Investments Flashcards
What taxes do you pay on Federal bonds?
Pay Federal; no S&L
What taxes do you pay on Muni Bonds?
Out of State: Pay S&L (no Federal)
In state: Double tax free
What price causes a margin call? (Formula)
(1-init marg %) / (1-maint marg %) * ORIGINAL price
YTM and YTC - how many pay pds/year?
2/year and PMT = 1/2 coupon (unless annual coupon stated)
Real Rate of Return Formula?
((1+After Tax Return)/(1+Inflation) - 1) * 100
How do you calculate YTM?
Solve for “i” on calc
PV = $ paid
FV = face value
N = # years till maturity*
PMT = 50% of coupon*
*USE 2 PAY/YR unless problem says “pays annually”
Taxable Equivalent Yield vs Tax Exempt Yield
TEY (Equiv) = Muni Coupon/(1-tax you don’t pay)
TEY is the CORP yield you would need for same result as muni
Tax EXEMPT Yield = TEY * Tax You DO pay
EXEMPT is the muni yield you’d need to equate to a corp bond
How many basis points are in 1%?
How much does 50 bps translate to in terms of %age?
100
100 bps = 1% (or .01)
50bps =1/2% (or .005)
Are preferred stock dividends fixed or variable?
What is the tax rate on Pref divs?
Fixed, as a %age of par
Cap gain rates if QUAL pref and owned 90/181 days!!
How many times/year are preferred dividends paid?
Quarterly - like any other stock dividend!!
(Even though FIXED div like bond, not paid semi)
How many times/year are common dividends paid?
Quarterly
How many times a year is bond interest paid?
2
What keys do you use to calculate mean (arithmetic/average) and standard deviation?
<Gold> 7
<Gold> 8
To input #s, use key to right of CF (Upper case Sigma)
</Gold></Gold>
What is the formula for liquidity or current ratio?
CA/CL
Are taxes (income & FICA) part of fixed & variable expenses in emergency fund?
NO
Does health status inform retirement needs and estate taxes?
Yes
Definition of pro-forma?
Future projection of biz income/expenses
Ultimately compared to actuals @ YE
Is a loss on a home LTCL?
No
Current Yield formula?
Coupon $ payment / Price paid for bond
How are qualified dividends taxed?
Capital gains rates
How is interest taxed?
Ordinary income
Does the Fed control the Prime or the discount rate?
Discount
Prime set by banks w/Fed
On the formula sheet, when you see D1, what is the substitute/equivalent for it?
D0*(1+g)
This is the current year’s dividend times the growth rate for next year’s dividend.
Formula: What is the coefficient of variation?
C of V = Sigma / mean expected return * 100
or
CV = Standard deviation / mean expected return * 100
STANDARD OVER MEAN KEEPS IT CLEAN!!!
The lower the number the better b/c it tell you how much expected return you’re risking for each unit of std deviation (variability)
What does COV stand for on the formula sheet? What does it tell you?
COVARIANCE (NOT Coefficient of Variation)
It tells you how things move in relation to each other; do they move in the same or opposite directions?
If it’s (+) they move in the same direction.
If it’s (-) they move opposite.
Helps to understand how combining diff assets in a portfolio will reduce volatility (if negative) or increase volatility (if positive).
It’s made up of correlation coefficient (rho) and std dev.
Rho tells you how tightly coupled two variables are and it ranges b/w -1 and +1. Zero or low + are best.
If something is -1 you’ve eliminated risk but you’ve also eliminated gain b/c they cancel each other out.
What is the market premium?
(Rm - Rf)*Beta
What is (Rm - Rf)*Beta?
Market premium
How do you calculate the HPR (Holding Period Return)?
(What I sold for +-(What happened)-Out of pocket)/OOP
What happened:
+ Dividend
- Margin Interest
- Margin Amount Borrowed
How do you calculate a Real Property’s Intrinsic Value (Formula)?
NOI/Cap Rate
How do you calculate NOI?
NOI = Operating Revenues - Operating Expenses
Do NOT include in Operating Expenses:
Interest/principal
Capital Improvements/expenses
DO include:
Maintenance
Prop Taxes & Insurance
What is the IV (intrinsic value) of a call?
What happens if it’s (-)?
IV of call= MP - Exercise$
COME: Call Option Mkt - Ex
IV can NEVER BE NEGATIVE (if negative then IV = 0)
If negative/0 then out of money; if positive it’s in the money
What is the IV (intrinsic value) of a put?
What happens if it’s (-)?
IV of put = Ex $ - MP $ (exercise $ - mkt $)
POEM (Put Option = Ex Price - Mkt Price)
IV can NEVER BE NEGATIVE (if negative then IV = 0)
If negative/0 then out of money; if positive it’s in the money
Formula for Return on Equity?
EPS/Common Equity book value
Formula for Dividend Payout Ratio?
Common Dividends Paid/EPS
Formula for PE Ratio?
Current mkt price/earnings
Formula for stock yield?
Annual Div per share / price per share
What does Beta tell you?
The degree to which a stock/portfolio moves with the market/benchmark you’re comparing to.
Beta of the ENTIRE MKT = 1 (a constant)
> 1 -> More volatile (1.5 is 50% more volatile)
=1 -> Exactly the same; risk is systematic
-1 -> Less volatile (.75 is 75% of the avg volatility)
What does IRR measure?
IRR = Dollar weighted return; it’s the return based on amount and timing of cash flows during a given period.
The rate (I) at which all future cash flows = cost of inv (if NPV = 0 the the IRR of inv = req’d return)
It’s used to compare investments
What does R2 tell you?
The ratio of a portfolio’s market variance to its total variance (in other words, how closely does it track to the market or index).
It measures %age of return attributable to the market variance (vs portfolio manager’s) to validate alpha/beta; how much the benchmark influences performance.
What does Treynor measure?
Return per unit of risk using beta as the risk measure.
What does Sharpe measure?
Return per unit of risk using std. dev as the risk measure.
What is the kiddie tax std deduction?
$1300
What is the value of a stock GIFT?
The FMV on the day gifted
When calculating IRR on an investment that involves a mortgage, how is the down payment and mortgage loan handled?
Only the cash put down goes into CF0 and for the last CFx, the mortgage is deducted from the amount received.
Maintenance Margin calc vs Margin maintenance call price calc?
The MM call price calc is the price at which a margin call is issued ((1-init marg/1-MM marg) * purchase price).
The Maintenance Margin calc (how much do you have to pay) is based on “forks”. Initial Marg and Equity drawn. Orig marg stays, but equity falls based on price. The amt is the maint marg% * equity.
What are the small cap, mid cap and large cap cut offs?
Small = $300M - $2B
Mid = $2B - $10B
Large = >$10B
What’s a GIC?
It’s like a bond or CD issued by an insurance company
Usually purchased by pension plans.
Low liquidity and low returns, but safe.
No interest rate risk b/c the rate is guaranteed and there’s no price fluctuation based on interest rate changes.
What are the %age requirements for REITS?
> = 95% from operations
> = 75% from real estate
<= 15% from securities (e.g.: GNMA)
> 90% income dist (they pay tax on <= rem 10%)
OR ALL INV INCOME TAXABLE TO REIT
CAN’T invest in LPs!!
What is the daily limit for commodity futures?
Max % up or down from previous day allowed.
What’s a Eurodollar?
US $ in foreign bank
What’s a Yankee Bond?
Foreign Co bond ISSUED in $USD in USA (SEC reg)
Do importers & processors go long or short?
Do exporters & growers go long or short?
Farmers SHORT to SECURE
Producers LONG to PROCURE
Processors/Importers long the right to lock in a price
Farmers/Exporters short to guaranted a sell price
If you fear incr prices -> go long
If you fear decr prices -> go short
What does Reg D concern?
New issues of private placements:
Requires disclosures/offering memorandum
Limits # of non-accredited investors to 35
Accredited ($1m/200/300)
Note: Qual Investor >$5M
Systematic risk vs systemic risk?
Business risk vs. financial risk?
Systematic: non-diversifiable risk of market/beta
Systemic: specific for a company or sector
Biz Risk: specific firm’s ops
Financial: specific to a firm’s bonds = CREDIT or DEFAULT risk
What are the types of risks (mnemonic)?
PRIME
What does sigma represent and how is it measured?
TOTAL Return or PORTFOLIO VARIABILITY of returns
Measured by std deviation
= Systematic (Beta) + Unsystematic
(Non diversifiable) (Diversifiable)
What is risk adjusted return (formula and meaning)?
= Return/Beta
This is how you standardize the return of MF so you’re comparing apples to apples.
Time Weighted Return (IRR/NPV) vs Dollar Weighted Return (Geometric Mean)?
Geometric Mean Calc?
IRR & NPV measures how I do as an investor, factoring in the returns and cash flows in & out.
Dollar Weighted (Geometric Mean) measures how the PORTFOLIO mgr does - it’s only looking at income/price changes not cash flows (which can distort returns).
Geometric Mean:
1. Add 1 to returns (be careful on (-) you’re ADDING) and MULTIPLY these #s = FV
2. Using FV from above, PV = -1, N = # years and solve for i.
What is total return?
Annual return including both +/- in asset price AND dividends/interest.
What are the weaknesses of HPR (Holding Pd Returns)?
It ignores timing and cash flows; the holding period could be 10 months or 10 years and you’d get the same result!
Also, if you buy on margin you get a “higher” return but that’s because you used less of your own money.
What is the duration of a bond used for?
Which bonds have highest duration?
To compare bonds; it tells how long to make your money back factoring price and coupon payments.
To figure impact: int rate - price - ytm - duration
UPS I’ve FALLEN
Int rates up -> SHORTEN
Int rates falling -> LENGTHEN
If a bond’s duration = 8, PRICE will go down 8% if int rates rise 1% and vica versa.
IT MEASURES SENSITIVITY TO INT RATE CHANGES and therefore volatility & risk
Highest duration = ZEROS
What is portfolio immunization?
Passive strategy
Immunized when avg DURATION (NOT maturity) = time horizon
To value a stock, what formula should you use if there are dividends?
What formula do you use if there are NO dividends?
Dividends: DDM
V=D1/r-g
No Div use P/E ratio: Price = earnings * P/E ratio
Capital Mkt Line vs Efficient Frontier vs Security Mkt Line
Cap mkt line: Macro (A=lowest, B=optimal and C=most risk); uses sigma/std dev
Eff Frontier: Macro; blends indifference curve w/CML; uses sigma/std dev
Security Mkt Line = Micro (formula uses Beta and Rf); uses Beta AKA CAPM
Who likes Efficient Mkt Hypothesis?
Passive strategy investors (mkt is efficient; active is useless)
Strong form = passive
Semi = Insider info
Weak = active; use fund analysis (maybe)
ALL forms Hate Technical analysis
Fundamental Analysis
By company
Top down or bottom up
Compare firms w/in sectors
Technical Analysis
Charts
Active Strategies
Reisistance/support levels
What are the (3) key performance measures, and what are they looking at?
Sharpe, Jensen’s Alpha and Treynor
They measure expected return to actual for a PORTFOLIO
How do you use R-squared and what does it tell you?
It is = “roe” (correlation coefficient) squared
RATS
B/W 0 and 100
Low - not very diversified
High - very diversified
How do TIPS work?
The face value adjusts per CPI (int rate is flat)
Increases to face value are added to basis for tax purposes
How do I-Bonds work?
Int rate adjusts
EE, H and I bonds can all be used for education
What do you pay phantom income on?
ZOTTS
Zeros
OID
STRIP
TIPS (on the increase in face value only!! the interest is paid out)
Treasury Receipts
Reinvested dividends produce PHANTOM INCOME but also INCREASES BASIS!!
ISOs produce phantom income for AMT calculation purposes only… you don’t actually pay the tax on the phantom income unless it pushes you into AMT (in which case you’re paying AMT)
