Investments Flashcards
Eurodollar
A deposit in any foreign bank denominated in dollars
Yankee bonds
Registered with the SEC, marketed in US and foreigner issued
Original Issue Discount
Zero coupon
Discounted when 1st issued
Discount is accreted over bond’s life for income tax purpose
Basis increased yearly by taxable phantom income
Treasury Securities
Carry NO default risk because issued by the Treasury but do carry RIP risk.
No state/local income tax
T-Bills: short term debt 3-12 mos maturity, quoted in discount yield ($100-$1,000,000)
T-Notes: Intermediate debt 1-10yrs ($1,000-$100,000)
T-Bonds: Long term debt 10-30yrs ($1,000-$1,000,000)
TIPS
Taxed annually on interest payment plus appreciation on face value
Phantom income collectible when sold or at maturity
Ex dividend date
1st business day AFTER
STRIPS
Treasury zero coupon bond with direct obligation of federal government (phantom income)
Mortgage backed securities
GNMA: guaranteed by federal government RIP
FNMA/FHLMC: NOT guaranteed DRIP
CMO mortgage backed pool
Mortgage payments distributed as cash flow
Tranches from expected cash flow (A-Z)
- A fast pay
- M medium pay
- Y slow pay
- Z no coupon = most risk
Common stock
Units of ownership of a corporation
Junior relative to other securities for liquidation purposes
Preferred stock
Resembles both equity & debt (hybrid)
Issued at par ($25 or $100) with fixed stated dividend rate
Maturity is infinite
Interest rate risk
ETF
Generally open end index funds (can be closed)
Fixed Unit Investment Trust (UIT)
Unmanaged security portfolio
Passive investment, not traded
No new securities purchased
Self liquidating & distributed to unit holders
Mutual Funds
Open end investment companies
Shares non negotiable
Redeemable
NOT marketable
Closed end Investment Companies
One time stock issuance and no new shares issued
Real Estate Investment Trust
Real estate, short term construction loans & mortgages
Equity REIT: operating rental properties
Mortgage REIT: mortgages & construction loans (inflation is bad for these)
Tax rules: > 75% income from real estate, 15% securities. 90% MUST be distributed or ALL taxable. Distributions are ordinary dividends
Black Scholes Option Valuation Model
Considers 5 variables for non dividend paying stocks
- Exercise price
- Time remaining to expiration
- Interest rate
- Volatility of underlying stock
- Price
All 5 have direct up relationships for calls, except price
Put option
Right to sell
Buy when bearish, sell when bullish
Long-term Equity AnticiPation (LEAP)
Expiration range from 9mos to 3yrs
Buyer taxed long term rates > 1yr 1day
Exercised, hold shares > 12mos for long term gain rates
Short Selling
Borrow the security»_space; sell borrowed security»_space; repurchase (one price drops)»_space; return borrowed security
Transaction done on margin
Think lawn mower example
Devaluation vs Revaluation
Devaluation: lowering value of currency
Revaluation: increasing value of currency
Risk Tolerance vs Risk Capacity
Risk tolerance: risk comfortable taking
Risk capacity: risk MUST take
Immunization
Passive investment strategy seeking to protect bond portfolio against interest rate volatility
Average duration NOT maturity = preselected time horizon
Efficient Frontier
Markowitz’s approach to evaluate portfolios based on expected return & risk measured by standard deviation
