you know if the bond is investment grade?
If it starts with a B and must have 3 letters.
So BB is a junk bond
How are muni bonds taxed?
Income: federal and state exempt (if you live in that state)
Capital gains: still applies
How does a zero coupon bond work?
You don’t get interest. You buy it at a discount and get the full value back. T-Bill is like that.
CMO
Collateralized Mortgage Obligation: mortgage-backed bonds … yield is not guaranteed … does not have federal government backing
What are STRIPS?
zero coupon bonds from the treasury
Debentures
it’s the same as an unsecured bond. That means it’s not backed by anything.
Convertible Debenture
corp bonds that can be converted into stocks
math:
face value (assume $1000) —- shares —– price/share
current value —- shares. —– price/share
Draw the table for options, including ownership. (explain the 2 scenarios for each)
Call up, Put down.
When you buy options, how many shares does it come with?
100
Explain how sell shorts works
You are betting that the stock value will go down. (1) you borrow 10 stocks, currently at $100 (2) you immediately sell it to someone (3) wait for the price to drop, then buy the stocks and return them to the OG owner (4) you can hedge it with a buy call option
What is this bond’s current yield? Its par value is $1000, and pays 5%. But I buy this bond at a discount, $920.
It measures income vs current market price:
So say I buy a bond at a discount. Its par value is $1000, and pays 5%, so $50/year. But I buy this bond at a discount, $920. Then the current yield is $50/920 = 5.4%.\
What is this bond’s yield to maturity: Its par value is $1000, and pays 5%. But I buy this bond at a discount, $920. And it matures in 10 years.
So say I buy a bond at a discount. Its par value is $1000, and pays 5%, so $50/year. But I buy this bond at a discount, $920. Then the current yield is $50/920 = 5.4%.\
Now say that the bond matures in 10 years. I get $50/yr. But since I bought it at $920, I also get to make $8/yr when it matures. So YTM is now $58/$920 = 6.3%.
What is this bond’s yield to call? Its par value is $1000, and pays 5%. But I buy this bond at a discount, $920. It matures in 10 years. But let’s say the bond has a provision to buy it back sooner, like 5 years.
So say I buy a bond at a discount. Its par value is $1000, and pays 5%, so $50/year. But I buy this bond at a discount, $920. Then the current yield is $50/920 = 5.4%.\
Now say that the bond matures in 10 years. I get $50/yr. But since I bought it at $920, I also get to make $8/yr when it matures. So YTM is now $58/$920 = 6.3%.
Now let’s say the bond has a provision to buy it back sooner, like 5 years. Then YTC = ($50+$80/5)/$920 = 7.2%
Current Yield vs. YTM vs. YTC
If market value < face value:
YTC > YTM > CY
If market value > face value:
CY > YTM > YTC
Years to double = X / annual rate. What is X?
72
What is sharp ratio and how do you calculate it?
Measures risk vs reward.
Sharpe ratio = (annual return - risk free rate)/SD
Imagine you have two investment options: Option A and Option B.
Option A: Provides an expected return of 8% with a standard deviation (a measure of risk or volatility) of 10%. The risk-free rate (Rf) is 2%.
Option B: Provides an expected return of 12% with a standard deviation of 15%. The risk-free rate (Rf) is 2%.
Now, let’s calculate the Sharpe ratio for each option:
Sharpe Ratio (A) = 0.6
Sharpe Ratio (B) ≈ 0.67
So B is providing a slightly better risk-adjusted return than A.
What is inflation adjusted return?
Total return - CPI
What is tax equivalent yield?
Yield you need for a corporate bond to give the same return as a muni bond:
= tax-free yield / (1-marginal tax rate)
How do you calculate discounted cash flow?
How much income a bond generates: coupon rate * face value * years to maturity
Money market account vs Money market funds
Money market accounts (savings accounts) are insured
Money market mutual funds are not insured
In life insurance, what is separate and general accounts? And which offers what?
General: insurance company pools everyone’s money, buys bonds and etc, and guarantees you a fixed rate of return.
Separate: you can decide what to invest in, but there’s no guaranteed return.
Whole life: general
Variable: both
Variable universal: separate
What are your 3 options if you don’t want to keep paying for your life insurance?
(a) sell it to a life settlement company: they’ll buy your policy at less than your death benefit but more than the cash surrender value your insurance company would’ve offered you
(b) viaticals are life settlements but for those with terminal illness and need the money to pay off medical bills
(c) insurance company gives you your cash surrender value
Max sales charge on mutual funds?
8.5%
What’s the required offering price for SPAC?
$10
Swaps
a type of derivative - contract where two parties agree to exchange sequence of cash flows
let’s say i have a loan of variable rates, and bob has a loan of fixed rate, we just swap our loans
