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CFP TL VERSION > Investments > Flashcards

Investments Flashcards

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1
Q

Premium vs discount bonds: yield ladder

A

Remember: YMCACMY

Yield to call (Discount bonds)
Yield to maturity
Current yield
Annual coupon - - - - - -
Current yield
Yield to maturity
Yield to call (Premium bonds)
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2
Q

EE bonds

A

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

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3
Q

GNMA

A

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.

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4
Q

Bankers acceptance

A

Used to finance imports and exports.

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5
Q

I bonds

A

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.

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6
Q

ETF

A

Open or closed ended

Can operate as unit trust or inv company.

More tax efficient than open end MF

Can buy on margin

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7
Q

UIT

A

Passive investment

No new securities are purchased

Pmt can be income or principal (end)

Self liquidating

Redeemed at NAV

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8
Q

Mutual Funds - open ended

A

Trades at NAV

Constant redemptions

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9
Q

Closed end MF

A

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

May hold illiquid securities

Cant be redeemed

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10
Q

Guaranteed investment contracts - GIC

A

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

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11
Q

Put Options

A

Buyer is bearish

Seller is bullish and want income

IV = EP - MP

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

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12
Q

Call options

A

Buyers are bullish

Sellers are seeking income - bearish

IV = MP - EP

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13
Q

Warrants

A

Issued by Corp not indv

Maturities of several years.

Terms not standardized

No intrinsic value

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14
Q

Types of systematic risk

A

PRIME - measured by beta

Purchasing power risk

Reinvestment risk

Interest rate risk

Market risk

Exchange rate risk

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15
Q

Types of unsystematic risks

A

Business risk - business declines because of new technology

Financial risk - strength of balance sheet

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16
Q

What risks does Standard deviation measure?

A

Variability

Non diversified

Total risk

17
Q

What risks does beta measure?

A

Volatility

Diversified

Systematic risk

18
Q

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?

A

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

19
Q

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?

A

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.

20
Q

Stock valuation using P/E ratio

Stock pays no divd

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

A

20x3= $60

The stock is undervalued at $50

21
Q

ROE example

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

A

.054 x $24.27 = $1.31

22
Q

Calculate the change in bond price?

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

A

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

23
Q

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?

A

$50 x $.50 = $25

Stock is overvalued.

24
Q

What is the following stocks yield?

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

A

Divd / closing price

$2 / $50 = .04 or 4%

25
Q

Bond duration principles to remember.

A

Y = CY is inversely related

C = annual coupon is inversely related

T = years to maturity is positively correlated

26
Q

Modern portfolio theory

A

Emphasis on diversification

Shows how a group of assets are correlated.

27
Q

Capital market line

A

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.

28
Q

Markowitz efficient frontier theory

A

Identifies an efficient portfolio as one with the SMALLEST RISK and HIGHEST RETURN.

Risk, return, covariance (SD) are important inputs.

29
Q

Security Market Line also know as CAPM formula and definition.

A

Values any asset, indv security or portfolio.

r = rf + (Erm - rf)B

30
Q

What is the market risk premium of the following stock?

Erm = 12%
Rf = 5%
B = 1.25
A

(.12 - .05)1.25 = 8.75%

31
Q

Efficient market hypothesis- 3 forms. Describe them.

A

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.

32
Q

Current ratio formula

A

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.

33
Q

Technical analysis approaches

A 
Dow theory
Barrons confidence index
Odd lot theory
Inv adviser opinions
Advance/decline line
200 day moving avg
MF cash position.
34
Q

Sharpe ratio

A

Measures excess return of portfolio to its SD.

Sp = rp-rf / SD of portfolio

35
Q

Treynor ratio

A

Excess return of portfolio compared to beta

Tp = rp-rf / beta

36
Q

Jenson ratio also known as alpha

A

Excess return compared to expected return

Alpha = rp - (rf + (rm-rf)B)

37
Q

Information ratio

A

Excess portfolio returns above the BM.

Rp - Rb / tracking error

Compared against portfolio BM where sharpe compares against risk free rate of return.

38
Q

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%?

A

1- initial margin % / 1-maintenance margin %

1-.50/1-.25 x $150 = $100/ share

39
Q

Passive investment strategies

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

CFP TL VERSION (6 decks)

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