Investments

Question 1

Eurodollar

Answer 1

A deposit in any foreign bank denominated in dollars

Question 2

Yankee bonds

Answer 2

Registered with the SEC, marketed in US and foreigner issued

Question 3

Original Issue Discount

Answer 3

Zero coupon

Discounted when 1st issued

Discount is accreted over bond’s life for income tax purpose

Basis increased yearly by taxable phantom income

Question 4

Treasury Securities

Answer 4

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)

Question 5

TIPS

Answer 5

Taxed annually on interest payment plus appreciation on face value

Phantom income collectible when sold or at maturity

Question 6

Ex dividend date

Answer 6

1st business day AFTER

Question 7

STRIPS

Answer 7

Treasury zero coupon bond with direct obligation of federal government (phantom income)

Question 8

Mortgage backed securities

Answer 8

GNMA: guaranteed by federal government RIP

FNMA/FHLMC: NOT guaranteed DRIP

Question 9

CMO mortgage backed pool

Answer 9

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

Question 10

Common stock

Answer 10

Units of ownership of a corporation

Junior relative to other securities for liquidation purposes

Question 11

Preferred stock

Answer 11

Resembles both equity & debt (hybrid)

Issued at par ($25 or $100) with fixed stated dividend rate

Maturity is infinite

Interest rate risk

Question 12

ETF

Answer 12

Generally open end index funds (can be closed)

Question 13

Fixed Unit Investment Trust (UIT)

Answer 13

Unmanaged security portfolio

Passive investment, not traded

No new securities purchased

Self liquidating & distributed to unit holders

Question 14

Mutual Funds

Answer 14

Open end investment companies

Shares non negotiable

Redeemable

NOT marketable

Question 15

Closed end Investment Companies

Answer 15

One time stock issuance and no new shares issued

Question 16

Real Estate Investment Trust

Answer 16

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

Question 17

Black Scholes Option Valuation Model

Answer 17

Considers 5 variables for non dividend paying stocks

1. Exercise price
2. Time remaining to expiration
3. Interest rate
4. Volatility of underlying stock
5. Price

All 5 have direct up relationships for calls, except price

Question 18

Put option

Answer 18

Right to sell

Buy when bearish, sell when bullish

Question 19

Long-term Equity AnticiPation (LEAP)

Answer 19

Expiration range from 9mos to 3yrs

Buyer taxed long term rates > 1yr 1day

Exercised, hold shares > 12mos for long term gain rates

Question 20

Short Selling

Answer 20

Borrow the security&raquo_space; sell borrowed security&raquo_space; repurchase (one price drops)&raquo_space; return borrowed security

Transaction done on margin

Think lawn mower example

Question 21

Devaluation vs Revaluation

Answer 21

Devaluation: lowering value of currency

Revaluation: increasing value of currency

Question 22

Risk Tolerance vs Risk Capacity

Answer 22

Risk tolerance: risk comfortable taking

Risk capacity: risk MUST take

Question 23

Immunization

Answer 23

Passive investment strategy seeking to protect bond portfolio against interest rate volatility

Average duration NOT maturity = preselected time horizon

Question 24

Efficient Frontier

Answer 24

Markowitz’s approach to evaluate portfolios based on expected return & risk measured by standard deviation

Question 25

Capital Market Line (CML)

Answer 25

Macro aspect of CAPM. It’s the relationship between risk & return on a portfolio

Rf = 100% Tbills = intersection of CML
Point B: Optimal risky portfolio proportional percent of all
Point A: combination of risk & risk free
Point C: 100% risky

Question 26

Security Market Line (SML)

Answer 26

Micro level. Relationship between risk & return for ONE asset. Can be used for individual security OR portfolio

Question 27

Anomalies

Answer 27

1. P/E effect
2. Small firm effect
3. January effect
4. Rejected firm effect
5. Value line

Question 28

Fundamental vs Technical Analysis

Answer 28

Fundamental: Includes research like interest rates, GDP, inflation, unemployment & inventories to predict direction of the economy & balance sheet/P&L to forecast stock prices

Technical: Charts or computer programs
1. Dow Theory
2. Baron’s Confidence Index
3. Mutual fund cash position
4. Advance/decline line
5. Moving 200 day avg
6. Investment advisor opinion

Question 29

Performance measures

Answer 29

Alpha/Treynor use beta β to express risk of diversified portfolio

Sharpe uses standard deviation σ to express risk of non diversified portfolio

RATS
Over 60, you need a treynor, under 60 you’re sharpe

Question 30

Bond rating companies

Answer 30

Standard & Poor’s and Moody’s

Question 31

P/E Valuation Model

Answer 31

Market price = earnings x P/E ratio

Question 32

Liquidity vs Marketability

Answer 32

Liquidity implies a security can be sold or purchased quickly and without substantial change in price

Marketability refers only to speed

Question 33

Wash Sale

Answer 33

No deduction is allowed for any loss.
The loss gets added to the existing shares basis.