Investments Flashcards

Question

Dollar-weighted return

Answer 1

Return on the number of stocks that a specific investor transacts Investor's cash flows (dollaR, investoR)

Answer 2

market-driven risk; **Non-diversifiable** risk * Purchasing power (inflation - cash, bonds) * Reinvestment Rate (risk that interest rates go down) * Interest rates * Market risk (general market movements, business cycle) * Exchange Rate Measured by beta

Answer 3

* diversifiable risk * business risk * accounting/audit risk * executive risk * country risk * default risk * financial risk

Answer 4

* Systematic risk + unsystematic risk * measured by Standard Deviation

Answer 5

* Sensitivity of a security to market movement * indication of a security's volatility relative to the market. * Only measures systematic, undiversifiable (market) risk. * Derived by plotting a security's return vs. market return; slope = beta * Security return = Beta \* Market change

Answer 6

* Absolute measure of risk. * Measure of total risk (systematic + unsystematic) * Based on an individual security's historical return * Higher standard deviation = more risk * σ * Measures variation of return around an average * +1/-1 SD : 68% probability * +2/-2 SD: 95% probability * +3/-3 SD: 98% probability

Answer 7

* compares assets that have different risk and different return. * higher CV, the greater the risk * Standard deviation/average expected return

Answer 8

* only measures instances where returns are below the mean * used so risk isn't understated by being influenced by high returns * better measure of downside risk

Answer 9

* normal distributions - bell curve * lognormal distribution - not symmetrical * skews either negative or positive * skewness - measures lack of symmetry * kurtosis - degree to which bell curves are flat or peaked

Answer 10

* drives risk reduction in diversification * ranges from -1 to 1 * r or Rho * -1: always move in opposite directions - no diversification benefit * 0: not correlated at all * 1: always move in the same direction

Answer 11

W_a = %age weight of stock a W_b= %age weight of stock b σ=standard deviation COV = covariance = Rho \* σ_a\* σ_b rho=correlation

Answer 12

Coefficient of determination * Correlation coefficient squared * Shows what **percentage** of return can be attributed to the market * The higher the r-squared, the better the measure to the benchmark * R² should be at least .7 or 70% * If R²is \> or equal to .7, then Beta is a good measure of risk because the market is not correlated enough to the investment for Beta to determine risk level.

Answer 13

* Portfolios that offer the highest level of return for a given level of risk * Created by Harry Markowitz * Portfolios that lie outside of the frontier - upper left - are not attainable * assumes that investors have perfect knowledge and want to maximize returns

Answer 14

* A well-diversified portfolio will fall along the CML, * Standard Deviation is the measure of risk * The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return. * M represents the market portfolio, so named since all rational investors (minimum variance criterion) should hold their risky assets in the same proportions as their weights in the market portfolio.

Answer 15

* Provides a measure for fund performance * Beta is the measure of risk * Line from the risk free rate (x-axis) * CAPM is the equation of this line * M (market return) is the intersection between efficient frontier and SML.

Answer 16

* Gives a required or expected rate of return, given the riskiness of the asset * r_i= Investors required rate of return * r_f= Risk free rate * r_m=Return of the market * ß= Beta

Answer 17

r_m- r_f= market risk premium The difference between market returns and returns at the risk free rate. The amount of returns required to undertake market risk (Beta = 1)

Answer 18

Multi-factor model. Beta is not an input

Answer 19

* Probability Analysis used to determine the expected return or expected risk based on the likelihood of different scenarios

Answer 20

* Quantifies how a client reacts to extreme low probability outcomes and determine how changes in risk/return impact asset allocations.

Answer 21

* employs many scenarios to build a probability distribution table for retirement planning.

Answer 22

* Trad: Based on diversifiying between sectors * MPT: Based on SD, Beta, Efficient frontier, low correlation securities

Answer 23

* predetermined asset class allocation

Answer 24

Weights for each asset class are adjusted periodically based on market analysis.

Answer 25

use stock-index futures and bond futures to change a portfolios asset allocation

Answer 26

* how much risk-adjusted return are we receiving per unit of risk taken. The higher the better. * Risk measure is SD S_p= Sharpe Index r_p= return of portfolio r_f=Risk free rate of return σ= standard deviation of the portfolio.

Answer 27

* Uses the Beta of the portfolio to measure the portfolio's return in relationship to risk. * The higher the better * Relative measure

Answer 28

* Difference between actual returns and expected returns * Actual return minus CAPM * Positive returns are good. * Absolute measure - not relative

Answer 29

* if r² is greater than or equal to .70, then it's okay to use Treynor or Sharpe * If r-squared is less than .70 then use Sharpe * R-squared indicates how reliable Beta is as a measure of risk. * Sharpe is the only one not affected by Beta (low r-squared is an indication that Beta is not a good measure)

Answer 30

Fixed dollar amount is invested at fixed intervals.

Answer 31

* portfolio has a speculative and a conservative portion * When the specualtive portion increases to a predetermined dollar amount, profits are transferred to the conservative * and vice versa

Answer 32

* portfolio has a speculative and a conservative portion * When the specualtive portion increases to a predetermined percentage, profits are transferred to the conservative * and vice versa

Answer 33

Ratio varies based on market timing

Answer 34

An offer to existing share holders to purchase new stocks (can be at a preferred price)

Answer 35

Conversion of one of the firm's subidiaries to a stand-alone company by distribution of stock in that new company to existing shareholders.

Answer 36

* Increases the number of shares and decreases the value of the stock by an equal amount. * Mutiply number of shares times the ratio and share price times reciprocal. e.g. 5 to 3 = 5/3

Answer 37

* Stocks that have been sold and subsequently bought back by the company. * Buybacks are considered a positive signal * Often used to fund management stock option plans rather than issue new shares.

Answer 38

* different classes of stock have different benefits * e.g Class A - non-voting stock; Class B - voting stock

Answer 39

* assets - liabilities - preferred stock = book * Book = shareholders equity * amount of equity shareholders have in the company.

Answer 40

* the prevailing market price of the security * market capitalization = market value \* number of shares outstanding

Answer 41

* The amount that investors believe a security should be trading for or what they think it's worth. * Based on expectations of risk and return and how return is expected from dividends and capital appreciation.

Answer 42

* Earnings per share * Profit after taxes - preferred dividends/number of shares outstanding. * Retained earnings are the percentage of EPS not paid to stockholders.

Answer 43

* Date on which one has to be a shareholder in order to receive the dividend * Takes 3 days to settle - must buy 3 days before Date of Record

Answer 44

* 3 trading days up to and including the date of record (2 trading days before) where stocks trade without the dividend * if you sell on or after the ex-dividend date you still receive dividend.

Answer 45

Annual dividend/current share price

Answer 46

* Ratio of amount paid out in dividends vs. amount reinvested in company * Dividends per share/earnings per share * High DPR could suggest difficulty in paying future dividends (not enough growth)

Answer 47

Issued by large, financially stable companies

Answer 48

* High dividend payouts * Sometimes have low growth potential * subject to interest rate risk

Answer 49

* Issued by companies that are experiencing rapid growth * Usually pay little or no dividends

Answer 50

* issued by companies are closely linked to the overall economy * move up and down with the business cycle

Answer 51

Pricing remains stable despite economic changes

Answer 52

* Market cap from 2 - 10 Billion * Good market return with less volatility than small-cap * baby blue chips: have same characteristics of blue-chips but smaller

Answer 53

* Less than $2 Billion Market Cap * High risk exposure

Answer 54

* The determined value of a stock based on economic analysis, industry analysis, and fundamental analysis (analysis of the company's financial and operations condition * dependent on future cash flows, discount rate used to determine future value, risk associated with future performance

Answer 55

General study of the prevailing economic environment to establish a foundation for the valuation of common stock. Looks at: * Fiscal policy * Monetary policy * Inflation * Consumer Spending * Currency rates * GDP

Answer 56

* Dividends are received as stock instead of cash. * Generally not taxable until sold.

Answer 57

* Dividend Re-Investment Plan * Automatically re-invest in the security * Taxed as if received as cash

Answer 58

* Price to earnings ratio * How much investors are willing to pay for each dollar of income. * Price per share/Earnings per share * Value stocks have lower PE ratios

Answer 59

* Perform SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. * Establish the competitive position of an industry relative to others.. * Develop industry outlook * Looks at the following * monopolistic vs. competitive * regulation * labor relations * role of technology

Answer 60

* Ratio study of particular company * Use financial statement, income statement, statement of cash flows.

Answer 61

* summary of assets, liabilities, and shareholder equity (assets - liabilities = shareholder equity) * at a point in time.

Answer 62

* Revenues and expenses over a period of time. * Reports net income

Answer 63

* Summary of a firm's cash flow and other events that caused changes in the cash position * Determines how cash was used or generated during period.

Answer 64

* Measures company's ability to meet day to day operating expenses and short-term obligations * Current Ratio = Current Assets/Current liabilities * Net Working Capital = Current Assets - Current liabilities

Answer 65

* Measure how well a firm is managing its assets * The higher the better: * Accounts receivable turnover = Sales/Accounts Receivable (how many times/year are we able to collect our accounts receivable) * Inventory turnover = Sales/Inventory (how many times/year are we turning over our inventory) * Total Asset Utilization = Sales/Total Assets (how is a firm utilizing their assets to generate sales?)

Answer 66

How much fixed financing has the firm been using? * Debt to equity ratio = Long-term debt/shareholder equity * Times interest earned = Expenses Before Interest and Taxes (EBIT) /Interest expense (the higher the better)

Answer 67

* Return on the amount invested * Net income/equity

Answer 68

* Measures relative success: * Net profit margin = Net income/sales * Return on assets = Net profit after taxes/Total assets (assets = liabilities + equity)

Answer 69

Stock's PE Ratio/3-5 year growth rate in earnings * If less than or equal to 1: growth is dues to earnings * If greater than 1: PE is outpacing earnings growth

Answer 70

* Shareholders' equity/Number of shares outstanding * Compare to market cap to determine if overvalued or undervalued.

Answer 71

* Market price/Book value per share * Book value = Shareholder's equity/number of shares.

Answer 72

Look at future: * Sales * Profit margin * earnings * dividends per share * PE

Answer 73

* Best for Blue Chip Stocks with constant dividend * Stock price = Dividend/Required Rate of Return

Answer 74

* Assumes dividends will grow at a constant and determinable rate * D_{1 =}D₀+ (1 + g) = Next year's expected dividend * V= Value of stock * r = Required rate of return * g = growth rate of dividend * P = Market price for security * V = D₁/ (r-g) * r = ( D₁/P )+ g

Answer 75

* Solve for return at and beyond the time period of constant growth using constant growth model * Use cash flows to calculate NPV. Cash flow 0 is 0. Final cash flow solution from constant growth model. Input interest rate and solve for NPV.

Answer 76

* g = ROE \* rr * g= growth * ROE = Return on Equity * rr = rentention rate (amt. retained after dividend payout = 1 - dividend payout rate

Answer 77

* Stock Price = EPS \* P/E ratio

Answer 78

* Forcasting stock prices based on * charting of stock movements * looking for patterns * looking at supply and demand for stocks

Answer 79

* Supply and demand * Volume * Breadth of the market (number of advancing stocks is greater than the number declining) * Short interest (lots of short selling indicates future demand, measures pessimism/optimism) * Odd-lot trading * Advance-decline line * New highs, new lows * charting * Moving average

Answer 80

* Stock prices are unpredictable and follow a random pattern * Contradicts techinical analysis

Answer 81

* Markets have a large number of knowledgeable investors who react quickly to new information * Asset prices reflect all relevant information.

Answer 82

* Past prices and volume is reflected in market pricing. * If markets follow weak-form efficiency * techical analysis is not useful * fundamental analyis is useful * inside information

Answer 83

All relevent public information is reflected in market prices: * Technical analysis not useful * Fundamental analysis not useful * Inside information useful

Answer 84

All public and private information is reflected in market pricing. Diversification is helpful; manage risk.

Answer 85

* January effect * Small-firm effect * Earnings announcements - drift * P/E effect

Answer 86

Investor's underestimate risk associated with investment

Answer 87

Attributes success to self, failure to others/factors

Answer 88

* Investors dislike loss more than gain * Investors will hang on to losers thingking they will bounce back

Answer 89

* Investors analyze stocks in isolation while ignoring larger conflicts * e.g. ignoring asset allocation

Answer 90

* investors ignore information that conflicts with their existing beliefs

Answer 91

What has just happened will continue to happen.

Answer 92

* Sell losing stocks * Don't chase performance * Be humble and open-minded * Review performance periodically * Don't trade too much

Answer 93

* Interest rates and bond values are inversely related * Interest rates are the single biggest determinant of bond price * Bond markets are bullish when interest rates are falling.

Answer 94

* Interest rate risk (price risk) * purchasing power risk (inflation) * liquidity risk * Call risk

Answer 95

* Annual interest payment of a bond stated as a percentage of par value * usually paid semiannually

Answer 96

* Principal amount * face value

Answer 97

* Date that the principal must be paid back * Longer maturity more risky - the closer to the maturity date, the closer the value gets to par. * Longer maturity more sensitive to interest rate changes.

Answer 98

* Has one maturity date

Answer 99

* Has several maturity dates * Portions of the bond mature at different dates

Answer 100

Can be called at any time.

Answer 101

Can never be called.

Answer 102

Not callable for a specified period, then callable

Answer 103

Additional amount paid to bond holder upon call

Answer 104

Par value + call premium

Answer 105

* Prohibits premature retirement of a bond in order to issue another bond at a lower rate. * Issuer can use cash on hand to issue a bond at a lower rate (just not the proceeds from the first bond)

Answer 106

* Repayment schedule for the bond * Only applies to term bonds * Issuer is obligated to pay off bond over time. * Issuer must systematically put money aside to pay off the debt or must pay off the bond over time.

Answer 107

Back by a legal claim to specific assets

Answer 108

* Backed by real estate

Answer 109

Backed by securities or bonds

Answer 110

Backed by specific pieces of equipment

Answer 111

Unsecured bonds Backed only by good faith

Answer 112

* Unsecured bonds (junior bonds)

Answer 113

* Unsecured bond whose claim is secondary to other claims

Answer 114

* Requires interest to be paid only after a certain amount of income has been earned * least secure type of bond

Answer 115

* Sells for more than par value

Answer 116

* Sell for less than par value

Answer 117

* Considered default-risk free * Interest exempt from state and local taxes * Sold in $1,000 denominations

Answer 118

Mature in less than 1 year

Answer 119

Mature in 2 - 10 Years

Answer 120

Maturity greater than 10 years

Answer 121

* Treasury Inflation Protected Securities * Principal adjusts based on inflation * Interest payments based on current principal amount. * At maturity pays at greater of par value or inflation adjusted par value.

Answer 122

* Inflation-adjusted bonds * Up to 30 years * Returns = fixed rate plus semi-annual CPI-adjusted rate * Can be redeemed after 12 months

Answer 123

* Issued by US Government Agencies * Almost no default risk * Moral obligations of the US government - only the * Interest rates higher than treasury bond

Answer 124

* Backed by the taxing authority that issues the bonds * Safer than revenue bonds

Answer 125

* Paid from the revenues of the project being financed. * If not enough revenues, bond may default

Answer 126

* Usually issued to finance stadiums * Can be subject to AMT

Answer 127

* Interest income exempt from Fed taxation * May be non-taxable by issuing state if holder is resident. * TEY: Taxable Equivalent Yield = Yield on Muni/(1 - tax rate)

Answer 128

* Fully taxable * Higher rate of return than gov't bonds

Answer 129

* Does not pay interest * Sold at deep discount from par value - value increases the closer it gets to maturity. * Subject to high price volatility from interest rate changes. * Treasury Strips are zero-coupon bonds created from Treasury bonds * Interest must be reported and taxed annually despite not receiving any payment until maturity.

Answer 130

* Secured by mortgages * Investor received payments of both interest and principal (only interest taxed) * Collaterallized Mortgage Obligations (CMO) created as pools of mortgages * Tranches created based on maturity. Principal goes to shortest term tranche

Answer 131

* Backed by pools of loans: * auto loans * credit cards * home equity loans * High yields and high credit quality because loans are greater than bond issuance. * Short maturities - 3-5 years * Interest and principal payments are monthly.

Answer 132

* High yield bonds * Highly speculative * Below BBB rating

Answer 133

* Sold in US - Yankee Bonds * Eurodollar bonds - Can be sold outside the US; not registered with SEC

Answer 134

* Stated as a percentage of Par Value - e.g. 97 would be 97% of par

Answer 135

* Can be exchanged for a predetermined amount of common stock * Said to have an "equity kicker" * Company can sometimes force conversion if the bond is called * Limits downside risk - if price of stock goes too low, can remain as bond * Current income is usually higher than dividend

Answer 136

Convertible Value (CV) = (Par Value/Conversion Price) \* Stock Price Conversion Ratio = Par Value/Conversion Price

Answer 137

* Time during which convertible issue can be converted * Can be freely convertible or not.

Answer 138

* Stated price per share that convertible issues can be converted into

Answer 139

* Pay a premium for the opportunity to hold the stocks in the convertible issue as opposed to simply purchasing the stocks. * = market price of convertible issue - conversion value

Answer 140

* how much would a share of the stock have to sell for to make it worth it to pay conversion premium. * = Market price of convertible bond/conversion ratio

Answer 141

* Annual interest (coupon) / Market price

Answer 142

* Measures bond's sensitivity to changes in interest rates. * Weighted average time until an investor receives all coupon payments and principal * The moment in time an investor is immunized against interest rate and reinvestment rate risk * Y = yield * t = term (n) * C = coupon

Answer 143

* Longer duration = higher price volatility * Higher YTM = Shorter Duration * Longer maturity = longer duration * Higher coupon = shorter duration * The INterest rate variables are INversley related to duration.

Answer 144

* Occurs when duration equals investment time horizon * Seeks to offset the opposite changes in bond valuation caused by price effect (caused by interest rate changes) and reinvestment effect (as income is received, it is reinvested at a higher or lower rate). * Zero coupon bonds have no reinvestment rate risk (duration = maturity).

Answer 145

* In a low interest rate environment, interest rate affect bond price more significantly than in a higher interest rate environment. * If there are large changes in interest rates, duration price change formula is not effective. * Convexity is good. Higher = better. Pay more for convexity so lower yield. * Duration overstates price depreciation when interest rates rise and understates price appreciation when interest rate decline.

Answer 146

Risk premium depends on: * Default risk * Term-to-maturity * Call risk

Answer 147

* Difference in interest rates between different types of securities

Answer 148

* Shows the relationship between YTM and Term to maturity. * Upward sloping (normal) - short-term rates lower than long-term rates * Downward sloping - Short-term rates higher than long-term rates.

Answer 149

* Inflation is determining factor * Explains both normal and inverted yield curve * If investors expect higher inflation they demand higher interest rates on longer maturities * Decreasing inflation expectations may result in inverted curve

Answer 150

* Only explains upward sloping yield curve * Because short-term securities have more liquidity, rates are lower. * Compensated for lower-liquidity in long-term investments.

Answer 151

* Supply and demand * Explains both upward-sloping and downward-sloping curves. * Higher demand on the part of the borrower/issuer pushes interest rates up. If demand is high for long-term securities rates are higher. And vice versa.

Answer 152

* long-term bonds are more price-sensitive when interest rates change (more volitile) * short-term are less affected by interest rate changes

Answer 153

* Approximates the true return if bond is held to maturity. * Solve for i * Assumes reinvestment rate as same rate as yield (market rate at time of purchase)

Answer 154

* Calculates yield using time to first date of call and call price

Answer 155

* If selling at a discount, Coupon \< CY \< YTM * If selling at a premiun, Coupon \> CY \> YTM

Answer 156

Takes into account changes in interest rates for reinvestment of bond cash flows. * Step 1: Calculate future value of only coupon payments at reinvestment rate * Step 2: Add that future value to redemption/sale value of the bond and to get new FV of bond to calculate I. * NO PMT because that is already accounted for in step 1

Answer 157

* Step 1: Calculate Duration - Y: YTM, C: Percent Coupon (as decimal), T: Years to Maturity. * Step 2: Calculate Modified Duration: Duration / (1 + YTM) * Step 3: Modified Duration \* Change in interest rates * OR * Step 2: Calculate Percentage Change: * -D [(Percentage change in interest rates)/(1 + YTM)]

Answer 158

* Hybrid security with characteristics of stocks and bonds * Dividends are fixed amounts as a percentage of par value * Preferred dividends paid before common dividends * Yields are similar to high-quality bonds. * For corps that own stock, they are able to exclude 70% of received dividends from taxes. * Many preferred dividends taxed at ordinary income tax rate (trust preferreds) * Some preferred stock is convertible

Answer 159

* Price of preferred stock = Annual Dividend Income (percent of par value)/Prevailing Market Yield (or required rate of return) * Inversely related to interest rates.

Answer 160

* Dividend rate is not fixed. * Can change with interest rates.

Answer 161

* Paid before other preferred stock

Answer 162

* Cumulative: all past unpaid dividends must be paid before common stock dividends are paid (including all those in arrears) * If buyer buys after dividends are in arrears, does not receive extra dividends. * Noncumulative: don't have to pay all dividends in arrears

Answer 163

* (Assets - Liabilties) / preferred stock outstanding

Answer 164

* Annual dividend income/current market price of stock.

Answer 165

* Investors buy and sell shares directly through the fund * Unlimited number of shares * All purchases and sales completed at EOD * NAV = Fair market value of assets - liabilities/number of shares outstanding

Answer 166

* Investment company only sells in the intial offering * Later trading happens on secondary market * Purchase and selling price based on supply and demand (not NAV) * Usually sell at a discount to NAV

Answer 167

Exchange-Traded Funds * Trade like individual stocks * Trade immediately * Trade close to NAV * Diamonds - track DJIA; Spiders - track S & P; Qubes - track NASDAQ * Haven't been tested to a significant degree * no phantom capital gains

Answer 168

* only apply to open-end mutual funds * low-load fund is 2-3% * 12 (b)1 fees: annual fee charged by mutual find company. Max: 1% of assets. * For no-load funds, max 12(b)1 fee: .25% * Max total load and 12b1 charges: 8.5%

Answer 169

* Unit Investment Trusts * Fixed pool of securities * **Sold in units, not shares** * Passively managed; securities are fixed * Can be costly due to high upfront sales charges.

Answer 170

* Private limited partnerships * Not subject to same regulations as mutual funds * General partners takes 10-20% of profits * Only sold to accredited investors

Answer 171

* Emphasis on capital appreciation * Few dividends * Moderately risky * High P/E ratio

Answer 172

* Highly speculative * High P/E * smaller companies * High risk * Turnaround situations

Answer 173

* High dividend yields * low P/E ratios * more appropriate for conservative investors

Answer 174

* High current income with long-term gains * Blue-chip stocks * Dividends * Preferred stocks * less risky * less volatility

Answer 175

* Combination of stocks and bonds * allocation typically remains constant * relatively conservative * diversified

Answer 176

* Stocks and bonds * higher percentage in stocks than in a balanced fund * more risky than balanced fund * long-term capital appreciation with some income * Moderate risk investment

Answer 177

* More liquid than individual bonds * Steady income * some price volatility because of interest rates * cannot be held to maturity

Answer 178

* Invest in short-term securities with maturities of less than 90 days * interest rates move up and down with market rates * cash substitute

Answer 179

* SEC Yield - compares yields on bond funds * Money Market funds 7 day yield * Money Market funds 7 day compound yield * Mutual fund 30 day yield

Answer 180

* invest in stocks, bonds, and money market securities based on asset allocation * age-based funds

Answer 181

* International - exclude US * Global - include US * for CFP - conservative investor would want some international

Answer 182

* Buy at offer (ask) * Sell at NAV (bid)

Answer 183

* written by a corporation * in effect for years * illiquid and nonstandarized

Answer 184

(Market price of underlying security - strike price) \* 100 shares

Answer 185

(Strike price - Market value of underlying security) \* 100 shares

Answer 186

Price of the option

Answer 187

Difference between premium (price of option) and fundamental value of option

Answer 188

Call option - buyer: Market price greater than strike price Call option - seller: Market price less than strike price Put option - buyer: Market price less than strike price Put option - seller: Market price greater than strike price

Answer 189

Call: Market price less than strike price Put: Market price greater than strike price

Answer 190

* Both seller and the buyer have an obligation to either make delivery of a good or purchase delivery of a good. * All trading is done a margin basis

Answer 191

* Option to buy a security at a certain price (strike or excersize price) at a certain point in time * Person who buys the option is the long position

Answer 192

* Option to sell a security at a certain point in time for a certain price (strike price) * Person who buys the option has the long position

Answer 193

* Seller of the option * short position

Answer 194

An option sold by a writer on a security the option writer does not own. Unlimited loss; most risky option.

Answer 195

* Buy a put option on one's long position to protect price or * buy a call option on one's short position to protect sale

Answer 196

Value = price of option = premium Intrinsic (fundamental) value + time value If option is out of the money, intrinsic value is 0

Answer 197

Amount an option is in the money. If out of the money, intrinsic value is 0.

Answer 198

* Value of a call option * in - interest rate (risk free rate) * V - volatility * E - exercise price (inversely related) * S - stock price * T - time value

Answer 199

* Buy a call and a put on the same stock at the same strike price * Breakeven points are price changes above or below total premiums paid * Used when volatility is expected

Answer 200

* used when volatility is not expected * appropriate in a flat market * sell both a call and a put on the same stock at the same strike price.

Answer 201

Options bought on entire market.

Answer 202

* Option that gives a right to buy a stock at a specified price * Issued by companies * Can be long-term * Non-standardized * Can be added to a bond issue * Not as liquid as listed options * Valued the same way as options (intrinsic value plus time value)

Answer 203

Buyer of contract is long position Seller of contract of short position

Answer 204

* obligation to buy and sell * to get out of contract, short the same contract. * delivery price set by supply and demand * bought on margin - leverage * no limit on potential loss * priced daily - "marked-to-market"

Answer 205

* Producers and processors * Protecting interest in underlying commodity or financial instrument

Answer 206

* Investors who buy/sell futures contracts between origination and delivery * provide liquidity for the market

Answer 207

* Hedge against inflation * diversification * Tax benefits - deduct mortgage interest, property tax

Answer 208

* The discounted present value of future cash flows. * NOI/Cap rate * NOI: (income less all expenses including vacancies) plus depreciation and interest expense (for CFP questions - depreciation and financing not generally included) * Capitalization rate: required rate of return * Gross income multiplier: sales price/annual gross income

Answer 209

* Closed-end diversified portfolio of real estate * securitized real estate * Must distribute 90% of income as dividends and must keep 75% of assets in real estate investments

Answer 210

* Equity REITs - own real estate * Mortgage REITs - holds mortgages * Hybrid REITs - holds both real estate and mortgages.

Answer 211

* Diversification * Hedge against inflation

Answer 212

* Guarantees a fixed or floating rate of return over a period of time. * issued by insurance companies * have higher rate of return than savings account * purchasing power risk

Answer 213

security return/market return

Answer 214

AMBAC MBIA

Answer 215

Yield a coporate bond must pay to be equivalent to a muni bond. =Tax-exempt yield/ (1-marginal tax rate)

Answer 216

After-tax yield of corporate bond =Corporate rate \* (1-Marginal Tax Rate)

Answer 217

IF you see a discount: Call Mom's Cell Now YTC (highest) Yield to Maturity Current Yield Nomimal Yield - coupon - (Lowest)

Answer 218

Values a call option using the following variables: * Price of underlying asset * Time until call * Volatility of underlying asset * Risk free rate

Answer 219

Values a put option based on the price a of call option on that security

Answer 220

* explains prices based on the underlying asset price moving in opposite directions; can be extrapolated out over time.

Answer 221

Long Term options. * Term is up to 2 years. * More expensive than regular options

Answer 222

Designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industry.

Answer 223

Rate anticipation swaps utilize forecasts of general interest rate changes.

Answer 224

The yield pickup swap is designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates.

Answer 225

The tax swap replaces bonds with offsetting capital gains and losses.

Answer 226

Detailed look at specific companies Value managers and technicians do this.

Answer 227

Analysts look at overall market conditions Group Rotations and Market timers

Answer 228

* Real Risk-Free Rate * Expected Inflation * Default-Risk Premium * Liquidity Premium * Maturity Premium

Answer 229

Pay interest to whoever is the registered owner

Answer 230

Baa - Moody's BBB - S & P rating

Answer 231

Bonds for the portfolio are purchased with both long and short periods of time to maturity, with little in between

Answer 232

Use dollar value of portfolio not number of shares.

Answer 233

Used for marketing and distribution costs.

Answer 234

The limited general obligation bond is a bond issued by an entity that has some ability to levy taxes to support itself (for example, a school district). However, this ability is limited when compared to that of the general taxing power of the state.

Answer 235

Can file HOH if dependent qualifies but doesn't live with taxpayer.

Answer 236

* makes a substantial understatement of tax liability, generally more than 10 percent of the correct tax liability and * at least a $5,000 tax deficiency.

Answer 237

All costs of making property ready for use are capitalized and added to basis. (can include legal fees)

Answer 238

Can deduct medical expenses paid on behalf of another individual who would qualify as a dependent except that his/her income is too high.

Answer 239

Guarantees payments for life, but refunds principal amount to beneficiary if not fully distributed in life

Answer 240

First $1M in stock issued by company. $50K/100K MFJ in losses can be deducted against OI.

Answer 241

It is the possibility of loss due to the overuse of debt financing for a company

Answer 242

the bondholder has the right to sell the bonds back to the issuer at a specified date for its principal.

Answer 243

uncertainty that the initial portfolio returns may have a drastic effect on the likelihood of the portfolio successfully providing the income required for the client’s lifetime