Investments

Question 1

Liquidity & marketability

Answer 1

Personal checking account cannot be traded or sold so not marketable. It is liquid as it can quickly be turned into cash. A personal residence and stock in a privately owned corporation are illiquid but marketable. US Treasury bills are both liquid and marketable.

Question 2

Repo rate vs repro margin

Answer 2

The percentage difference between repurchase price and borrowed amount. The repo margin or haircut is the % difference between the amount borrowed and the value of the collateral

Question 3

Primary purchaser of negotiable cds

Answer 3

Institutional investors

Question 4

Stock dividends taxation…only dividends paid in cash are reported as income.

Question 5

Treasury bills taxation

Answer 5

Interest income from us treasury bills taxed federal level at ordinary income. No state tax!

Question 6

Eurodollar CDs

Answer 6

Are obligations of NON-U.S. bank
Offer slightly higher yield than domestic CDs
Less liquid than domestic CDs
Used to settle international transactions

Question 7

Private placement

Answer 7

Limited to 35 unaccepted investors, but available to unlimited number of accredited investors.

Question 8

Series I bonds interest rate is a combo of fixed rate of return and semi-annual inflation adjusted return rate. Can be used ( like the EE bond) for higher education costs free of income tax ( phase out limits). Note: series HH bonds may not be used in this way.

Question 9

Private activity bond

Answer 9

Has high credit risk

Question 10

Preferred stocks value is based on prevailing interest rates. The value for a preferred stock is its dividend divided by prevailing interest rates.

Question 11

GO bonds

Answer 11

Most secure of all muni debt
Backed by full faith and credit of issuer
Supported by taxes

Question 12

Investment value of bond ( intrinsic value as a straight bond)

Answer 12

Using financial calculator: set at 2 periods per year. N Gold #, int/yr, Pmt, $1000 fv, solve for pv

Question 13

The intrinsic value of a preferred stock formula

Answer 13

P= D÷r ( dividends divided by market interest rate)

Question 14

To immunize a bond portfolio over a specific time horizon

Answer 14

Investors would match the average weighted duration of the bond portfolio to the investment horizon.

Question 15

The interest on a public purpose bond is received tax-free. Only the capital gains realized on the sale is subject to income tax.

Question 16

The downside of a convertible bond is the difference between current market value of the bond and it’s investment value

Question 17

Revenue bonds are secured by

Answer 17

User fees

Question 18

Series E bonds may no longer be exchanged for series HH bonds.

Question 19

According to the unbiased expectation theory of interest rates

Answer 19

The current long-term rate is the average of today’s short-term rate and expected future short-term rates. Under this theory, an upward sloping yield curve indicates increasing inflation expectation.

Question 20

The amount attributed to bond market discount is generally not included in income until the sale of the bond and then it is treated as interest income.

Question 21

Disadvantage of investing in convertable bonds?

Answer 21

Yield to maturity tends to be lower than similar non-convertable bonds.

Question 22

Portfolio immunization for bondholders

Answer 22

Protects them from interest rate risk and from reinvestment rate risk.

Question 23

Regarding duration

Answer 23

A risk-averse investor should consider bonds with low durations. Aggressive investors should consider bonds with high duration when they think interest rates will go down and consider bonds with low durations when they think interest rates will rise.

Question 24

Multisecter bonds invest in..

Answer 24

Multisect bonds typically purchase: us government bonds, high-yield corporate bonds, & foreign bonds.

Question 25

A low coupon bond is more suseptible to price fluctuations. A long-term bond is more suseptible to price fluctuations.

Question 26

All things being equal, a profitable company with a higher debt level will have a higher return on equity.

Question 27

A daily limit of a commodity futures contract is the maximum

Answer 27

Price increase or decrease relative to the settlement price the previous day.

Question 28

Revaluation/ devaluation

Answer 28

Devaluation- goes down Revaluation- goes up

Question 29

Zero-coupon bonds are not subject to reinvestment rate risk. However, they are subject to purchasing power, interest rate and default risk.

Question 30

Covariance is the most important variable in minimizing the standard deviation in a portfolio.

Question 31

Systemic or non-diversifiable risks are:

Answer 31

(PRIME) purchasing power risk, reinvestment rate risk, interest rate risk, market risk, exchange rate risk

Question 32

Exchange rate risk is a type of systematic risk ( those risks that affect the entire market)

Question 33

Skewness

Answer 33

Measures how far the median return is from the mean return in decimal terms.

Question 34

Assets that lie above the security market line (SMLl) are undervalued because their expected returns are higher than the required return represented by the SML.

Question 35

Efficient frontier in portfolio theory

Answer 35

Indicates the highest returns for given levels of risk.

Question 36

Market indexes and averages

Answer 36

- Wilshire 5000 index is often used to measure the overall market in the U.S. - Russel 2000 index is used to benchmark small cap companies - The S& P 500 index is used by most professional investors as a benchmark for U.S. large cap equity investments. - Averages and indexed are constructed to inform investors about changes in the market. Also serve as benchmarks

Question 37

The S& P 500 index automatically adjusts for stock splits and dividends by focusing on market value instead of price.

Question 38

Jensen alpha may be used by itself to judge an investment.

Question 39

Jensen alpha tell us

Answer 39

The percentage a manager over- or under- performed based on the amount of risk taken.

Question 40

Alpha

Answer 40

Is measured as the portfolio's actual or realized return in excess ( or deficient to) the expected return calculated by the capital asset pricing model, CAPM.

Question 41

When using a security market index to represent a market's performance, the performance of that marker over time is best represented by...

Answer 41

The change in the index value.

Question 42

Prof. Harry Markowitz's Modern Portfolio Theory (MPT) uses standard deviation as a measure of portfolio risk.

Question 43

Indifference curves, which represent the risk-reward trade-off that the investor is willing to make, will

Answer 43

- cross the efficient frontier in two locations - life tangent to the efficient frontier - will not intersect the efficient frontier * the portfolio that lies at the point of tangency of an indifference curve and the efficient frontier is the optimal portfolio for the investor.

Question 44

When using the CAPM model, an increase in beta will cause the risk premium to increase. The expected rate of return will increase.

Question 45

The capital market line CML provides a direct relationship between the risk and return for a well- diversified portfolio. CML graphically depicts the relationship of risk and return. CML uses standard deviation as a risk measure.

Question 46

Capital asset pricing model (CAPM)

Answer 46

= risk-free return + (market risk premium - risk-free return) beta coefficient of stock

Question 47

The CAPM has two components:

Answer 47

1.) Stock risk premium 2.) Market risk premium

Question 48

The CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risks, which is assumed have been diversified away.

Question 49

If CAPM is higher than the investor's required rate of return, a positive investment decision is warranted.

Question 50

Calculate standard deviation of a series of returns

Answer 50

Using Fin. Calculator: enter the number and the summation symbol, then gold #8 ( which is Sx Sy)

Question 51

Current yield (CY)=

Answer 51

Annual interest ÷ market price

Question 52

T-Bills have the lowest credit risk because they are issued by the US Treasury.

Question 53

Eurodollar

Answer 53

A deposit in a foreign bank denominated in dollars ( example: a us dollar deposited into a Hong Kong bank)

Question 54

Yankees bond

Answer 54

Dollar denominated bonds issued in the US by foreign banks and corporations. Registered with the SEC.

Question 55

Municipal discount bonds must be acreted Corporate discount bonds must be acreted Zero coupon bonds must be acreted Accretion generates phantom income and enables the bondholder to raise the basis accordingly

Question 56

Treasury bills terms

Answer 56

3, 6, and 12 months ( a man came up with this - only a woman does 9 mo- no 9 mo term!)

Question 57

When is an issuing corp. Most likely to call it's bonds?

Answer 57

When bonds selling at a significant premium, newly issued are offered with lower coupons.