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Investments Flashcards

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1
Q

Formula for intrinsic value of a company

A

IV= NOI / capitalization rate

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2
Q

What is a bakers acceptance

A

Used to provide financial backing for imports/exports

They are MM securities bc maturity cannot exceed 270 days

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3
Q

Are non-public REITs and RELPs liquid or marketable?

A

No!

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4
Q

If an investor wants to immunize a bond portfolio, what is immunization most likely to reduce?

A

Duration can immunize a bond from loss of principal due to changes in interest rates

=interest rate risk

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5
Q

What is an American Depository receipt?

A

Receipts for the shares is foreign based (issued) corporation held in the vault of a US bank

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6
Q

Do grandparents qualify for the income tax benefit on I bonds if used for their grandchild’s education?

A

No, only applies to parents

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7
Q

What kind of risks are government bonds subject to?

A

RIP

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8
Q

What kind of risk are investment grade bonds subject to?

A

DRIP

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9
Q

GNMA are subject to what kind of risks?

A

Interest rate risk

Reinvestment rate risk

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10
Q

What kind of risk do T-notes and T-bonds have?

A

RIP

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11
Q

What is pro forma?

A

Illustrates what future financial statements are expected to show

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12
Q

What are the most common probability distributions?

A

Normal
Triangular
Uniform
Lognormal

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13
Q

What is the difference between active return and excess return?

A

Excess- return over the risk free asset

Active- return over the benchmark

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14
Q

What is a yankee bond?

A

Dollar denominated bonds issued by foreign banks and corporations

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15
Q

What are Eurodollars?

A

Deposit in any foreign bank that is denominated in dollars

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16
Q

How do STRIPS distribute income?

A

Interest is accrued and is phantom income

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17
Q

When is an issuing corp most likely to call its bonds and why?

A

When the bonds are selling at a significant premium

Being called bc newer bonds are being offered with lower coupons

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18
Q

Are t bonds callable

A

Yes, 15 years prior to maturity

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19
Q

What is the bond conversion value formula

A

= (par/CP) ps

PS=market price

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20
Q

IV Put formula

A

EP-MP

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21
Q

IV Call formula

A

MP-EP

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22
Q

Can an IV be negative?

A

No, if it is the answer is zero

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23
Q

Can systematic risk be minimized by owning more securities?

A

No

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24
Q

What kind of risk do brokered CDs have that bank CDs don’t and why?

A

Interest rate risk

Bc they are traded (negotiable)

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25
Q

What kind of risk are CDs subject to?

A

Purchasing power risk

Reinvestment rate risk

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26
Q

What are OIDs?

A

Zero coupon bonds originally sold far below par value and paying interest until maturity

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27
Q

How are t bills quoted?

A

In terms of discounted yield

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28
Q

How are t bills taxed?

A

The difference between issue price and par at maturity is taxed as interest

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29
Q

Who purchases STRIPS?

A

Normally purchased by taxed deferred entities like:

Pension plans, IRA, annuity

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30
Q

Do STRIPS recognize phantom income

A

Because they are purchased by a tax deferred entity, the phantom income does not have to be recognized

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31
Q

How are TIPS taxed?

A

In the year accrued

Taxed on interest payment plus appreciation in face value

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32
Q

Z tranche keys

A

Bears no coupon but received cash flow from collateral remaining after other tranches are satisfied

Most risky bc it has no coupon

Functions like a zero coupon bond

It’s duration is highest among all the tranches

Has the highest interest rate risk

Receives higher yield than other classes

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33
Q

What type of people buy preferred stock and why?

A

Corporate treasurer with excess funds

If a corporate treasurer buys bonds, all of the interest is taxable. If they buy preferred stock, at least 50% of dividends are received tax free-saves them money on taxes

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34
Q

What kind of risk do you have with an ADR?

A

Exchange rate risk

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35
Q

UIT Keys

A

Unmanaged security portfolio

Passive investment-assets are not traded but frozen

No new UNITS are purchased

is UNITS not securities

Trust is self liquidating

***Sponsor REDEEMS UNITS AT NAV-very important

There is an informal secondary market

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36
Q

Are mutual fund shares marketable

A

No!

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37
Q

GIC keys

A

Similar to CDs

Issued by insurance companies

Maturity of 2-5 years

Bears a guaranteed rate of interest

Value does not fluctuate with interest rate changes

Insurance companies takes on the market, credit, and interest rate risk

Investors have default, inflation and reinvestment rate risk

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38
Q

Is marketability associated with RE?

A

No

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39
Q

What are the tax rules to achieve conduit status?

A

75% of REIT income must come from RE investments

15% of income can come from securities like GNMA

If a REIT distributes 90% of net investment income it will only pay taxes on undistributed portion

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40
Q

What type of entity is most likely to purchase a REIT

A

A tax deferred entity

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41
Q

Is improved land, stock, a LP, or mortgage REIT a good hedge for inflation

A

Land

Everything else decreases with inflation

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42
Q

Intrinsic value

A

Minimum price the option will command as an option

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43
Q

What are call writers and sellers seeking?

A

Premium income

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44
Q

What is the difference between selling a naked call and a naked put

A

Naked call losses are unlimited

Naked put losses are limited-cannot go below zero

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45
Q

When is the time value of the option the greatest

A

When the market price and the exercise price are equal

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46
Q

What is the hold time for LEAPs to be taxed as long term?

A

Once leap is exercised, must hold for more than 12 months

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47
Q

What is the capital gains rate for fine art and coins?

A

28%

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48
Q

Are savings accounts, money market accounts and treasury bills liquid?

A

Yes-they can be converted to cash without any loss

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49
Q

Are open ended mutual funds liquid or marketable?

A

Not liquid and not marketable

They are non-negotiable redeemable securities

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50
Q

Can a portfolio have a negative beta?

A

Yes, that means it’s moving opposite of the stock market

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51
Q

What is an example of a portfolio with a negative beta?

A

Gold fund

52
Q

Geometric mean keys

A

Also called time weighted return

Evaluates the performance of a portfolio manager

Measures investment performance as a percentage of capital at work

Eliminates the affects of additions and withdrawals and their timing that distort dollar weighted return accounting

53
Q

What is the difference between time weighted and dollar weighted return

A

Time weighted factors percentages

Dollar weighted factors cash flow (dollar weighted can also be called IRR)

54
Q

What is systematic risk represented by?

A

Beta

55
Q

What is total risk represented by?

A

Total risk

56
Q

Can systematic risk be minimized by owning more securities?

A

No

57
Q

Current yield formula

A

Annual interest in dollars/ bonds market price

58
Q

Can you sell mutual funds?

A

No! You can only redeem them

59
Q

Can you trade an open ended fund with a series 6?

A

No you must have a series 7 for an open ended fund

60
Q

What type of account would you want to purchase REITS and why?

A

Tax shelters accounts

Taxed as ordinary income tax so that will defer taxes

61
Q

Options chart

A
62
Q

For LEAPS what determines the short term or long term gain?

A

Time period from EXERCISE NOT purchase

63
Q

What is the current income tax and capital gain tax for fine art?

A

Current income tax-none

Capital gains-28%

64
Q

What is the current income tax and capital gains of coins?

A

Current income tax-none

Capital gains-28%

65
Q

What is current income tax and capital gains tax for a growth stock?

A

Current income tax-none

Capital gains-0-20%

66
Q

What is the current income tax and capital gains tax for zero coupon bonds?

A

Current income tax-phantom income

Capital gains tax-none

67
Q

Liquidity key

A

Liquid cannot lose money

68
Q

Marketability keys

A

Marketable can sell quickly

69
Q

Devaluation of a currency

A

When it takes more of a currency to purchase a dollar, that currency has been devalued

70
Q

Which bonds are only subject to IP of RIP and why?

A

EE and STRIP bc they bear no interest

71
Q

What yield is most important to a bond investor and why?

A

YTM

  • YTM expresses the total return from a bond
  • on basis of risk, YTM is where the risk is
72
Q

What is the intersection of the CML called?

A

Rf or risk free (100% t bills)

73
Q

What is point B called in the CML line?

A

Optimal risky portfolio

Is a proportional percentage of all risky assets

Is also the tangent line of the CML and Markowitz efficient frontier

74
Q

For the CML line what happens if the portfolio moves from the point of tangency to Rf?

A

The investor sells risky assets (like stocks and long term bonds) and buys t bills

75
Q

What’s happening when you are moving from point b to point a on the CML?

A

You are lending money to the government bc you are buying t bills

76
Q

What does the SML value?

A

Used to value any asset, whether it’s an individual security or a portfolio

77
Q

Does the SML care whether the portfolio is diversified?

A

No

78
Q

Random walk

A

Price changes are unpredictable and patterns are accidental

79
Q

Fundamental analysis keys

A

Involves studying financial statements

Includes factors such as interest rates, GDP, unemployment, inventories

Tries to predict direction of the economy

Considers past performance in predicting future trends

80
Q

What is technical analysis?

A

Studying moving averages and other charts

81
Q

Does the EMH find value in technical analysis?

A

NO!

82
Q

Difference between top down and bottom up method?

A

Top down-investor first looks at trends of economy, then industries, then companies

Bottom up-client searches for individual stock, then economic trends

83
Q

What does the bottom up method assume?

A

An individual company will do well even if the industry is not performing well

84
Q

How should you use ratio analysis

A

Compare multiple individual ratios for a firm over a period of time or establish norms for the firm

Compare individual firms ratios to an industry average

85
Q

Is technical analysis concerned with the financial position of a company?

A

No

86
Q

Examples of technical analysis approaches

A 
Dow theory
Barton’s confidence index
Mutual fund cash position 
Advance/decline line
Moving average (200 day)
Investment advisor opinions
87
Q

Sharpe basic concepts

A

Risk measured in terms of standard deviation

Has systematic and unsystematic risk

88
Q

What is variability

A

Systematic and unsystematic risk

89
Q

Jensen (alpha) / Treynor basic concepts

A

Risk is measured in terms of beta

Systematic risk only

90
Q

How to calculate coefficient of variation?

A

Standard deviation/average mean

91
Q

Standard deviation versus beta

A

Standard deviation-variability, non diversified, total risk, sharpe

Beta-volatility, diversified, systematic risk, trainer

92
Q

How to calculate risk adjusted return?

A

Return/beta

93
Q

Risk recognition

A

How much risk you THINK you are taking

94
Q

What is the difference between the market risk premium formula and stock risk premium formula

A

Market risk premium- ERM-RF

Stock risk premium- (ERM-RF)B

***beta is in market risk premium formula, but beta of the market is 1 so it is redundant to include. Beta of a stock could be different

95
Q

Are options marginable?

A

No

96
Q

TIPS keys

A

Issued in minimum denominations of 1,000

Interest rate is fixed

Interest payments vary as principal is adjusted for inflation AND deflation

Obligations of the federal gov

97
Q

What type of taxes are REITs subject to and why?

A

Ordinary income

Bc they are never taxed at a corporate level

98
Q

Are REITs redeemable?

A

No. They are negotiable and trade on exchanges

99
Q

What must a client do to offset a short sale?

A

Must purchase the stock to close the short sale

100
Q

What happens with a stock split?

A

The par value of the stock is lowered to reflect the lower per share

101
Q

When you are selling vs buying an option, what is the tax consequence?

A

Selling an option-LTCG

buying an option-STCG

102
Q

What education accounts impact a child’s ability for financial aid?

A

Coverdell
UTMA

*if this is a concern use a Roth IRA

103
Q

What is the most important factor in analyzing a tax sheltered RELP?

A

Fundamental investment strength

104
Q

Is risk capacity and risk tolerance quantitative or qualitative information?

A

Risk capacity-Quantitative

Risk tolerance-qualitative

105
Q

What does the buying and selling of bonds by the federal reserve board do to the money supply?

A

Buying bonds-increases money supply

Selling bonds-decreases money supply

106
Q

If you don’t own a stock, but you think it is going to rise and don’t have funds today (but will soon) what would you do to invest?

A

Buy a call

107
Q

What is a valid comparison between CAPM and APT?

A

APT is a multi factor model while CAPM is a single factor model

108
Q

What is based on the idea that perfect substitutes must sell at the same time

A

APT

109
Q

What kind of risk is eliminated with zero coupon bonds?

A

Reinvestment rate risk

110
Q

How does NPV relate to an investors required rate of return?

A

Positive NPV-client earned over required rate
Zero NPV-client achieve required rate
Negative NPV-client did not achieve required rate of return

111
Q

Monetary policy refers to the activities in which the federal reserve board influence the amount of what in the economy?

A

Money and credit

112
Q

Are profitability projections included in corporations annual reports?

A

No. The SEC believes that this could mislead shareholders

113
Q

What does the CML tell us?

A

The expected return on a fully diversified portfolio

114
Q

In regard to the SML, beta is what?

A

A variable

115
Q

What is another name for a clients discount rate?

A

Their required rate of return

116
Q

What is the difference between a red herring and a prospectus?

A

Red herring omits the selling price and the size of issue

117
Q

Net present value

A

It’s calculation discounts unequal cash flows at a required rate of return less the initial cost of the investment

118
Q

When common stock is converted to preferred stock what is the result of the remaining common stock?

A

The value of the common stock for gift tax purposes will be based on dividends paid on the preferred stock

119
Q

When do you want a call and put feature on bonds?

A

Put-when interest rates are expected to rise

Call-when interest rates are expected to fall

120
Q

When are credits/deduction more valuable?

A

Low tax bracket-credit

Deduction-high tax bracket

121
Q

What is the biggest risk with establishing an unfunded ILIT

A

Biggest risk is that an existing policy will be included in the grantors estate in 3 years

It they die within 3 years the policy is included in estate but proceeds are payable to the trust

122
Q

Can you receive commissions on an ETF with a series 6 license?

A

No

123
Q

Are GICs liquid?

A

No

124
Q

Does decreasing margin requirements stimulate the economy?

A

No

The federal reserve board would not do this with a shaker economy. It would increase market speculation but that doesn’t necessarily stimulate the economy

125
Q

What is the greatest risk associated with investing in bonds?

A

Price volatility

126
Q

What are improvements to the land called that add value to the land?

Ex: having the property graded level, seeded, and surveyed?

A

Capital improvements

*these improvements can be capitalized NOT expensed

CFP (10 decks)

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