Investments Flashcards
are CDs marketable?
yes
are CDs negotiable?
yes. they can be sold in the open market before maturity
What kind of risk do CDs carry?
interest rate risk and purchasing power risk
Commercial paper
$100k denominations
maturity of 270 days or less
sold at a discount and rated as to quality
banker’s acceptance
finance import and export transactions
9 months or less to maturity
trade at a discount to face value
Eurodollar
deposit in ANY foeign bank denominated in dollars
yankee bonds
dollar-denominated
issued in the US by foreign banks and corporations
when does a bond sell at a discount
when its par value is in excess of the bond’s purchase price
premium bond
when the bond’s purchase price is in excess of par value
Yield ladder
yield to call
maturity
current
nominal
current
maturity
call
nominal yield
stated rate of interest of the bond
interest is generally earned by a bondholder _______
daily
OID
original issue discount
discounted from par when it is issued
many are zero coupon bonds
no interest until maturity
phantom income
T Bill
3, 6, and 12 month maturity
$100 to $1M
NO risk
not callable
no coupon
subject to federal income/exempt from state and local income tax
weekly auction
Treasury Notes
1-10 years
$1k to $100k
What risk? reinvestment, interest, purchasing power
NOT callable
subject to federal income/exempt from state and local income tax
semiannual interest
monthly auction
treasury bonds
10 - 30 year maturity
$1k to more than $1M
RIP (risk)
No default rate risk
Callable 15 years prior to maturity
subject to federal income/exempt from state and local income tax
semiannual interest
quarterly auction
Treasury STRIPS
treasury issued zero coupon bonds
direct obligation of the federal govt
discount is taxable income, earned annually
TIPS
inflation protection
marketable
face value (principal) adjusted semiannually
the higher the inflation rate, the higher the face value of the bond
Sold in $1k denominations
EE Bonds
interest earned is NOT subject to federal income taxation until the bonds are redeemed or reach final maturity
I bonds
inflation-indexed accrual securities of the US govt
non marketable
nontransferable
nonegotiable
cannot be pledged for collateral
sold at face value
interest accumulates monthly
GNMA Risk(s)
interest rate risk - price falls when interest rates rise
reinvestment rate risk - prepayment when interest rates fall
debenture
corporate debt obligation backed only by the integrity of the issuer
bond rating
Standard & Poor’s
Moody’s
a convertible bond will not sell for less than…..
the larger of the following:
-its value as a bond (debt)
-its conversion value
when would an issuer call bonds?
likely to call a bond if interest rates have dropped in the market since the bond was issued
10Q vs 10K
reports from corporate to the SEC
q = quarterly
k = annually
qualified dividends with preferred stock
stockholder must own the stock for 90 days in a 181 day period that begins 90 days before the ex dividend date
ETF vs mutual fund
ETFs are generally more tax efficient than traditional open end mutual funds
unit investment trust
investment company with no day to day portfolio mgmt
unmanaged
handled by an independent trustee
passive investment
assets are not traded, they’re frozen
the trust collects income, and eventually, repayment of principal
self liquidating
NAV
mutual funds
open end investment companies
nonnegotiable, redeemable securities
NAV - daily
redemptions are always at NAV
closed end investment companies
issue stock once, then the books are “closed”
no new shares are issued
hold illiquid securities
shares are sold in the market (like any other stock)
Guaranteed investment contracts
GICs
issued by insurance companies
2-5 years
real estate and inflation
investment real estate can be an effective hedge against inflation
low correlation coefficient with US common stock (typically)
properties intrinsic value
NOI must be divided by the cap rate
CAP rate = rate of return
non public reits
not liquid or marketable
REITs vs RELPs
REIT is a portfolio investment
RELPs are subject to passive loss rules
REITS are actively traded
RELPs are generally not marketable
REITs are managed by a board of directors
derivative (definition)
financial instrument whose value is based on an underlying asset (such as a stock) or group assets
Long term equity anticipation securities (LEAPs)
long term options
ranging up to 2 years and beyond
warrant
similar to a call option
issued by corporations
several years to maturity
not standardized
issued with no intrinsic value
taxation on collectibles
long term capital gains rate is 28%
Private placement (regulation D)
offered privately
max of 35 non accredited investors and an unlimited number of accredited investors
qualified purchaser
when a person owns at least $5M in investments
systematic risk
non diversifable risk
AKA: PRIME
total risk vs systematic risk
Total risk = standard deviation
systematic risk = beta
liquidity
BOTH transaction speed and stability of price
marketability
speed of a transaction
correlation coefficient and covariance
BOTH express the extent to which the movements of stocks/securities in the same portfolio are similar or not
Covariance
considers an infinite possibility of outcomes
correlation coefficient
falls within a specific range
Correlation coefficient of +1.0
expose the maximum risk to the portfolio
coefficient of variation
(CV)
measure of relative variability used to compare investments with widely varying rates of return and standard deviation
CV equation
average (or mean)
standard deviation
measures variability of returns in a nondiversified portfolio and is a measure of total risk
beta
volatility of returns used in a diversified portfolio and is a measure of systematic risk
simple return
arithmetic mean
geometric mean
compound returns over more than one time period
AKA time-weighted return
dollar weighted return
measures changes in total dollar value, treating additions and withdrawals of capital as part of the return along with income and capital gains and losses
nominal return
actual returns produced over a given period computed without accounting for the purchasing power of the dollar inflation
total return
annual return on an investment including appreciation or loss and dividends or interest
holding period return
total return (income plus price appreciation and dividends less margin interest) over the period from purchase to end of period or sale divided by the price of the investment
Yield to maturity
effective yield of a bond
takes into account both the market price of the bond as well as any capital gains or losses on the bond if held to maturity
ALWAYS USE SEMIANNUAL COMPOUNDING (even with zero coupon bonds)
yield to call
presumes that the bond will be redeemed by the issuer at the first call date specified in the indenture agreement
current yield
takes into account the interest in dollars and current market price of the bond
Annual interest in dollars/ bond’s current price
taxable equivalent yield
(tax exempt yield)/
1-tax rate
taxation of muni bonds
exempt from federal tax, but subject to state and local tax
bond duration
weighted average maturity of the bond’s cash flow on a present value basis
what is the purpose of duration
compare price volatility of bonds with equal coupons but different terms
risk averse investors prefer what bonds?
short duration
aggressive investors prefer what bonds?
long duration WHEN they anticipate that interest rates will decline
short duration when they anticipate interest rates will rise
immunization
portfolio is immunized if the duration of the overall portfolio is equal to a preselected time horizon
interest rate risk (bonds)
interest rate risk describes the realationship between bond prices and required rate of return
reinvestment rate risk (bonds)
uncertainty about the rate at which future income can be reinvested
zero coupon bonds
durations equal to their maturities
zero coupon bond fluctuations
because they have no coupons, their prices fluctuate more than those of coupon bonds with the same maturities
if interest rates are expected to rise (bonds)
buy higher coupon bonds with short maturities to shorten duration
if interest rates are expected to fall (bonds)
buy low coupon bonds with long maturities to lengthen duration
when the bond coupon is smaller….
the relative price fluctuation is greater
when the term to maturity (on bonds) is longer
the relative price fluctiation is greater
when the market interest (of bonds) rate is lower the price fluctuation is?
greater
convexity
expresses the degree to which duration changes as a bond’s yield to maturity changes
convexity is the largest for…..
low coupon bonds, long maturity bonds, and low yield to maturity bonds
book value
accounting value of the equity shown on the balance sheet
Return on equity
EPS/common equity
capital market line
expresses the MACRO aspect of modern portfolio theory
CML reveals
the expected return on a fully diversified portfolio
that a diversified portfolio should fall somewhere along the CML
that individual securities or inefficient portfolios fall below the CML
cannot be used to evaluate the performance of a single security or a portfolio that lacks full diversification
that Rf is the risk free return
efficient frontier provides
the highest return for any given level of risk or the lowest risk for any given level of return
Inefficient (attainable)
all the dots below the efficient frontier are feasible but are inefficient
they carry to much risk relative to their expected return
not feasible (unattainable)
portfolios outside (or above) the boundary of the efficient frontier are not feasible because they cannot function for any period of time under the model
Anomalies (exceptions to EMH)
P/E effect - low P/e performs better than high p/e
Small firm effect
Janaury effect
Neglected firm effect
value line phenomenon
anchoring
investors become fixated on certain price points, often their purchase price
fundamental analysis
examines balance sheets and income statements to forecast future stock price movements
top down method
an investor first looks at trends in the general economy, selects industireis, and ultimately selects companies that should benefit from those trends
bottom up method
individual stock search with outstanding performance before considering the impact of economic trends
activity ratio
measures how rapidly a firm is able to convert various accounts into cash (or sales)
the sooner a company can convert assets into sales or cash, the more effectively the firm is being run
technical analysis
generally use charts or computer programs to identify and project price trends
technical approaches
dow theory
barron’s confidence index
odd lot theory
investment advisor opinions
advance/delcine line
moving average
mutual fund cash position
dow theory
aggregate measure of securities prices and thus does not predict the direction of changes in individual stock prices
barron’s confidence index
differential between the retruns on quality bonds and bonds of lesser quality will forecast future price movements
dow jones
price weighted
S&P 500
float weighted
russell 2000
cap weighted index of the smallest 2000 stocks in the russell 3000
wilshire 5000
value weighted index consists of over 7000 issues
value line
equally weighted index of 1700 issues
ex dividend date for common stock
the date of record for the corporation is the first business day after the ex dividend date
sharpe ratio
expressed as the ratio of the excess return of the portfolio to its standard deviation
treynor ratio
ratio of the excess return of the portfilio to its beta
jensen ratio
AKA alpha
portfolio reutnr actually attained and subtracts from it what the retne should have been based on the risk assume din the portfio
what does r^2 reveal?
the percentage of a fund’s movement that is explained by movements in the S&P 500.
aka the correlation coefficient
how do you decide which ratio to use? in relation to R^2
if R2 is less than 60, the portfolio is nondiversified. look for the highest share number
if r2 is greater than 60 the portfolio is diversified. so look for the highest positive alpha, if this isn’t a choice, select the highest treynor
stock option collar
investor owns a stock and wants to hedge against the stock declining in value
sells a call at one strike price (out of the money) and buying a put at a lower strike price (out of the money). they then own three positions
laddered bond portfolio
bonds are purchased with different maturity dates
as each bond matures, a new longer term bond is purchased
bullet (bonds)
investor purchases intermediate duration bonds and does not acquire long duration or short duration bonds
options and mutual fund shares in relation to margin
NOT marginable
maintenance margin formula (NOT on the formula sheet)
(1-initial margin percent)
———————————– x purchase price
(1 - maintence margin percent)
types of unsystematic risk
known as diversifiable risk
business risk
financial risk
how do you reduce unsystematic risk
diversification
total risk is ________
standard deviation
Brokered CDs vs regular (bank) CDs
brokered CDs have interest rate risk, but bank/regular CDs do not
types of risk for CDs (non brokered)
purchasing power
reinvestment rate
Income from TIPS
- fixed interest (that I pay taxes on)
- if interest rates rise, I’ll owe taxes on the phantom income on the increase but I’ll add this to my basis
EE bonds are issued at what value
face value
EEs in an UTMA
- owned by the child
-taxed as ordinary income at redemption
EE (education bonds)
-normally owned by parent
-tax free if the parent’s AGI is less than the phaseout at redemption
i bonds are sold at?
face value
taxation of i bonds
the same as EE bonds and may qualify for “education” bond status
GNMA vs FNMA/FHLMC
Ginnie Maies are guaranteed
the others are technically NOT for the exam
GO bonds vs Revenue
GOs trump Revenue
CMOs
-A = fast pay
M = medium pay
Y= slow pay
Z tranche which bears no coupon (most risk)
Zero coupon bonds don’t have what risk?
reinvestment risk
why is there a premium on convertible debt?
there is an embedded call option
duration on preferred stock
it’s infinate
who buys preferred stock?
c corporations
an ETF is most similar to….
an open end fund
what type of investment can ALWAYS be purchased at NAV?
no loan balanced mutual fund
when the market price of a stock is lower than the exercise price of the option, the put is _____
in the money
The return on _______ assets is normally negatively correlated with returns on _____ assets
physical
Financial
intrinsic value
difference between the underlying stock price and the exercise price
