Investments: Money Market Securities Flashcards

Question

cognitive dissonance

Answer 1

tendency to misinterpret info that is contrary to an existing opinion or only pay attention to info that supports existing opinion

Answer 2

AKA regret avoidance or faulty framing where normal investors do not mark their stocks to market prices investors create mental accounts when they purchase stocks and continue to mark their value to purchase prices even after market prices have changed

Answer 3

- investors tend to over/under estimate the risk of investments with which they are unfamiliar/familiar

Answer 4

the process of investing in every option available to the investor common with 401k plans AKA 1/n diversification equally diversified in all funds

Answer 5

thinking that a good company is a good investment without regard to an analysis of the investment Peleton!!

Answer 6

causes investment in companies that are familiar, such as an employer Enron

Answer 7

suggests investors prefer avoiding losses more than experiencing gains YOUR LOSSES ARE ALWAYS LARGER THAN YOUR GAINS unwillingness to sell a losing investment, in the hopes that it will turn around

Answer 8

process of acquiring values, beliefs, and behaviors that are acceptable and expected by society

Answer 9

defined as an extension of general psychology that recognizes that multiple aspects of identity influence a persons worldview including race, ethnicity, language, sexual orientation, gender, age, disability, class status, education, religion, etc when psychologists are helping clients, training students, advocating for social change and justice, and conducting research

Answer 10

awareness of and sense of responsibility for problems or injustices that exist within society

Answer 11

useful in determining which investment has more relative risk when investments have different average returns tells us the probability of actually experiencing a return close to the average return the HIGHER the CV, the MORE RISKY an investment per unit of return = Std Dev / Avg Ret

Answer 12

- normal distribution - longnormal distribution - skewness

Answer 13

appropriate if an investor is considering a range of investment returns

Answer 14

not a normal distribution appropriate if an investor is considering a dollar amount or portfolio value at a point in time with a longnormal distribution, you are looking for a trend line or ending dollar amount

Answer 15

commodities are skewed Right Skewed = positive skewness Left Skewed = negative skewness

Answer 16

refers to variation of returns little variation of returns = high peak = positive kurtosis = leptokurtosis = treasuries greater variations of returns = low peak = negative kurtosis = platykurtic

Answer 17

process of adding risky securities to a portfolio, but keeping the expected return the same finding the balance of combining asset classes that provide the lowest variance as measured by std dev.

Answer 18

- simulation that adjusts assumptions in order to reflect the probability of an event occurring

Answer 19

measure of 2 securities combined and their interactive risk how price movements between 2 securities are related to each other measure of RELATIVE risk COV = (std dev A) \* (std dev B) \* (correl coeff AB)

Answer 20

ranges from -1 to +1 provides the investor with insight as to the strength and direction 2 assets move relative to each other +1: 2 assets are perfectly positively correlated 0: assets are completely uncorrelated - 1: perfectly negative correlation Diversification benefits begin anytime correlation is LESS THAN 1

Answer 21

measure of an individuals security's volatility relative to that of the market used to measure the volatility of a diversified portfolio measures **systematic** risk meta of the market is 1 Beta is used for well-diversified portfolios \>1: stock fluctuates more than the market and has greater risk =1: Beta of the market \<1: stock fluctuates less than the market and has less risk = security risk premium / market risk premium = fund return / market return

Answer 22

* measures total risk for a nondiversified portfolio

Answer 23

measure of how much a return is due to the market or what % of a security's return is due to the market R^2 = squaring the correlation coefficient R^2 = % of the fund's return is due to the market provides insight as to how well-diversified the portfolio is if B \> or = 0.70, then B is an appropriate measure of total risk if B \< or = 0.70, then B is not an appropriate measure of total risk and std dev should be used to measure total risk

Answer 24

the lowest level of risk one could expect in a fully diversified portfolio non-diversifiable risk market risk economy-based risk **beta**

Answer 25

exists in a specific firm or investment that can be eliminated through diversification diversifiable risk unique risk company-specific risk **standard dev**

Answer 26

* Purchasing power risks * reinvestment rate risk * interest rate risk * market risk * exchange rate risk systematic risk = market risk = PRIME

Answer 27

* type of systematic risk

Answer 28

* type of systematic risk

Answer 29

* type of systematic risk

Answer 30

* type of systematic risk

Answer 31

* type of systematic risk

Answer 32

* accounting risk * business risk * country risk * default risk * executive risk * financial risk * government/regulation risk unsystematic risk = ABCDEFG = diversifiable risk

Answer 33

* type of Unsystematic Risk

Answer 34

* type of Unsystematic Risk

Answer 35

* type of Unsystematic Risk

Answer 36

* type of Unsystematic Risk

Answer 37

* type of Unsystematic Risk

Answer 38

* type of Unsystematic Risk

Answer 39

* type of Unsystematic Risk

Answer 40

the acceptance by an investor of a given level of risk while maximizing expected return objectives investors seek the highest return attainable at any level of risk investors want the lowest level of risk at any level of return the assumption is also made that investors are risk averse

Answer 41

curve which illustrates the best possible returns that could be expected from all possible portfolios Risk and return comparison finding the most optimal portfolio portfolios beneath the efficiency curve are inefficient portfolios above the efficient frontier are considered unattainable

Answer 42

constructed using selections made based on this highest level of return given an acceptable level of risk

Answer 43

occurs when an investors indifference curve is tangent to the efficient frontier

Answer 44

the one selected from all efficient portfolios the point at which an investors indifference curve is tangent to the efficient frontier, represents that investors optimal portfolio

Answer 45

macro aspect of the CAPM specifies the relationship between risk an dreturn in all possible portfolios CML becomes the new efficient frontier, mixing RF assets with a diversified portfolio a portfolios return should be on the CML inefficient portfolios are below the CML is not used to evaluate the performance of a single security Rp = Rf = std dev (p) \* ((Rm - Rf)/ std dev (m))

Answer 46

calculates the relationship of risk and return of an individual security using B as its measure for risk often referred to as the SML Ri = Rf + (Rm - Rf)B Ri = required or expected rate of return Rm - Rf = market risk premium CAPM uses standard deviation as risk

Answer 47

(Rm - Rf) how much an investor should be compensated to take on a market portfolio vs a rf asset

Answer 48

CAPM = SML the SML intersects the y-axis at the risk free rate of return SML = Beta as risk if portfolio return is above SML = considered undervalued and should be purchased if portfolio return is below SML = considered overvalued and should not be purchased SML can be used for individual securities

Answer 49

* a relative risk-adjusted performance measure * measures excess return and the consistency provided by a fund manager, relative to a benchmark * the higher the excessive return (information ratio), the better * can be either positive or negative IR = (Rp - Rb)/ std dev (A) Rp = portfolios actual return Rb = return of the benchmark Rp - Rb = excess return Std dev A = tracking error of active return

Answer 50

* uses beta of a portfolio as its denominator, and the difference between the portfolio return and the rf return as the numerator * the higher the ratio, the better * risk-adjusted performance measure * measure of how much return was achieved for each unit of risk * measures the reward achieved Tp = Rp - Rf / Bp Rp = realized return on the portfolio Rf = risk free rate of return Bp = beta of portfolio

Answer 51

* provides a measure of portfolio performance using a risk-adjusted measure that standardizes returns for their variability. * risk-adjusted performance measure * measure of how much return was achieved for each unit of risk * the higher the Sharpe ratio, the better * Sharpe uses **Standard dev,** treynor uses **beta** Sp = (Rp - Rf) / std dev (P) Rp = realized return on the portfolio Rf = risk free rate of return std dev (P) = standard dev of the portfolio

Answer 52

* is indicative of the level of a managers performance * higher the alpha, the better the performance * negative alphas = managers underperformed the market on a risk-adjusted basis * is the **actual** return of the fund less the **expected** return on the fund ALPHA p = Rp - {Rf + (Rm - Rf)Bp] Rp = realized portfolio return Rf = risk-free rate of return ALPHA p = alpha, the intercept that measures the managers contributions to the portfolio return Bp = beta of the portfolio Rm = expected return on the market

Answer 53

use beta as a measure of risk portfolio is considered diversified use Treynor and Alpha as appropriate risk-adjusted performance measures

Answer 54

use standard deviation as a measure of risk portfolio is considered non-diversified, use standard deviation Sharpe ratio uses std dev as its measure of risk

Answer 55

* a time-weighted compounded rate of return

Answer 56

* used to evaluate capital expenditures that will result in differing CFs over the useful life of the investment period * if +: make investment * if 0: make investment * if -: do not make investment NPV = PV of CFs - initial cost

Answer 57

* the discount rate that sets the NPV formula = 0 * can be thought of as a compounded rate of return * should be calculated with uneven CFs and are asked to calculate a compounded rate of return * if NPV +, IRR \> Discount Rate * if NPV -, IRR\< Discount Rate * if NPV 0, IRR = discount rate

Answer 58

* calculate the IRR! * Takes into account additional share purchases * looking for investor return

Answer 59

* Calculates the IRR using security's CF * Only concerned with the activity of 1 share * assumes a buy and hold * does NOT take into account additional share purchases * concerned with the growth of a single purchase of a share * **MFs report on a time-weighted return basis**

Answer 60

* asserts that pricing imbalances cannot exist for any significant period of time * **multi-factor model** that attempts to explain return based on factors * when facto = 0, the factor has no impact on return * attempts to take advantage of pricing imbalances * inputs of factors: inflation, risk premium, and expected returns and **sensitivity** to those factors * **std dev and beta** are not input variables Ri = a1 + b1F1 + b2F2 + b3F3 + e

Answer 61

* convert US dollars to the foreign currency to determine the cost * compute the return, typically utilizing the holding period return calc * convert the foreign currency back to US dollars

Answer 62

* constant growth dividend discount model * values a company's stock by discounting the future stream of cash flows V = D1 / (r - g)

Answer 63

* represents how much an investor is willing to pay for each dollar of earnings * measures the relationship between a stocks price and its earnings * useful to value a stock if the firm pays no dividends

Answer 64

* compares a stocks PE Ratio to the company's 3-5 year growth rate in earnings * used to determine if the stocks PE Ratio is keeping pace with the firms growth rate in earnings * PEG = 1: the stock is fairly valued bc PE ratio is in line with the earnings growth rate * PEG \> 1: the stock price is fully valued bc an expanding PE ratio is contributing to the stock price appreciating more than the growth rate of earnings

Answer 65

* represents the amount of stockholders equity in the firm or how much the company's shareholders would receive if the firm was liquidated * if the stock price is significantly higher than the firms book value, it may indicate that the firm is overvalued * if book value per share is = or higher than the firm's stock price, it may indicate the firm is undervalued

Answer 66

* the relationship between the amount of earnings paid to shareholders in the form of a dividend, relative to EPS * the higher the div payout ratio, the more the mature the company * high div ratio = indicate that the possibility of the dividend being reduced * low div payout ratio = may indicate the div may increase, increasing the stock price ## Footnote **common stock dividend / earnings per share**

Answer 67

* measures the overall profitability of a company * there is a direct relationship between ROE, earnings and dividend growth = EPS / stockholders equity per share

Answer 68

* states the annual dividend as a % of the stock price = dividend / stock price * a company will raise its dividend to match it's EPS

Answer 69

* process of conducting ratio analysis on the balance sheet and income statement to determine future financial performance and a forecasted stock price based upon that future financial performance * includes: liquidity, activity, profitability, and common stock measurements * looks at economic data to determine how the economy will impact various industries * includes: GDP, unemployment, interest rates, inflation * believe that a stock price performance is largely driven by the financial performance of the firm * assumes: * investors can determine reliable estimates of a stocks future price behavior * some securities may be mispriced and can be determined which are

Answer 70

* the process of charting/plotting a stocks trading volume and price movements * these activities will predict the future direction of stock prices long before fundamental analysis will * does not involve ratio analysis * believe S & D drive a stock price

Answer 71

* may develop when investors who bought on an earlier high may now view this as a chance to get even * some may see as an opportunity to take a profit

Answer 72

* may develop when a stock goes down to a lower level of trading because investors may choose to act on a purchase opportunity that they previously passed * this is a signal that a new demand is coming into the market

Answer 73

* charting * market volume * short interest * odd lot trading * dow theory * breadth of the market * advance decline line

Answer 74

* plotting of historical stock prices to determine a trading pattern * plotting 50-, 100-, or 200- day moving averages along with historical stock prices

Answer 75

gives investors insight into sentiment if market volume is high and market goes up: positive indicator regarding investor sentiment if volume is high and market goes down: negative indicator of investor sentiment if volume is low and market goes up: negative indicator if volume is low and market goes down: positive indicator regarding investor sentiment

Answer 76

* # of shares sold short gives insight into future demand for a stock * stock that was sold short eventually needs to be purchased * high short interest = pent up demand

Answer 77

* trades less than 100 shares * done by small investors

Answer 78

* signals an end to a bull or bear market * does not indicate when it will happen, just confirms that it has ended

Answer 79

* measures the # of stocks that increase in value vs the # of stocks that decline in value

Answer 80

* the difference between the # of stocks that closed up vs. the # of stocks that decreased in value

Answer 81

* investors cannot consistently achieve above-average market returns * prices reflect all information that is available and change very quickly to new info * stock prices will follow a **“random walk”** * investors who believe in the efficient market hypothesis believe a **passive investment strategy** is appropriate, such as a buy and hold index

Answer 82

* behavior of stock prices closely resembles a random walk * **prices of stock are unpredictable** but not arbitrary * its impossible to consistently achieve above-average market returns * at any given moment, **prices that exist on securities are the best incorporation of all available info** and a true reflection of the value of that security * prices are in equilibrium * changes in P and volume of trading are generated by changing needs of investors

Answer 83

* Weak Form * Semi-strong form * strong form

Answer 84

* **Believes in fundamental analysis** * historical info will not help investors achieve above-average market returns * **rejects technical analysis** and asserts that fundamental analysis will help an investor achieve above average returns * security prices reflect all price and volume data * in direct contradiction with technical analysis, which attempts to predict future pricing based on the study of past pricing and volume patterns * **Price reflects** = historical price data * **advantage** = fundamental analysis & inside info

Answer 85

* asserts that both historical and public info will not help investors achieve above-average market returns * **rejects both technical and fundamental analysis**, but inside info will lead to above average returns * **Price reflects** = public info * **advantage** = inside info

Answer 86

* No above average returns, passive investment strategy * asserts that historical, public, and private info will not help investors achieve above-average returns * suggests that stock prices reflect all available info and react immediately to any new info * even with inside info, the market cannot be outperformed on a consistent basis * **Price reflects** = all info * **advantage** = none

Answer 87

* January Effect * Small firm effect * value line effect * P/E effect These do not support the EMH in any of the 3 forms

Answer 88

* jan tends to be a better month due to tax loss selling in Nov and Dec followed by investors getting back into the market in Jan

Answer 89

* small caps tend to outperform large caps * easier for them to grow revenue and earnings faster than a large cap

Answer 90

* stocks that receive Value Line's highest ranking outperform stocks that receive the lowest ranking

Answer 91

* stocks with a low PE ratio tend to outperform stocks with a high PE ratio

Answer 92

* active * passive

Answer 93

* investors believe that markets are efficient * investors can achieve above-average market returns through active investing and market timing

Answer 94

* Investors believe that markets are efficient * difficult difficult to achieve above-average returns * passive buy-and-hold investment strategy is best * ex: laddered bonds, ETFs, barbell bond strategy, UITs, and index investing

Answer 95

* involves assessing the likely outcomes for various allocation mixes between asset classes * done every few years * an **active** allocation strategy

Answer 96

* an **active** allocation strategy where the investor determines expected returns for asset classes, then rebalances the portfolio to take advantage of the expected returns * performed frequently

Answer 97

* provides an investor with an approximation of the rate of return that a given security, meeting certain levels of pricing and divs, may be expected to provide

Answer 98

* used to price or value a stock if that stock is a growth stock that pays no dividends

Answer 99

* not taxable at the state and local level

Answer 100

* not easily bought/sold * Series EE Bonds * Series HH bonds * Series I Bonds

Answer 101

* sold at face value * $25 minimum purchase * offered at one half of face val * **nonmarketable**, nontransferable * do not pay interest periodically * bond slowly increases in value over 20 years based on a fixed rate at time of purchase * redeemable after 1 year with 3 months interest penalty if redeemed in less than 5 years * interest is not subject to fed income taxes until bond is redeemed * may qualify for tax free treatment if redeemed for education expenses * interest is not taxed at state/local level

Answer 102

* pay interest semi-ann * have not been issued since 2004

Answer 103

* inflation-indexed bonds issues by US gov * sold at face val and have no guaranteed rate of return * mitigates against purchasing power risk * interest consists of: * fixed rate of return * inflation component that is adjusted every 6 months

Answer 104

* Tbills * Tnotes * Tbonds * all bills, notes and bonds are sold in denominations of $100+ * treasury securities are sold on an auction basis with the lowest yield winning the auction

Answer 105

* less than 1 year to maturity * sold on a discount yield basis, they do not pay interest, the bond just matures at par

Answer 106

* maturity between 2 - 10 years * interest is paid semi-annually

Answer 107

Maturity of \> 10 years interest paid semi-annually

Answer 108

* issued at a discount from par value * example is a zero coupon bond that is sold at a deep discount to par * a $1,000 par zero-coupon bond sells for $600 * must recognize income each year even though no interest is received (phantom income) * **semi-annual**

Answer 109

* provide inflation and purchasing power protection * par value adjusts for inflation and the coupon rate is applied to the new principal amount * coupon rate does not change

Answer 110

* periodic coupon payments are separated from the bond and each coupon payment including par trade separately * STRIPS create zero- coupon bonds * are highly liquid and appropriate for investors looking for a low risk, highly liquid net investment and with a specific time horizon

Answer 111

* agency bonds are moral obligations of the US gov but are not backed by the full faith and credit of the US gov * 1 exception: GNMAs are backed by full faith and credit of US gov

Answer 112

* GNMA - Ginnie Mae, division of Department of Housing and Urban Development * Farmers Home Administration (FHA)

Answer 113

* FNMA - Fannie Mae * FHLMC - freddie Mac * SLMA - Sallie Mae * Fed Farm Credit Banks - FFCB * Fed Intermed Credit Banks - FICB * Fed Home Loan Bank FHLB

Answer 114

* GNMA * Consists of a pool of FHA/VA guaranteed mortgages * each month GNMA distributes interest and principal payments to investors * FNMA and Fed Home Loan Mortgage Corp * historically not backed by the gov * biggest risk with MBS is falling interest rates * Mortgages could get repaid early, bond gets retired early, which leaves investors with a reinvestment problem

Answer 115

* secured bonds * collateralized mortgage obligations (CMOs) * Unsecured Corporate Bonds

Answer 116

* MBS * backed by a pool of mortgages * payment consist of both interest and principal * prepayment risk is biggest risk to bond holder * collateral trust bond * backed by an asset owned by the company issuing the bonds * the asset is held in trust by a 3rd party * in the event of default on the debt payment, the bond holders are entitled to the asset being held in trust

Answer 117

* investors are divided into tranches which determine which investors will receive principal repayment * investors are divided into tranches A-Z, which are short, intermediate, and long term tranches * interest from the pool of mortgages is distributed pro-rata and the principal repayments are used to retire tranches sequentially * investors in the ST tranches receive principal repayment before the intermediate and LT tranche * these are meant to mitigate against prepayment risk associated with MBSs

Answer 118

* debentures: * unsecured debt not backed by any asset * backed on the belief of the credit worthiness that the issuing company will repay the debt * Subordinate debentures: * have a lower claim on assets than other unsecured debt * have more risk because of the lower claim on assets if the company defaults on the bond repayments * Income bonds: * interest is only paid when a specific level of income is attained

Answer 119

* Moody's and S&P both rate bonds on the company's default risk and investment quality * higher the bond rating, lower the yield * bond rating agencies analyze a firms: * liquidity * total amount of debt * earnings and stability of those earnings

Answer 120

Aaa - C Aaa - Baa: investment quality bonds Ba and below are junk bonds

Answer 121

AAA - D AAA - BBB: investment grade bonds BB and below: junk bonds

Answer 122

* issued by insurance companies with a guaranteed rate of return * insurance company agrees to repay the principal and guaranteed rate of return for a period of time * yield is higher than treasury securities

Answer 123

* nontaxable at the fed, state, and local level if you live in the issuing state * bonds issued by territories of the US are not subject to taxes at the fed, state and loval levels * 3 types of muni bonds: * General obligation bonds * revenue bonds * private activity bonds

Answer 124

* backed by the full faith, credit and taxing authority of the muni that issued the bond

Answer 125

* backed by the revenue of a specific project * are NOT backed by the full faith, credit and taxing authority of the entity issued the bond

Answer 126

* used to finance construction of stadiums

Answer 127

* american municipal bond assurance corp (AMBAC) * municipal bond insurance association corp (MBIA) * if an insured muni bond is in default, the insurance company will pay the interest and principal amounts

Answer 128

* Corporate Bond risk * US Gov Bond Risk

Answer 129

* default risk * reinvestment rate risk * interest rate risk * purchasing power risk

Answer 130

* reinvestment rate risk * interest rate risk * purchasing power risk

Answer 131

* the yield a taxable corporate bond would need to pay for the yield on a tax-exempt muni to be equivalent to a taxable corporate bond * TEY is the after tax rate of return a taxable corporate bond pays * if a bond is double or triple tax free, simply combine fed state and local income tax rates * this is used for the marginal tax rate in the formula below * to be double TF the bond holder must love in the state that issued the muni bond * to be triple TF the bond holder must live in the local muni that issued a bond

Answer 132

= r / (1-t) = corporate rate \* (1 - marginal tax rate) r= tax exempt yield t = marginal tax rate

Answer 133

* exempt from BOTH fed and state taxes

Answer 134

Exempt from ONLY state and local taxes

Answer 135

= paid amount of a treasury security / ( 1 - (state income tax)

Answer 136

= issue of a municipality / (1 - [fed tax rate + (state tax rate \*(1 - fed tax rate))])

Answer 137

the periodic interest payment received by a bond holder the annual payment calculated as a constant $ payment a bond with a 10% coupon pays $50 semi-annually each time = PMT

Answer 138

the principal amount which is $1,000 on bonds unless stated otherwise the amount that will be repaid to bond investors at the end of the loan period = FV

Answer 139

* the time remaining until the bondholder receives par * described as the # of periods to maturity or that the loan will be outstanding = N

Answer 140

* the yield that is currently being earned in the marketplace * the rate used to discount a bond to determine what it is currently selling for in the market = i

Answer 141

compounded rate of return if an investor buys a bond today and holds it until maturity assumes that an investor is able to reinvest the coupon payments at the YTM rate = i

Answer 142

ALWAYS ASSUME SEMI-ANNUAL COMPOUNDING UNLESS TOLD OTHERWISE

Answer 143

* lower yields for shorter maturities bc some investors prefer liquidity and are willing to pay for liquidity in the form of lower yields * LT yields should be higher than ST yields bc of the added risks associated with LT maturities

Answer 144

the yield curve depends on S and D at a given maturity and there are distinct markets for given maturities with distinct buyers and sellers at each maturity when S \> D at a given maturity, rates are low. Rates will then have to increase for D to increase when D \> S at a given maturity, rates are high. Rates will then begin to decrease to drive demand down

Answer 145

* since investors are uncertain or believe inflation will be higher in the future, LT yields are higher than ST yields * when inflation is expected to be lower in the future, LT rates will be lower than ST rates

Answer 146

* related to the term structure of interest rates * today's LT interest rates have embedded in them expectations about future ST interest rates * LT rates are geometric averages of current and expected future ST interest rates 1rN = [(1+1R1)(1+E(2r1)…(1+E(nR1))]^(1/n) - 1 Borrowing money for n years at the x rate today should be equivalent to borrowing money for 1 year for x # of years

Answer 147

* weighted average maturity of all CFs * the bigger the duration, the more price sensitive/volatile the bond is to interest rate changes * the moment in time the investor is immunized from interest rate risk and reinvestment rate risk * a bond portfolio should have a duration = to the investors time horizon to be effectively immunized * underestimates the P appreciation when interest rates decrease * Overestimates the P depreciation when interest rates increase

Answer 148

a bond's price sensitivity to changes in interest rates

Answer 149

* Zero Coupon bond: bond will always have a duration = to its maturity * as the coupon rate increases, the duration decreases * as the YTM increases, duration decreases * As the term of a bond increases, duration increases Bond A: 30 year zero coupon bond, duration = 30 Bond B: 30 year 5% coupon, duration = 27 Bond C: 30 year 10% coupon, duration = 25

Answer 150

INterest rates coupon rate and YTM

Answer 151

* Tax Swaps * Barbells * Laddered Bonds * Bullets

Answer 152

* involves selling a bond that has a gain and a bond that has a loss which offset each other * involves sell a bond that has a loss and just buying a new one * similar to tax harvesting, offsetting the losses for tax purposes

Answer 153

* involves owning both ST and LT bonds * when interest rates move, only 1 set of positions needs to be sold and restructured

Answer 154

* requires purchasing bonds with varying maturities * as bonds mature, new bonds are purchased with longer maturities that what is outstanding in the portfolio * helps reduce interest rate risk bc bonds are held until maturity

Answer 155

* have very little payments during the interim period and then a lump-sum at the specified date in the future * most of the bonds in this strategy will mature in or around the same time period * zero coups, treasuries, and corporates are most likely candidates for this strategy since they pay little or no coupon during the period and the payoff comes at some predetermined date in the future * used when the investor has a balloon payment due on a liability at some future date

Answer 156

has both equity and debt features * debt: * par val * dividend rate as a % of par * Equity: * price of a preferred stock may move with the price of common stock * Differences: * divs do not fluctuate like common stock * no maturity date like a bond * price of preferred stock is more closely tied to interest rates than common stock * Corporate investors benefit most from the tax advantages of preferred stocks * they receive a 50-60% deduction of dividends based on a % of ownership of the company paying divs

Answer 157

* conversion value is the value of the convertible bond in terms of the stock into which it can be converted * even if the stock does not perform well, the investor has a floor built in * the floor is the par value of the bond that the investor will receive if the convertible is held until maturity CV = (Par / CP) \* Ps Ps = price of the common stock CP = conversion price (1,000 / CP) = conversion ratio or # of shares the convertible can be converted into

Answer 158

* closed end * open end * UITs

Answer 159

* have a fixed initial market cap bc specific # of shares are initially sold to the public * those shares are then traded on an organized exchange * no new shares are issued by the fund * shares may trade at a premium or discount to NAV

Answer 160

* have unlimited # of shares * as long as open-end fund receives contributions the fund fam will continue to issue shares * shares are bought/redeemed directly from fund fam * shares trade at NAV = (assets - liabs) / shares outstanding

Answer 161

* can be equity or fixed income UIT * Typically fixed income trust * managed by a TTEE, there is no investment manager * **self liquidating** * have **passive management** and no trading of assets within the trust * issues units, not shares * can be sold back to the UIT at NAV * there is a very thinly traded secondary market

Answer 162

* do not charge a sales commission when bought/sold

Answer 163

* charge a sales commission when bought/sold * include A, B and class C shares

Answer 164

* front-end load fund * small 12-b 1 fee (marketing fee used to pay distribution expenses) * no redemption fee or back-end load * appropriate for LT investors bc of low 12-b1 fee

Answer 165

* contain a back-end sales load * have high 12b-1 fee, max of 1% * do not have front end load sales loads * can be converted to A shares * advantage is that an investor would not pay the front-end load but they would pay the higher 12b-1 fee until the shares are converted into A shares * many funds no longer offer B shares

Answer 166

* do not chare a front load * usually charge a small back-end load and charge the max 12-b1 fee * usually most appropriate for ST investors * do not convert to A shares

Answer 167

* portfolio of stocks that represent an index * traded on an exchange similar to stocks and can be traded intra-day unlike traditional MFs * investors do not have to buy and sell blindly * have a low cost of ownership bc they are typically passive investments * only when stocks are added/removed from an index is there actually selling of assets within an ETF * most ETFs are tax efficient bc of the low asset turnover and passive investment strategy

Answer 168

* attractive bc of the low correlation with the stock market and the diversification benefit that the provide to portfolios * a hedge against inflation * must distribute 90% of investment income to shareholders to maintain tax-exempt status * 3 types: Equity, Hybrid, mortgage

Answer 169

* invest in real estate for cap apprec * income is generated from rental income and apprec

Answer 170

* invest mostly in mortgages and construction loans * make the spread between the lending and borrowing rate

Answer 171

* combo of both equity and mortgage

Answer 172

* represent foreign stock held in domestic banks foreign branch * entitle the shareholder to divs and cap gains * cap gains include currency fluctuation * trade on US exchanges, are denominated in US $ and trade in US $ * divs are paid in US $ * do not eliminate exchange rate risk * There IS currency risk

Answer 173

* cash * equities * bonds

Answer 174

* any asset that is not cash, equities or bonds * typically high risk w/ large min purchase reqs and high fees * actively managed * limited liquidity * no secondary market * REITs, CMOs, Limited Partnerships, hedge funds, collectibles, precious metals, crypto

Answer 175

* derivative security * value depends on the value of another underlying asset * contract is an agreement btwn 2 parties, the seller (writer) or buyer * all transactions are handled through a clearing house * 2 types: calls and puts

Answer 176

* right to buy specific # of shares @ specific price within a specific period of time or at a future date

Answer 177

* the right to sell a specific # of shares at a specific price within a specific period of time or at a specific future date

Answer 178

* hedging * speculation * income

Answer 179

Buy a call

Answer 180

* buy a put

Answer 181

stock price - strike price stock price is the expiration stock price $

Answer 182

strike price - stock price stock price is the expiration stock price $

Answer 183

= premium - intrinsic value

Answer 184

St: stocks gain or loss - if you own the underlying stock O: Option gain or loss (intrinsic value) P: premium paid (-$) S: # of shares (usually # but then multiply by 100)

Answer 185

CANNOT HAVE NEGATIVE INTRINSIC VALUE

Answer 186

* Covered call * married put * straddles * collar/zero cost collar

Answer 187

* BUY A PUT

Answer 188

* Black/scholes * Put/call parity * binomial pricing model

Answer 189

* commodities futures: Copper, wheat, pork bellies, oil * financial futures: currency, interest rate, stock indices * **obligate** the holder to make to take delivery of the underlying asset

Answer 190

selling a naked call option

Answer 191

give the holder the **right** to do something

Answer 192

hedgers speculators

Answer 193

producers and processors protecting their interests in underlying commodity or financial instrument provide the actual products being sold

Answer 194

investors trying to profit on expected swings in prices of futures contracts long positions benefit if price increases, short position benefits if price decreases

Answer 195

* these bonds are considered to be owned by whoever possesses them

Answer 196

= low fees

Answer 197

* unsecured corporate debt

Answer 198

* represents a more volatile bond

Answer 199

* bond basis increases at a set rate each year * difference between maturity value and the OID price is known as the OID * bonds earnings are treated as exempt interest income * bond was issued at a discount to its par value

Answer 200

* actual maturity is not known with certainty * actual CFs are not known with certainty

Answer 201

the best combo of risk and return for a given combo of investments

Answer 202

* has a positive alpha

Answer 203

= required equity ( price per share \* mm) = actual equity (current price - current loan)

Answer 204

Federal Reserve

Answer 205

= loan \ (1-mm) loan = (price per share \* initial margin)

Answer 206

= (D1)/(r-g)

Answer 207

D1 / (r-g)

Answer 208

* always the strongest determinant as to what should be added to the portfolio

Answer 209

* an anomaly to the EMH

Answer 210

* tells you the diff between a funds realized return and its risk-adjusted expected return

Answer 211

* the better indicator for evaluating a bonds sensitivity to interest rate risk * the time remaining when a securitys discounted FCF remains at risk

Answer 212

* match the average weighted duration of the bond portfolio to the investment horizon

Answer 213

* longest duration

Answer 214

* current price * time to maturityYTM * coup rate

Answer 215

* used to estimate the price of a bond, given a change in interest rates

Answer 216

* more volatile

Answer 217

less volatility

Answer 218

* will have the biggest duration * the bigger the duration, the more price sensitive the bond is to interest rate changes

Answer 219

* most dangerous position

Answer 220

= sum of purchases / total # of shares = average price

Answer 221

* One group that insures muni bonds

Answer 222

* have lower rates of return due to lower risk

Answer 223

* uses the geometric average to compute daily value

Answer 224

* price weighted average

Answer 225

* price weighted average

Answer 226

* size of fund * amount of time until a distribution is made * amount of time the current portfolio manager has managed the fund

Answer 227

traded on the secondary market

Answer 228

* receive monthly income from investing in real estate loans

Answer 229

* designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industty

Answer 230

* utilize forecasts of general interest rate changes

Answer 231

designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates

Answer 232

replaces bonds with offsetting cap gains and losses

Answer 233

* used to determine whether a stock is overvalued or undervalued

Answer 234

* buying a put and a call on the same security at the same price for same period of time

Answer 235

* purchasing a put and call on the same security at different prices for the same period of time

Answer 236

* purchase a put and call at the same price and the time are the same, but 2 puts and 1 call are purchased

Answer 237

buys a put and a call on the same security 2 calls, 1 put at the same price for the same amount of time

Answer 238

* expect the oranges to be delivered to you

Answer 239

* if there is a cash dividend issued on underlying stock

Answer 240

protects the downside

Answer 241

* a market anomalie * if a stock produces superior earnings and rates of return but has gone unnoticed by securities analysts and is often considered underpriced

Answer 242

* analysts start with the company, then industry and finally the economic climate

Answer 243

* starts with the economic climate, moves to the industry and then the company

Answer 244

* sell covered calls on the stock option

Answer 245

* market fluctuations are greater than the LT bond market fluctuations * more risky than debt

Answer 246

the best index to use capturing the overall US market

Answer 247

* 2 equally weighted investments with a correlation of -1

Answer 248

* 50% * set by the federal reserve

Answer 249

= COV (im) / std dev ^2 m or = (correlation coeff \* std dev i) / (std dev m)

Answer 250

means that the fund's performance patterns have been in line with the index * the higher, the less non-systematic risk is present

Answer 251

* investment with the greatest amount of price volatility due to interest rate changes

Answer 252

* if there is a rise in the price of the Yen in relation to the US Dollar

Answer 253

* issued with a restrictive revenue base

Answer 254

equity REITs participate in the appreciation of the underlying properties

Answer 255

* group rotation managers * market timers

Answer 256

* value managers * technicians

Answer 257

loan / (1-MM)

Answer 258

Macualay Duration / (1+YTM)

Answer 259

standard dev / x

Answer 260

alpha / std dev

Answer 261

n sq rt (1 + R1)(1+R2)(1+R3) - 1 \* 100

Answer 262

DRIP * default risk * Reinvestment rate risk * - interest rate risk * - purchasing power risk

Answer 263

RIP * Reinvestment rate risk * - interest rate risk * - purchasing power risk

Answer 264

* = Risk free rate * is not subject to DRIP or RIP risks

Answer 265

= (new Price - MM) - (new Price - loan)

Answer 266

* traded on the exchange

Answer 267

* financing exports

Answer 268

* RRLLTU * risk, return, liquidity, laws, taxes, unique circumstances * does not include investment selection

Answer 269

* an active management portfolio strategy that rebalances the % of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors

Answer 270

strategy for accumulating wealth involves purchasing during market highs and lows

Answer 271

* a “buy and hold” strategy

Answer 272

* represents the purchasing of stock with low PE ratios to hold over a long time horizon

Answer 273

* repositioning assets during economic downturn

Answer 274

* decrease by the # of years of duration but in % form

Answer 275

= (par / conversion price) \* price of the stock

Answer 276

= par / # of convertible shares

Answer 277

* the lowest correlation coefficient * -1 is always the best

Answer 278

* are less efficient that US markets * due to lower correlation with US stocks, foreign stocks can lower total portfolio risk

Answer 279

* time weighted return

Answer 280

= Net operating income / capitalization rate

Answer 281

= net income + interest + depreciation

Answer 282

= price per share / EPS

Answer 283

projected earnings \* PE multiplier

Answer 284

is a better method for evaluating projects that the IRR method

Answer 285

* npv has more realistic reinvestment rate assumptions * is a better indicator of profitability and shareholder wealth * always choose the higher NPV over the IRR option

Answer 286

* these purchase levels indicate the # of small investors in the market * says that small investors are always wrong

Answer 287

* moving average chart indicates that actual prices have dropped through the moving 200 day average line

Answer 288

* requires a buyer and seller

Answer 289

* should LONG the commodity and SELL a futures contract

Answer 290

* created by individuals * have shorter durations than warrants * receives the stock shares from a seller of the option when exercised

Answer 291

* issued by corporations * longer durations than calls * receives the stock shares from the seller of the warrant when exercised

Answer 292

= net earnings / capitalization rate

Answer 293

= ALPHA / std dev

Answer 294

= highest duration

Answer 295

* higher the volatility

Answer 296

refers to the purchase of debt instruments in anticipation of fluctuations in the rates of return on both long and short-term instruments.

Answer 297

is always the strongest determinant as to what should be added to a portfolio

Investments: Money Market Securities Flashcards

(352 cards)