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CFP > Investments > Flashcards

Investments Flashcards

1
Q

Unsystematic Risk

A

Diversifiable Risk

  • Business Risk: refers to the nature of the firms operation (loss due to new technology)
  • Financial Risk: refers to how the firm finances its assets (loss due to heavy debt financing)
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2
Q

Systematic Risk

A

Non-diversifiable Risk: (PRIME)

  • Purchasing Power Risk: inflation
  • Reinvestment Risk: risk that proceeds available for reinvestment must be reinvested at lower rates than the instrument that generated the proceeds
  • Interest Rate Risk: risk that change in rates will cause value of fixed income securities to fall
  • Market Risk: overall market
  • Exchange Rate Risk: associated with changes in values of currencies
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3
Q

I Bonds and EE Bonds

A
  • non-marketable, nontransferable, cannot be used for collateral
  • sold at face value
  • rate based on 10-year note yield
  • fixed interest rate that is in effect at time of purchase (EE)
  • interest rate is composed of: a fixed base rate (remains the same for life of bond) and inflation adjustment (every 6 months) (I)
  • subject to federal tax when redeemed (unless used as education bonds)
  • EE NO R AND B
  • not subject to state and local tax
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4
Q

Types of Municipal Securities

A

GO Bonds: backed by full faith, credit, and taxing power of the issuer. Safest muni bond.

Revenue Bonds: backed by a specific source of revenue which the full faith and credit of issuer has not backed. (toll roads, hospitals, power plants). Riskier. Higher yields.

Insured Muni Bonds: insurers pay timely interest and principal when the issuer is in default (AMBAC and MBIA)

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5
Q

Corp, Muni, Gov Bonds (DRIP) Risks

A

Default Risk: creditor may seize the collateral and sell it to recoup the principal (not with gov bonds)

Reinvestment Risk: as payments are received, interest rates fall, and funds reinvested at lower yields

Interest Rate Risk: rising rates may cause bond prices to fall

Purchasing Power Risk: inflation lowers value of payments

greatest risks to bonds could be said to be price volatility

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6
Q

Capitalization Market Value of Company

A

Large ($10B)
Mid ($2-$10B)
Small (less than $2B)
Micro (less than $300M)

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7
Q

American Depository Receipt (ADR)

A
  • Prices of ADR’s quotes in USD
  • Dividend paid in USD
  • Dividends declared in foreign currency
  • Exchange rate risk
  • Investors get foreign tax credit
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8
Q

Warrants vs Call Options

A
  • warrants are issued by corporations, calls are created by individuals
  • warrants typically have maturities of several years
  • warrant terms are not standardized, calls are
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9
Q

Futures Contracts

A

Long Commodity Position: if a farmer is long corn he needs to short hedge and will sell a futures contract

Short Commodity Position: if Kellogg’s is short corn, they need a long hedge and will buy a futures contract

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10
Q

Regulation D: Accredited vs Non Accredited

A

Accredited (unlimited) (123 Test):

1) net worth of $1m or
2) individual with an annual income of $200k
3) couple with joint income of $300k

Non Accredited (max 35):

1) sold to a max of 35 investors
2) must use a purchaser representative if not “sophisticated”

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11
Q

Zero Coupon Bonds

A
  • duration = maturity
  • no coupon interest, yet produces phantom income
  • no reinvestment risk
  • sold at deep discount
  • fluctuate more than bonds with similar yields
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12
Q

Convexity

A
  • the degree which duration changes as YTM changes
  • largest for low coupon bonds, long maturity bonds
  • allows investor to improve the duration approximation for bond price changes.
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13
Q

EMH (three types)

A

Strong: prices fully reflect all information. no analysis can produce superior returns over time. (random walk)

Semi: prices reflect all public information. insider info can achieve superior results. no analysis can help.

Weak: historical data is reflected. technical analysis will not help. fundamental analysis can help

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14
Q

Tax Basis of Mutual Funds

A
  • FIFO method treats shares aquired first as being sold first45
  • specified ID requires seller to identify shares of funds that are sold (allows investor to create gain, neutralize gain, or loss - most flexible)
  • Average cost method allows investor to divide the total cost of all shares held by number of shares held
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15
Q

Passive Investment Strategies

A
  • buy and hold
  • DCA
  • index investing
  • strategic asset allocation (review every few years)
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16
Q

Active Investment Strategies

A
  • market timing
  • tactical asset allocation
  • technical analysis (charts and trends)
  • Fundamental analysis (interest rates, GDP, ect.)
  • Ratio analysis (company ratios)
17
Q

Arbitrage Pricing Theory (APT) Keys

A

Price movements are explained by:

  • Unexpected inflation
  • Unexpected changes in industrial production
  • Unanticipated shifts in risk premium
  • Unanticipated shifts in structure of yields.
18
Q

Asset Backed Securities (MBS)

A
  • GNMA: purchase a pool FHA/VA mortgages, guaranteed by US government
  • FNMA/FHLMC: not guaranteed, mortgages and student loan bundles
  • CMO: bundle mortgages, separated into tranches based on risk and speed of payment, Z tranche has no coupon (risky) but receives income from the collateral remaining after other tranches are paid
19
Q

Ex-Dividend Date

A

To be listed on corporations books as a holder (eligible for dividend), you need to own the stock on the records date. You must purchase the stock before the ex-dividend date (1 business day before record date)

Essentially: Buy 2 business days before record

20
Q

Preferred Stock Keys

A
  • Hybrid of Equity and Fixed Income
  • fixed dividends
  • cumulative dividends (before common)
  • Typical purchaser would be treasurer
  • For test, think this has little chance of any growth…
  • warrants can be added
21
Q

Eurodollar vs Yankee Bonds

A

Eurodollar: a deposit in any foreign bank that is denominated in USD. Any country.

Yankee Bond: dollar-denominated bonds issued in the US by foreign banks and companies

22
Q

ETF
UIT
OEMF
CEMF

A

EFT: index, traded on exchange, tax efficient
UIT: unmanaged, no new, units not shares, income distrib, NAV
OEMF: continue sell, NAV
CEMF: no new, trade on exchange at premium or discount of their NAV

23
Q

Call and Put Bonds

A

Callable: issuer has right to redeem bond at specific price and date. Likely to happen if interest rates have dropped. To do this the issuer pays a call premium. Investors are protected from this for a stated period.

Put: permits the holder to sell the bond back to the issuer at specific price and date. If rates were to rise (dropping price) a holder would exercise the put to get the higher stated par value. For this option, the holder sacrifices some yield.

24
Q

CD’s and Brokered CD’s

A

CD: You buy a CD and the bank promises to pay it back with interest at maturity. Must hold until term or penalty (you wont get full amount). Liquid.

Brokered CD: A CD that was bought by a wire house and is not being bought and sold on the secondary market by individuals. You do not need to hold until term. Marketable.

CFP (7 decks)

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