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Investments Flashcards

1
Q

A diversified portfolio retains what type of risk?

A

Systematic

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2
Q

Write the bond ladder

A

(Discount bond)
YTC
YTM
CY
Nominal Rate
CY
YTM
YTC
(Premium bond)

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3
Q

Taxation of TIPS

A

Increase in principal is taxed in the year it increased even though no income was paid out - increasing basis.
*Phantom income

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4
Q

Are EE bonds marketable?

A

No - EE bonds are nonmarketable, nontransferable, and nonnegotiable.

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5
Q

Are EE bonds issued at face value or a discount?

A

Face value

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6
Q

I Bonds interest

A

Two components:

1) A fixed base rate - remains the same for the life of the bond

2) An inflation adjustment additional amount - adjustment is updated every 6 months

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7
Q

Are GNMA guaranteed by Govt?

A

Yes

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8
Q

CMO Z tranche

A

Bears no coupon - acts like a zero coupon

CMO’s are paid on a cash flow basis and Z’s are paid last so highest risk

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9
Q

Risks associated with Corp/Muni bonds and Treasury bonds

A

Corp/Muni: “DRIP”
- D: Default
- R: Reinvestment
- I: Interest rate
- P: Purchasing power

Treasury: Only “RIP” - no default risk.

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10
Q

Preferred bonds give a ____ dividend rate

(Fixed or variable)

A

Fixed

**high duration so more volatile than a bond

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11
Q

Which investment vehicle allows a person to buy a foreign security with US dollars?

A

ADRs

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12
Q

Can you trade options with ETF’s and Mutual funds?

A

ETFs - yes
Mutual funds - no

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13
Q

Are mutual funds considered marketable?

A

No - they are redeemable.

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14
Q

Calculation for NOI (net operating income)

A

Gross rental receipts
+ Nonrental income
= Potential gross income (PGI)
- Vacancy and collection losses
- Operating expenses
= NOI

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15
Q

Intrinsic value calculation of a rental building

A

Net operating income (NOI) / cap rate = intrinsic value

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16
Q

Put and Call option calculation

A

PUT = POEM or “Please Excuse Mom”

Put option = Exercise - Market

CALL = COME

Call Option = Market - Exercise

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17
Q

Are MMDA (mm deposit accts) FDIC insured?

A

Yes

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18
Q

What is commercial paper?

A

ST unsecured promissory note issued by large companies.

Denominations start at $100,000.

Maturity is 270 days or less.

Sold at a discount.

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19
Q

What is a banker’s acceptance?

A

Used to finance imports and export transactions.

Maturity is 9 months or less.

Trades at a discount.

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20
Q

What is a Eurodollar?

A

A deposit in any foreign bank that is denominated in US dollars.

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21
Q

What are Yankee Bonds?

A

Dollar-denominated bonds issued in the US by foreign banks and corporations.

Registered with SEC.

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22
Q

What does accreted mean?

A

An OID (original issue discount) bond (most commonly zero’s) must be accreted over time on a straight-line basis over the life of the bond.

“Phantom income”

If held to maturity, no cap gain/loss.

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23
Q

T bills / Notes / Bonds

A

**All are subject to Federal income tax. Exempt from state and local.

T Bills:
- Maturity in 3, 6 or 12 months.
- Issued from $100 - $1,000,000
- Issued at a discount
- Not callable

Notes:
- Maturity 1-10 years
- Issued from $1,000 - more than $100,000
- Issued at par
- Not callable

Bonds:
- Maturity 10-30 years
- Issued from $1,000 - more than $100,000
- Issued at par
- Callable 15 yrs prior to maturity

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24
Q

Strips Vs Tips

A

Strips:
- Zero coupon bond - issued at a discount
- Direct obligation of the fed govt
- Accreted annually

Tips:
- Marketable
- The face value is adjusted semi-annually to keep pace with inflation by the CPI
- Also issued with a stated coupon rate that is low
- Increase in the principal value of the bond due to the inflation adjustment is reportable income (phantom income)

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25
EE Bonds vs I Bonds
Both: - can be redeemed for education expenses tax-exempt - Are non-marketable. - Issued at face value - Both are backed by the full faith and credit of the US Govt EE's: - Earn a fixed interest rate - 20 year maturity but can add 10 more years - US Treasury guarantees the bond will double after 20 years or else they will make a one time adjustment at maturity I Bonds: - Have no guaranteed interest rate. - Are composed to two rates: a fixed base rate and an inflation adjustment. - Fixed rate remains the same through the life of the bond - Inflation adjustment is announced every 6 months. - Owner can decide when to pay taxes (each year or defer until maturity)
26
GNMA
Are a direct guarantee of the US Govt (no default risk) - But bc they are not ISSUED by the Treasury, they are subject to Fed, state & local tax!
27
GNMA vs FNMA
GNMA is a direct guarantee of the US Govt FNMA is NOT backed by the US govt. Fannie Mae is a profit-making corporation. It is backed "implicitly" through the lines of credit.
28
What are CMOs?
CMOs are a mortgage pool but eliminate their risk of immediate principal payment fluctuation. They send payments on a cash flow basis. Separate classes get paid in order - A tranche = first - Z tranche = last.
29
What is a debenture?
A corporate debt obligation backed only by the integrity of the issuer.
30
Who are the two main rating agencies for bonds?
Standard & Poor's and Moody's Standard & Poor's: Highest = AAA Moody's: Highest = Aaa
31
Calculation for convertible bond
(Par/Conversion price) x current market price of the underlying stock
32
Capitalization values (Large cap/mid/sm/micro)
Per market value of the company: Large cap: $10B Mid cap: $2B - 10B Sm cap: Less than $2B Micro: Less than $300M
33
What are the two corporate reports and where must they be sent?
10Q (quarterly reports) and 10K (annual reports) Sent to the SEC
34
What are UITs?
An investment company with no day to day portfolio management. - Assets are frozen (a passive investment) No new securities are purchased and securities are rarely sold. *But there is a secondary market for used units. "Unit holders" not shareholders
35
Global vs International Funds
Global = securities traded worldwide (includes the US) International = only companies outside the US
36
What are GICs?
Similar to CD's but issued by insurance companies. Terms = 2-5 years and bear a guaranteed rate of interest.
37
REIT vs RELP
- REIT is actively traded on securities market - RELPs are generally not marketable - REIT is managed by a board of directors - RELPs are managed by a general partner - REIT is a portfolio investment and subject to taxation like a stock - RELPs are subject to passive loss rules
38
Intrinsic value of a put
"POEM" Put Option = Exercise - Market
39
Intrinsic value of a call
"COME" Call option = market - exercise
40
Call Options (Max monthly to maturity)
9 months or less
41
What are LEAPS?
"Long term equity anticipation securities" Long-term options ranging from 2 years and beyond
42
What are warrants?
Shares of common stock issues by the company at a specific price with no current intrinsic value. Warrant terms are not standardized like call options. No time limit.
43
Futures contracts: what does a short vs a long position mean?
Short = I have too much corn and want to be short some of it. The SELLER. Long = I am "longing" for corn. The BUYER.
44
Collectables special long term cap gains rate
28%
45
Private Placement (Reg D) special rules
**Max of 35 non-accredited investors. Unlimited accredited. Accredited investor criteria: - $1M net worth - $200k AI (ind) - $300k (AI) (joint) Remember the 1-2-3 test **Or a "qualified purchaser" = owns over $5M in investments.
46
Systematic vs Unsystematic risk
Systematic: Non-diversifiable Unsystematic: Can be largely eliminated
47
List the 5 systematic risks
"PRIME" - Purchasing power risk - Reinvestment risk - Interest rate risk - Market risk - Exchange rate risk **Non-diversifiable risks**
48
Examples of unsystematic risk
Business risk Financial risk **Can largely be eliminated via diversification
49
BETA is an expression of what?
Systematic risk
50
Standard deviation is an expression of what?
Total Risk **Combination of both systematic and unsystematic risk
51
Devaluation vs Revaluation
Devaluation is the lowering of the value of a currency relative to the currency of one or all other nations. Revaluation is an increase in the currency's value.
52
Liquidity vs Marketability
Liquidity: - Both transaction speed and stability of price - Examples: CDs, Life ins CV, MM fund Marketability = speed only *Savings accts, MM accts, and Mutual funds are not marketable - they are redeemable!
53
What does the coefficient of variation measure?
Measures the RELATIVE variability to compare two investments with widely varying rates of return and standard deviation. This measure indicates risk per unit of expected return. The higher the result, the greater the relative risk.
54
Key strokes for calculating standard deviation and mean
Type in each years' return and then the "E" button. Then: - Gold, (7 key) for Mean (avg) - Gold, (8 key) for standard deviation
55
What are the rates for 1, 2, and 3 standard deviations?
1 = 68% 2 = 95% 3 = 99%
56
What is Beta?
A measure of volatility of a particular security's (or portfolio) rate of return or price relative to the volatility of the market as a whole. Result over 1.0 = more volatile than the market
57
Risk adjusted return does what?
Standardized mutual funds for risk. Divide an ind funds return by its beta Fund A: Annual return of 24% with a beta of 2. = Risk adjusted return of 12%
58
Holding period return calcuation
Sold for + (what happened) - bought for __________________________________________ Bought for
59
Internal rate of return calculation (aka unequal cash flow)
Use CFj - > then Gold, IRR/YR
60
What does the CML measure?
Capital Market Line Measured the relationship between risk & return on a portfolio (not an ind security) It is a STRAIGHT LINE that is tangent to the Markowitz efficient frontier.
61
What does the efficient frontier measure?
An efficient portfolio is one that has the lowest portfolio risk for a given level of expected return, or the highest expected return for a given level of risk. - Under the efficient frontier = inefficient - Over the efficient frontier = unattainable
62
What does the SML measure?
Measured the relationship between risk and return for an INDIVUAL ASSET
63
What is this formula called? (Erm - Rf)
Market risk premium
64
What is this formula called? (Erm - Rf) x B(beta)
Stock risk premium
65
Fundamental vs Technical analysis use what tools?
Fundamental: - Analysts examine balance sheets and income statements to forecast future stock price movements. Technical: - Analysts use charts and computer programs to identify and project price trends. They are not concerned with specific financial position of the company.
66
Fundamental analysis: - Top Down vs Bottom Up Method
Top Down - Investor first looks like trends in the economy, then industries, and then companies Bottom Up - Investor first looks for an ind stock with outstanding performance before considering the impact of economic trends
67
What is included and how is it measured? Dow Jones
30 industrial stocks Price weighted
68
What is included and how is it measured? S&P 500
Includes the largest issues that trade on the NYSE Float weighted
69
What is included and how is it measured? Russell 2000
Smallest 2000 stocks in the Russell 3000 Index Cap weighted
70
What is included and how is it measured? Wilshire 5000
Broadest measure. Consists of over 7,000 issues that trade on the NYSE, AMEX, and OTC. Value weighted
71
What is included and how is it measured? Value Line
1,700 selected issues on NYSE, AMEX, and OTC. Equally weighted index
72
What is included and how is it measured? NASDAQ
Broadest measure of OTC trading. Includes al issues that trade on the NASDAQ system. Cap weighted
73
What is included and how is it measured? EAFE
Typically compared to the S&P 500 to show relative performance of the US and international equity markets
74
What date do you need to buy a stock in order to get the dividend?
Date of Record = Friday Ex-Dividend Date = Thursday Purchase Date = Wednesday
75
Evaluating security performance - when to use Sharpe/Treynor/Jensen (Alpha)
Roy Rogers (R2) is this old guy (60) that likes to hang out with Megan Treynor (alpha) and this other guy (Jensen). They are both famous signers and have songs really HIGH on the charts. If your IQ is less than 60, you aren’t very Sharpe. Sharpe is measured with Standard deviation (both start with S)
76
How to calculate a margin call
(1-initial margin %) / (1-maintenance %) x purchases price of stock
77
Strategic Asset Allocation VS Tactical Asset Allocation
Strategic: allocation is made once every few years. Tactical: allocation is performed routinely - aka market timing approach.
78
CAPM created what?
Capital asset pricing model (CAPM) - created the CML. CAPM is concerned with the equilibrium relationship between the risk and expected return on an asset.
79
What is the APT (arbitrage pricing theory)?
States that the pricing pf securities in different markets cannot differ for any significant length of time. It believes that the security's movement and return are not explained by a relationship between risk and return.
80
Black-Scholes option valuation model vs Binomial option pricing
Black-Scholes: - The value of the option is based on a number of variables (time remaining, exercise price, interest rate, volatility of stock) Binomial Option: - Assumes that stock's price can be two possible values at the option expiration so can allow you to create a perfect hedge.
81
Trick to remember performance measures using R2
Left side of chart: - Roy Rodger’s is this old guy (>60). He likes to hang out with Megan (Treynor) and this other guy Alpha (Jensen). They are both singers and their songs are HIGH (choose highest number) on the charts! Right side: - If your IQ is less than 60, you aren’t very Sharpe. - Sharpe is measured using Standard Deviation (both begin with S)
82
When calculating TEY, when do you use multiplication and when do you divide?
Divide when you know the tax free yield Multiply when you know the taxable yield
83
What is another name for a 529?
QTP Qualified Tuition Plan

CFP Personal Flashcards (9 decks)

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