Repeated mistakes Flashcards
AER
AER = (1 + (r / j)) ^j - 1
FV =
FV = PV x (1+r)^n
PV
PV = FV / [ (1+r)^n ]
compound interest
= deposit x compound factor
= deposit x (1+r)^n
discounting factor
= 1/compound factor
= 1/ (1+r)^n
PV annutity formula
PV = PMT x 1/r x (1 - 1/(1+r)^n)
PV of perpetuity
= perp payment / interest rate
FV annuity formula
FV = PMT x 1/r x [((1+r)^n)-1] x(1+r)
leading economic indicators
stock market 3-6 months
index of consumer expectations (1-2 months)
building permits
money supply
coincident economic indicators
change at same time as economy as a whole
GDP, retail sales, industrial production
lagging economic indicators
unemployment
1-6 months
CAPM
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
primary, secondary and tertiary sectors
Primary Sector - raw materials/extraction,
Secondary - manufacture,
Tertiary - service industries/ distribution
physical delivery of derivs
Warrants always physically delivered
Futures and options either delivered or cash settled depending on contract
CFDs are always cash settled.
Intrinsic val of options
Time val of options
Intrinsic value = amount in the money
Time value = Premium - Intrinsic Value
physical ETF vs synthetic ETF
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
SEIS (seed enterprise investment scheme)
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
modified Macaulay duration
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)
Macaulay duration
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
RY/running yield/ flat yield/ income yield
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
Nominal yield
gross annual coupon / nominal value
GRY
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
EPS
EPS = net income / no. of outstanding ordinary shares
net income = earnings/profit available to ordinary shareholders
EPS steady growth indicates successful consistent company
PE ratio
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
Earnings yield
= EPS / share price
= (net income / no. of ordinary shares)/ share price
Dividend yield
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
dividend cover
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
gearing ratio
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
residential SDLT
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
Risk measurements (4)
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
holding period return
Holding period return = return earned over period investment wad held
= [income +(end val - initial val)] / initial val
sharpe ratio
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
treynor ratio
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
information ratio
type of risk adj return for active funds
baso avg alpha/SD of alpha
= (portfolio return - benchmark return) / tracking error
higher = better
synthetic risk and reward indicators
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)
passive eq strat
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
passive bond strategy
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
Fisher eq
Real money supply?
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).
Financial Bootstrapping
Bootstrapping is the practice of self-financing a business w/out involving outside investors
tax on gains made in investment bonds
top slicing?
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
EIS and VCT
max investment
tax relief
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
NI classes
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
TWRR (for investor)
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
pension tax relief
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
SASS - small self administered scheme
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%
CIS tax overview for fund
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
CIS TAX FOR INVESTOR
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
4 types of annuity
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
FRNs
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
unit linked bonds
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’
with profit bonds
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)
distribution bonds
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
pension tax relief
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
LONG AND SHORT OPTIONS PROFIT AND LOSS
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
3 factors of multi factor model
what is multi factor model?
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
arbitrage pricing theory vs capm
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
fundamental vs technical analysis
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
rental yield
= (gross rent - expenses) / (cost of prop including purchasing costs)
initial yield (property)
current annual rent / val of prop incl purchasing costs
CAP rate
ratio used to estimate val of income producing prop
= net op income / sales price or val of prop
class I NIC
employers responsible for calculating deducting and paying
13.25%: £242 - £967/week
+3.25% xs of 967/week
self employed NI
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.
