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Investments Flashcards

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1
Q

CD’s and MMF’s

A

CD’s are insured up to $250k

MMF’s are not insured

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2
Q

Banker’s Acceptance, Eurodollar & Yankee Bonds

A

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

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3
Q

Yields on Premium vs. Discount bonds

A

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)

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4
Q

OID

A

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

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5
Q

Treasuries

A

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

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6
Q

TIPS and STRIPS

A

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

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7
Q

Series EE, HH and I bonds

A

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.

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8
Q

GNMA & Other Agency Securities

A

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

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9
Q

Muni Bonds

A

GO bonds: are the safest type of municipal credit

Rev Bonds: Back by a specific revenue source and not pledged

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10
Q

CMO’s

A

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

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11
Q

Bond Risks

A

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

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12
Q

Rating Agencies

A

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)

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13
Q

Bond Conversion Equation

A

Conversion Value = (Par Value / Conversion Price) * Current Market Price

Convertible bonds sacrifice yield for the conversion factor

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14
Q

Callable and Putable Bonds

A

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

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15
Q

Stocks Caps

A

Large: > 10 billion
Mid: >2 billion < 10bilion
Small: < 2 billion
Micro: < 300 million

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16
Q

Corporate Reports

A

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

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17
Q

Preferred Stock and ADRs

A

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

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18
Q

Dividend Tax Rates

A

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

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19
Q

ETFs

A

Low management fees, open or close end fund and are generally tax efficient

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20
Q

UIT (Unit Investment Trust)

A

No day to day portfolio management (passive investment), unit holders not shareholders and units are redeemed at NAV

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21
Q

Mutual Funds

A

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

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22
Q

Closed-end companies

A

Issue shares once and then books are closed. Shares trade on an exchange and sold on market or negotiated not redeemed

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23
Q

Hedge Fund

A

Aggressively managed private investment partnership open to a limited number of investors. May be unregulated and are usually illiquid

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24
Q

GICs

A

Like a CD, but issued by insurance companies. 2-5 years in length with guaranteed interest rate, value fluctuates but interest rate does not.

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25
Q

Real Estate

A

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

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26
Q

NOI, Cap Rate & Intrinsic Value

A

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

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27
Q

REITs, RELPs, REMICs

A

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

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28
Q

Options Intrinsic Value

A

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

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29
Q

Call Option Taxation 9 months or less

A

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

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30
Q

Warrants

A

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

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31
Q

Tangible Assets

A

Stamps, coins, oriental rugs and antiques. typically rise in inflationary periods

Long Term Cap Gain Rate: 28%

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32
Q

Private Placement (Regulation D)

A

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)

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33
Q

Futures

A

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

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34
Q

Systematic Risks

A

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

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35
Q

Unsystematic Risks

A

Business Risk: Nature of firms operations

Financial Risk: How firm finances its assets

Can be reduced through diversification

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36
Q

Total Risk

A

Total risk is expressed by standard deviation. It is a makeup of systematic and unsystematic risk.

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37
Q

International Investing

A

Lower correlation of foreign securities with US securities

38
Q

Liquidity and Marketability

A

Liquidity: Security can be bought or sold without delay and without substantial price change

Marketability: Speed of a transaction

39
Q

Mean and Distribution of Returns

A

Mean: Middle point between two extremes

Normal Distribution: Mean = most likely return, and is centered in bell curve (68, 95, 99)

Lognormal Distribution: Upper limit is unlimited but lower cant go below 0, distribution is positively skewed with most values near lower limit, mean is to the right of highest point

40
Q

Correlation Coefficient and Covariance Formulas

A

Correlation Coefficient: Ranges from +1 (perfectly correlated and move together) to -1(negatively correlated and move opposite). Symbol is Pii.

Pii= COVii / (STdev1*STdev2) use whole numbers for STdev’s

Covariance: COVii = PiiSTdev1STdev2

41
Q

Coefficient of Variation

A

= Standard Deviation / Mean

42
Q

Standard Deviation vs Beta

A

St. Dev: Measures the variability of returns, used in non diversified portfolio to measure total risk

Beta: Measures volatility of returns used in a diversified portfolio to measure systematic risk

Bi (beta) = [Pii * STdev(stock)] / STdev(market)

43
Q

Calculator Calculations for Mean, Standard Deviation

A

2nd Stat: Enter returns for stock under each year
2nd Data: down to X = mean, Sx= St Dev

44
Q

Standard Deviation of a Portfolio

A

(Sum of STdev’s of all funds ) / # funds (use whole number not percentages)
then look for the next lowest answer

45
Q

Weighted Beta

A

Stock 1 Beta * Stock 1 weighting = Stock 1 weighted beta
Stock 2 Beta * Stock 2 weighting = Stock 2 weighted beta

Sum those answers together

46
Q

Risk-adjusted return

A

Funds Annual Return / Beta

47
Q

Geometric vs Arithmetic Mean Return

A

Geometric: Time Weighted Return

(1+ return1) * (1+ return2) * (1 + return3) = FV for financial calculator. PV = sum of money, N= # of returns. Solve for I/Y

Arithmetic = Sum of all returns / # of returns. Not a good use of measuring returns

Dollar Weighted = IRR and NPV

48
Q

Real Rate of Return

A

[(1+after tax return) / (1+inflation rate)] - 1 then multiply by 100

49
Q

Returns

A

Nominal: Actual returns produced over a given time without account for inflation

Total: Annual return including appreciation or loss and dividends/interest

Risk Adjusted: Return has been altered to account for differences in risk among variables of the same type

Holding Period: (Sale price + Dividends&Interest - Purchase Price) / Purchase Price

Margin HPR: [(Sale Price * Total Shares) - (Borrowed Funds + Interest) - Purchase Price of Shares Client Paid For] / Purchase Price of Shares Client Paid For

50
Q

IRR

A

Use CF on calculator. Note: that if dividend hits on the same year as sale, net out the proceeds in that year.

51
Q

YTM

A

When calculating YTC, use semiannual compounding (2 p/y)

PV= Current MP
I/Y = Solve for
N = # Years xP/Y
FV = Par
PMT = (Coupon Rate * Par) / 2

52
Q

YTC

A

When calculating YTC, use semiannual compounding (2 p/y)

PV= Current MP
I/Y = Solve for
N = # Years until callable x P/Y
FV = Call Price
PMT = (Coupon Rate * Par) / 2

53
Q

Current Yield

A

(Coupon Rate * Par) / Current Price

54
Q

Taxable Equivalent Yield

A

Tax exempt yield / (1 - Tax Rate)

55
Q

Duration

A

Measure of how long it will take recoup the price paid by cash flows. Compares price volatility with equal coupons but different term lengths.

Interest rates expected to rise: Buy high coupon short maturity (shorten duration)
Interest rates expected to fall: Buy low coupon long maturities (lengthen duration)

Duration = (1 + y) / y

y = current yield on comparative bonds

56
Q

Portfolio Immunization

A

Passive investment strategy where the portfolio duration is equal to a preselected time horizon

57
Q

Zero Coupon Bonds

A

Their Duration equals their maturity. Their prices fluctuate more than those of coupon bonds with same maturities

58
Q

Changes in Bond Prices Formula

A

Change in Price / Price

also = -Duration (change in interest rates / [1 + YTM])

59
Q

Bond Volatility

A

Smaller Coupon: greater price fluctuation. Convexity is largest
Longer maturity: greater price fluctuation. Convexity is largest
Market interest rate is lower: greater price fluctuation

Low yield to maturity: Convexity is largest

60
Q

Dividend Growth Models

A

Zero Growth:
Price = Dividend / Required Rate of Return

Constant Growth Model:
Price = [Dividend * (1 + Growth Rate)] / (Required Rate of Return - Growth Rate)
(Also same as Price to Free Cash Flow Fomula, Dividend is replaced by FCF per share)

Dividend Discount Model (Shortcuts):
Solve for constant growth using the 2nd dividend growth rate.
Price = [Dividend * (1 + 2nd Growth Rate)] / (Required Rate of Return - 2nd Growth Rate)

If 1st Growth Rate < 2nd Growth Rate, select the next lowest answer than the price solved for.

If 1st Growth Rate > 2nd Growth Rate, select the next highest answer than the price solved for.

61
Q

Yield Curve

A

Normal: Higher yield for longer maturities

Inverted: Lower yield for longer maturities

62
Q

Price to Earning

A

P/E:
Price = Earnings * P/E ratio

63
Q

Return on Equity

A

ROE (per share) = EPS / Bookvalue or net worth (per share)

Dividend Payout ratio:
Common dividends paid / EPS

64
Q

Modern Portfolio Theory

A

Seeks to quantify the relationship between risk and return. Four Basic Steps.

  1. Security Valuation: Describe universe of assets by expected return and risk
  2. Asset Allocation Decisions: Determining how assets are to be distributed among classes
  3. Portfolio Optimization: Reconciling risk and return in selecting the securities to be included
  4. Performance Measurement: Dividing each stock’s performance into systematic and unsystematic risk
65
Q

Capital Market Line

A

Expresses macro aspect of MPT. The straight line CML is tangent to Markowitz Efficient Frontier, optimal portfolio’s align.

It reveals:
- Expected return on fully diversified portfolio
- Diversified portfolio should fall somewhere on the CML
- Individual securities or inefficient portfolios fall below the CML
- Cannot be used to evaluate performance of a single security or not fully diversified portfolio
- Risk free rate/return is 100% T-Bills

66
Q

Efficient Frontier

A

Markowitz’s approach to portfolio selection, investors should evaluate portfolios based on their expected returns and risk (standard deviation). There are many optimal portfolios along the indifference curve. Indifference curves cannot intersect, where they are tangent is the optimal portfolio for that investor

Lowest level of risk for a given level of expected return
Highest expected return for a given level of risk.

Any points above the efficient frontier are not feasible or unattainable.

Any points below are attainable but inefficient.

Risk averse have steep curved lines, less risk averse have flatter lines

67
Q

Security Market Line

A

At a micro level, its the relationship between risk and return for an individual security.
It uses the CAPM to solve for the required rate of return.

Rr= Rfr + (return market - Rfr) * Beta

Return market - Rfr = Market Risk Premium
(Return market - Rfr)*Beta = Stock Risk Premium

If markets are in equilibrium, the expected return should equal the required return

68
Q

Efficient Market Hypothesis

A

Strong Form: All past, public and private info is included. Nothing can provided superior results

Semi Strong Form: All past and current public info is included. Neither fundamental or technical analysis can produce superior results

Weak Form: Past/historical Info is included, but fundamental analysis could produce superior results, but technical cannot.

69
Q

Anomalies

A

Perform in contrast to what is expected in totally efficient:

P/E Effect: Low P/E ratio stocks perform better than high P/E ratio stocks

Small Firm Effect: Small firm stocks outperform large firm stocks

January Effect: Stocks decline at the end of the year and rebound in January

Neglected-firm Effect: Not commonly studied firms stocks outperform heavily studied firms

70
Q

Liquidity Ratios

A

Current Ratio: Current Assets / Current Liabilities

CA: Cash, Marketable Securities, AR and Inventory
CL: AP, Credit Card Debt and Taxes Payable

71
Q

Technical Analysis

A

Use charts or computer programs to identify and project prices.
- Dow Theory: Aggregate measure of securities prices, shows direction of the overall market
- Barron’s Confidence Index: differential between returns of bonds and bonds of lesser quality will forecast future price movements
- Advance/Decline Line, Moving Average, IA opinions, Odd lot theory

Charting: Believe stock prices move in patterns. Plot market variables, stock prices and moving averages.

Resistance: Price ceiling which shows persistent selling of a security. Sellers enter the market to push price lower. If stock breaks through resistance level, usually mean prices will go higher and outcome is considered bullish

Support: Level where security tends to stop falling, due to more demand then supply. Temporary price floor, price at which security or index bottomed at the past. If price drops past support level, outcome is considered bearish

72
Q

Benchmarks

A

Dow Jones: 30 individual stocks. Price weighted

S&P: Largest stocks on the NYSE

Russell 2000: Smallest 2000 stocks in Russell 3000 index. Cap weighted

Wilshire 5000: Broadest measure of activity in overall stock market

Value Line: 1,700 stocks equally weighted on NYSE, AMEX and OTC

NASDAQ: Broadest measure of OTC trading. Cap weighted

EAFE: Compares performance of U.S. and international equity markets

73
Q

Monte Carlo Simulation

A

1,000 trials based on inputs put into the system to determine the most possible outcomes. Results are shown in a histogram

74
Q

Tax Implication for Sale of Mutual Fund Shares

A

3 Methods:

FIFO
Specific Lot
Average Cost

75
Q

Stock Splits

A

Split: Amount owned in $’s stays the same, # of shares increases and cost per share decreases

Reverse Split: mount owned in $’s stays the same, # of shares decreases and cost per share increases

76
Q

Wash Sale

A

Cannot repurchase the same security within 30 days of selling it for a loss. If you do no deduction will be allowed for the loss.

77
Q

Purchase Date, Ex-Dividend Date and Date of Record

A

Purchase Date: Day order was placed and filled
Ex-Dividend Date: Stock must be purchased before this date in order to qualify for the dividend
Date of Record: 1st business day after the ex-dividend date. Shows the date the trades are settled.

*Watch out for holidays and weekends they like to test those

78
Q

Sharpe Ratio

A

Excess return of a portfolio to its standard deviation.

Sharpe = (Return portfolio - Rfr) / STdev portfolio

It’s meaningless unless compared to the market or other MF’s. You want the highest risk adjusted return when comparing to market or other MF’s

79
Q

Treynor Ratio

A

Excess return of a portfolio to the Beta of the asset (not the market beta). Risk adjusted return

Treynor = (Return portfolio - Rfr) / STdev portfolio

You want the highest risk adjusted return when comparing to market or other MF’s

80
Q

Jensen Ratio

A

Alpha. Measures the contribution of the portfolio manager.

Alpha = Return portfolio - CAPM

81
Q

Using R2 to determine the right performance measure

A

R2 = square of the correlation coefficient (correlation coefficient * correlation coefficient)

R2 < 60: Non-diversified portfolio, look for highest Sharpe ratio. Sharpe is measured in STdev, contains systematic and unsystematic risk

R2 > 60: Look for highest Alpha (Jensen), if that is not a choice choose highest Treynor

82
Q

Information Ratio

A

Active return of a portfolio over it’s benchmark.

IR = (Return portfolio - Return benchmark) / Tracking error

83
Q

Passive Investing

A

Indexing, weights portfolio to match a broad based index

84
Q

Swaps and Collars

A

Bond Swap: Selling a bond and replacing it with another

Stock option collar: Hedging strategy. Stock owner, sells a call at one strike price (out of the money) and buy a put at a lower strike (out of the money)

Floating rate note collar: Protect holders against higher interest rates but pay lower yields than fixed rate notes of same maturity

85
Q

Bond Portfolio Strategies

A

Ladder: Bonds are purchased with different maturity dates, when each one matures another long term bond is purchased

Bullet: Immediate duration bonds purchased and dont acquire short duration or long duration bondds

Barbells: half short term duration bonds and half long duration bonds. Requires periodic rebalancing

86
Q

Margin

A

Initial Margin: Reg T set requirement of 50%

Maintenance Margin:
[(1 - Initial Margin Requirment) / (1- Maintenance Margin requirement)] * Purchase price of stock

87
Q

Short Selling, Option Straddles & Currency Futures

A

Short Selling:
-Investor thinks that the price will security will decline but they do not own the stock

Straddle: Buying a put and buying a call on the same security, because investor feels there will be movement of the security

Protective Put: Owning a security and buying a put on it

Currency Futures: Establish long position on a currency to lock in a price and avoid the risk

88
Q

Risk Tolerance vs Risk Capacity

A

Tolerance: Amount of risk that an individual is comfortable assuming

Capacity: amount of risk an investor must take in order to reach financial goals.

89
Q

Asset Allocation

A

Tactical: Market timing approach

Passive: Buy & Hold, Immunization, Laddered, Indexed Porftolio, Barbell, Dollar cost averaging

Rebalancing is done for change in wealth, liquidity requirements, legal/regulatory, time horizon, tax circumstances, or needs/circumstances

90
Q

Asset Pricing Models

A

CAPM: See previous cards

Arbitrage Pricing Theory: Premise is that pricing of securities cannot differ for an significant length of time. Investors seek to take advantage of price differences because of unexpected inflation, changes in industrial production levels, shifts in risk premium, and changes in the structure of yields

91
Q

Black-Scholes

A

Used to value options.

Increase in the exercise price of a call, decreases the call’s value

Increase in the exercise price of a put, increases the put’s value

92
Q

Binomial Option Pricing

A

Model assumes price of an option can be two possible values at the option expiration

CFP (20 decks)

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