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Wrong Answer Deck > Investments > Flashcards

Investments Flashcards

1
Q

Inv 1-2 What is a US dollar deposited in a Hong Kong bank called?

A

Eurodollar- Any dollar deposited in any foreign bank

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2
Q

Inv 1-2 What is a yankee bond?

A

Dollar denominated bonds issued in the US by foreign banks and corps.

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3
Q

INV 1-3 How can you remember premium and discount bonds?

A

Premium
-———— N CY YTM YTC
Discount /\

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4
Q

INV 1-3 when is an issuing corporation most likely to call its bonds?

A

When the bonds are selling at a significant premium.

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5
Q

Inv 1-3 Client purchased a 5k bond bearing interest at 8% per year, payable January 1st and July 1st. Price was 5,250 and included accrued interest of $133 for Jan 1- April 30 (4 months). What will the 1099 report? What will be taxable interest? What is the basis?

A
  1. $200, $67 reportable income, basis 5,117.
    $200 received on 7/1 will cause the 1099 and will include accrued interest. $200-133 paid to the bond seller. Taxable interest is $67. Basis is 5,250-133= 5117
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6
Q

INV 1-5 What is accretion in relation to bonds?

A

Accretion generates phantom income on original issue discount bonds. Bondholder raises basis accordingly.

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7
Q

INV 1-6 When denominations are T-Bills sold? When do they mature?

A

6 months, $100 denominations

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8
Q

Investments 1-7 Can Treasury Bonds be called? When?

A

Yes, 15 years prior to maturity

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9
Q

Investment 1-7 Describe tax treatment of TIPS.

A

Interest paid and principal increase is taxed as ordinary income tax. The principal increase is phantom income and raises the cost basis. Remember, this is only subject to federal tax.

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10
Q

Investments 1-9 are EE, HH, and I bonds marketable?

A

No

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11
Q

Investments 1-9 Describe the taxation of EE bonds.

A

Owner has the option of having the interest taxed each year. Otherwise not subject to federal income tax until the bonds are redeemed or reach maturity. State and local tax free.

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12
Q

Investments 1-10 Can UTMA or UGMA accounts hold EE or I bonds?

A

No

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13
Q

Investments 1-12 What’s the default risk, interest rate risk, reinvestment rate risk for GNMAs?

A

Default none.
Interest rate risk- prices fall when rates rise
Reinvestment rate risk- Reduced certainty of the monthly payment due to homeowners repaying their mortgage loans prematurely when interest rates fall.

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14
Q

Investment 1-12 How is the payment received broken down for GNMA?

A

Part interest and part return of principal.

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15
Q

Investments 1-12 of GNMA, FHLB, CNMA, FHLMC, which are backed by the government.

A

GNMA

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16
Q

Investments 1-13 What’s the safest type of municipal credit?

A

GO bonds- they can compel a tax levy to make payment on debt if needed.

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17
Q

Investments 1-14 Describe a Z tranche CMO.

A

Longest duration of all the classes (like a zero bond) received interest and principal only after the other tranches have been liquidated. Highest interest rate risk. Highest yield of all tranches.

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18
Q

Investments 1-17 What is the bond conversion value formula?

A

CV= (par/cp) Ps
CP= conversion price
Ps= current market price of underlying stock
PAR= Par value of bond (presume $1,000 if not stated otherwise)

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19
Q

Investments 2-1 what’s the difference between 10Qs and 10Ks.

A

10Qs are Quarterly reports from the corporation to the SEC and 10Ks are annual.

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20
Q

Investments 2-2 What’s the difference between cumulative and non cumulative preferred stock shares?

A

Cumulative- Missed dividend payments must be made up. Non cumulative doesn’t.

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21
Q

Investments 2-2 Who typically buys preferred stock?

A

Corporate treasurer- 50% of dividends received are typically excluded from taxation.

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22
Q

Investments 2-3 How are ADR dividends declared?

A

Declared in country of origin

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23
Q

Investments 2-4 Highlights of UITs

A

Units are redeemed at NAV. Distributed to unit holders (not shareholders). Done on secondary market.

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24
Q

Investments 2-9 Formula for a properties intrinsic value?

A

NOI/Cap rate= Inti sic value

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25
Q

Investments 2-10 What’s the 90% rules for REITs?

A

If a REIT distributes 90% of its income then it only has to pays tax on the undistributed portion. If it’s below 90% then it pays tax on everything.
Note shareholders can deduct 20% of pass through income from reits.

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26
Q

Tax 2-11 What can’t reits invest in?

A

Limited partnerships because they are tax shelters.

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27
Q

Inv. 3-1 What is the formula for intrinsic value of a put?

A

IV= EP- MP

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28
Q

Inv 3-2 What is the formula for intrinsic value of a call option?

A

IV = MP- EP

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29
Q

Inv. 3-6 Client bought a stock @ $60 on Jan 15. 13 months later, he wrote a 9 month call $70 when the stock was trading at $70. The call premium was $13. The price of the stock continued to rise, and the holder exercised the call before the option expired. What amount of gain will Lance have to report, and is it long term or short term?

A

2,300 LTCG

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30
Q

Inv 4-7 Define a liquid asset.

A

Asset that can be converted into cash without significant loss of principal.

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31
Q

Inv 4-8 Define marketable asset

A

Asset that can be traded (not redeemed)

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32
Q

Inv 4-11 What is the equation for Coefficient of Variation? CV

A

CV = Standard deviation divided by the average of mean return.

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33
Q

Inv 4-11 What does standard deviation measure?

A

Measures variability of returns in a non diversified portfolio and is a measure of total risk.

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34
Q

Inv 4-11 what does Beta measure?

A

Beta measures volatility of returns used in a diversified portfolio and is a measure of systemic risk.

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35
Q

Inv 4-12 Which of the following stocks has highest standard deviation?
1. 10%, 6%, 12%, -5%
2. 8%, 12%, 16%, -8%

A

Use E+ for each number then gold 8key
Second stock

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36
Q

Inv. 4-13 In a normal bell shaped curve. Where does one standard deviation fall? What about 2 and 3?

A
  1. 68%
  2. 95%
  3. 99%
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37
Q

Inv 3-15 If you own both stock A and Stock B equally. What is the risk of correlation coefficient is .6?
Stock A Expected return 10% Risk 15%
Stock B Expected return 35% Risk 45%

A

Between 20-30%. 30% would be the answer if it was 1.0 correlation coefficient. So at .6 go with something was than 30.

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38
Q

Inv 4-16 What does Beta measure?

A

Measures the volatility of a particular security or portfolio rate of return to the volatility of the market as a whole.

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39
Q

Inv 4.16 What is the equation for Beta?

A

Beta= COV(stock,market)/SDsquared (market…= Coorelation coefficients standards deviation (stock) divided by standard deviation of market

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40
Q

Inv 4-18 How do you determine a mutual funds risk adjusted return?

A

Take the annual return and divide it by beta.

41
Q

Inv 5-1 what’s another term for geometric mean?

A

Time weighted return.

42
Q

Inv 5-1 How to solve for geometric mean?

A
  1. Add 1 to all the percentages. (12% become 1.12, -15% becomes .85)
  2. Multiple all the numbers in step 1
  3. The answer become FV
  4. -1 is your PV always
  5. N is the number of years of the investment
  6. Solve for i
43
Q

Inv. 5-5 Client buys 100 shares of stock at 50/share. Stock pays .25 quarterly dividend. Company earnings increase by 10% and it declares the dividend will increase by 5% for the year. Client sells stock at $53. What is the total return if he holds the stock for one year?

A

8.1%
53+ 1.05 - 50/ 50

44
Q

Inv. 5.5 Client has 10k to invest. Wants to buy max possible of shares on margin. Interest on margin of 9%. Stock goes up by 30% in one year and client sells. What is the rate of return?

A

51%
26k-(10k+900) -10k/10k

45
Q

Inv 5.6 Why is buying on margin aggressive?

A

The downside risk is larger than upside potential.

46
Q

Inv. 5.6 client 24% tax bracket bought 1k shares for 40k. Paid 1k dividend. After 1 year sold for 60k. What was her after tax holding period return?

A

44.63%
21kx.85%

47
Q

Inv. 5-12 Client lives in a state with state income tax of 6% and federal income tax of 24%. Which of the following bonds has the best return?
A. Muni issued in his state 5.2%
B. Treasury bond paying 7%
C. Corp bond paying 7.8%
D. Muni bond paying 6.4% issues out of state

A

D

48
Q

Inv 5-14 Bought house 5 years ago. Paid 50k plus repairs of 10k. Then repairs of the following 5k, 3k, 10k, and 8k then selling in year 5 for 110k but additional 5k of repairs. What’s the return on investment?

A

4.87%
CFj everything then gold IRR/Yr

49
Q

Inv 6.1 what is duration inversely related to?

A

Yield to maturity

50
Q

Inv 6-2 What risks can you offset by matching duration of a bond to clients time horizon?

A

Reinvestment risk and interest rate risk

51
Q

Inv 6-4 for duration questions, what must you always look for?

A

Matching the bonds duration to the time horizon. If a zero has a 10yr maturity and time horizon was 10…then that’s perfect. All other coupons that have 10 year maturity must have shorter than. 10 year duration.

52
Q

Inv. 6-5 what is the approx change in the price of a 1k par bond when interest rates decline by .75% the YTM is 6.75% and the bond duration is 10 yrs?

A

-10[-.0075/1+.0675] = .07 or 7%
7% of 1000= $70

53
Q

Inv 6-6 What’s the equation for zero growth model?

A

Price = Div/ required rate of return

54
Q

Inv 6-6 What’s the equation for constant growth model?

A

Price = D1/ r-g = Do(1+g)/r-g
R= required rate of return
G = growth rate of dividends

55
Q

Inv. 6-10 How to calculate price of the stock using PE ratio and no dividend?

A

Price = Earnings x P/E ratio

56
Q

Inv 6.11 What’s the free cash flow equation?

A

Identical to DDM.
FCFo(1+g)/ r-g

57
Q

Inv 6-11 How to calculate Return on equity?

A

Earnings available for common (EPS)/ common equity (net worth or book value)

58
Q

Inv 6-12 How to calculate dividend payout ratio?

A

Dividend payout ration= common dividends paid/earnings available for common (EPS)

59
Q

Inv 7.6 What is the formula for sml? Also known as capital asset pricing model or CAPM and can also be used for required rate of return.

A

Ri= Rf + (Rm- Rf) Bi

60
Q

Inv. 7-6 How do you determine market risk premium?

A

It’s embedded in the required rate of return formula.
(Rm-Rf)B

61
Q

Inv. 7-9 What does semi strong form of the efficient market theory reflect?

A

Current prices reflect past prices and factor all publicly available information. Key is all publicly known information.

62
Q

If 8-8 what is the purpose of a sinking fund requirement?

A

The purpose of the sinking fund is to reduce default risk. Allows the issuer to retire a portion of the debt each year until the entire issue matures. Periodic payments to the sinking fund are generally the same each period.

63
Q

Inv. 8-13 If the Date of Record for a stock is Friday Jan 19th, when is the ex dividend date? Purchase date? What if it was Monday Jan 22nd?

A

Jan 17th purchase date, Jan 18th ex dividend date.
Thursday Jan 18th purchase date, Friday Jan 19 dividend date.

64
Q

Inv 8-14 What’s the sharpe ratio?

A

Sp= Rp-Rf/SD
Rp= risk of portfolio

65
Q

Inv 8-14 What is the treynor ratio?

A

Tp= Rp-Rf/Bp

66
Q

Inv 8-14 What is the Jensen ratio? What is it usually referred to as? What is it measuring?

A

Alpha=Rp- [rf - (Rm-Rf) Bp)

Alpha
Contribution of portfolio manager

67
Q

INV 8-16 How do you determine R^2?

A

Take the square of the correlation coefficient.

68
Q

Inv 8-16 if R^2 is less then 60 what number should you look at? Keys?

A

Sharpe
- RISK is measured in standard deviation
- variability
- contains systematic and unsystematic risk

69
Q

Inv 8-16 What if R^2 is greater than 60? Keys?

A
  1. Look for highest positive alpha (Jensen), if alpha/jenson is not a choice look for the highest treynor number.
    Keys
    - Risk is measured in terms of beta
    - Volatility
    - Contains systematic risk
70
Q

Inv 8-18 What is the information ratio? What does it measure?

A

IR= Rf-Rb/SD
Measures a portfolio returns above benchmark to the volatility of those returns.

71
Q

Inv 9.4 What is the margin requirement formula?

A

Margin requirement= (1- initial margin percentage)/ (1- maintenance margin percentage) c purchase price of the stock

72
Q

Inv 9.5 Client purchased 200 shares of X at 150 per share on margin. The initial margi. Requirement is 15k (borrows up to 15k). If the maintenance margin is 25% what is the amount of maintenance call if the stock drops to $90.

A

1500
200shares x 90 = 18k
25% c 18k = 4,500
18k - 15k = -3k (actual equity)

4500-3000 = 1500

73
Q

Inv 9.2 what makes up a stock option collar?

A
  • A long position in the stock (own it)
  • A short position in the call (wrote [sold] the call and received premium)
  • A long position in the put (owns it and paid premium)
74
Q

Inv. 9-5 A client buys 100 shares of stock at $75 per share. The initial margin is 50%. The maintenance margin rate is 30%. Below what trade price will the margin call start?

A

53.57
1-.5/1-.3 x $75 = 53.57

75
Q

Inv 9.5 100 shares at 75 bought 50% on margin. Drops to 40$. Maintenance margin is 30%. What dollar amount is the maintenance call?

A

950$
.3x 4000 = 1200
4000-3750(original margin)=250

1200-250= 950

76
Q

Inv 10-6 For Blaco wholes option valuation model. What is the relationship between the exercise price of a call and the calls value? What about the exercise price of a put and the puts value? What about all the other variables?

A

Exercise price of call increases, calls value decreases
Exercise price of put increases, puts value increases
All other variables and a direct relationship to calls or puts.

77
Q

Inv quiz 2 what are some generalities of UITs?

A

Can be self liquidated, can trade on secondary market.
Isn’t actively managed, no continuous offerings and redemptions.

78
Q

Inv quiz 2 Which type of investment can always be purchased at NAV?

A

No load funds

79
Q

Inv quiz 1 How are EE bonds purchased?

A

At face value

80
Q

Inv quiz 1 Which of the following are not directly guaranteed by the us government? strips, GNMA, CMO, EE bond

A

STRIPS

81
Q

Inv Quiz 1 Grandma is in the 35% tax bracket. She lives in NYC. Bought EE bonds for her grandchildren. All of her grandchildren live in NYC. If she redeems the bonds for her grandchildren educations, how will it be taxed?

A

The interest will be taxed at the federal rates for grandma.

82
Q

Inv quiz 1 What is generally used to finance import export transactions?

A

Bankers acceptance

83
Q

Inv quiz 3 A pit option has a strike price of $110 and is selling for 3.5 premium. Price of the stock is 108. What’s the intrinsic value?

A

2

84
Q

Inv quiz 3 Dec 55 call with premium of 6.5 and trading at $58. What’s the intrinsic value?

A

3 intrinsic value

85
Q

Inv quiz 4 What are the examples of Systematic risk or non diversifiable risk?

A

prime
Purchasing power, reinvestment, interest rate, market, exchange rate

86
Q

Inv quiz 4 What does beta measure in a portfolio?

A

Volatility, diversified portfolio, systematic risk.

87
Q

Inv quiz 4 what impact does a negative correlation coefficient have on Beta and the portfolio?

A

It will reduce risk of portfolio and make beta negative.

88
Q

Inv quiz 5 The annual returns for a stock are 8%, 12%, -6%. What is the geometric return?

A

4.37%
1.08 x 1.12x .94 = 1.137 FV
-1 is PV, 3n

89
Q

Inv Quiz 5 Buys 20k stock on margin. Deposits 10k. Interest on margin is 12% quarterly. Sells stock 1 year later for 25k, how much did he make?

A

$3,745
Set calc for 4p/yr
-10k PV, 1 gold XP/YR, 12i, FV
11,255-10k = 1,255 interest
25k-21255

90
Q

Inv Quiz 6 How are duration and maturity related?

A

They are positively correlated.

91
Q

Inv Quiz 6 What is the approx price change of a 1000 bond when interest rates go up by 1.56%, duration is 8 years and YYM is 4%.

A

-120
-8(.0156/1.04)=-12%
1k x 12%= 120$

92
Q

Inv quiz 7 If Rm is 10% and Rf is 6% then what is the stock risk premium if the security has a beta of 1.4?

A

5.6%
(10%-6%)1.4

93
Q

Inv quiz 8 what is the index that is price weighted?

A

DJIA

94
Q

Inv quiz 8 why is the financial ratio considered to be the most useful?

A

Several ratios with the same industry over time.

95
Q

Inv Quiz 8 If an investor wants to immunize a bond portfolio, what is immunization most likely to reduce?

A

Interest rate risk

96
Q

Inv quiz 8 How does a straddle work?

A

Buying a put and call on the same stock with the same exercise price and expiration date.

97
Q

Inv.Quiz 8 How would you determine mutual fund capital gain sale using average cost method?

A

Take the total money spent and divide by the total number of stocks.

98
Q

Inv quiz 10 In the APT model, when the factor is zero, what can you conclude?

A

The factor has no impact on the return because it is expected or anticipated.

99
Q

Inv Quiz 10 Binomial option pricing is ____ model?

A

Valuation

Wrong Answer Deck (6 decks)

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