Investments Flashcards
Negotiable CDs
sold in market before maturity
interest rate risk
insured 250k fdic
MMDA
offered by banks
insured $250k
MMF
open ended investment companies offer
NOT INSURED (think SWVXX)
Commercial Paper
unsecured promissory note issued by large companies
starts at $100k denoms
270 days or less maturity
normally sold at a discount
Bankers Acceptance
finances import/exports
9 months or less maturity
discount
assurance of pmt when goods arrive
Eurodollar
deposit in ANY foreign bank that is denominated in dollars
Yankee Bonds
dollar denom foreign securities issued in US
Par Value
stated par value (usually 1000) and stated rate of interest
Yield Ladder
Disc: YMCACMA :Prem
Accrued Interest
your bond 1099 may be over/understated
OID
issued at discount
usuallly 0 coup
phantom income & basis increases
no gain @ maturity
Tbill
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
T Note
1-10 yrs
1k to 100k at par
RIP
not callable
semi annual int
monthly auction
subject to fed tax
T Bond
10-30 yrs
1k to 1mm at par
RIP
callable 15 yrs prior to maturity
semiannual int
quarterly auction
STRIPS
treasury zero coup bond
TIPS
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
EEs
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
I Bonds
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
GNMA
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
GO Munis
general obligation bonds
safest munis
backed by full faith of municipality. if they cant pay, taxes can be levyed to make pmt on debt
Revenue Bond
higher yields than GO
greater credit (default) risk
Insured Munis
when muni bonds are insured they are basically AAA
timely interest & principal
CMOs
A Tranche: highest coupon, lowest duration, paid first
Z Tranche: zeros, paid last, highest duration, highest yield
Debenture
corporate debt obligation backed only by issuer integrity
Indenture
formal agreement, deed of trust between issuer of bond and ttee
Investment Grade Bond Risks
DRIP
Govt Bond Risks
RIP
Convertible Bond
hybrid debt security
Bond Conversion Value
greater of bond intrinsic value and conversion value
PAR x Cp/Ps
Intrinsic Value of a Bond
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”
Callable Bonds
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
Put Bond
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
10Q
Quarterly Report to SEC
10k
Annual report to SECl
annual report
corp report to shareholders
large cap
10b
mid cap
2b-10b
small cap
anything less than 2b
micro cap
anything less than 300mm
preferred stock
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
ADR
foreign shares in us in form of ADR
receipt
quoted in usd, divs paid in usd, but declared in country of origin
ETFS
open or closed ended
unit trust or investment company
traded on stock exchange
more tax efficient than MF
basket or index of stocks/bonds
UIT
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
Mutual Funds
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
Closed Ended Investment Companies
issue stock once
trade on any exchange
may hold illiquid
GIC
issued by insurance companies
2-5 yr term
guaranteed rate of interest
POPULAR W DB PLANS
Real Estate Correlation w/ US Stocks
low. good for diversification
Unimproved Land
passive investment, return is potential price appreciation (no income generation)
Improved Land
generally funds from rentals. intrinsic value can be calculated from NOI
NOI
GNPVON
gross rental income
-nonrental income
=potential gross income
- vacancies & collections
-operating expenses (includes debt servicing)
=NOI
Property Intrinsic Value
annual income (FROM NOI, make sure its in years) / capitalization rate (given my exam)
REIT Distribution Rules
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
REIT Income Deduction
passthrough income. may deduct 20% of passthrough income from REITS
Equity REITS
office buildings, hotels, shopping centers etc, mosdest leverage
too much leverage + too much vacancy can be negative for cashflow
Mortgage REITs
loans to develop property
vulnerable to purchasing power risk and higher default risk
RELPS
subject to passive loss rules, not marketable, managed by GP, nonpublically traded (see nonpublicly traded partnership in taxation)
REMICS
limited life self liquidating entity
more flexibility than CMOs
range of risk levels
pass thru rules
Holding Period Return
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
Intrinsic Value of an Option
minimum price the option will command
difference between market price and exercise (strike) price
Exercise/Strike Price of Option
price at which the stock can be purchased or sold upon exercise of the option
Premium
cost of the option
as option approaches expiration date, premium approaches intrinsic value
time premium
amount by which premium exceeds intrinsic value
smaller time premium - closer to expiration
Black Scholes
Option Valuation Models
CALL UP (except exercise price)
time remaining to expiration
int rate
volatility
price of underlying stock
ex. price
Call Writer Taxation
lapse: premium received is stcg
exercised w/ covered call: premium received and to sale price (lt if underlying held 12+ months, st if less)
Call Buyer/Holder Taxation
lapse: expired = exercised. stcl or stcg
most are sold before before expiration (not exercised). stg or l
LEAPS
9 months - 3 years expiration
once exercised, you must hold the stock for 12 addtl months to pay ltcg
warrants
company, not individuals
several years maturity
Short Selling
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
Short Future/Long Future
short: hedging against loss/fall
long: hedge against increase/rise
YTM risk
reinvestment risk (zeros have no reinvestment risk because there is no coupon to be reinvested)
Bell Curve
normal distribution, historical returns, leveraged $
Log Curve
no margin, ending portfolio values, positively skewed, values cannot go below 0
Covariance
infinite outcomes, the relationship between movements of securities in the same portfolio
Correlation Coefficient
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
CV
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
St Dev vs Beta
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
Calc ST DEv
return #, sigma for all years
orange 7 = mean
orange 8 = st dev
St Dev %s in bell curve
1: 68% (on both sides of curve)
2: 95%
3: 99%
Market Beta (and compare to higher lower)
1
higher beta: more volatile, greater systematic risk
lower beta: less volatile
Risk Adjusted Return (using beta
return/beta coefficient
time weighted return
geometric mean
better for investment returns
evaluate portfolio manager
not affected by cash flows
calculating geometric mean
multiply returns (1+ or - return), this is fv
pv = -1 always
n = years investment
i = geo mean
issue with dollar weighted return
not accounting for reinvestment rate
we are assuming its reinvested at the same rate which may not be true
IRR Definition
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
current yield calc
annual int in dollars / current bond price
tax equivalent yield
tax equivalent yield = tax exempt yield / 1-tax rate
Immunization
passive strategy
match duration to time horizon
Investment Rate Risk - bonds
relationship between bond price and required rate of return
reinvestment rate risk
uncertainty about the future rate that income (coupon payments) can be reinvested
zeros - duration
duration = maturity
price fluctuates more
duration & change in bond prices
measures sensitivity in price to change in rates
duration of 8 years = 8% of value lost with change in +100 bps of price (.01%)
UPS
rates up, shorten duration
buy higher coupon bonds w shorter duration
Fallen
rates fall length duration
buy lower coupon bonds with higher duration
convexity
degree to which duration changes as wtm changes
large for low coupon, long maturity, low ytm
imrpove duration approximation for bond price changes
div growth models - why do we use them
can be used to valuate stocks since dividends are sometimes the only cash payment a stockholder receives
gives estimated price (v=est. price)
DDM Hack: changing div growth value
- use last growth rate to solve using ddm formula
- if first growth rate lower: choose next lowest answer
- if first growth rate higher: choose next highest answer
PE Ratio
current market price = earnings x pe ratio
if company doesnt pay divs, use to valuate
Free Cash Flow
same formula as ddm but use fcf1 instead of d1
if company doesnt pay divs, use to valuate
ROE
eps/net worth or book value
profitability
determines earning growth therefore div growth
div payout ratio
common divs paid / eps
eps
roe per share x book value
CML
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
efficient frontier
risk and return on axis
anything on the line is the most efficient portfolio (highest return for given level of risk)
curves of risk averse investors
steep
more additional return needed to assume a level of risk
curve of risk tolerant investor
less additional return needed in order to assume a certain level of risk
SML
security market line
risk and return for a specific security
SML vs required rate of return
above sml = more return for same amount of risk as sml or lower
strong form emh
everything is baked in
semi strong form emh
insider info could produce superior returns
weak form
fundamental analysis MAY produce superior results
dont try to use technical analysis to predict future returns
anomalies - are they emh?
not a form of EMH, it is an outlier effect (if emh was completely true, these wouldnt happen)
PE effect
stocks with low PE perform better
small firm effect
small firms outperform larger firms
january effect
stocks decline at year end and rebound in feb
neglected firm effect
firms that are not commonly studied out perform
value line phenomenon
stocks rated 1 out perform stocks rated 5
top down
trends in economy first
then picking companies
i.e. looking at inflation then buying in the retail industry
bottom up
search for a specific stock with good performance before looking at impact of economic trends
Current Ratio
current assets/current liabilities
*retirement accts are not considered current
technical analysis
charts & programs to identify and project
not concerned with financial position of the company
resistance & support
resistance = price ceiling
support = price floor
dow theory
aggregate measure of securities prices, looks at position of overall market
DJI and DJT
BARRONS confidence index
differential between returns on quality bonds and bonds of lesser quality will predict future price movements
muni bond priorities
statements that show where the revenue is allocated
where in the list bondholders are paid
stock split
you get more shares
price of each share is smaller
reverse stock split
you get less shares
price of each share is more expensive
wash sale
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
ex dividend date
dont forget weekends or holidays
to get current dividends, must purchase day before x div
purch > ex div > date of record
sharpe ratio keys
must be compared to other funds to mean something
treynor ratio
excess return to the assets beta
jensen ratio
aka alpha
measures contribution of pm (+ is better)
when to use sharpe/jensen/treynor
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
information return
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)
stock option collar
owns a stock
sell call, buy put
hedging against it going down
floating note rate collar
max and min rate paid on floating note
tied to tbills (example)
dividend reinvestment plan
CREATES PHANTOM INCOME
bond ladder
different maturity dates
when one matures, another is purchased
bond bullet
only purch short term bonds
barbell
half short term half long term
if interest rates change, only one group needs to be sold
maintenance margin formula
1-initial margin
________________ x purch price
1-maintenance margin
required initial margin
50%
