Questions Flashcards
1
Q
ch.1
Investment bankers generally agree to sell a new issue on a ……………
a) Best Efforts
b) Firm Committment
A
b) Firm Commitment
The investment banker buys the offering from the firm and resells it to the investors.
2
Q
The most basic function that brokers and their firms perform is to link investors to the securities markets.
A
True
3
Q
A specialist is charged by an exchange to make a market in a security.
A
True
4
Q
Churning is the practice of
A
Churning is the practice of placing trades for the primary purpose of generating commission income for the broker.
5
Q
Money market instruments are traded in the
a) OTC
b) NYSE
c) Regional Exchanges
A
a) OTC (over the counter) market.
6
Q
The three major costs of executing a trade are:
A
commissions, bid-ask spread, and price impact
7
Q
A specialist is charged with managing the auction activity in a security.
A
True
8
Q
What is the: Primary market Secondary Market Third Market Fourth market
A
Primary: New issue stock. IPO’s. Managed by investment bankers.
Secondary: The secondary market is where investors buy and sell securities they already own. It is what most people typically think of as the “stock market,”
Third: The third market involves exchange-listed securities that are being traded over-the-counter between broker-dealers and large institutional investors.
Fourth: Arrangements for direct trading between institutions are referred to as the fourth market.
9
Q
A stock could trade simultaneously on the NYSE, a regional exchange, and in the OTC market.
A
True
10
Q
What are Alternative trading systems (ATSs) and what is their purpose?
A
Alternative trading systems are the organizations and programs that facilitate trading in the fourth market (direct between institutions). They are not used in the third market because the third market is trading between institutions and brokers. ATSs include electronic communication networks (ECNs) and dark
pools.
11
Q
Explain a Limit Order?
A
A limit order to buy sets the maximum price the investor is willing to pay, and a limit order
to sell sets the lowest price an investor will accept
12
Q
Explain a Stop Loss Order?
A
A stop-sell order is a request to activate a market order if the stock trades at or below the designated stop price, which is itself below the current market price.
13
Q
Explain Stop-Limit Orders?
A
The difference between stop-limit orders and stop orders is that stop orders convert to market orders and stop-limit orders convert to limit orders once the stop price is hit. When placing a stop-limit order, one must specify both the stop price and the limit price, although they could be the same.
14
Q
An all-or-nothing order must be either executed immediately or canceled?
A
False. An all-or-nothing order can be executed only when sufficient volume is available because the order must trade as a unit. However, the order does not have to be executed immediately; it can wait until sufficient volume exists for a single transaction. The type of order that must be either executed immediately or canceled is a fill-or-kill order.
15
Q
The vast majority of trading is done with which type of orders?
A
Market and limit orders.
16
Q
Investors who sell short can invest the proceeds of the sale as they see fit?
A
False. The proceeds from a short sale are left with the brokerage firm as collateral, along with additional collateral.
17
Q
SIPC coverage is based on account title and is only available to U.S. citizens?
A
False. It is based on account title but It applies to anyone holding an account at a covered brokerage firm, regardless of nationality or where they live.
18
Q
Cash accounts are Type …… and margin accounts are type …….
A
Cash = type 1 Margin = type 2
19
Q
SIPC insurance coverage does not apply to cash left on deposit in a brokerage account for the primary purpose of earning interest income.
A
True
20
Q
Portfolio Turnover Ratio
A
The portfolio turnover ratio measures the trading
activity in an account. The ratio is computed in a two-step process. The first step is to add up all of the purchases in an account during a period and add up all of the sales during that same period. The second step is to divide the lesser of these two numbers by the average value of total assets.
21
Q
Relates the profit on an investment directly to its beginning price is a definition for what?
A
HPR (Holding Period Return)
For an individual investment, the HPR is the sum of all the income received from this investment during
the holding period and the change in its price, divided by the beginning price of the
investment.
22
Q
? = Beginning price / Income received + Change in price
A
HPR
23
Q
? = Beginning price / Income received + Ending price
A
HPRR
24
Q
An asset’s per-period return (PPR) is defined as the sum of that period’s income payments and price appreciation divided by its beginning-of-period price.
A
True
25
The arithmetic mean return for an investment that earned successive annual
rates of return of –12 percent, 20 percent, and 22 percent equals:
-12% + 20% + 22% / 3 = 10%
26
Dispersion of possible returns refers to what term in investments?
"Risk"
27
In insurance, one can insure for the expected profit, as well as compensation for loss.
False. In insurance, one can only insure for loss of value, not for loss of potential profits.
28
The risk that one might unexpectedly have to put additional monies into an investment is called?
'Additional commitment risk'
29
Refers to the degree to which an investment is affected by changes in interest rates. This type of risk has two components: price risk and reinvestment rate risk.
We think about it primarily in conjunction with the bond investments.
Interest Rate Risk
30
The potential inability to quickly sell an asset with no price concession is
Liquidity Risk
31
The risk from events that affect a particular company.
Business Risk
32
Risks that come from events while operating in a foreign country, such as expropriation.
Political Risk
33
Risk of owing more taxes than one expected to owe due to changes in the tax code or tax rates.
Tax Risk
34
The most fundamental measurement of risk is
Variance
35
The most commonly used measurement of risk is?
Standard Deviation
36
Calculating standard deviation on the calculator?
You note that the returns on a stock for the last 3 years are –15 percent, 5 percent, and 28 percent. You believe these returns are representative of future returns, and you are willing to base your estimate of expected return and standard deviation on these historical data. The expected return and standard deviation are computed as follows?
```
15, +/–, Σ+
5, Σ+
28, Σ+
SHIFT, x,y – – {Display: 6.00}
SHIFT, sx
,sy
{Display: 21.52}
```
37
If an investment’s returns are normally distributed, then 95 percent of the time the actual return will be within one standard deviation of the expected return.
False. The actual return is within one standard deviation of the expected return only 68 percent of the time.
38
Skewed Returns
A skewed distribution of returns is one in which the tail on one side is longer than that on the other. An unusually large positive rate of return is more likely to occur with a positively skewed distribution of returns than with a negatively skewed distribution.
39
The initial margin rate is
the minimum amount of cash the investor must put up.
40
The Federal Reserve Board currently has set the initial margin requirement on stocks at
50%
41
When buying on margin, the investor will need to pay in cash the interest each month that has accumulated on the loan?
The interest on a margin loan is allowed to accumulate as an increase in the loan amount. No payment is required as long as the maintenance margin requirement is met.
The maintenance margin percentage is
the minimum amount of equity an investor must have, as a percentage of the portfolio, without having to repay part of the loan. The Federal Reserve Board also sets this rate, and brokerage firms can set a higher rate.
42
A margin call is issued whenever the market value of the account is less than the loan balance divided by one minus the maintenance margin rate.
True
43
The maintenance margin rate is lower than the initial margin rate.
True
44
The three ways to satisfy a margin call are?
To pay down the loan, add marginable securities to the account, or to sell holdings and use the proceeds to pay down the loan balance.
45
As long as an account has borrowing power, one can withdraw cash by increasing the loan balance?
True
46
A statistical measure of the strength of the relationship between the relative movements of two variables. The values range between -1.0 and 1.0.
Correlation Coefficient
A value of exactly 1.0 means there is a perfect positive relationship between the two variables.
A correlation coefficient of 0 does not necessarily mean there is no relationship between two sets of returns, only that there is no obvious linear relationship.
47
A portfolio's return is the ................ average of the returns of the assets included therein.
Weighted
48
A correlation coefficient of -1 between two assets provides the least opportunities to reduce the variability of the portfolio's return.
False. A perfect negative correlation (–1) of the returns between two assets would provide the maximum opportunity to reduce the variability of the portfolio's return. If the correlation coefficient is –1, then there will exist one combination of the two assets that is actually risk-free.
49
The efficient frontier
The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are sub-optimal because they have a higher level of risk for the defined rate of return.
50
Covariance
The covariance, like the mean and standard deviation, is a statistic that is almost always estimated from ex post (historical) values of the relevant variables. It measures the comovement or covariability of two variables. Thus, the covariance of two assets’ returns is an index of how their prices tend to move relative to each other.
51
MVP`
Minimum Variance Portfolio.
| Only the most risk-averse clients should hold the minimum variance portfolio.
52
The portfolios that lie below the MVP portfolio are preferred to those that lie above it.
The portfolios that lie below the MVP portfolio are preferred to those that lie above it.
53
The optimal portfolio to hold is the one that places the investor on the highest possible indifference curve.
True
54
Indifference curves are based on one's marginal utility for wealth, and may differ dramatically among investors.
True
55
indifference curve
An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent.
Along the curve, the consumer has no preference for either combination of goods because both goods provide the same level of utility.
Each indifference curve is convex to the origin, and no two indifference curves ever intersect.
56
The market portfolio
The market portfolio is the portfolio of all assets, with the weight of each based on its market value. As a practical matter, the market portfolio is an unfathomable entity, but it has interesting implications
for managing portfolios.
57
The capital market line (CML)
The capital market line (CML) represents portfolios that optimally combine risk and return. Capital asset pricing model (CAPM), depicts the trade-off between risk and return for efficient portfolios. It is a theoretical concept that represents all the portfolios that optimally combine the risk-free rate of return and the market portfolio of risky assets.
58
Risk-Free Rate and what is typically used to calculate this rate?
The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. The real risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration.
The interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate for U.S.-based investors.
59
The coefficient of determination (R2) indicates how closely changes in the value of the market portfolio are associated with changes the value of the particular?
Asset or portfolio.
60
One of the more common surrogates for the market portfolio is the
S&P 500
61
BETA
Beta, used in capital asset pricing model (CAPM), is a measure of the volatility, or systematic risk, of a security or portfolio, in comparison to the market as a whole.
The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market, and how volatile (risky) it is compared to the market.
The Beta for the market is always 1
62
Investors seeking the highest possible expected return should seek out investments with the highest possible betas.
True
63
The most commonly used model to analyze a security's performance is the CAPM.
True
64
The key law affecting the management of trust assets is the Uniform Principal and Income Act.
True
Uniform Principal and Income Act. At that time, it laid out the principle known as the prudent man rule. This rule stated that each security or asset in a trust must meet this standard: It must be one in which a prudent man who wanted fi rst and foremost to ensure the
preservation of his assets would invest.
65
Are dividends left in a portfolio included as interim cash flows?
No. Interim cash flows are withdrawals from and deposits into a portfolio by the investor, not the dividend or interest payments that accrue within a portfolio.``
66
A time-weighted rate of return gives more weight to more recent performance than earlier performances.
False. All time periods are equally weighted, regardless of whether they are the most recent or the earliest observation.
67
A dollar-weighted rate of return gives more weight to the rates of return when the portfolio is larger
True
68
An individual investor is more likely to use ........... weighted rate of return when evaluating his or her own portfolio and a portfolio manager would likely be evaluated using the ............. weighted rate of return.
Individual investors would likely use a dollar weighted rate of return, as the investor presumably has some control over the movement of cash into and out of the portfolio. The portfolio manager likely will be evaluated using time weighted rate of return.
69
To compute a value for the DJIA, sum up the prices of the 30 stocks and divide by 30
False. The divisor of the DJIA is adjusted to reflect stock dividends, stock splits, and changes in the index. The divisor's current value is substantially less than one.
70
The S&P 500 Index is a .........-weighted index.
Value
71
The DJIA index is the most widely quoted index, one reason being that it is the oldest stock market index.
True
72
Portfolio comparison to the DJIA is not encouraged.
True. The DJIA is not a good comparison for client portfolios.
73
All of the stocks in the S&P 500 are listed on the NYSE.
False. Some of the stocks in the S&P 500 are listed on the NASDAQ, and a few are listed on the AMEX.
74
FTSE 100 index
100 most highly capitalized stocks on the London Stock Exchange.
75
MSCI EAFE
the most common index used as a benchmark for foreign funds.
76
The Dow Jones Industrial Average (DJIA) is a type of ...........-weighted index that currently measures the stock performance of .... large companies.
Price; 30
77
index divisor
- An index divisor is a standardization figure used to compute the nominal value of a price-weighted market index.
- The divisor is used to ensure that events like stock splits, special dividends, and buybacks do not significantly alter the index.
- Some divisors, such as the one used to normalize the Dow Jones Industrial Average, are updated regularly.
78
how does a stock split effect a value weighted indices?
Stock splits are irrelevant because market capitalizations are unaffected by splits.
79
The Sharpe ratio is sometime called?
reward-to-variability ratio (RVAR)
80
The information Ratio
The information ratio looks at how a portfolio manager performed relative to an index or benchmark.
81
When evaluating portfolio performance a ........... value is always better.
True
82
information is widely available and that stock prices move in a random fashion are characteristics of what?
efficiency in the market
83
EMH:
Weak form
Semi Strong
Strong
Weak: Current stock prices fully reflect all market trading data, including past stock prices, trading volume, and short sales. Future returns are unrelated to past return patterns. (Charting and other types
of technical analysis do not produce superior returns.)
Semi-strong: Current stock prices fully reflect all publicly available information. Future returns are unrelated to any analysis based on public information. (Fundamental analysis does not result in superior
returns.) In order to beat the market you would need to know something that is not public information.
Strong: Current stock prices fully reflect all information. Future returns are unrelated to any analysis based on public or nonpublic data. (Insider trading does not result in superior returns.)
84
“dogs of the Dow” Strategy and its success
One of the more famous strategies for beating the market that has emerged in recent years is known as “the dogs of the Dow.” The strategy is simple. At the start of each year, an investor ranks the 30 stocks in the DJIA based on dividend yield (from high to low).
The investor then buys the top 10 stocks on the list (that is, the 10 stocks with the highest dividend yields). These stocks are held for one year, at which time a new portfolio is constructed in the same manner.
This strategy has provided normal to below-normal returns since its first year.
85
The day-of-the-week price effect suggests that, if no overriding considerations intervene, investors might as well sell on Friday and wait until late in the day on Monday to buy.
True
86
A number of studies suggest that stocks with low price-earnings ratios, small market capitalizations, low per-share prices, or related characteristics tend to outperform the market.
True
87
The Dow Theory
The Dow theory seeks to confirm if a trend in a primary index, either upward or downward, has emerged. The theory relies on the trend in a secondary index to confirm the trend in the primary index.
88
The ratio of odd-lot purchases to odd-lot sales tends to be less than 1.
False. The ratio tends to be greater than 1 because people sometimes buy several odd lots over time and accumulate a round lot, which they later sell as a round lot.
89
Chart reading is a type of ............. analysis.
Technical
90
Fundamental analysis consists of
Analyzing the factors that affect the amount and value of the expected future income streams provided by a security. Thus, fundamental analysts assess a firm’s earnings and dividend prospects by evaluating such factors as its sales, costs, and capital requirements.
91
Technical analysis concentrates on
past price and volume relationships of a security (narrow form) or technical market indicators applicable to that security (broad form). Both types of technical analysis attempt to identify evolving investor sentiment, but neither has a sound theoretical base.
92
A point-and-figure chart
A point-and-figure chart diagrams only stock price movements and has no time dimension. The vertical axis measures the stock price, and the horizontal axis is used to note a change in the direction of price movement. To start a chart, one looks for a price movement of a minimum magnitude, usually $3. The initial price movement required to start the chart
could be larger or smaller than $3 if the nominal price of the stock is unusually low or high.
93
Breadth-of-market indicators attempt to look at how the entire market is doing relative to the common market indices. The most common breadth indicator is the
Advance-decline index.
This is the cumulative sum of the difference between advances and declines for each day. Although most of the time the advance-decline index moves in the same
direction as the general market indices, there are occasions upon which the two diverge. In these instances, the assumption is that the advance-decline index is preceding the market indices, and thus is a good short-term predictor. In general, a rising advance-decline index is bullish, and a falling one is bearish.1
94
Support and Resistance levels are created when and what do they indicate?
A resistance level occurs when a significant number of investors look to get out when a certain price level is reached and a support level occurs as new buyers suddenly emerge when a certain price level is reached.
95
An investor who is planning to hold stock for only a short time need not be concerned about the stock's expected dividend stream after the time he or she expects to sell the stock.
False. The price appreciation a shareholder can reasonably expect when selling a stock is based on the discounted present value of the stock's expected future dividends after the stock is sold.
96
As an equilibrium in the market place expected rate
| of return is equal to ........... rate of return.
Required
The required rate of return is the minimum return an investor will accept for owning a company's stock, as compensation for a given level of risk associated with holding the stock. The RRR is also used in corporate finance to analyze the profitability of potential investment projects.
97
When the required rate of return equals the expected rate of return on a stock, the expected dividend growth rate equals the expected annual percentage change in the stock price.
True
98
The price of common stock should reflect the present value of its expected future stream of dividends
True
99
Constant-Growth Model
Making the assumption that a company's dividend will increase at a constant rate forever (g) you can simplify the dividend growth model and use a formula called the constant-growth model or Gordon growth model.
Po = D1 / (r-g)
In this equation, P0 is the intrinsic value of the stock today (at time 0), d1 is the dividend projected for the coming year (time period 1), r is the required rate of return, and g is the growth rate.
100
For the constant growth model to apply, the discount rate must exceed the growth rate.
True
101
American Depository Receipt (ADR)
An American Depository Receipt (ADR) comes into existence when the foreign branch of a U.S. bank or its overseas correspondent bank acquires shares of stock of a company based in that foreign country, and then issues certificates that represent claims upon these
shares.
There is no requirement that there be a specific ratio
between the number of shares held and the number of ADRs issued. The ADR is then listed to trade on a U.S. exchange, with the result being that an investor can effectively purchase shares in the underlying stock in U.S. dollars just as easily as any other listed stock can be purchased.
102
American Depository Receipts (ADRs) trade where?
1) OTC
2) NASDAQ
3) NYSE
4) all of the above
4. all of the above
103
Dividend schedule definitions
* The declaration date is the day on which the board of directors announces the dividend.
* The ex-date or ex-dividend date is the trading date on (and after) which the dividend is not owed to a new buyer of the stock. The ex-date is one business day before the date of record.
* The date of record is the day on which the company checks its records to identify shareholders of the company. An investor must be listed on that date to be eligible for a dividend payout.
* The date of payment is the day the company mails out the dividend to all holders of record. This may be a week or more after the date of record.
104
May 5th =
May 6th = Ex-Dividend Date
May 7th =
May 8th =
When is the record date?
May 5th =
May 6th = Ex-Dividend Date
May 7th = Record Date
May 8th =
The date of record is the day on which the company checks its records to identify shareholders of the company and is one day after the ex-dividend date. If a
shareholder buys the stock on the ex-dividend date they wouldn't show up on the companies records until May 8th.
105
The Sotheby Index provides an indication of price changes on?
The Sotheby Index provides an indication of price changes on a variety of types of art, ceramic, silver, and furniture collectibles.
106
If four rights are needed to purchase a new share of stock, the shares are currently trading at $50, and the subscription price for a new share is $42. What is the approximate value of each right?
$2.
107
Why do companies primarily issue rights?
Companies issue rights primarily to raise new equity capital while allowing current investors to maintain their pro rata ownership of the company.
108
The most common reasons for creating warrants are
for the firm to obtain a lower interest rate on its debt and to sell stock at a later date.
109
Dividend payments on common stock tend to .........over time.
1) increase
2) decrease
3) remain constant
1) increase
110
Stock prices are an example of a leading economic indicator.
True
111
The unemployment rate refers to?
the percentage of the labor force that is out of work and actively seeking employment
112
If the open-market operations are resulting in a net purchase of securities, the Fed has an expansionary monetary policy
True
113
Monetary policy is set by the
Federal Reserve
114
A goal of full employment means
an acceptable level of unemployment.
115
The federal funds rate is the rate charged by
The federal funds rate is the rate that banks charge each other for the overnight use (loan) of funds. The rate the Fed charges is called the discount rate.
116
The tools of fiscal policy are changes in
tax rates and the level of government spending by the treasury dep.
117
Tools of monetary policy
Reserve requirements and open-market operations by the Federal Reserve.
118
The primary goals of both monetary policy and fiscal policy are the same and what are they?
full employment and price stability.
119
Price stability is
Price stability is the absence of either a rising or falling trend in overall prices. It is desirable to have the price level (average) remain stable, while individual prices fluctuate to reflect changing supply and demand conditions for individual goods and services.
120
The basic balance sheet equation is as follows:
Assets = liabilities + net worth.
121
The quick ratio is used to assess a firms?
Liquidity
cash + accounts receivable / current liabilities
122
Most money market securities have relatively high minimum denominations ($100,000 or more)
true
123
Commercial paper is usually issued by large corporations to finance their short-term needs.
True
124
What is a negotiable CD
- A negotiable CD is one that can be bought and sold on a secondary market.
- Relatively short time frames, 2 weeks - 1 year
- Banks will sell negotiable CDs with a minimum denomination of $100,000
- trades in negotiable CDs have a minimum denomination of $1 million
125
Bankers Acceptance
A banker’s acceptance involves an obligation to pay a certain amount at a specified time. In other words, it is a time draft (one could also think of it as a postdated check). This type of instrument is usually created as a result of international trade. This obligation becomes a
bankers’ acceptance once it is accepted (guaranteed) by a bank.
Once a banker's acceptance is created, it trades like other money market securities.
126
The federal funds rate is
The interest rate that banks charge other banks for what are typically overnight loans.
127
Discount loans are extended by ................ to member banks ostensibly to cover..............
The Federal Reserve; To cover a short term reserve deficiency
128
Prime Rate
The prime rate used to be known as the rate that banks charged their largest, safest borrowers. Nowadays, a bank’s prime rate is defined as an index rate the bank uses to price its loans.
Each bank usually has a committee that sets its own prime rate.
129
T-............... have maturities of 1-10 years
Notes
130
T-............ have maturities of 10 or more years
Bonds
131
What is Securitization?
Securitization involves taking assets that heretofore were not easily traded in a secondary market and structuring a marketable security or group of securities from them. The goal of the process is to convert assets with poor marketability into assets with much greater
market acceptance.
132
indenture
Behind every bond issue is an indenture, which is the legal contract between the issuer of the bond and the investor. The indenture describes all of the bond’s characteristics, and provides positive affirmations and negative affirmations. The positives are things the issuer promises to do, and the negative are things the issuer promises not to do. These affirmations are intended to ensure that the company remains solvent and able to make interest and principal payments when due.
133
Debentures
Debentures do not have specifi c property serving as collateral but, rather, are backed by
the full faith and credit of the issuer. In the event of bankruptcy, holders of debentures are
treated the same as any other general creditors of the issuer.
134
A cap on a floating rate bond does what?
A collar also does what to a floating rate bond?
A cap limits the amount of interest the bond issuer might have to pay; it has no effect on the interest the bondholder receives.
A collar combines a cap with an interest rate floor and reduces the cost of the cap.
135
A death put
A death put allows the executor of an estate to redeem these bonds at par value upon the death of the owner.
136
Chapter XI and Chapter VII bankruptcy.
Chapter VII is for the purposes of liquidation and chapter XI is for the purpose of reorganization.
137
Realized Compound Yield to Maturity (RCYTM)
One aspect of the yield to maturity is that it incorporates no assumptions about what the
investor does with the coupon payments.2
In general, we can make two assumptions about
coupon payments.
1) They are spent
| 2) They are reinvested
138
The coupon rate for the bond equals
The annual interest payment divided by the par value
| and is fixed for the life of the bond.
139
Current Yield is
The current yield is the annual coupon divided by the
current market price. Although the coupon is fixed, the price varies; thus, the current yield will vary during the bond’s life.
140
The yield to maturity will be ....... than the current yield when?
Higher than
equal to
less than
The YTM is higher than the current yield for discount bonds.
They are equal when bonds trade at par.
The current yield is greater when bonds trade at a premium.
141
Bond Duration
Duration is an approximate measure of a bond's price sensitivity to changes in interest rates.
142
Immunizing a Portfolio
• Purchase zero-coupon bonds whose maturities correspond with the
planning horizon.
• Assemble and manage a bond portfolio whose duration is kept equal to
the planning horizon.
• Immunizing a portfolio reduces the investor's interest rate risk exposure.
143
Bonds:
| Tax Swap
In this case, the bond sold and the one bought are considered near-perfect substitutes. The primary motivation for such a swap is recognition of a loss for
tax purposes.
144
Bonds:
| intermarket spread swap
The basis of this swap is the equilibrium relationship in
the spreads between yields of bonds in different markets or sectors. For example, suppose the yield on top-rated bonds of utilities tends to be about one-quarter of one percent (that is, 25 basis points) below that on top-rated bonds of transportation companies, but that currently the two yields are the same. This suggests that either utility bonds are underpriced (the yield is too high) or the transportation bonds are overpriced (the yield is too low). To the extent that the investor holds transportation bonds, an intermarket spread swap involves selling the transportation bonds and buying utility bonds.
145
Bonds:
| pure-yield pick-up swap
In this case, the investor sells a bond with a lower yield
and buys one with a higher yield. This differs from the intermarket spread swap in that the intermarket swap has an expectation of bond price changes. The pureyield pick-up swap has expectation of no price changes; it is simply an action to increase the yield of the portfolio, where the increased yield comes either from buying bonds with longer maturities or buying riskier bonds.
146
Bonds
| rate anticipation swap
This type of swap involves adjusting the duration of a bond portfolio, based on the belief about the direction of change in market interest rates. When an investor expects interest rates to fall, the rate anticipation swap
entails selling bonds with short durations and buying bonds with long durations. Conversely, when the investor expects interest rates to rise, this swap involves selling bonds with long durations and buying bonds with short durations.
147
Bonds:
| substitution swap
Like the intermarket spread swap, this type of swap is made to benefit from the perception that two bonds are mispriced relative to each other. The difference from the intermarket spread swap is that a substitution swap is made with two bonds that are believed to be essentially identical.
148
Bonds:
| Barbell investment strategy
A barbell strategy involves heavy weights in short-term and long-term bond holdings.
149
Do bond ladders have an equal weighting or a heavyweight towards a specific duration of bond?
A true bond ladder has equal weights among all maturities covered
150
TERM STRUCTURE OF INTEREST RATES
The relationship between the terms to maturity on bonds and their yields to maturity
(assuming all other factors, such as default risk, are equal) is known as the term structure of
interest rates.
151
No-load mutual funds are typically sold directly to the public without a sales person?
True
152
To purchase a fund with a NAV of $20 a share and a 5 percent load, an investor has to pay $21.05 per share
True
153
mutual funds with 12b-1 fees in excess of 0.25 percent are classified as
Load Funds
154
Mutual Fund purchases
| Letters of intent typically cover a period no longer than?
13 months
155
portfolio turnover ratio
A portfolio turnover ratio is an especially important ratio to compute when an investor has a discretionary account. It can also be important to track even when an investor is making his or her own investment decisions. The portfolio turnover ratio measures the trading
activity in an account. The ratio is computed in a two-step process. The first step is to add up all of the purchases in an account during a period and add up all of the sales during that same period. The second step is to divide the lesser of these two numbers by the average value of total assets.
156
A REIT is a (open or closed) end investment company?
Closed end
157
Difference between open-end and close-end funds?
The major distinction among investment companies is whether they are open-ended or closed-ended. Open-ended investment companies are known popularly as mutual funds. The distinction between a mutual fund and a closed-end company is that the only way an
investor can buy shares in a mutual fund is from the fund itself through the creation of new shares. The only way an investor can sell shares of a mutual fund is back to the fund, which is referred to as redeeming shares. Shares in a closed-end investment company can be bought only from another investor; they also can be sold only to another investor.
158
Unit investment trusts are
Unit investment trusts are typically unmanaged investment portfolios that have a termination date for when the trust is dissolved.
159
Mutual funds must use the last reported trade price in determining its NAV?
False. Mutual funds are asked to use fair value pricing, which means they can use a different price than the last reported trade if they believe the trade price is sufficiently stale
