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IRT > Repeated mistakes > Flashcards

Repeated mistakes Flashcards

1
Q

AER

A

AER = (1 + (r / j)) ^j - 1

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2
Q

FV =

A

FV = PV x (1+r)^n

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3
Q

PV

A

PV = FV / [ (1+r)^n ]

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4
Q

compound interest

A

= deposit x compound factor
= deposit x (1+r)^n

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5
Q

discounting factor

A

= 1/compound factor

= 1/ (1+r)^n

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6
Q

PV annutity formula

A

PV = PMT x 1/r x (1 - 1/(1+r)^n)

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7
Q

PV of perpetuity

A

= perp payment / interest rate

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8
Q

FV annuity formula

A

FV = PMT x 1/r x [((1+r)^n)-1] x(1+r)

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9
Q

leading economic indicators

A

stock market 3-6 months
index of consumer expectations (1-2 months)
building permits
money supply

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10
Q

coincident economic indicators

A

change at same time as economy as a whole
GDP, retail sales, industrial production

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11
Q

lagging economic indicators

A

unemployment
1-6 months

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12
Q

CAPM

A

E(Rp) = Rf + (Rm - Rf)Bp
expected ret for stock P = risk free return + (excess return on market)*B of stock P

calc expected return given risk
assumes
- diversification
- everyone can borrow at rf rate
- no tax or transaction cost
-same expectations
-want to maximise ret and min risk

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13
Q

primary, secondary and tertiary sectors

A

Primary Sector - raw materials/extraction,
Secondary - manufacture,
Tertiary - service industries/ distribution

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14
Q

physical delivery of derivs

A

Warrants always physically delivered
Futures and options either delivered or cash settled depending on contract

CFDs are always cash settled.

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15
Q

Intrinsic val of options
Time val of options

A

Intrinsic value = amount in the money
Time value = Premium - Intrinsic Value

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16
Q

physical ETF vs synthetic ETF

A

physical - investors use cash to buy underlying

synthetic - use deriv contracts to gain expose (e.g. total return swaps)
counterparty and collateral risk
stock lending in phsyical ETFs can expose to these risks also

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17
Q

SEIS (seed enterprise investment scheme)

A

baby cousin of EIS and VCT
<2 years old
up to 25 employees
assets up to 200k

tax relief for investors withs <30% stake in company
max investment 100k/tax year in all SEIS companies - 50% tax relief
no CGT if held >3 years
no IHT if held >2 years

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18
Q

modified Macaulay duration

A

modified mac duration = approx % change in bond price for 1% change in yield
allows measurement of sensitivity of bond to changes in interest rates
longer maturity and lower coupon % = more sensitive

= mac duration / (1 + GRY)

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19
Q

Macaulay duration

A

duration measures the sensitivity of a bond’s price to changes in interest rates
Macaulay duration = weighted average time before bondholder recieves bonds cash flows
weighted average term to maturity of cash flows from a bond

= sum ( net present val of bonds cash flows x time to cash flow receipt) / sum net present cash flows

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20
Q

RY/running yield/ flat yield/ income yield

A

RY = gross annual coupon / market price

4 bonds
pre tax annual return
uses: income seeking non-tax payers
irredeemable bonds

gross annual coupon = CR x PAR

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21
Q

Nominal yield

A

gross annual coupon / nominal value

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22
Q

GRY

A

GRY = YTM
pre-tax annualized return on coupon, capital and investment

GRY = %RY + %profit(loss) at redemption

% profit/loss @ redemption = (NV - MV)/MV
%RY = gross annual coupon / market price

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23
Q

EPS

A

EPS = net income / no. of outstanding ordinary shares
net income = earnings/profit available to ordinary shareholders
EPS steady growth indicates successful consistent company

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24
Q

PE ratio

A

PE ratio = price per share / earnings per share

relative valuation multiple
can gage relative valuations

EPS = net income/ no. of outstanding ordinary shares
low = undervalued and higher risk

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25
Q

Earnings yield

A

= EPS / share price

= (net income / no. of ordinary shares)/ share price

26
Q

Dividend yield

A

DY = div per share / market price per share

UK = gross usually but can be net
measures income return from shares
growth companies have lower DY as mosre income reinvested, value have higher DY

27
Q

dividend cover

A

DC =net income / common div
Indicates sustainability of the dividend, or the likelihood of the existing dividend being maintained
Literally, how many times a company could have paid its
dividends
Indicates how much profit is re-invested

28
Q

gearing ratio

A

gearing ratio = LT liabilities / capital employed

cap employed = LT liabilities + equity

Debt is riskier (from the issuers’ point of view) than equity as it typically requires fixed and obligatory interest payments
The higher the proportion of debt a company has the greater the risk to shareholder dividends

29
Q

residential SDLT

A

paid by buyer on purchase of UK land/property

up to 125k = 0%
next 125k (to 250k) = 2%
next 675k (to 925k) = 5%
next 575k (to 1.5m) = 10%
remainder >1,5m = 15%

2nd home = +3%
overseas buyers = +2%

500k and above = 15% when purchase by corp bodies

30
Q

Risk measurements (4)

A

SD = volatility, variability and degree of uncertainty
- measures total risk (systematic and specific)

coefficient of variation (CV) - measure of risk vs return
CV = % SD / % avg return
= risk / return

-1<correlation<1
shows linear relation of way assets move i n relation to eachother both strength and direction

covariance - describes way asssets move in relation to eachother only directional not strength

31
Q

holding period return

A

Holding period return = return earned over period investment wad held

= [income +(end val - initial val)] / initial val

32
Q

sharpe ratio

A

A
baso : excess return comparved to gov bond/total risk
calc of risk adjusted return
uses total risk - assumes no diversification
higher = greater risk adj return - better

sharpe ratio = (portfolio return - risk free return)/ portfolio stnd dev

risk free = gov bond
stnd dev = total risk

33
Q

treynor ratio

A

excess return compared to gov bond/market risk

(portfolio return - risk free)/beta of portfolio

type of risk adjusted return
systematic risk only, assumes diversification
higher = better

34
Q

information ratio

A

type of risk adj return for active funds
baso avg alpha/SD of alpha
= (portfolio return - benchmark return) / tracking error
higher = better

35
Q

synthetic risk and reward indicators

A

SRRI - included in KID
required by UCITS and PRIIP

risk reward measure, 1-7 score of volatility of returns (measured using NAV) over 5 years
lower score = lower risk(/reward)

36
Q

passive eq strat

A

buy and hold - infrequent adjustments, holding to mat then replace with similar

indexation
full rep - market cap weighted call constant
stratified samp - representative sample - sampling error
optimisation - mimic index characteristics
synthetic - swaps to track return
factor matching - secs selected based on chosen factors or risk

37
Q

passive bond strategy

A

duration switching - alters with expected changes in interest rate
cash flow matching
immunisation (duration matching)
laddering - buying bonds with range of maturities reducing Interest rate risk
bullet portfolios - durations close to liabilities
barbell - both short and long dated either side of liability
combination matching - matching early liabilities with cash flows and later with immunisation strat

38
Q

Fisher eq

Real money supply?

A

MV = PT
The real money supply is the total amount of money in the economy, adjusted for inflation by dividing by the average price of each transaction (M/P).

39
Q

Financial Bootstrapping

A

Bootstrapping is the practice of self-financing a business w/out involving outside investors

40
Q

tax on gains made in investment bonds
top slicing?

A

no tax on gains until chargeable event - taxed in year of event
can removed 5% per year and defer tax
20% tax already deducted so given tax credit - only HR and AR taxpayers have additional liability

can lead to tax paid at higher rate than if gains assessed annually - top slicing = remedy
occurs when gain takes indiv into HR/AR bracket
if chargeable gain takes income above 100k - PA not reduced

chargeable gain = cash in val + any 5% withdrawals - orig investment
divide gain by no. of years invested (top slicing)
add val yearly income - if basic then no additional liability
if HR/AR - tax amount above basic at 20%/25%
multiply liability by no. of years invested

41
Q

EIS and VCT
max investment
tax relief

A

EIS - £1 mil - 30% - 3 years - no CGT- no IHT if held >2 years before death
carry back tax relied
loss relief

VCT - 200k - 30% - 5 years
no divi tax, no CGT, yes IHT
no tax relief carry back

42
Q

NI classes

A

class 1 prim = employees
classs 1 sec - employers
class 2 - self employed profits under 6723
class 3 - vol
class 4 - self employed prof over 11909

43
Q

TWRR (for investor)

A

removes MWRR cash flow distortion by breaking up investment period into sub periods at each cash flow

TWRR = EV1/SV1 * EV2/SV2 * EVn/SVn -1
EV = end val
SV = start val

44
Q

pension tax relief

A

20%, 40% or 45% depending on marginal rate
annual allowance for £40,000 lost £1 for every £2 earned over £200k down to min of £4,000 @salary of £272,000

45
Q

SASS - small self administered scheme

A

company scheme - members usually directors
set uo by trust deed
tax relief higher of 3600/100% UK earnings

schemes under 12 members - exempt from trustees understanding of pensions act 2004

can borrow
- can’t exceed 50% of net market val of scheme
- secured
- no longer than 5 year term
- interest >1% above bank rate

shareholdings in sponsoring employer not >5%
total shareholdings of sponsoring employers not >20%

46
Q

CIS tax overview for fund

A

ALL NO CGT
eq CIS
20% income, SD

debt CIS
20% income, SD on eq

ITC
19% CT, SD on income

REIT
no income (90% prof redistributed), SDLT income

VCT
19% CT, SD

47
Q

CIS TAX FOR INVESTOR

A

eq CIS
gross DIV, GCT, no stamp duty

debt CIS
gross savings, CGT, no stamp duty

ITC
gross div, CGT, stamp duty (listed comp)

REIT
BR net non saving, CGT, stamp duty

VCT
no IT, no CGT, stamp duty on sale
hold for 5 years

48
Q

4 types of annuity

A

lifetime annuity - contract between insurance comp and pension scheme member, member hands over all/part of fund and insurance pays income for rest of life. can be fixed or index linked
- can be set up so annuity is fixed term even if member dies

impaired life annuity - higher amount to those with med conditions - reduced life expectancy

enhanced annuity - avail for smokers, overweight people, hazardous jobs - higher income lower life expectancy

deferred annuity - pensions under an occ scheme bought out with a deferred annuity - covered by FSCS in case of bankruptcy

49
Q

FRNs

A

bonds that pay variable interest linked to economy rate e.g SONIA, SOFR regularly adjusted
prices are less sensitive to changes in interest rates than fixed bonds - good during periods of IR volatility

50
Q

unit linked bonds

A

premium buys policyholder units in fund through a life company - policy val measured in no. of units
value can be fully linked to underlying funds
can have ‘min sum insured’

51
Q

with profit bonds

A

offer benefit payable at some future date (or death or encashment)

policyholder receives sum insured + any profits made by life company shared through bonuses

  • reversionary bonus - paid yearly
    terminal bonus - awarded at maturity or death
    lower volatility that with reg investments as bonuses are smoothed (some profit in good years half back to pay out in bad years)
52
Q

distribution bonds

A

distribution bonds separate income and capital unlike unit linked bonds
income from fund is placed in separate fund that can thence distributed regularly - investor can then encase units representing just the income portion of the bond

53
Q

pension tax relief

A

tax relief at MR
contributions treated as net of basic and HR/AR can claim addition relief
annual allowance is 40,000 gross - any contributions above are taxed at MR

adjusted income - total taxable income before allowances less reliefs
threshold income = same but without pension contributions

allowance down £1 for every £2 earned above adjusted income 240k or threshold income £200k down to min of £4,000

54
Q

LONG AND SHORT OPTIONS PROFIT AND LOSS

A

long call
- holding call. think prices rising. max profit unlimited, max loss = premium
short call
- writing call, think prices falling. max profit premium, max loss is unlim

long put
-holding put, think prices falling, max profit = strike- prem. max loss= premium
short put
- writing put, think prices rising. max profit = prem, max loss = strike - prem

55
Q

3 factors of multi factor model

what is multi factor model?

A

model that aims to explain main factors of funds return

Macro– factors such as inflation, interest rates, employment
Fundamental – factors such as earnings, dividend yield
Statistical – other factors such as using stock market indices

56
Q

arbitrage pricing theory vs capm

A

CAPM -
single factor (B) and more restrictive assumptions

APT
multi factor, more accurate, less assumptions
factors can be correlated :(
applies separate risk premium and separate beta to each factor

57
Q

fundamental vs technical analysis

A

fundamental
- used to find intrinsic val -compare to market val to see if over or under priced
- analysing fundamentals (company, management, financials), macro

technical
- doesn’t try to find intrinsic value - uses past prices to gen pricing patterns and buy/sell signals
assumes
-market discounts everything
- prices move in trends
- history repeats itself

58
Q

rental yield

A

= (gross rent - expenses) / (cost of prop including purchasing costs)

59
Q

initial yield (property)

A

current annual rent / val of prop incl purchasing costs

60
Q

CAP rate

A

ratio used to estimate val of income producing prop

= net op income / sales price or val of prop

61
Q

class I NIC

A

employers responsible for calculating deducting and paying
13.25%: £242 - £967/week
+3.25% xs of 967/week

62
Q

self employed NI

A

class 2
flat rate: £3.15 earnings are above the small profit threshold of £6,725 per year.

Class 2 NICs do not count towards the additional state pension, statutory sick pay or jobseeker’s allowance.

Class 4 NICs
10.25% on annual profits £12,570 - £50,270
3.25% on any profit over that amount.
Class 4 NICs do not count towards benefit entitlements.

IRT (9 decks)

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