Investments Live Review Flashcards
A final pass of the investments live review section
Yield Ladder
(Discount)
Yield to Call
Yield to Maturity
Current Yield
Nominal Yield
Current Yield
Yield to Maturity
Yield to Call
(Premium)
Brokered CDs are subject to what risk and why?
interest rate risk
they are traded (negotiable)
Current yield formula
Annual interest in dollars/bond’s market price
OIDs
zero coupons
no interest until maturity
phantom income
Are Treasury securities marketable?
ES
Taxation on treasury securities
no state of local income tax
STRIPS
zero coupon treasury securities
direct obligation of the federal government
phantom income earned annually
who normally buys STRIPS?
tax deferred entities like pensions/IRAs/annuites
given their deferred nature, the phantom income need not be recognized
EE Bond Basics
nonmarketable
nontransferable
nonnegotiable
Issued at face value
term is 20 years (can go for an additional 10 years)
EEs in an UTMA custodial account
owned by the child
taxed as ordinary income at redemption
EE education bonds
normally owned by the parent
Tax free if the parent’s AGI is less than the phaseout at redemption
taxation of EEs
Interst earned is not subject to fedearl income taxation until the bonds are redeemed
interest is not subject to state or local taxes
i bonds
non marketable
nontransferrable
nonnegotiable
sold at face value
no guaranteed rate of earnings
fixed base rate and an inflation adjustment additional amount
GOs vs Revenue
GOs are “safer” because the issuer promises to raise taxes
CMOs
A- fast pay
M - Medium pay
y - Slow pay
Z - NO coupon (most risk)
risks associated with corporate and muni bonds
DRIP
Default
Reinvestment
interest rate
purchasing power
risks of treasury bonds
RIP
Reinvestment risk
interest rate risk
Purchasing power risk
duration of preferred stock
duration is infinite
means riskier than bonds
ADRs
shares of foreign-based corps held in US banks
Dividends of ADRs
declared in foreign currency so there is some exchange rate risk
real estate and inflation
effective hedge against inflation
low correlation coefficient with the US common stocks
potential for diversification is one of the strongest arguments for including real estate in an individual’s portfolio
NOI calculation
Gross rental receipts
+ non rental income
= potential gross income
- vacancy and collection losses
- operating expenses
= NOI
intrinsic value of a property
NOI/Cap rate
intrinsic value of options
minimum price the option will command as an option
Difference between the Market price and exercise price
exercise price
price at which the stock can be purchased or sold
time premium
the amount by which the market price of an option exceeds its intrinsic value
when do investors buy calls?
when they are bullish
call writers are?
pessimistic, they seek to keep the premium income
put options do what?
gives the holder the right to sell a specific number of shares of one common stock at a set price for a given period of time
why would investors buy puts?
when they are bearish
intrinstic value of a put (formula)
IV= EP - MP
protective put
buying a stock and a put for the same stock
a long position in both the stock and put
the put acts as insurance against a decline in the underlying stock
warrants
right to purcahse
issued by corporations
several years to maturity (generally)
Not standardized
futures short cut
if you’re long the commodity - go short
if you’re short the commodity - long the hedge
correlation of physical and financial assets
typically low correlations
Private placement (reg d)
max of 35 non accredited investors
unlimited # of accredited investors
devaluation
lowering of the value of a currency relative to the currencies of one or more other nations
revaluation
increase int he currency’s value
Covariance/Correlation coefficient
measures the extent to which stocks are related to each other or how the price movements of one of the securities is related to the price movements of a second security
coefficient of variation (CV)
relative variability to compare investments with widely varying rates of return and standard deviation
Standard deviation vs beta
SD measures variability in a nondiversifed portfolio (measure of total risk)
Beta - volatility in a diversified portfolio (systematic risk)
IRR
discount rate at which the present value of the future cash flow equals the cost of the investment
“effective return”
Time weighted factors ____
percentages
dollar weighted factors ____
cash flow
Holding period return
HPR
total return (appreciation, margin interest, etc) divided by the price of the investment
Yield to Maturity
assumes that the investor reinvests all coupons received from a bond at a rate equal to the computed YTM
TEY
tax equivalent yield
=tax exempt yield/(1-marginal tax rate)
bond duration
weighted average maturity of the bond’s cash flow on a present value basis
aggressive investors and duration
aggressive investors should conisder bonds with high durations only when they anticipate that interest rates will decline (bond prices go up)
what is the intersection of the CML called?
Rf or risk free (100% t bills)
What is point B called?
the optimal risky portfolio, a proportional percent of all risky assets, or the tangent of the CML and the efficient frontier
SML
relationship between risk and return for one individual asset
ex dividend date for a stock
date of record is the first business day after the ex dividend date
to be listed as holder of record, the investor must purchase its stock before the ex dividend date
are options marginable
no
reg t
50%
margin call formula
(1-intial margin)/(1-maintenance)
then multiply by the purcahse price of the stock
