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Investments Flashcards

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1
Q

Negotiable CDs

A

sold in market before maturity
interest rate risk
insured 250k fdic

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2
Q

MMDA

A

offered by banks
insured $250k

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3
Q

MMF

A

open ended investment companies offer
NOT INSURED (think SWVXX)

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4
Q

Commercial Paper

A

unsecured promissory note issued by large companies
starts at $100k denoms
270 days or less maturity
normally sold at a discount

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5
Q

Bankers Acceptance

A

finances import/exports
9 months or less maturity
discount
assurance of pmt when goods arrive

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6
Q

Eurodollar

A

deposit in ANY foreign bank that is denominated in dollars

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7
Q

Yankee Bonds

A

dollar denom foreign securities issued in US

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8
Q

Par Value

A

stated par value (usually 1000) and stated rate of interest

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9
Q

Yield Ladder

A

Disc: YMCACMA :Prem

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10
Q

Accrued Interest

A

your bond 1099 may be over/understated

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11
Q

OID

A

issued at discount
usuallly 0 coup
phantom income & basis increases
no gain @ maturity

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12
Q

Tbill

A

3,6,12 months
issued @ discount yield basis (100 to 1mm)
safest investment out there! benchmark for risk free rate
no coup interest
subject to federal tax
weekly auction

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13
Q

T Note

A

1-10 yrs
1k to 100k at par
RIP
not callable
semi annual int
monthly auction
subject to fed tax

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14
Q

T Bond

A

10-30 yrs
1k to 1mm at par
RIP
callable 15 yrs prior to maturity
semiannual int
quarterly auction

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15
Q

STRIPS

A

treasury zero coup bond

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16
Q

TIPS

A

treasury inflation adjusted securities
part 1: face value/principal adjusted semi annually by cpi to keep up w inflation. phantom income, increases basis
part 2: fixed coupon rate paid semi-annually, taxed on this as well

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17
Q

EEs

A

if held in parents name: education eligible
savings bonds
nonmarketable, nontransferrable, nonnegotiable
fixed rate for 30 years, 20 years + 10 extended
not subject to tax until bonds redeemed (option of yearly taxation)
only subject to fed tax
issued at face

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18
Q

I Bonds

A

issued at face
no guaranteed int rate
2parts:
fixed base rate stays same for life of bond
inflation adjustment updated every 6 months per cpi
can be used for education
taxation same as ee

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19
Q

GNMA

A

IR risk
gnma buys insured mortgages, puts then into pools. pass thru certs for pool
direct guarantee of us govt
taxed at all levels
min 25k
each pmt is interest and return of principal, no par at maturity
increasing rates: bonds down, gnma down

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20
Q

GO Munis

A

general obligation bonds
safest munis
backed by full faith of municipality. if they cant pay, taxes can be levyed to make pmt on debt

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21
Q

Revenue Bond

A

higher yields than GO
greater credit (default) risk

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22
Q

Insured Munis

A

when muni bonds are insured they are basically AAA
timely interest & principal

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23
Q

CMOs

A

A Tranche: highest coupon, lowest duration, paid first
Z Tranche: zeros, paid last, highest duration, highest yield

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24
Q

Debenture

A

corporate debt obligation backed only by issuer integrity

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25
Q

Indenture

A

formal agreement, deed of trust between issuer of bond and ttee

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26
Q

Investment Grade Bond Risks

A

DRIP

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27
Q

Govt Bond Risks

A

RIP

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28
Q

Convertible Bond

A

hybrid debt security

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29
Q

Bond Conversion Value

A

greater of bond intrinsic value and conversion value
PAR x Cp/Ps

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30
Q

Intrinsic Value of a Bond

A

present value of cashflows. use all info from the given bond except for i/yr, which will be the “yield of comparable bonds/yield of bonds w same maturity and grade on the market”

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31
Q

Callable Bonds

A

right to redeem at a certain price before maturity
when will issuer call a bond: when premiums on other bonds are higher (next best answer - when rates have dropped)
call protection:10 years
cost to issuer: call premiumPu

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32
Q

Put Bond

A

holder can sell instrument back to issuer
if rates rise and price of bonds drop, put option would be exercised
some yield is sacrificed to have the put privilege

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33
Q

10Q

A

Quarterly Report to SEC

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34
Q

10k

A

Annual report to SECl

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35
Q

annual report

A

corp report to shareholders

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36
Q

large cap

A

10b

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37
Q

mid cap

A

2b-10b

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38
Q

small cap

A

anything less than 2b

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39
Q

micro cap

A

anything less than 300mm

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40
Q

preferred stock

A

hybrid security
usually issued at $25 or 100 par with stated div rate
pays a fixed div rate
duration infinite
perpetual stock/no maturity date
more price fluctuation than bonds (duration higher)
cumulative: div payments must be made up
CORP PURCH OF PREFERRED STOCK: 50% DIVS ARE EXCLUDED FROM TAXATION
typical purchaser: corporation w extra funds

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41
Q

ADR

A

foreign shares in us in form of ADR
receipt
quoted in usd, divs paid in usd, but declared in country of origin

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42
Q

ETFS

A

open or closed ended
unit trust or investment company
traded on stock exchange
more tax efficient than MF
basket or index of stocks/bonds

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43
Q

UIT

A

investment company w no day to day pm
redeemed at NAV
unitholders (not shareholders)
unmanaged security portfolio created by sponsor and handled by independent TTEE
not traded/frozen
collects income & repayment of principal
self liquidating

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44
Q

Mutual Funds

A

open ended investment company
nonnegotiable, redeemable securities
each day, fund computes NAV
all shares held by fund are marked to market: total market value/# shares outstanding
no load: no sales charge

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45
Q

Closed Ended Investment Companies

A

issue stock once
trade on any exchange
may hold illiquid

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46
Q

GIC

A

issued by insurance companies
2-5 yr term
guaranteed rate of interest
POPULAR W DB PLANS

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47
Q

Real Estate Correlation w/ US Stocks

A

low. good for diversification

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48
Q

Unimproved Land

A

passive investment, return is potential price appreciation (no income generation)

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49
Q

Improved Land

A

generally funds from rentals. intrinsic value can be calculated from NOI

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50
Q

NOI

A

GNPVON

gross rental income
-nonrental income
=potential gross income
- vacancies & collections
-operating expenses (includes debt servicing)
=NOI

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51
Q

Property Intrinsic Value

A

annual income (FROM NOI, make sure its in years) / capitalization rate (given my exam)

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52
Q

REIT Distribution Rules

A

must have 75% invested in RE (other 25% can be securities like gnma). 90% must be distributed, remaining amount is taxable. if 90% not distributed, all NII taxable to REIT

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53
Q

REIT Income Deduction

A

passthrough income. may deduct 20% of passthrough income from REITS

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54
Q

Equity REITS

A

office buildings, hotels, shopping centers etc, mosdest leverage

too much leverage + too much vacancy can be negative for cashflow

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55
Q

Mortgage REITs

A

loans to develop property
vulnerable to purchasing power risk and higher default risk

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56
Q

RELPS

A

subject to passive loss rules, not marketable, managed by GP, nonpublically traded (see nonpublicly traded partnership in taxation)

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57
Q

REMICS

A

limited life self liquidating entity
more flexibility than CMOs
range of risk levels
pass thru rules

58
Q

Holding Period Return

A

total return / price of investment

total return: income (which is sell price - purchase price) + price appreciation + dividends - margin interest

price of investment: out of MY pocket cost

over 1 year: overstated return

under 1 year: understated return

59
Q

Intrinsic Value of an Option

A

minimum price the option will command

difference between market price and exercise (strike) price

60
Q

Exercise/Strike Price of Option

A

price at which the stock can be purchased or sold upon exercise of the option

61
Q

Premium

A

cost of the option

as option approaches expiration date, premium approaches intrinsic value

62
Q

time premium

A

amount by which premium exceeds intrinsic value

smaller time premium - closer to expiration

63
Q

Black Scholes

A

Option Valuation Models

CALL UP (except exercise price)

time remaining to expiration
int rate
volatility
price of underlying stock
ex. price

64
Q

Call Writer Taxation

A

lapse: premium received is stcg

exercised w/ covered call: premium received and to sale price (lt if underlying held 12+ months, st if less)

65
Q

Call Buyer/Holder Taxation

A

lapse: expired = exercised. stcl or stcg

most are sold before before expiration (not exercised). stg or l

66
Q

LEAPS

A

9 months - 3 years expiration

once exercised, you must hold the stock for 12 addtl months to pay ltcg

67
Q

warrants

A

company, not individuals
several years maturity

68
Q

Short Selling

A

short seller borrows stock

short seller sells

short seller instructs repurchase, cancels postion and returns security

profit: difference between borrowed price and repurchase price

need margin, dividends declared must be covered (paid back to holder) by short seller

69
Q

Short Future/Long Future

A

short: hedging against loss/fall

long: hedge against increase/rise

70
Q

YTM risk

A

reinvestment risk (zeros have no reinvestment risk because there is no coupon to be reinvested)

71
Q

Bell Curve

A

normal distribution, historical returns, leveraged $

72
Q

Log Curve

A

no margin, ending portfolio values, positively skewed, values cannot go below 0

73
Q

Covariance

A

infinite outcomes, the relationship between movements of securities in the same portfolio

74
Q

Correlation Coefficient

A

standardized measure of movement of 2 stocks in portfolio (like covariance but easier to compare)

P guy on sheet in cov formula

between -1 and 1, one is perfect positive corr, -1 perfect neg correlation.

0 = no relationship

-1 = no risk (St dev 0)

1 = max risk , weighted average = max risk

75
Q

CV

A

coefficient of variation = measure of relative variability with securities that have different ror and st dev

standard deviation / average or mean return

risk per unit of expected return

higher cv = higher relative risk

76
Q

St Dev vs Beta

A

both used to express risk

st dev: for a non diversified portfolio and measures total risk. VARIABILITY of returns

beta: for diversified portfolio and measures systematic/market risk. VOLATILITY of returns

77
Q

Calc ST DEv

A

return #, sigma for all years
orange 7 = mean
orange 8 = st dev

78
Q

St Dev %s in bell curve

A

1: 68% (on both sides of curve)
2: 95%
3: 99%

79
Q

Market Beta (and compare to higher lower)

A

1

higher beta: more volatile, greater systematic risk
lower beta: less volatile

80
Q

Risk Adjusted Return (using beta

A

return/beta coefficient

81
Q

time weighted return

A

geometric mean
better for investment returns
evaluate portfolio manager
not affected by cash flows

82
Q

calculating geometric mean

A

multiply returns (1+ or - return), this is fv
pv = -1 always
n = years investment
i = geo mean

83
Q

issue with dollar weighted return

A

not accounting for reinvestment rate
we are assuming its reinvested at the same rate which may not be true

84
Q

IRR Definition

A

discount rate at which present value of cash flows = cost of investment

irr greater than required return = good investment

when npv is 0 discount rate used is irr

85
Q

current yield calc

A

annual int in dollars / current bond price

86
Q

tax equivalent yield

A

tax equivalent yield = tax exempt yield / 1-tax rate

87
Q

Immunization

A

passive strategy
match duration to time horizon

88
Q

Investment Rate Risk - bonds

A

relationship between bond price and required rate of return

89
Q

reinvestment rate risk

A

uncertainty about the future rate that income (coupon payments) can be reinvested

90
Q

zeros - duration

A

duration = maturity

price fluctuates more

91
Q

duration & change in bond prices

A

measures sensitivity in price to change in rates

duration of 8 years = 8% of value lost with change in +100 bps of price (.01%)

92
Q

UPS

A

rates up, shorten duration
buy higher coupon bonds w shorter duration

92
Q

Fallen

A

rates fall length duration
buy lower coupon bonds with higher duration

93
Q

convexity

A

degree to which duration changes as wtm changes

large for low coupon, long maturity, low ytm

imrpove duration approximation for bond price changes

94
Q

div growth models - why do we use them

A

can be used to valuate stocks since dividends are sometimes the only cash payment a stockholder receives

gives estimated price (v=est. price)

95
Q

DDM Hack: changing div growth value

A
  1. use last growth rate to solve using ddm formula
  2. if first growth rate lower: choose next lowest answer
  3. if first growth rate higher: choose next highest answer
96
Q

PE Ratio

A

current market price = earnings x pe ratio

if company doesnt pay divs, use to valuate

97
Q

Free Cash Flow

A

same formula as ddm but use fcf1 instead of d1

if company doesnt pay divs, use to valuate

98
Q

ROE

A

eps/net worth or book value

profitability
determines earning growth therefore div growth

99
Q

div payout ratio

A

common divs paid / eps

100
Q

eps

A

roe per share x book value

101
Q

CML

A

macro MPT

relationship between risk and return of portfolio

straight line tangent to efficient frontier @ point b

point a = combo of risk free & risky
point b = proportional mix
point c = 100% leveraged portfolio

y axis intersection = risk free rate, t bills

slope = market price of risk

102
Q

efficient frontier

A

risk and return on axis

anything on the line is the most efficient portfolio (highest return for given level of risk)

103
Q

curves of risk averse investors

A

steep

more additional return needed to assume a level of risk

104
Q

curve of risk tolerant investor

A

less additional return needed in order to assume a certain level of risk

105
Q

SML

A

security market line

risk and return for a specific security

106
Q

SML vs required rate of return

A

above sml = more return for same amount of risk as sml or lower

107
Q

strong form emh

A

everything is baked in

108
Q

semi strong form emh

A

insider info could produce superior returns

109
Q

weak form

A

fundamental analysis MAY produce superior results

dont try to use technical analysis to predict future returns

110
Q

anomalies - are they emh?

A

not a form of EMH, it is an outlier effect (if emh was completely true, these wouldnt happen)

111
Q

PE effect

A

stocks with low PE perform better

112
Q

small firm effect

A

small firms outperform larger firms

113
Q

january effect

A

stocks decline at year end and rebound in feb

114
Q

neglected firm effect

A

firms that are not commonly studied out perform

115
Q

value line phenomenon

A

stocks rated 1 out perform stocks rated 5

116
Q

top down

A

trends in economy first

then picking companies

i.e. looking at inflation then buying in the retail industry

117
Q

bottom up

A

search for a specific stock with good performance before looking at impact of economic trends

118
Q

Current Ratio

A

current assets/current liabilities

*retirement accts are not considered current

119
Q

technical analysis

A

charts & programs to identify and project

not concerned with financial position of the company

120
Q

resistance & support

A

resistance = price ceiling

support = price floor

121
Q

dow theory

A

aggregate measure of securities prices, looks at position of overall market

DJI and DJT

122
Q

BARRONS confidence index

A

differential between returns on quality bonds and bonds of lesser quality will predict future price movements

123
Q

muni bond priorities

A

statements that show where the revenue is allocated

where in the list bondholders are paid

124
Q

stock split

A

you get more shares

price of each share is smaller

125
Q

reverse stock split

A

you get less shares

price of each share is more expensive

126
Q

wash sale

A

basis of whatever created the wash is increased by the amount of the disallowed loss

no deduction for any loss

think wash SALE

disallowed loss added to the sale basis

127
Q

ex dividend date

A

dont forget weekends or holidays

to get current dividends, must purchase day before x div

purch > ex div > date of record

128
Q

sharpe ratio keys

A

must be compared to other funds to mean something

129
Q

treynor ratio

A

excess return to the assets beta

130
Q

jensen ratio

A

aka alpha

measures contribution of pm (+ is better)

131
Q

when to use sharpe/jensen/treynor

A

alpha & treynor: needs to be diversified since it uses beta.

r squared = coefficient of determination

greater than 60, diversified

highest alpha, if no alpha given, highest treynor

less than 60, look for highest sharpe

132
Q

information return

A

returns above benchmark

higher = manager is more consistant

rp = asset return

rb = benchmark return

rp - rb = active return

st dev a = st dev of asset

tracking error = st dev of active return (goes in denom)

133
Q

stock option collar

A

owns a stock

sell call, buy put

hedging against it going down

134
Q

floating note rate collar

A

max and min rate paid on floating note

tied to tbills (example)

135
Q

dividend reinvestment plan

A

CREATES PHANTOM INCOME

136
Q

bond ladder

A

different maturity dates

when one matures, another is purchased

137
Q

bond bullet

A

only purch short term bonds

138
Q

barbell

A

half short term half long term

if interest rates change, only one group needs to be sold

139
Q

maintenance margin formula

A

1-initial margin
________________ x purch price
1-maintenance margin

140
Q

required initial margin

A

50%

141
Q
A

Ri CFP (18 decks)

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