Investments

Question 1

What are the features of a GNMA?

Answer 1

Mortgage rates decrease, prepayment may increase

Amount received each month can vary

Guaranteed by the US government

Payments include interest and principle

Realize yield on bonds can be somewhat variable

Question 2

What describes an I Bond?

Answer 2

Can earn interest for 30 years

Accrue earnings based on a fixed rate of return and the semi annual inflation rate

Tax benefits for education that apply to EE bonds also apply

Difference between purchase price and the redemption value is taxable interest

Question 3

What is the formula for bond conversion value on convertible bonds?

Answer 3

CV = (Par/CP) Ps

CP = stock conversion price

Ps = current market price of stock

PAR = par value of the bond assume $1000

Question 4

What is a CMO?

Answer 4

Collateralized mortgage obligation

Are multi class pass through securities

Has separate classes of securities called trenches

Question 5

What are ETFs?

Answer 5

Basket of stocks or bonds

Operate as an open end or closed end fund

Traded on the stock exchange

More tax efficient than an open end mutual fund

Question 6

What are UITs?

Answer 6

No day-to-day portfolio management

Handled by an independent trustee

Sponsor makes a market for investor, selling units and buyers of used units (secondary market)

Redeemed at NAV

Question 7

What are closed end funds?

Answer 7

Issue stock once then it is closed

Trade on an exchange sold in the market like a stock

Question 8

Mutual funds are what?

Are redeemed at what?

Answer 8

Open end investment

NAV

Question 9

If a covered option is exercised how is the premium treated for capital gain purposes?

Answer 9

Options are usually short term gain or loss unless the underlying security is exercised and sold…(covered) then it has the same LTCG or loss as the underlying security

Question 10

How are collectibles and natural resources correlated with the stock market?

Answer 10

Negatively can offer a hedge against the market (down- turn)

Question 11

Total Risk is expressed as what?

Answer 11

Standard deviation

Question 12

Systematic risk is expressed by what

Answer 12

Beta

Cannot be diversified

Question 13

What is total risk or portfolio risk?

Answer 13

Combination of systematic risk and unsystematic risk

Systematic risk cannot be diversified away

Un systematic risk can be diversified away

Question 14

What is the Coefficient of Variation?

What’s the formula?

Answer 14

Is a measure of relative variability used to compare investments with widely varying rates of return and standard deviations

standard deviation / Average or mean return

Question 15

How do you calculate standard deviation using a single investment?

Stock A:

Yr 1 15%
Yr 2 18%
Yr 3 25%
Yr 4 -20%

Answer 15

10B Calculator

15 E+
18 E+
25 E+
20 +/- E+
Shift x (7 key) gives
Mean
Shift Sx, Sy (8 key) solves for standard deviation

Question 16

Municipal bond is exempt and subject to what taxes

Answer 16

Exempt from federal

Subject to state and local

Question 17

What taxes are paid on US treasuries?

Answer 17

Federal

No state or local taxes

Question 18

Risk averse investors ( not risky) prefer bonds with what Durations?

Answer 18

Short

Question 19

Aggressive Investors should prefer bonds with long Durations if..

And short Durations if…

Answer 19

Long; if anticipate rates will decline

Short; if anticipate that rates will rise

Question 20

Bond Duration

High Coupon (Interest) equals

Answer 20

Low Duration ( Inversely Related)

Question 21

Bond Duration

Smaller Coupon ( Interest ) equals

Answer 21

Higher Duration ( Inversely Related )

Question 22

Bond Duration

Long Maturity ( time ) =

Answer 22

Long Duration ( positively or directly related )

Question 23

Buy matching the duration of the bond or bonds to the time horizon of the financial goal you can generally offset what risk?

Answer 23

Interest rate risk

Reinvestment rate risk

Question 24

Zero coupon bonds have durations that equal their

Answer 24

Maturities

Question 25

Duration If interest rates are expected to rise, what kind of bond should you buy?

Answer 25

Higher coupon bonds with short maturities to shorter duration Remember UPS Interest Rate UP, Shorten Duration

Question 26

Duration If interest rates are expected to fall, what kind of bond should you buy?

Answer 26

Low coupon bonds with long maturities to shorten duration Remember Fallen Interest rates Fall, Lengthen duration

Question 27

What is Duration?

Answer 27

Most important measure of how risky bonds are, measures sensitivity to interest rate changes

Question 28

When the bond coupon is smaller, the relative price fluctuation is…

Answer 28

Greater

Question 29

When the term to maturity is longer, the relative price fluctuation is…

Answer 29

Greater

Question 30

When the market interest rate is lower, the relative price fluctuation…

Answer 30

Greater

Question 31

What is convexity?

Answer 31

Degree to which duration changes as a bond yield to maturity changes Longest for low coupon bonds, long, maturity bonds, and low yield to maturity bonds

Question 32

What must an investor do to make sure they receive the dividend of a stock?

Answer 32

Must purchase the stock “before” the ex-dividend date. Be sure to pay attention to weekends and holidays these are often tested Ex. Thursday Jan 18th: ex dividend date Friday Jan 18: date of record Last Purchase date to receive the dividend wld be Wednesday Jan 17

Question 33

How do you calculate Holding period return?

Answer 33

What u sold it for + total distributions - what u paid or put into it. Dividend by what you paid for it

Question 34

What is the formula for Correlation Coefficient?

Answer 34

Covariance of two investments / ( standard deviation 1 x standard deviation 2)

Question 35

What is the Markowitz approach to portfolio selection?

Answer 35

A reasonable investor should evaluate portfolios based on their expected returns and risk measured by standard deviation The efficient frontier Use a standard deviation as a risk measurement ( covariance, correlation coefficient, and return ) does not factor beta

Question 36

When is a publicly traded corporation most likely to issue new bonds

Answer 36

When previously issued bonds are selling at a premium When interest rates are expected to rise When interest rates have fallen

Question 37

What is the best way for a US investor to buy a foreign stock?

Answer 37

ADR

Question 38

Margin interest is only deductible up to what?

Answer 38

Investment income received

Question 39

The installment method permits the capital gain recognized to be spread over the life of the note rather than be recognized entirely in the year of the sale. What is the formula for determining the gross profit percentage on each payment and what happens if the property is sold to a related party and it sold within two years of the original purchase date?

Answer 39

Profit divided by total contract price equals gross profit percentage of each payment If they related party sells a property within two years, the original purchase date, the cement stall collapses for tax purposes, and you must recognize a capital gain on the entire amount in the first year

Question 40

What are the key components of using the FIFO method?

Answer 40

Increase earnings Greater tax liability Current cost of inventory

Question 41

What are the key components of LIFO?

Answer 41

Reduced earnings Deferral of taxes Understated inventory