Investments Flashcards
CD’s and MMF’s
CD’s are insured up to $250k
MMF’s are not insured
Banker’s Acceptance, Eurodollar & Yankee Bonds
Bankers Acceptance: Used to finance import and export transactions
Eurodollar: Deposit in a foreign bank denominated in US Dollars
Yankee Bonds: Dollar denominated bonds issued in U.S. by foreign banks and corps
Yields on Premium vs. Discount bonds
Premium: (high side of teeter totter) Coupon, Current, YTM, YTC (low side)
Discount: (High side) YTC, YTM, Current Coupon (low side)
nominal = coupon rate (semi annual payment though)
OID
Discount bonds, usually zero coupon, which they generate no income each year but the income that was to be generated that year due to the discount is taxed to them as phantom income
Treasuries
TBills: 3, 6 & 12 months. $100 to $1mil (safest) Rfr. No interest paid. Weekly auction
TNotes: 1-10 years. $1,000 to $100,000. Reinvestment risk, purchasing power. Semiannual interest. Monthly auction
Tbonds: 10-30 years. 1,000 to $100,000. Reinvestment risk, purchasing power. Semiannual interest. Quarterly auction
TIPS and STRIPS
TIPS: Adjust the principle semiannually to keep pace with inflation. Adjustment is based on current CPI
STRIPS: The interest (phantom income) on zero coupon bonds is taxable income earned annually but is a direct obligation of the government
Series EE, HH and I bonds
All non-marketable. Cannot be held in UTMA/UGMA accounts
EE: 30 year term, issued at face value, fixed interest rates, owner has the option of having interest taxed each year or at final maturity. Interest not subject to state/local taxes
HH: Only available by exchanging at least $500 of EE bonds. Semiannual interest payment by check
I: Inflation indexed. Sold at face value. Owner has the option of having interest taxed each year or at final maturity.
GNMA & Other Agency Securities
GNMA: Mortgage pools that offer individual interest in the pool. They are a direct guarantee of the U.S. government, but not issued by the treasury. Each payment is part interest and repayment of principal.
Risks for this include: Interest rate (prices fall when interest rates rise) and reinvestment (premature payments by homeowner)
Other Agencies: Government does not directly back their securities
Muni Bonds
GO bonds: are the safest type of municipal credit
Rev Bonds: Back by a specific revenue source and not pledged
CMO’s
Tranches of mortgages get paid based on their rank from A to Z. A is fast paying to Z is slow paying but highest yield
Bond Risks
Ratings Agency rate bonds only for Credit Risk
Muni and Corporate: DRIP
Default, Reinvestment, Interest Rate, Purchasing Power
Government: RIP
Reinvestment, Interest Rate, Purchasing Power
Rating Agencies
Standard & Poor’s:
AAA, AA, A, BBB (investment grade)
BB and below (junk)
Moody’s:
Aaa, Aa, A, Baa (investment grade)
Ba and below (junk)
Bond Conversion Equation
Conversion Value = (Par Value / Conversion Price) * Current Market Price
Convertible bonds sacrifice yield for the conversion factor
Callable and Putable Bonds
Callable: Issuer has right to redeem at a predetermined price at a date prior to maturity. Would if interest rates have dropped since bond was issued
Putable: Permits holder to sell bond back to issuer at par value at specific time. Would if interest rates have risen since bond was issued
Stocks Caps
Large: > 10 billion
Mid: >2 billion < 10bilion
Small: < 2 billion
Micro: < 300 million
Corporate Reports
Annual Report: Sent annually to shareholders to explain previous years results
10Q: Quarterly report from corporate to SEC
10K: Annual report from corporate to SEC
Preferred Stock and ADRs
Preferred Stock: Has a fixed dividend rate, dividend can either be cumulative or non, duration is infinite and thus making them riskier than bonds
Corporations typically buy preferred shares because 50% of the dividends received are excluded from taxes
ADRs: Shares of forgeign based shares bought in the US. It is paid in USD, but declared in foreign currency
Dividend Tax Rates
Single:
0%: < 41,675
15%: 41,675 to 459,750
20%: > 459,750
Joint:
0%: < 83,350
15%: 83,350 to 517,200
20%: > 517,200
ETFs
Low management fees, open or close end fund and are generally tax efficient
UIT (Unit Investment Trust)
No day to day portfolio management (passive investment), unit holders not shareholders and units are redeemed at NAV
Mutual Funds
Open-end fund, shares are purchased by new shareholders and redeemed back to company. Redemption is at NAV, shares are marked to market daily and the fund passes through capital gains
Closed-end companies
Issue shares once and then books are closed. Shares trade on an exchange and sold on market or negotiated not redeemed
Hedge Fund
Aggressively managed private investment partnership open to a limited number of investors. May be unregulated and are usually illiquid
GICs
Like a CD, but issued by insurance companies. 2-5 years in length with guaranteed interest rate, value fluctuates but interest rate does not.
Real Estate
Unimproved land is a passive investment, can only appreciate not generate income.
Improved land generates income from rentals. Intrinsic value of property is computed using NOI
NOI, Cap Rate & Intrinsic Value
NOI calculation:
Gross Rental receipts
+Non-Retnal Income
= Potential Gross Income (PGI)
-Vancany and collection losses
-Operating Expenses (excluding interest & depreciation)
=NOI
Intrinsic Value = NOI / Cap Rate
REITs, RELPs, REMICs
REIT: Similar to close end fund, invests in real estate, construction loans and mortgages but is liquid. Equity REITs are income producing, mortgage REITs loan money to develop property (vulnerable to default and purchasing power risk). Taxed like a stock
RELPs: Managed by GP, generally not marketable, subject to passive loss rules
REMICs: Provide more flexibility than CMOs and may eventually replace them
Options Intrinsic Value
Put:
Intrinsic Value = Exercise Price - Market Price
If EP > MP then put is in the money
If EP < MP then IV is 0 and out of the money *cannot be negative
Call:
Intrinsic Value = Market Price - Exercise Price
If MP > EP then call is in the money
If MP < EP then IV is 0 and out of the money *cannot be negative
Call Option Taxation 9 months or less
Writer:
Option Lapses = short term gain for premium received (same for a put option)
Option exercised = premium received added to sale price, can be long term gain if covered call and security was held for > 12 months
Holder:
Option not exercised = short term loss
Warrants
Option to purchase stated number of shares for a specified time period.
- Issued by corporations
- Maturities of years (calls only up to 9 months)
- Non standardizes terms
- No intrinsic value
Tangible Assets
Stamps, coins, oriental rugs and antiques. typically rise in inflationary periods
Long Term Cap Gain Rate: 28%
Private Placement (Regulation D)
Max 35 non-accredited investors. Unlimited accredited investors.
Accredited = 1-2-3 Test. 1 mil net worth (excluding primary residence), 200k annual income (single), 300K annual income (joint)
Futures
3 main types: Financial, Commodity and Foreign Currency
Delivery: means settlement
Offset: buyers sell their positions and sellers buy their positions prior to delivery
Long position: Person who wants to buy commodity
Short: Person who wants to sell the commodity
Speculating is very risky in futures, but companies may use futures to hedge or mitigate risk
Spot: Current market price
Open interest: Number of contracts trading on a given day
Daily limit: maximum permissible price increase or decrease relative to settlement price on previous day
Systematic Risks
Purchasing Power Risk: rise of prices and services erode purchasing power of fixed income through inflation
Reinvestment Rate Risk: Proceeds will be invested at a lower interest rate than the security that generated the proceeds. Uncertainty about the rate future income can be invested at
Interest Rate Risk: Change in interest rates will cause market value of fixed income security to fall. Relationship of bond prices and required rate of return
Market Risk: Risk of the overall market
Exchange Rate Risk: Uncertainty of the price at which one country’s currency can be converted into anothers.
- Devaluation: lowering the value of a currency relative to
another currency
- Revaluation: Increase in the value of a currency relative to
another currency
Systematic risk is expressed by Beta
Unsystematic Risks
Business Risk: Nature of firms operations
Financial Risk: How firm finances its assets
Can be reduced through diversification
Total Risk
Total risk is expressed by standard deviation. It is a makeup of systematic and unsystematic risk.