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Beth's flashcards 2020 CFP > Random Flashcards > Flashcards

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CFP® flashcards
1
Q

Covariance

A

COV = correlation coefficient x standard deviation a x standard deviation b
how the price movements of one of the securities is related to the price movement of the second security

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2
Q

Correlation Coefficient

A

Correlation Coefficient = COVij/Stand Dev a x Stand Dev b

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3
Q

Collaterized mortgage obligations

A

principal repayments vary as homeowners refinance their homes the amount of principal repayments received by the investor changes every month

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4
Q

Bonds

A

always use semiannual payments

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5
Q

Bond Ladder

A 
Discount
Y
M
C
A
C
M
Y 
Premium
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6
Q

Yankee Bonds

A

Dollar denominated bonds issued in the US by foreign banks and corporations. These bonds are issued in the US when market conditions are more favorable than on the Eurobond market or in domestic markets overseas. Registered with the SEC.

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7
Q

Eurodollars

A

A eurodollar is a deposit in any foreign bank that is denominated in dollars

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8
Q

Banker’s acceptance

A

Used to finance imports and export transactions
maturity: 9 months or less
Trades at discount to face value

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9
Q

Ranking lowest to highest risk

A
  • *T-bills** - issued by US Treasury carry no credit/default risk
  • *CD w/6 mos maturity**
  • *MM fund** - contains comm paper default poss & not insured
  • *Tax-exempt MM account** - municipal debt
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10
Q

Commercial paper

A

Short-term, unsecured promissary note issued by large, well known and financially strong companies
$100,000 denominations
Maturity 270 days or less
Sold at discount

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11
Q

Treasury Bills

A

“Bill passed a Note to James Bond”
Short-term securities w/maturities of one year or less
Issued at discount to face value

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12
Q

Money Market Mutual Funds (MMFs)

A

Not insured

Open end investment

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13
Q

Money Market Deposit Accounts (MMDAs)

A

Financial institutions (commercial banks)
Insured up to $250k individual by the FDIC
6 pre-auth transfers allowed each month
(of which 3 by check)

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14
Q

Duration of T-bills, T notes, and Treasury Bonds

A

“Bill sent a Note to James Bond”
Bill short
Note = 2-10 years
Bond=Long

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15
Q

CAPM - capital asset pricing model the risk-free rate of return must be greater than what?

A

Zero

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16
Q

Options

A

Long Call - right to buy stock
Long Put - Right to sell stock
Short Call - obligation to sell stock
Short Put - obligation to buy stock

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17
Q

Collectibles

A

Fine art, coins - 28%

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18
Q

Growth stock

A

0/15/20%

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19
Q

Zero-coupon

A

phantom income

least likely to reduce current income tax and are least likely to increase capital gains

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20
Q

Today’s dollars; inflation adjusted

A

[(1 + after tax rate / 1 + inflation rate) - 1 ] x 100

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21
Q

End Mode

A

401k
PSP Contr
Bond Int Paid
Mortgage Paid

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22
Q

Begin Mode

A

College tuition paid
Retirement benefits received
Family needs

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23
Q

Present Value

A

Amount when loan begins almost always negative

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24
Q

Unequal Cash Flows

A
  1. Always use 0 as first Cf0 + then required rate of return. Enter 0 for PV - solve for NPV
  2. Always enter negative as first CF for IRR/dollar weighted return
  3. Always enter negative as first CF and then required rate of return for NPV

NPV 0
IRR Req Return

+ > req return
- < req return

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25
Q

Muni vs Corp Bond

A

TEY (taxable) = (r / (1 - t)
t=tax marginal
r = tax exempt

on the sheet!

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26
Q

Mortgage Backed Securities
GNMA
interest rate increase/decrease

A

When interest rates increase - people will just continue their previously issued mortgages. Then the GNMA holder is stuck with an investment that pays lower than market rates - value of investment falls

Interest rates decrease - homeowners pay off mortgages and would receive the principal. Principal would be reinvested

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27
Q

US Government doesn’t back these Mortgage backed securities backed implicitly through lines of credit

A

Federal Home Loan Bank (FHLB)
Federal Nat’l Mortgage Association (FNMA)
Federal Home Loan Mortgage Corp (FHLMC)

Fannie Mae, Freddie Mac

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28
Q

When the NPV is zero…

A

the interest rate is the same as the required rate of return. Important concept.
You have calculated that the NPV of an investment is zero using a 12% interest rate. The purchase price is 100k of the investment. What is the IRR?
12%

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29
Q

Zero Coupon Bond

A

Duration = maturity for a zero coupon bond

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30
Q

OID (Original Issue Discount)

A

Bought at $500 and every year (5 year zero coupon bond)
1st year $100.00 added to basis - $600
2nd year $100.00 added to basis - $700

accreted - earned as taxable interest income bonds basis increases.

At end get a check for $1000.

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31
Q

Which is riskier: tax-exempt mm account or mm fund?

A

tax exempt mm account

32
Q

Commercial paper

A 
short-term
unsecured promissory note issued by large well-known strong companies
$100,000 start
270 days or less
Sold at discount and rated on quality
33
Q

Money Market mutual funds

A

Money Market securities
Open end investment companies offer these
Not insured
average maturity limit 90 days
Taxable - t-bills, neg CDs, prime comm paper
Tax exempt - short-term munis

34
Q

Treasury bills

A

one year or less issued at discount from face value

35
Q

Negotiable CDs

A

interest rate risk
sold in the open market b/f maturity
insured up to $250k (per individual) by the FDIC

36
Q

Money Market Deposit Accounts

A

Money market securities
Financial inst. (commercial banks) offer MMDAs
$250,000 insured by FDIC
6 pre-auth transfers allowed each 3 by check

37
Q

Mortgage-Backed Sec GNMA

A

Pass through securities
Direct guarantee by the US Govt - not issued by the Treasury, GNMA interest taxed at federal, state and local levels. Minimum size of an individual GNMA cert sold is $25,000
Risks - Default - None
Interest rate - fixed int rate means price falls when interest rates rise
Reinvestment risk rate - int rate falls, homeowners pay off homes prepayment

38
Q

EE Bonds vs I Bonds

A

The inflation adjusted interest on i bonds accrues until the bond matures or is redeemed
EE bonds provide a fixed rate of interest
i bonds interest 2 parts: fixed part and inflation part
interest added to bond monthly and paid when the holder cashes the bond

39
Q

i bonds

A

Inflation indexed accrual securities of the US govt
Non-marketable
Sold at face value
Accumulate interest monthly
Unlike EE bonds, have no guaranteed interest rate
Redeemed for education expense is tax-exempt (similar to EE bonds)

40
Q

EE bonds

A

Pays a fixed rate of interest for up to 30 years
No longer exchangeable into HH bonds
Fixed interest rate is based on 10 year treasury note yields that are current when issued
Rate is fixed for life of bond
Guaranteed to reach face value in 20 years, but can earn interest over 30 years

41
Q

Series HH, EE, and I bonds

A 
Non marketable
Issued at face value
Fixed interest rates
Low as $50 denominations
Interest accrues monthly and compound semiannually
Can choose how interest is paid
42
Q

Taxation of TIPS (treasury inflated protection securities)

A

Taxed annually on the interest payment plus the appreciation in face value. Federal tax only ordinary income tax rate. e.g., $65 in increased face value is imputed or phantom income taxable now but not collected until bond sold or matures

43
Q

TIPS

A

Offers protection against inflation
Marketable
Face value - (principal) adjusted semiannually to keep pace with inflation as measured by the consumer price index over a 6-month period
Sold in $1,000 denominations

44
Q

Treasury STRIPS

A

Treasury’s own zero coupon bonds
acquire a direct obligation of the fed gov’t discount on STRIPS is treated as taxable income earned annually
CATS and TIGRS - obligation of the brokerage firm and created to choose either the interest to be rec’d in a specific year or the principal at the bond’s maturity

45
Q

Treasury Bonds

A 
10-30 years maturity
$1,000 to more than $1,000,000 at par
Subject to RIP
No default risk
*Callable (15 years prior to maturity)
semiannual auction

sold at yield to maturity basis

46
Q

Treasury Notes

A 
1-10 years maturity
$1,000 to more than $100,000 at par
Subject to RIP
No default risk
Non-callable
Interest paid semiannual
Federal income tax only
Monthly auction
47
Q

T-bills

A 
3, 6, 12 months
$100 to 1,000,000 issues
Discount yield basis
No risk safest, no default risk
Not callable
No coupon interest/interest is the discount
Fed income tax only 
Weekly auction
48
Q

9 months

A

T-bills are issued carrying all of the following terms except 9 months.
3, 6, and 12 months

49
Q

Taxation of T-bills, Notes, and Bonds

A

Subject to federal income tax

Exempt from state/local income tax

50
Q

Original issue discount (OID)

A

OID is discounted from Par value when issued
Pay difference at maturity
Discount is accreted over bond’s life
Bond’s basis increased year-to-year “phantom income”

OID muni - straight line method non taxable income
if held to maturity no cap gain/loss

51
Q

Accrued interest big example

A

$1000 corporate bond quoted at 90 is selling at a discount of 10 points. ($100) from par. A bond or “point” is worth $10.00. What amount is taxable interest?

He bought 10 listed bonds at a price of 105. Harry’s transaction cost was $100. He paid his broker $10,800 for the bonds. Of the 10,500 was the cost, 100 was commission, and 200 was accrued interest. What amt is taxable interest? He reports $400 on Sch B (1099-INT) and subtract 200 as accrued that was paid to seller. Taxable int = $200 arrears

52
Q

Accrued Interest

A

If bondholder sells a bond between interest payments the purchaser must compensate the seller for the difference

53
Q

Nominal Yield

A

The stated rate of interest on the bond (the coupon rate)

54
Q

Premium Bond

A

A bond sells at a premium when the bond’s purchase price is in excess of par value

55
Q

Negotiable CDs

A

interest rate risk
marketable
insured up to 250k
per individual (by FDIC)

56
Q

Conversion Price of a Bond (Convertible)

A

CV = (Par / conversion price) x price of stock

57
Q

Intrinsic Value of Bond

A 
$1,000 FV
12 yrs N (2x12)
10%
8% ($80)
PV = 862.01
what is its intrinsic value
58
Q

What is the price or intrinsic value of a bond with a $1,000 face value, a 7% coupon and 5 years to maturity if comparable bonds are yielding 8%?

A 
FV = $1000
PMT = $70
N = 5
I/yr = USE 8% comparable rate
solve for PV = $959.45
59
Q

CATS/TIGRS

A

block of treasury bonds and removing all coupons and then offering either the interest to be received in a given year or the principal at bond’s maturity. No longer an obligation of the federal gov’t.

60
Q

Convertible bond

A

Bond with a call option

Go for a premium because embedded call option

61
Q

Speculative Grade (junk bonds)

A

Standard/Poors - BB and below (junk bonds)

Moody’s - Ba and below (junk bonds)

62
Q

Investment grade bonds risks

A

Default Risk
Reinvestment Risk
Interest Rate Risk
Purchasing Power

Government bonds (RIP)

63
Q

Debenture

A

Corporate debt obligation backed only by the integrity of the borrower

Indenture

64
Q

CMO

A through Z (tranches)

A 
A (fast pay) through Z (slow pay)
Z tranches - yield should be higher than other tranches
longest duration (like a zero)
it receives interest and principal only after all other tranches have been liquidated
increased interest rate risk
65
Q

What investments are issued at discount from face value?

A

T-bills, commercial paper, bankers acceptance, OID, STRIPS

66
Q

Information Ratio

A

Measure portfolio managers ability to generate excess returns relative to a benchmark
Higher IR = consistency

67
Q

Maintenance Margin

A

200 shares of stock at $150 per share on margin. Initial margin requirement is $15,000 (borrows 15k). If the maintenance margin is 25% what is the amount of the maintenance call if the stock drops to $90.

200 shares x 90 = $18k
25% x 18000 = 4,500
18000 - 15000 = 3000/1,500 maint call

68
Q

Passive Asset Allocation strategies

A 
Buy and Hold
Immunization
Laddered bonds
Indexed portfolios
Barbell strategy
Dollar cost averaging
69
Q

Arbitrage Pricing Theory

A

In arbitrage, the security’s movement and return are not explained by a relationship between risk and return
Unexpected inflation
Unexpected changes in the level of industrial production
Unanticipated shifts in risk premium
Unanticipated changes in the structure of yields

70
Q

Black-Scholes option valuation method

A

Increased price stock = increase call value
Increased time remaining to option expiration = increase call value
Increased volatility = call’s value

Increase in exercise price = decrease call’s value

71
Q

Negatively correlated with returns on financial assets

A

Antique, Gold mining stocks, oil and gas private placement

72
Q

Private Charities

A

War Veterans Organizations (30% orgs)

Foundations (private charities)

73
Q

Use Related and LTCG can qualify for…

A

FMV treatment

74
Q

Property considered ordinary income and not capital gains for calculation of deductible charitable contributions

A

Use-unrelated property
Inventory
Short-term cap gains property

75
Q

Public charities

A

All schools, all churches, red cross, humane society, hospitals

76
Q

Divorces before 2019

A

alimony and separate maintenance payments are deductible

Beth's flashcards 2020 CFP (1 decks)

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