Topic 1: Investment Alternatives

Question 1

Investors will try to increase return and reduce what?

Answer 1

Reduce risk

Question 2

What does portfolio analysis look at?

Answer 2

Doesn’t look at individual securities in isolation rather looks at the individuals contribution to the portfolio

Question 3

Direct Investment - Non marketable financial assets can’t be traded on _______________ or can’t be sold onto another _____?

Answer 3

No traded on any marketable market exchanges

Question 4

Direct Investment - What is the Money Market

Answer 4

provides short-term funds. deals in short-term loans, generally for a period of a year or less(highly liquid). Low risk.

instruments e.g. T-Bills and Commercial Bills

Question 5

Instruments

Answer 5

an instrument is a tradable asset, or a negotiable item, such as a security

Question 6

Direct Investment - What are Fixed Income Securities

Answer 6

debt instruments that pay a fixed amount of interest—in the form of coupon payments—to investors.

e.g. Bonds

Question 7

Direct Investment - What are Equity Securities?

Answer 7

represent ownership claims on a company’s net assets

common stock and preferred stock

Question 8

What is Common stocks

Answer 8

represents equity ownership in a corporation

Shareholders

Question 9

What is a preferred stock?

Answer 9

has characteristics of both stocks and bonds.
No voting rights to shareholders.
Dividend Payout before common stock

Question 10

Direct Investment - What are Derivatives

Answer 10

Things that the return is derived from another instrument

E.g. Options and Futures

Question 11

What are Options

Answer 11

Options trading is how investors can speculate on the future direction of the overall stock market or individual securities/

Question 12

What are stock options

Answer 12

the price of a given stock dictates the value of the option contract.

Question 13

What is a Call option?

Answer 13

A call option gives you the opportunity to buy a security at a predetermined price by a specified date.

Question 14

What is a Put option?

Answer 14

allows you to sell a security at a future date and price.

Question 15

Strike price and expiration date

Answer 15

Predetermined price. . Traders have until an option contract’s expiration date to exercise the option at its “strike price”.

Question 16

The price to purchase option is called a ______ and its calculated based on the underlying security’s _________.

Answer 16

a premium, and it’s calculated based on the underlying security’s price and values.

Question 17

Intrinsic Value

Answer 17

is the difference between an option contract’s strike price and current price of the underlying asset.

Question 18

Extrinsic Value

Answer 18

represents other factors outside of those considered in intrinsic value that affect the premium, like how long the option is good for

Question 19

What does the term in-the-money and out-of-the-money mean?

Answer 19

Depending on the underlying security’s price and the time remaining until expiration, an option is said to be in-the-money (profitable) or out-of-the-money (unprofitable).

Question 20

Call Option: Once the underlying asset’s price has exceeded the ____ , you can sell the call option which is called _____ and earn the difference between the ____ you paid and the current premium. Alternatively, you can exercise the option to buy the _____ asset at the agreed-upon _____.

Answer 20

break-even price, closing your position, premium, underlying strike price

Question 21

Put options. Once the asset’s ___ has fallen below the break-even level, you can ___ the options contract and therefore _________and collect the difference between the _____ you paid and the current premium. Alternatively, you can exercise the option to _____ the underlying asset at the agreed-upon _____.

Answer 21

price, sell, closing your position, premium, sell, strike price

Question 22

What are Futures?

Answer 22

are a type of derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price

E.g. like a spot sale at a future date, but terms are specified
now

Question 23

What is Hedging against investment risk

Answer 23

means strategically using financial instruments or market strategies to offset the risk of any adverse price movements.

Question 24

The futures markets typically use ____. Leverage means that the trader does not need to put up 100% of the contract’s _______ when entering into a trade. Instead, the broker would require an ______, which consists of a _____ of the total contract value.
3

Answer 24

High leverage, value amount, Initial Margin amount, fraction

Question 25

Contract for Difference (CFD)

Answer 25

Bet on the difference between future price and now

Question 26

What are indirect investments

Answer 26

under which the investor through an intermediary financial institution or by way of buying shares and stock[, and] in which the investor is not directly involved in management of the enterprise

Question 27

Indirect investment: Open End Funds (Mutual Funds)

Answer 27

Shares continue to be sold to the public at Net Asset Value (NAV) after initial sale that capitalizes the company., Shares may be sold back to the company at NAV

Question 28

What are treasury bills?

Answer 28

A Treasury Bill (T-Bill) is a short-term U.S. government or crown (NZ) debt obligation backed by the Treasury Department with a maturity of one year or less

Question 29

Actual Annualized Yield T - Bill Formula?

Answer 29

= (Face Value – Market Value/Market Value ) * (365/# of

Days)

Question 30

Discount Yield T- Bill formula?

Answer 30

= (Face value – Market Value/Face Value) * (360/#

of Days)

Question 31

Effective Annual Interest rate: EAR

Answer 31

= (1+(Par Value – Market Value/Market value))^(365/#of

Days) - 1

Question 32

Describe EAR?

Answer 32

This is the interest rate you actually get when you can get

interest on interest – the compounding effect

Question 33

Describe Realised Annual Return

Answer 33

This is the amount of return you actually got, after you have
bought and sold the asset

Question 34

Realised Annual Return

Answer 34

= ((Psell/Pbuy)-1)(365/# of Days)100

Question 35

What is the reason why realised annual return can be higher or lower than the expected return?

Answer 35

due to the fact that if the yield changes
from when you bought it to when you sold it, then the price
will change inversel

Question 36

Price of a T-Bill

Answer 36

Note that the prices move inversely to the Yield

Par Value/(1+r *(#ofdays/365))

Question 37

What are commercial Bills

Answer 37

These are Documents comprising of a promise from the borrower to
repay the lender

Question 38

Why are commercials sold at discount to face value?

Answer 38

Because of time value of money and risk

Question 39

What is yield

Answer 39

This is the discount per year and is applied to all cash flows

Question 40

When the maturity date draws nearer the price and par value will?

Answer 40

converge

Question 41

What is yield to maturity

Answer 41

The minimum return expected from holding a bond to
maturity and re-investing all cash flows at the same interest
rate

Question 42

Yield to Maturity is determined by _____, therefore it also measures an investors required ________

Answer 42

market price, rate of return