Security Analysis Quiz 3 Flashcards
Investment Grade Bonds
BBB or Baa and above
Speculative Grade/Junk Bonds
Below BBB or Baa
Convexity
A 5% decrease in YTM creates a much larger price increase than a 5% increase in YTM. Also, the first percentage increase/decrease is greater than subsequent increase/decreases.
Yield to Maturity (bonds)
One rate that sets the present value of all the future cash flows equal to the current value.
Bond stripping
Buy a long-term bond and sell off rights to each individual cash flow year.
Call Option
gives its holder the right to buy an asset:
At the exercise or “strike” price
Valuable upon exercise if market value > strike price
Put Option
gives its holder the right to sell an asset:
At the exercise or “strike” price
Valuable upon exercise if market value < strike price
Call Option (long/short)
Call Option gives its holder the right to buy an asset:
Long:
Buy the call –> right to buy shares at exercise price
Short / write:
Sell the call –> must deliver shares
Put Option (long/short)
gives its holder the right to sell an asset:
Long:
Buy the put –> right to sell shares
Short / write:
Sell the put –> must buy shares at exercise price
Protective Put
Own the shares and buy a put. Used as insurance against price declines. Cost of premium is price of put.
Covered Call
Own stock and write calls against it; upside potential, no downside protection. Call writer gives up any stock value above X in return for the initial premium. Can earn extra profit if planning to sell underlying asset at a set price anyway.
Long Straddle
Buy long call and put with same exercise price and maturity.
Long Straddle Payoff
If St < X, straddle = put payoff - premiums.
If St > X, straddle = call payoff - premiums.
