Investments

Question 1

Premium vs discount bonds: yield ladder

Answer 1

Remember: YMCACMY

Yield to call (Discount bonds)
Yield to maturity
Current yield
Annual coupon - - - - - -
Current yield
Yield to maturity
Yield to call (Premium bonds)

Question 2

EE bonds

Answer 2

Purchased at face value

Can declare interest annually or at redemption

Subject to federal tax.

Only parent qualifies for education exp exclusion, not grandparent

Not features:
Not marketable
Int is not paid semi annually

Question 3

GNMA

Answer 3

If rates increase, prepayment may increase

Amt received can vary each mo.

Guaranteed by US gov’t

Pmts included int & principal

Realized yield is somewhat variable.

Question 4

Bankers acceptance

Answer 4

Used to finance imports and exports.

Question 5

I bonds

Answer 5

Earn int up to 30 yrs

Fixed rate plus inflation adjusted semiannually

Education tax benefit available like EE bonds

Diff between purchase price and redemption value is the taxable interest.

Question 6

ETF

Answer 6

Open or closed ended

Can operate as unit trust or inv company.

More tax efficient than open end MF

Can buy on margin

Question 7

UIT

Answer 7

Passive investment

No new securities are purchased

Pmt can be income or principal (end)

Self liquidating

Redeemed at NAV

Question 8

Mutual Funds - open ended

Answer 8

Trades at NAV

Constant redemptions

Question 9

Closed end MF

Answer 9

Fund issues stock then books are closed. No new shares issued

May hold illiquid securities

Cant be redeemed

Question 10

Guaranteed investment contracts - GIC

Answer 10

Like CD that is issued by ins company.

Term is 2-5 yrs w/ guaranteed rate.

Do not fluctuate with changes in int rates

Popular for DB plans

Question 11

Put Options

Answer 11

Buyer is bearish

Seller is bullish and want income

IV = EP - MP

This is the right to sell a stock at a certain price

Question 12

Call options

Answer 12

Buyers are bullish

Sellers are seeking income - bearish

IV = MP - EP

Question 13

Warrants

Answer 13

Issued by Corp not indv

Maturities of several years.

Terms not standardized

No intrinsic value

Question 14

Types of systematic risk

Answer 14

PRIME - measured by beta

Purchasing power risk

Reinvestment risk

Interest rate risk

Market risk

Exchange rate risk

Question 15

Types of unsystematic risks

Answer 15

Business risk - business declines because of new technology

Financial risk - strength of balance sheet

Question 16

What risks does Standard deviation measure?

Answer 16

Variability

Non diversified

Total risk

Question 17

What risks does beta measure?

Answer 17

Volatility

Diversified

Systematic risk

Question 18

Stock valuation constant growth model.

Stable Corp pays $2.50 divd that are expected to grow at 7%. If required ror is 10% what is the estimated price of stable?

Answer 18

$2.50(1 + .07)/.10-.07 = $89.17

Question 19

Dividend discount model - DDM with 2 dividend growth rate increases

$2 divd expected to increase by 10% for 3 years and 15% for 5 years with an required ror of 10%. what should you pay for the stock?

Answer 19

2(1.15)/.15-10= $46

If first rate is lower than second then chose next lowest.

If second rate is higher chose the next highest answer.

Question 20

Stock valuation using P/E ratio

Stock pays no divd

Stock selling at $50. FA determines P/E ratio is $20 with $3 divd

Answer 20

20x3= $60

The stock is undervalued at $50

Question 21

ROE example

Stock has ROE of 5.4% and a book value of $24.27. What is the EPS?

Answer 21

.054 x $24.27 = $1.31

Question 22

Calculate the change in bond price?

Bond price at $1000. Int rates increase by 1.56%. Duration is 8 yrs and YTM is 4%.

Answer 22

8(.0156) / 1.04 = .12 or down $120

Question 23

ROE example 2

Stock selling at $28.50 w/ PE ratio of 50 and firm will earn $0.50. Pays no dividend. What is ROE?

Answer 23

$50 x $.50 = $25

Stock is overvalued.

Question 24

What is the following stocks yield?

Closing price = $50
Divd = $2
EPS = $3
Trading range = $50-$52

Answer 24

Divd / closing price

$2 / $50 = .04 or 4%

Question 25

Bond duration principles to remember.

Answer 25

Y = CY is inversely related C = annual coupon is inversely related T = years to maturity is positively correlated

Question 26

Modern portfolio theory

Answer 26

Emphasis on diversification Shows how a group of assets are correlated.

Question 27

Capital market line

Answer 27

Specified the relationship between risk and return of a portfolio. CML is tangent to markowitz efficient frontier Shows the variability if returns and the risks for all portfolios.

Question 28

Markowitz efficient frontier theory

Answer 28

Identifies an efficient portfolio as one with the SMALLEST RISK and HIGHEST RETURN. Risk, return, covariance (SD) are important inputs.

Question 29

Security Market Line also know as CAPM formula and definition.

Answer 29

Values any asset, indv security or portfolio. r = rf + (Erm - rf)B

Question 30

What is the market risk premium of the following stock? ``` Erm = 12% Rf = 5% B = 1.25 ```

Answer 30

(.12 - .05)1.25 = 8.75%

Question 31

Efficient market hypothesis- 3 forms. Describe them.

Answer 31

Strong form: stock prices reflect all information both public and private. Semi-strong: all public info is reflected. Technical and fundamental analysis can’t produce superior returns. Weak: historical data is reflected and fundamental analysis may produce better returns.

Question 32

Current ratio formula

Answer 32

Current assets / current liabilities Current assets are those that can be converted to cash easily. IRAs are not included either are doll collections unless they are inventory.

Question 33

Technical analysis approaches

Answer 33

``` Dow theory Barrons confidence index Odd lot theory Inv adviser opinions Advance/decline line 200 day moving avg MF cash position. ```

Question 34

Sharpe ratio

Answer 34

Measures excess return of portfolio to its SD. Sp = rp-rf / SD of portfolio

Question 35

Treynor ratio

Answer 35

Excess return of portfolio compared to beta Tp = rp-rf / beta

Question 36

Jenson ratio also known as alpha

Answer 36

Excess return compared to expected return Alpha = rp - (rf + (rm-rf)B)

Question 37

Information ratio

Answer 37

Excess portfolio returns above the BM. Rp - Rb / tracking error Compared against portfolio BM where sharpe compares against risk free rate of return.

Question 38

Maintenance margin formula and example Stock purchased 200 shares at $150. At what price can he expect a margin call if maintenance requirement is 25%?

Answer 38

1- initial margin % / 1-maintenance margin % 1-.50/1-.25 x $150 = $100/ share

Question 39

Passive investment strategies

Answer 39

``` Buy and hold Immunization Laddered bonds Indexes portfolios Barbell strategy Dollar cost averaging ```