Investments Flashcards
Formula for intrinsic value of a company
IV= NOI / capitalization rate
What is a bakers acceptance
Used to provide financial backing for imports/exports
They are MM securities bc maturity cannot exceed 270 days
Are non-public REITs and RELPs liquid or marketable?
No!
If an investor wants to immunize a bond portfolio, what is immunization most likely to reduce?
Duration can immunize a bond from loss of principal due to changes in interest rates
=interest rate risk
What is an American Depository receipt?
Receipts for the shares is foreign based (issued) corporation held in the vault of a US bank
Do grandparents qualify for the income tax benefit on I bonds if used for their grandchild’s education?
No, only applies to parents
What kind of risks are government bonds subject to?
RIP
What kind of risk are investment grade bonds subject to?
DRIP
GNMA are subject to what kind of risks?
Interest rate risk
Reinvestment rate risk
What kind of risk do T-notes and T-bonds have?
RIP
What is pro forma?
Illustrates what future financial statements are expected to show
What are the most common probability distributions?
Normal
Triangular
Uniform
Lognormal
What is the difference between active return and excess return?
Excess- return over the risk free asset
Active- return over the benchmark
What is a yankee bond?
Dollar denominated bonds issued by foreign banks and corporations
What are Eurodollars?
Deposit in any foreign bank that is denominated in dollars
How do STRIPS distribute income?
Interest is accrued and is phantom income
When is an issuing corp most likely to call its bonds and why?
When the bonds are selling at a significant premium
Being called bc newer bonds are being offered with lower coupons
Are t bonds callable
Yes, 15 years prior to maturity
What is the bond conversion value formula
= (par/CP) ps
PS=market price
IV Put formula
EP-MP
IV Call formula
MP-EP
Can an IV be negative?
No, if it is the answer is zero
Can systematic risk be minimized by owning more securities?
No
What kind of risk do brokered CDs have that bank CDs don’t and why?
Interest rate risk
Bc they are traded (negotiable)
What kind of risk are CDs subject to?
Purchasing power risk
Reinvestment rate risk
What are OIDs?
Zero coupon bonds originally sold far below par value and paying interest until maturity
How are t bills quoted?
In terms of discounted yield
How are t bills taxed?
The difference between issue price and par at maturity is taxed as interest
Who purchases STRIPS?
Normally purchased by taxed deferred entities like:
Pension plans, IRA, annuity
Do STRIPS recognize phantom income
Because they are purchased by a tax deferred entity, the phantom income does not have to be recognized
How are TIPS taxed?
In the year accrued
Taxed on interest payment plus appreciation in face value
Z tranche keys
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
What type of people buy preferred stock and why?
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
What kind of risk do you have with an ADR?
Exchange rate risk
UIT Keys
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
Are mutual fund shares marketable
No!
GIC keys
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
Is marketability associated with RE?
No
What are the tax rules to achieve conduit status?
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
What type of entity is most likely to purchase a REIT
A tax deferred entity
Is improved land, stock, a LP, or mortgage REIT a good hedge for inflation
Land
Everything else decreases with inflation
Intrinsic value
Minimum price the option will command as an option
What are call writers and sellers seeking?
Premium income
What is the difference between selling a naked call and a naked put
Naked call losses are unlimited
Naked put losses are limited-cannot go below zero
When is the time value of the option the greatest
When the market price and the exercise price are equal
What is the hold time for LEAPs to be taxed as long term?
Once leap is exercised, must hold for more than 12 months
What is the capital gains rate for fine art and coins?
28%
Are savings accounts, money market accounts and treasury bills liquid?
Yes-they can be converted to cash without any loss
Are open ended mutual funds liquid or marketable?
Not liquid and not marketable
They are non-negotiable redeemable securities
Can a portfolio have a negative beta?
Yes, that means it’s moving opposite of the stock market
What is an example of a portfolio with a negative beta?
Gold fund
Geometric mean keys
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
What is the difference between time weighted and dollar weighted return
Time weighted factors percentages
Dollar weighted factors cash flow (dollar weighted can also be called IRR)
What is systematic risk represented by?
Beta
What is total risk represented by?
Total risk
Can systematic risk be minimized by owning more securities?
No
Current yield formula
Annual interest in dollars/ bonds market price
Can you sell mutual funds?
No! You can only redeem them
Can you trade an open ended fund with a series 6?
No you must have a series 7 for an open ended fund
What type of account would you want to purchase REITS and why?
Tax shelters accounts
Taxed as ordinary income tax so that will defer taxes
Options chart
For LEAPS what determines the short term or long term gain?
Time period from EXERCISE NOT purchase
What is the current income tax and capital gain tax for fine art?
Current income tax-none
Capital gains-28%
What is the current income tax and capital gains of coins?
Current income tax-none
Capital gains-28%
What is current income tax and capital gains tax for a growth stock?
Current income tax-none
Capital gains-0-20%
What is the current income tax and capital gains tax for zero coupon bonds?
Current income tax-phantom income
Capital gains tax-none
Liquidity key
Liquid cannot lose money
Marketability keys
Marketable can sell quickly
Devaluation of a currency
When it takes more of a currency to purchase a dollar, that currency has been devalued
Which bonds are only subject to IP of RIP and why?
EE and STRIP bc they bear no interest
What yield is most important to a bond investor and why?
YTM
- YTM expresses the total return from a bond
- on basis of risk, YTM is where the risk is
What is the intersection of the CML called?
Rf or risk free (100% t bills)
What is point B called in the CML line?
Optimal risky portfolio
Is a proportional percentage of all risky assets
Is also the tangent line of the CML and Markowitz efficient frontier
For the CML line what happens if the portfolio moves from the point of tangency to Rf?
The investor sells risky assets (like stocks and long term bonds) and buys t bills
What’s happening when you are moving from point b to point a on the CML?
You are lending money to the government bc you are buying t bills
What does the SML value?
Used to value any asset, whether it’s an individual security or a portfolio
Does the SML care whether the portfolio is diversified?
No
Random walk
Price changes are unpredictable and patterns are accidental
Fundamental analysis keys
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
What is technical analysis?
Studying moving averages and other charts
Does the EMH find value in technical analysis?
NO!
Difference between top down and bottom up method?
Top down-investor first looks at trends of economy, then industries, then companies
Bottom up-client searches for individual stock, then economic trends
What does the bottom up method assume?
An individual company will do well even if the industry is not performing well
How should you use ratio analysis
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
Is technical analysis concerned with the financial position of a company?
No
Examples of technical analysis approaches
Dow theory Barton’s confidence index Mutual fund cash position Advance/decline line Moving average (200 day) Investment advisor opinions
Sharpe basic concepts
Risk measured in terms of standard deviation
Has systematic and unsystematic risk
What is variability
Systematic and unsystematic risk
Jensen (alpha) / Treynor basic concepts
Risk is measured in terms of beta
Systematic risk only
How to calculate coefficient of variation?
Standard deviation/average mean
Standard deviation versus beta
Standard deviation-variability, non diversified, total risk, sharpe
Beta-volatility, diversified, systematic risk, trainer
How to calculate risk adjusted return?
Return/beta
Risk recognition
How much risk you THINK you are taking
What is the difference between the market risk premium formula and stock risk premium formula
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
Are options marginable?
No
TIPS keys
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
What type of taxes are REITs subject to and why?
Ordinary income
Bc they are never taxed at a corporate level
Are REITs redeemable?
No. They are negotiable and trade on exchanges
What must a client do to offset a short sale?
Must purchase the stock to close the short sale
What happens with a stock split?
The par value of the stock is lowered to reflect the lower per share
When you are selling vs buying an option, what is the tax consequence?
Selling an option-LTCG
buying an option-STCG
What education accounts impact a child’s ability for financial aid?
Coverdell
UTMA
*if this is a concern use a Roth IRA
What is the most important factor in analyzing a tax sheltered RELP?
Fundamental investment strength
Is risk capacity and risk tolerance quantitative or qualitative information?
Risk capacity-Quantitative
Risk tolerance-qualitative
What does the buying and selling of bonds by the federal reserve board do to the money supply?
Buying bonds-increases money supply
Selling bonds-decreases money supply
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?
Buy a call
What is a valid comparison between CAPM and APT?
APT is a multi factor model while CAPM is a single factor model
What is based on the idea that perfect substitutes must sell at the same time
APT
What kind of risk is eliminated with zero coupon bonds?
Reinvestment rate risk
How does NPV relate to an investors required rate of return?
Positive NPV-client earned over required rate
Zero NPV-client achieve required rate
Negative NPV-client did not achieve required rate of return
Monetary policy refers to the activities in which the federal reserve board influence the amount of what in the economy?
Money and credit
Are profitability projections included in corporations annual reports?
No. The SEC believes that this could mislead shareholders
What does the CML tell us?
The expected return on a fully diversified portfolio
In regard to the SML, beta is what?
A variable
What is another name for a clients discount rate?
Their required rate of return
What is the difference between a red herring and a prospectus?
Red herring omits the selling price and the size of issue
Net present value
It’s calculation discounts unequal cash flows at a required rate of return less the initial cost of the investment
When common stock is converted to preferred stock what is the result of the remaining common stock?
The value of the common stock for gift tax purposes will be based on dividends paid on the preferred stock
When do you want a call and put feature on bonds?
Put-when interest rates are expected to rise
Call-when interest rates are expected to fall
When are credits/deduction more valuable?
Low tax bracket-credit
Deduction-high tax bracket
What is the biggest risk with establishing an unfunded ILIT
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
Can you receive commissions on an ETF with a series 6 license?
No
Are GICs liquid?
No
Does decreasing margin requirements stimulate the economy?
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
What is the greatest risk associated with investing in bonds?
Price volatility
What are improvements to the land called that add value to the land?
Ex: having the property graded level, seeded, and surveyed?
Capital improvements
*these improvements can be capitalized NOT expensed
