Topic 1: Investment Alternatives Flashcards
Investors will try to increase return and reduce what?
Reduce risk
What does portfolio analysis look at?
Doesn’t look at individual securities in isolation rather looks at the individuals contribution to the portfolio
Direct Investment - Non marketable financial assets can’t be traded on _______________ or can’t be sold onto another _____?
No traded on any marketable market exchanges
Direct Investment - What is the Money Market
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
Instruments
an instrument is a tradable asset, or a negotiable item, such as a security
Direct Investment - What are Fixed Income Securities
debt instruments that pay a fixed amount of interest—in the form of coupon payments—to investors.
e.g. Bonds
Direct Investment - What are Equity Securities?
represent ownership claims on a company’s net assets
common stock and preferred stock
What is Common stocks
represents equity ownership in a corporation
Shareholders
What is a preferred stock?
has characteristics of both stocks and bonds.
No voting rights to shareholders.
Dividend Payout before common stock
Direct Investment - What are Derivatives
Things that the return is derived from another instrument
E.g. Options and Futures
What are Options
Options trading is how investors can speculate on the future direction of the overall stock market or individual securities/
What are stock options
the price of a given stock dictates the value of the option contract.
What is a Call option?
A call option gives you the opportunity to buy a security at a predetermined price by a specified date.
What is a Put option?
allows you to sell a security at a future date and price.
Strike price and expiration date
Predetermined price. . Traders have until an option contract’s expiration date to exercise the option at its “strike price”.
The price to purchase option is called a ______ and its calculated based on the underlying security’s _________.
a premium, and it’s calculated based on the underlying security’s price and values.
Intrinsic Value
is the difference between an option contract’s strike price and current price of the underlying asset.
Extrinsic Value
represents other factors outside of those considered in intrinsic value that affect the premium, like how long the option is good for
What does the term in-the-money and out-of-the-money mean?
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).
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 _____.
break-even price, closing your position, premium, underlying strike price
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 _____.
price, sell, closing your position, premium, sell, strike price
What are Futures?
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
What is Hedging against investment risk
means strategically using financial instruments or market strategies to offset the risk of any adverse price movements.
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
High leverage, value amount, Initial Margin amount, fraction
Contract for Difference (CFD)
Bet on the difference between future price and now
What are indirect investments
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
Indirect investment: Open End Funds (Mutual Funds)
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
What are treasury bills?
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
Actual Annualized Yield T - Bill Formula?
= (Face Value – Market Value/Market Value ) * (365/# of
Days)
Discount Yield T- Bill formula?
= (Face value – Market Value/Face Value) * (360/#
of Days)
Effective Annual Interest rate: EAR
= (1+(Par Value – Market Value/Market value))^(365/#of
Days) - 1
Describe EAR?
This is the interest rate you actually get when you can get
interest on interest – the compounding effect
Describe Realised Annual Return
This is the amount of return you actually got, after you have
bought and sold the asset
Realised Annual Return
= ((Psell/Pbuy)-1)(365/# of Days)100
What is the reason why realised annual return can be higher or lower than the expected return?
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
Price of a T-Bill
Note that the prices move inversely to the Yield
Par Value/(1+r *(#ofdays/365))
What are commercial Bills
These are Documents comprising of a promise from the borrower to
repay the lender
Why are commercials sold at discount to face value?
Because of time value of money and risk
What is yield
This is the discount per year and is applied to all cash flows
When the maturity date draws nearer the price and par value will?
converge
What is yield to maturity
The minimum return expected from holding a bond to
maturity and re-investing all cash flows at the same interest
rate
Yield to Maturity is determined by _____, therefore it also measures an investors required ________
market price, rate of return
