Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP Canada > Investments > Flashcards

Investments Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

What is the coupon rate of a bond?

A

The coupon is the annual interest payable on the bond and is a percentage of the face amount

Interest payments on a bond are normally paid every 6 months although the coupon rate is quoted as an annual rate

Sometimes coupon is the nominal interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is an extendible bond?

A

An extendible bond is one where the bond holder can extend the maturity of the bond for a longer period of time than the original maturity date indicates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is a retractable bond?

A

A retractable bond is the opposite of an extendible bond.

A retractable bond is one where the holder is allowed to redeem the bond at face value prior to the scheduled maturity date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a convertible bond?

A

A convertible bond allows the bond holder to exchange the bond for a predetermined number of common shares of the bond issuer’s corporation during the life of the bond.

They offer a lower rate of return compared to non convertible bonds.

Conversion ratio = # of common shares per bond

Conversion price = bond’s par value / # of common shares per bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a callable bond?

A

A callable bond or a redeemable bond is one where the issuer has the right to redeem the bond at a specified price and at a specified date prior to the bond’s maturity.

The bond holder usually is paid a premium over the face value of the bond if the issuer opts to call the bond.

If interest rates have declined since the bond was issued, the issuer will likely refinance its bonds at a lower rate of interest, so the issuer will call the bond and reissue at a lower interest rate.

Interest payments are only guaranteed up to the call date, which is the date on which the bond may be redeemed by the issuer before maturity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a floating rate bond?

A

A floating rate bond is a bond wheee the interest rate paid on the bond fluctuates with changes in the market conditions and is often pegged to the yield on a benchmark security such as interest rate on T-bills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is an income bond?

A

An income bond where the interest is paid based on the company’s profit performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a mortgage bond?

A

A mortgage bond is one where the bond is backed by real property.

Can be a first or second mortgage bond with first mortgage bonds having higher claim priority in the event of a default, this also means second mortgage bonds have higher interest rates because of the higher risk compared to first mortgage bonds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a strip bond?

A

A strip bond or strips or a zero coupon bond is a bond that has its interest payments separated from its principal repayments. The coupons have been stripped from the bond so there’s no regular coupon payment.

They are sold at a discount to the face value and are redeemed at face value.

Strip bonds do not pay any money till maturity so there is no ongoing worry of reinvestment risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How are strip bonds taxed?

A

Strip bonds do not provide the bond holder with interest from coupon payments but the bond holder is required to include in income each year a notional amount of interest.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is a junk bond or a high yield bond?

A

A junk bond or high yield bond is a bond that has a credit rating in the speculative category.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the formula for the quoted yield of a T-Bill?

A

Quoted yield = ((End Value - Beginning Value) / Beginning Value) X (365 / Days to maturity) X 100

OR

Quoted yield = Face Value - Purchase Price / Purchase Price) X (365 / days to maturity) X 100

Quoted yield is a simple interest rate that does not take into account the reinvestment of interest earned on the investment instrument

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the purchase price formula?

A

Purchase price = Face value / (1 + ((Quoted yield) X (Days to maturity) / 365)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How many days is a year based on for U.S. treasury bills?

A

360 days

Canada uses 365 days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why is the effective yield higher than the quoted yield for T-bills shorter than 1 year?

A

Because the effective yield assumes a reinvestment of the earnings.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the current yield of a bond and what is the formula?

A

The current yield of a bond is the rate of return of the bond, it does not incorporate any compounding, so no reinvestment of coupon payments or capital appreciation or loss.

It is good for assessing the current annual income from a specific investment.

Current yield = (annual interest payment / current market price) X 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the yield to maturity (YTM) of a bond and what is the calculation?

A

Yield to maturity of a bond is the IRR of a bond. It measures the total rate of return of a bond over its lifetime.

Solve for I/Y using the TVM calculation
P/Y = 2 usually
PMT = face value of bond X coupon / # of payments (2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How are bonds taxed?

A

Coupon bearing bonds - interest paid is taxed in the year received

If the bond was purchased at a discount then it is considered a capital gain on maturity.

If the bond was purchased at a premium then it is considered a capital loss at maturity.

Strip bonds are taxed on an accrual basis.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the current yield of a preferred share?

A

Same as current yield of a bond.

Current yield = (annual dividend payment / current market price) X 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How do you calculate the market price?

A

Market price = Dividend payment / prevailing market rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is the holding period return?

A

The holding period return is the total return on an investment, income plus capital appreciation, during a specific holding or time period

Holding period return = ((closing value - opening value) / (opening value)) X 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is duration?

A

Duration is used to measure the price sensitivity and risk related to fixed income securities.

It is a useful tool to track a bond’s portfolio price volatility.

Duration = (PV of all time weighted cash flows discounted at the security’s YTM) / current market price

YTM - yield to maturity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is bond immunization?

A

Bond immunization is a technique used to match the duration of the bond to the investor’s cash flow requirements.

This helps in reducing interest rate and reinvestment risk.

24
Q

What is the markowitz model?

A

The Markowitz Model is a mathematical approach for maximum return for a given level of risk.

25
Q

What is the Capital Asset Pricing Model (CAPM)?

A

The CAPM expands on Markowitz model by introducing the risk free investments and using margin (borrowing)

26
Q

What is the Arbitrage Pricing Theory (APT)?

A

The APT proposes that factors other than volatility of returns should be considered when measuring risk, such as changes in inflation, business related activities, risk premiums and interest rates.

27
Q

What is the post modern portfolio theory (PMPT)?

A

Post modern portfolio theory (PMPT) suggests that volatility is not necessarily bad; only considers volatility below investor’s minimum acceptable return (MAR)

28
Q

What is the strategic asset allocation?

A

The strategic asset allocation is that long term asset class

29
Q

When is a stock dividend issued and how are they taxed?

A

A stock dividend is issued when a company issues additional shares of a stock as payment of a dividend instead of cash.

It may be used when the company wants to preserve cash while still providing benefit to the shareholders.

It is taxed the same as a cash dividend.

30
Q

Define the following dates when it comes to dividends:

Declaration date

Record date

Ex-dividend date

A

Declaration date - date on which the board of directors authorize and announce the date and amount of the next dividend payment

Record date - date on which an individual must own shares to be eligible to receive the declared dividend

Ex-dividend date/ ex-date - the first date of the ex-dividend period in which any stock trades that occur from the ex-dividend date are ineligible to receive the dividend

31
Q

What is cum dividend?

A

Cum dividend means with dividend. It is the opposite of ex-dividend.

If a new owner buys a stock after a dividend is declared before the ex-dividend date then the owner is eligible to receive a dividend.

32
Q

What is a liquidating dividend?

A

A liquidating dividend is normally paid to shareholders when a company is going out of business.

With respect to the tax implications, it is comprised of a regular taxable dividend and a return of capital.

The amount that exceeds the paid up capital is the taxable dividend. The paid up capital is paid tax free to the shareholder and is the original subscription price of the share as first issued.

33
Q

What is the P/E ratio?

A

P/E = Current market price / net earnings per share

For a stock that does not pay dividends, the P/E reflects the company’s stock price compared to its earnings.

34
Q

What is style based investing and give the two examples?

A

Style based investing is that certain categories of stocks have similar defining characteristics and performance trends.

The return of stocks within a category trend tend to be highly correlated but returns of stocks in different categories have low correlation levels.

Examples:

  1. Value stocks
  2. Growth stocks
35
Q

What are two common formula investing techniques?

A

Dividend reinvestment plan (DRIP)
Dollar cost averaging (DCA)

Third is systematic withdrawal plans (SWPs)

36
Q

Which account: registered or non registered is better for strip bonds?

A

Registered.

Strip bonds do not provide the bond holder with interest from coupon payments. However the holder is required to include a notional amount of interest income every year. The preferred investment would be registered plans since there is no annual tax consequence on accruing investments.

37
Q

What is the best place to hold bonds and GICs and interest bearing investments?

A

RRSP and TFSA

38
Q

What’s the best place to hold Canadian dividend stocks in order from best to good?

A

Non registered

TFSA

RRSP

39
Q

What’s the best place to hold US and foreign dividend stocks?

A

RRSP and TFSA

40
Q

What does beta represent in investments?

A

Beta is the degree to which a stock’s price fluctuates in relation to the overall market.

Beta = 0 - cash has a beta of 0, assuming no inflation because there is no risk

Beta between 0 and 1 - volatility is less than the market

Beta = 1 - volatility is equal to the market

Beta > 1 - volatility is greater than the market

41
Q

An investor with a low risk tolerance should lean towards investments that have which type of beta?

A

Beta < 1

42
Q

An investor with a high risk tolerance should lean to stocks that have which level of beta?

A

Beta > 1 - usually many growth stocks have a beta > 1

43
Q

How is the risk of a portfolio measured?

A

The risk of a portfolio is the weighted average of the investment’s risk - the standard deviation

Standard deviation measures where the average over time is taken and measured against now the actual results deviated over time

44
Q

What is dollar weighted return?

A

Dollar weighted return is also called the internal rate of return (IRR).

It is the annual interest rate at which the PV of all cash inflows - PV of all cash outflows = 0

It accounts for the timing and amount of all dollars flowing in and out of the portfolio.

It makes it inappropriate to use when comparing to other benchmarks

45
Q

What is the difference between time weighted return and dollar weighted return?

A

Time weighted return reflects the return actually realized by the investment manager while dollar weighted return reflects the rate of return realized by the portfolio owner.

46
Q

What is time weighted return?

A

It is a return that ignores cash flows into the portfolio and measures the actual rate of return earned by the portfolio manager.

47
Q

What does it mean when two securities have a perfect positive correlation with each other?

A

It means that if one security increases in value, then the other securities does the same.

When both securities move together in tandem, they are considered to have a perfect positive correlation with a coefficient correlation of +1 and vice versa

48
Q

What is the coefficient correlation value of two securities that have no correlation with each other?

A

0

49
Q

What is the efficient frontier analysis?

A

The efficient frontier analysis is that in a given number of holdings, there is only one possible combination of holdings that will result in the maximum possible return with respect to a given amount of risk assumed.

The optimum combination of holdings is efficient. The portfolios that provide the maximum expected return for a given standard deviation and the minimum standard deviation for a given expected return are efficient portfolios.

50
Q

What is the efficient market hypothesis?

A

The efficient market hypothesis is that all known information is instantly reflected in the price of a stock.

51
Q

List and define the three types of market efficiency.

A

Weak form of market efficiency - states that the current price of stock fully reflects all of the information contained in the past prices of the stock and volumes of trading.

Basically an investor cannot general excess profits based on past trends.

Semi strong form of market efficiency - not only is all past price and volume info in the current price but also all public info as well.

Basically all public info is incorporated in the stock price.

Strong form of market efficiency - all information, public and insider is already included in the price

52
Q

What is strategic asset allocation?

A

Strategic asset allocation considers the division of portfolio assets based on long term forecasts for expected returns, variances, and covariances.

It relies on long term forecast and involves periodic rebalancing of the portfolio to ensure the targeted asset mix has not slipped.

53
Q

What is tactical asset allocation?

A

Tactical asset allocation considers the division of the portfolio’s funds based on short term forecasts using current market conditions.

54
Q

What are the four main investment objectives?

A

Income
Safety of principal
Liquidity
Growth

55
Q

What are retractable shares?

A

Retractable shares are a specific type of preferred stock that lets the owner sell the share back to the company at a set price.

CFP Canada (26 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions