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CFP Exam > Investments > Flashcards

Investments Flashcards

1
Q

What are types of unsystematic risk?

A

Accounting
Business
Country
Default
Executive
Financial
Governmental/Regulation

Remember ABCDEFG
These risks are diversifiable

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2
Q

What is the percent liklihood a return will be within 1, 2 or 3 standard deviations away from the average?

A

1 - 68%
2 - 95%
3 - 99%

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3
Q

What is beta?

A

A measure of systematic/market risk.

It represents the relationship between a portfolio and the market.

How our portfolio returns are related to market returns

If beta = .88
When market goes up 10%, portfolio goes up 8.8%
(The beta of the market is always 1)

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4
Q

What is r2?

A

R squared is the correlation between a portfolios and the market.

What percent of return is due to the market.

If correlation = .8
r-squared = 64%

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5
Q

When is beta an appropriate measure of risk?

A

Only when r-squared is greater than .70

r-squared is the correlation coefficient squared.

If it’s less than .7 than beta is NOT an appropriate measure of risk. -> Use standard deviation to measure risk instead.

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6
Q

What is the efficient frontier?

A

Harry Markowitz

The portfolios that offer the highest rate of return based on the risk of the portfolio - these are the most efficient combinations of risky assets.

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7
Q

What is the market portfolio?

A

The optimal portfolio. Connects the risk free rate with the efficient frontier.

The Capital Market line maps from the risk free rate - helps determine the best portfolio based on the risk that you’re comfortable.

Only works on a well diversified portfolio with systematic risk.

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8
Q

What is market risk premium?

A

The risk over the risk free rate.

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9
Q

What is the required rate of return when the risk free rate of return is 3%, the beta is 1.2 and the risk premium is 8%

A

rm = market return
rm-rf = market risk premium

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10
Q

What is duration?

A
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11
Q

If you buy a put you..

A

have the RIGHT to sell a security at a certain price.

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12
Q

If you buy a call…

A

you have the RIGHT (but not obligation) to buy the underlying asset at a predetermined price at a pre determined time.

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13
Q

If you sell a put…

A

You’re agreeing, and you’re obligated, to sell a security at a specific price within a specific time period

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14
Q

What is a long stock position?

A

Someone who has a long position has the right to buy the asset/commodity for $x.

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15
Q

What is the value of the option when “in-the-money”?

A

An in-the-money call option is when the strike price is less than the market price. Does not take premium into account. Profit.

Ex: Strike price - $50, market price - $55

  • You’re in the money because you can redeem your call and profit $5

At-the-money: prices are equal
Out-of-the-money: price is less - no profit

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16
Q

The longer the timeframe on an option, the ____(greater/less) the value

A

Greater.

You’ll pay more for a longer time frame to execute an option.

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17
Q

How to value an option?

A

Add the fundamental value plus the time value.

Fundamental value is the difference between strike and market price. Fundamental value can’t be negative.

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18
Q

If you’re long on a futures contract of corn..

A

You benefit if the price goes up because you have a locked in price.

If you’re short, you’ve agreed to sell at a certain price. Benefit when price goes down.

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19
Q

What is short selling?

A

Sell at a higher price with the hope that market price drops and you can fulfill the order with cheaper stock.

Must have a margin account

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20
Q

What is the initial margin?

A

The amount that an investor must contribute to enter into a margin position.

Regulation T by the Fed requires that it must be 50% or greater.

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21
Q

At what price does an investor receive a margin call price?

A

Formula to memorize

Loan/(1-maintenance margin)

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22
Q

What is the value line?

A

Ranks stocks on a scale of 1 to 5 based on timeliness and safety. 1 is the highest

Morning star is 1 to 5 stars, 5 is the highest

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23
Q

What is the dividend date?

A

The date you receive the dividend

The ex-dividend date is the day before the day of record. If you buy on that day you don’t get the dividend.

Note that it’s BUSINESS DAYS

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24
Q

Requirements for a cash dividend do be qualified and received capital gains treatment

A
  1. Paid by American company or qualifying foreign company
  2. Not specifically listed by the IRS as a non-qualifying dividend
  3. Held for more than 60 days during the 121 day period that begins before the ex-dividend date.

note that a stock dividend is not taxable to the shareholder.

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25
Q

What is the Securities Act of 1933?

A

Paper Act

Issuance of new securities (IPOs)

secondary offering (but not secondary market) - so a company is selling more shares into the market

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26
Q

What is the Securities Act of 1934?

A

People Act - one investor to another investor

Regulates the secondary market and trading of securities

Created the SEC

1934 - FOR the people

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27
Q

What is the Investment Company Act of 1940

A

Authorized SEC to regulate investment companies.

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28
Q

What are treasury bills?

A

Denominations of $100
Less than 1 year to maturity, direct obligation of the government

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29
Q

What is commercial paper?

A

Short term loans between corporations
Maturities of 270 days or less
Denominations of $100k

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30
Q

What is a Certificate of Deposit?

A

Time deposit at a bank with a set interest rate and maturity date

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31
Q

What is the coefficient of variation?

A
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32
Q

What is the information ratio?

A

Looks at the portfolio return versus the return of a benchmark

Risk measure is standard deviation

RELATIVE risk measure

the higher the better

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33
Q

How do you calculate geometric mean?

A
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34
Q

What is regulation D?

A
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35
Q

What is the investment policy statement?

A

Establishes client objectives and limitations on investment manager.

Return requirements

Risk tolerance

Constraints including:
- Time horizon
- liquidity needs
- taxes - is the account taxable?
- Laws and regs - ex when held in trust
- Unique Circumstances - anything unique to the client

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36
Q

What is the Dow?

A

Index
Price weighted average
Does not include market capitalization

30 stocks

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37
Q

What is the S&P 500?

A

Value weighted index - does incorporate market capitalization

large cap stocks

Russel 2000-small cap

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38
Q

What is standard deviation?

A

Measures systematic AND unsystematic risk.

The bigger the most risky.

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39
Q

How do you calculate the standard deviation?

A

Use calculator.

input each number followed by sigma key

Shift 8 for standard dev

Shift 7 for mean

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40
Q

How do you calculate coefficient of variation?

A

standard deviation / mean

(standard deviation per unit of mean return)

The more coeffecient of variation, the more risk

The lower CV is a better mix of risk and return

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41
Q

What is the correlation?

A

Perfectly negative correlation (-1) - securities move opposite of each other. No risk

No correlation (0)

Perfectly positive (+1) move exactly like each other

Note: You don’t need a negative correlation to be diversified! Just something less than 1. The closer to 0 the better.

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42
Q

What is covariance?

A

measures risk of a security reletive to another security.

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43
Q

What is beta?

A

Measure of systematic risk in a diversified portfolio.

the beta of the market is 1.

Beta greater than 1 is more volatile than the market.

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44
Q

What is the Coefficient of Determination?

A

R2 – square the correlation coefficient

Measures how much return is due to the market

If R2 is over 70%, then beta is an appropriate measure of risk
- this means you are an appropriate measure of risk
-if less than 70%, you’ll want to use something else to measure risk

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45
Q

What is the Capital Market Line?

A
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46
Q

What is the capital asset pricing model?

A

AKA SML

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47
Q

A security is _____ if it is over the SML

A

Undervalued

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48
Q

How do you measure risk of a portfolio?

A

Use the standard deviation of a portfolio formula on the formula sheet.

W = weighting
σ = standard deviation

Exam tip: take the average of the standard deviation. Eliminate answers above this average because

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49
Q

What is the information ratio?

A

IR = α /σ (On formula sheet)

A relative risk-adjustmed performance measure
The higher the better
Measure the excess return and consistency provided by a fund manager

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50
Q

What is the Treynor Ratio?

A

Measures reward achieved relative to risk (beta risk)

Just like Sharpe but uses beta as the denominator
The higher the better
Because it uses beta, r2 needs to be > .7

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51
Q

What is the Sharpe Ratio?

A

Provides a measure of portfolio performance

The higher the Sharpe the better

Does not measure a portfolio managers performance against the market

Relative risk measure (must compare it to something)

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52
Q

What is Jensens Alpha?

A

Measures how well a portfolio manager performed based on the risk that they took.

The higher the alpha the better

Negative alpha means fund underperformed the market

Absolute measure - so doesn’t need to be compared to anything but itself

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53
Q

What are Sharpe aand Treynor ratios?

A

Relative performance measure. Use Sharpe when r2 is low- Sharpe doesn’t use beta. Use Treynor

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54
Q

What is Arbitrage Pricing Theory?

A

tries to take advantage of pricing imbalances

Does not use beta or standard deviation!!!

Attempts to take advantage of pricing imbalances
It’s a multi factor model
Inputs are factors such as inflation and expected returns and their sensitivity to those factors.

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55
Q

What is holding period return?

A

NOT a compounded rate of return
No consideration of time
Might be part of a margin return question but otherwise not that useful

This is on the exam sheet

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56
Q

What is the effective annual rate?

A

On formula sheet

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57
Q

What is the Geometric Average?

A

On formula sheet

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58
Q

What is weighted average?

A
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59
Q

If NPV is 0, do. you invest?

A

yes

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60
Q

What is the difference between time weighted and dollar weighted return?

A
  • Time weighted is used by mutual fund wholesalers
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61
Q

What is the dividend discount model?

A

In formula sheet
measures intrinsic value

r = the required rate of return for the stock
g = growth rate of stock

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62
Q

In the dividend discount model, if the required rate of return decreases, the stock price will…
If the dividend is expected to increase, the stock price will..

A

Increase

increase

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63
Q

What is the expected rate of return?

A
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64
Q

What is the PE ratio?

A

PE = stock price / earnings per share

Represents how much an investor will pay for each dollar of company earnings

companies that grow fast have a high P/E ratio - tech

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65
Q

What is the dividend payout ratio?

A

Dividend payout ratio = common stock dividend / earnings per share

The higher the dividend payout ratio, typically the more mature the company. In early years companies are spending on growth so paying a smaller dividend.

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66
Q

What is Return on Equity?

A

Earnings per share / stockholders equity per share

Stockholders equity per share = total equity / shares outstanding

A typical ROE is between 18-25%

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67
Q

What is Dividend Yield?

A

Dividend per share / stock price

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68
Q

What is the random walk theory?

A

the behavior of stocks resembles a random walk. They are “unpredictable”

Everything you need is priced in

Go for index funds

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69
Q

What is the weak form of efficient market hypothesis?

A

Historical info will not help investors achieve above average returns. Rejects technical analysis.

..but can be beat by fundamental analysis or insider knowledge (not insider trading)

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70
Q

What is the semi-strong form of efficient market hypothesis

A

Historical AND public info will not help investors

Technical and fundamental analysis are already priced in so they don’t work

Only insider info might give you advanatage

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71
Q

What is the strong form of efficient market hypothesis?

A

There’s nothing you can do

Historical, public, and private info will not help investors

Rejects technical, fundamental, AND inside info.

Just go with an index

It’s efficient! even if you’re cheating with insider info

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72
Q

What are market anomalies?

A

January effect
Small firm effect
Value line effect
P/E effect
AFC/NFC
Presidential Elections

Market anomalies do not support the EMH or any of the three forms

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73
Q

What is an active investment strategy?

A

markets are inefficient
Investors can achieve above average returns through active investing

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74
Q

What is a EE bond?

A

Used to be in paper but stopped this in 2011. Were sold at a 50% discount

Now they are treasury direct at 100% par

$10k max annually

Covers qualified post secondary only - college and grad
Qualified education expenses include tuition but not room and board or books
30 year max maturity. Guaranteed to double in value in 20 years

To qualify for excluding accrued interest from taxes
- owner must be at least 24 at time of purchase
- child can be named as POD bene
- Magi phase out

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74
Q

What is a I bond?

A

Used to be in paper but stopped this in 2011. Were sold at a 50% discount

Now they are treasury direct at 100% par

$10k max annually

Covers qualified post secondary only - college and grad
Qualified education expenses include tuition but not room and board or books
30 year max maturity. Guaranteed to double in value in 20 years

To qualify for excluding accrued interest from taxes
- owner must be at least 24 at time of purchase
- child can be named as POD bene
- Magi phase out
> Single $85,800 to $100,800
>MFJ/QW taxpayer - $128,650 to $150

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75
Q

What are maturity periods of treasury bills, notes, and bonds?

A

Bills: < 1 year
Notes: 2-10 years
Bonds: 10+ years

3 month t bill is the risk free rate

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76
Q

What are STRIPS?

A
77
Q

What are TIPS?

A
78
Q

What are Series I bonds?

A
79
Q

What are secured bonds?

A

Mortgage bonds
Backed by a pool of mortgages
Payment consists of both principal and interest
Biggest risk: default and prepayment risk
Investors are divided into tranches (a-z)

80
Q

What are unsecured bonds?

A

There is no asset to seize in case of default! More risky than

AKA Debentures
Subordinated debentures
Income bonds
Variable interest rate bonds

81
Q

What are Muni Bonds?

A

General Obligation (GOs) that are backed by full faith, credit and taxing authority

Revenue Bonds - backed by a specific project like bay bridge. No full faith backing

Private activity bonds - stadiums

Muni bonds are not taxable at the federal, state, and local level if you live in the issuing state
Bonds issued by territories (Puerto Rico) also not taxed

Note that private activity bonds are still subject to AMT

82
Q

What is the formula for tax equivalent yield

A

Don’t forget to add in 3.8% medicare tax when relevant!!

83
Q

How are bonds taxed at the Fed, State/Local, and AMT levels?

A
84
Q

How are treasury securities taxed?

A

ARE taxed at fed level.
They ARE NOT taxed at state level

85
Q

What is the current yield?

A

The annual payment divided by CURRENT price of the bond.

86
Q

How do you calculate Yield to Maturity?

A

Discount the stream of cash flows (interest payments plus par value repayment) to current value.

Use N, PV, PMT, FV, I
- make sure N is 2 payments per year
- PV is current market price of the bond
- PMT is twice a year
- FV is always $1000
- Solve for i (don’t forget to multiple by 2 for twice annual payments)

87
Q

What’s the relationship between current yield and yield to maturity in a discount bond?

A

Current yield will be less than yield to maturity

88
Q

How do you calculate yield to call?

A

Same as YTM but different time and future value

Discount the stream of cash flows (interest payments plus par value at call) to current value.

Use N, PV, PMT, FV, I
- make sure N is 2 payments per year
- PV is current market price of the bond
- PMT is twice a year
- FV is always $1000
- Solve for i (don’t forget to multiple by 2 for twice annual payments)

89
Q

What is accrued interest on a bond?

A

Buyer of the bond pays the seller for accrued interest since last coupon payment

Buyer receives a 1099

Figure out how much of a half year he didn’t own the bond

Buyer gets a deduction equal to the amount of interest paid to the seller

90
Q

What are features of an original issue discount bond?

A
  • the bond increases at a set rate each year
  • the difference between the maturity value and the original discount price is known as the OID
  • the bond’s earnings are treated as tax exempt interest income
  • The bond was issued at a discount to its par value
91
Q

What is phantom income tax on a bond?

A

When a discounted zero coupon is growing in value, you pay tax on the growth.

Therefore, it’s better to hold these in tax qualified accounts

92
Q

What is the liquidity preference theory?

A

The yield curve results in lower yields for shorter maturities because an investor prefers liquidity and is willing to pay for liquidity in the form of lower yields

93
Q

What is market segmentation theory?

A

The yield curve depends on supply and demand at a given maturity.

94
Q

What is expectations theory?

A

The yield curve reflects investors inflation expectations. Typically, since investors are uncertain or believe that inflation will be higher in the future, long term yields are higher than short term yields

95
Q

What is the unbiased expectations theory?

A

Today’s long term interest rates already reflect expectations about future short term interest rates.

Long term rates are geometric averages of current and expected future shorter term interest rates.

96
Q

How do you calculate future interest rates based on UET?

A
97
Q

What is Bond Duration?

A

Duration is a bonds price sensitivity to changes in interest rate.

The moment in time that an investor Is immunized from interest rate and reinvestment rate risk — the time when the investor receives all the coupon and principal payments back.

The longer the duration, the more volatile the bond.

Duration should equal the investors time horizon

98
Q

How do you calculate bond duration?

A
99
Q

How do you estimate the price of a bond with duration?

A
100
Q

What is preferred stock?

A

Has debt and equity features

Debt features:
- stated par value
- stated dividend rate as a percentage of par

Equity features:
- Price of bond moves with price of common stocks

Differences
- No maturity of bond

Corporate investors benefit from these because of THE DIVIDEND RECEIVED DEDUCTION – If an ownership company has a subsidiary, and the subsidiary pays a dividend, the owner company can exclude 65% of the dividend income

101
Q

What is a convertible bond?

A

Convertible to stock

Conversion value is the value of the convertible bond in terms of the stock that it can be converted to

Companies that are trying to reduce interest costs. They might be bearish on their own equity

102
Q

How do you valuate property?

A

Use Net Operating Income.

Value = NOI/Capitalization Rate

NOI = Net Income + Depreciation + Interest Expense (financing expenses)

or

NOI = Gross Income - Operating Expenses

103
Q

What are 12b-1 fees

A

For marketing

104
Q

What are A shares?

A

-Front end load
-12b-1 fees

105
Q

Why are ETFs popular?

A

More tax efficient because

106
Q

What are REITS?

A

They pay ordinary dividends
90% of the REIT investment income must be distributed every year
Three types:
1. Equity REITS
2. Mortgage REITS
3. Hybrid

107
Q

What are American Depository Receipts?

A

ADRs are foreign stock held in domestic bank’s foreign branch
Trade on the US exchange and denominated in US dollars

ADRs do NOT eliminate exchange rate risk

108
Q

What are features of Crypto currency?

A

Virtual
No bank or country
Taxed as property
Not widely excepted
Limited “Coins”

109
Q

What are LEAPs?

A

Longer versions of options

110
Q

Why would someone buy a call option?

A

They are bullish on the stock

111
Q

What is a straddle?

A

A long straddles is when an investor buys a put and a call option. They are expecting volatility but they aren’t sure which direction

112
Q

What is the black/Scholes model?

A

Only for call options
Considers a bunch of variables
- current price

113
Q

What is the Put/Call Parity model?

A

attempts to value a PUT based on a call option

114
Q

What is the Binomial Pricing Model?

A

Explains prices of options based on the underlying asset price moving in TWO directions

115
Q

What are Warrants?

A

-warrants are essentially call options issued by the corporation
-Much longer period - 5-10 years
- Warrants are not standaridzed

Issue a warrant to buy..

116
Q

Differences between futures and options?

A

A future is an obligation

117
Q

How are muni bonds insured?

A

Municipal Bond Insurance Association

118
Q

How would a fundamental analyst define the intrinsic value of common stock?

A

The discounted value of all future dividends

119
Q

if the market risk premium were to increase, the value of common stock would

A

decrease to provide investors with compensation for the increased risk associated with the market risk premium increasing.

120
Q

American Depository Receipts are used to

A

Trade foreign securities in the US market

They are denominated in USD
They do not eliminate currency or exchange rate risk

121
Q

What are bond swaps?

A

Selling one bond and using the proceeds to buy another

  • A substitution swap is designed to take advantage of a bond that is perceived as similar
  • Rate anticipation swaps are based on forecast of general interest rate changes
  • The yield pickup swap is designed to change the cashflow of the portfolio by exchanging similar bonds that have different coupon rates
122
Q

What risks are associated with mortgage backed securities?

A
  • purchasing power risk
  • prepayment risk
  • interest rate risk
  • default risk
123
Q

What are the lengths of treasury
bills
bonds
notes

A

bills - up to 52 weeks
notes - 2-10 years
bonds - 10+ years

124
Q

Type of bond a company would use to finance equipment?

A

Equipment Trust Certificate

– the equipment serves as collateral

125
Q

The lower the coupon,

A

the longer the duration and the more volatile the bond.

126
Q

Who establishes the margin requirement?

A

Fed Reserve

Brokerage firms might have their own as well

127
Q

Smallest increment of a T Bill?

A

$!00

128
Q

The max maturiity on a treasury note is…

A

10 years

129
Q

Commercial paper

A
  • short term debt security issued by corporations in the open market
  • less than 270 days to maturity
  • avoid SEC registration
130
Q

What is a long hedge?

A

the investor owns (buys) the futures contract to insure a certain price of the commodity that they don’t own yet.

Hedging is taking an opposite futures position than the investors inherent underlying position.

Orange juice maker hedges oranges.

131
Q

Municipal bonds that are backed by the income from specific projects are known as:

A

Revenue Bonds

132
Q

What is the fourth market?

A

The fourth market is the market where corporation and institutional investors deal directly with one another.

133
Q

What is the formula for geometric mean?

A

Geometric mean is always lower than the arithmetic means

134
Q

What is the Securities Investor Protection act of 1970?

A

The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of brokerage house failures.

135
Q

What is the Investment Advisers Act of 1940?

A

The Investment Advisers Act of 1940 requires that person or firms advising others about securities investment must register with the Securities and Exchange Commission.

136
Q

What is the Securities Act of 1933?

A

The Securities Act of 1933 regulates securities in the primary markets.

137
Q

Whats the difference between strategic and tactical asset allocation?

A

Strategic asset allocation is concerned with allocating the wealth of a client among various asset classes, consistent with the clients’ investment objectives, time horizons and risk preferences.

TIMING Tactical asset allocation is concerned with shifting wealth between asset classes to take advantage of expected price level changes (timing) arising from broad movements in the business cycle.

138
Q

What is the formula for NOI?

A

NOI = Net Income + Interest + Depreciation

(ADD interest/depreciation don’t subtract)

Net Income =

139
Q

The form of technical analysis that utilizes Advances and Declines (also known as Breadth of the Market) as an indicator is known as:

A

Price Indicator

140
Q

What are requirements as part of the due diligence process where securities investments are concerned?

A

Company management.
Financial track record of the firm.
Company status (private or public)
Company stability.
Accounting procedures used.

There are more

141
Q

What is Riding the Yield Curve?

A

Riding the yield curve refers to the purchase of debt instruments in anticipation of fluctuations in the rates of return on both long and short-term instruments. Rising rates of interest require repositioning a portfolio in advance of the rise in order to avoid significant price drops. These moves are based on anticipated changes in the yield curve.

142
Q

What is liquidity preference theory?

A

Liquidity preference states that investors prefer liquidity, therefore, short-term money pays less.

143
Q

What is market segmentation theory?

A

The market segmentation theory states that supply and demand explain at various maturities the shape of the yield curve.

144
Q

What is expectations theory?

A

The theory of the Yield Curve that attempts to explain the yield curve based upon future rates of inflation.

145
Q

Which federal agency security is backed by full faith, credit, and taxing power of the US gov?

A

Ginnie Maes!

146
Q

According to a fundamental analysis, the intrinsic value of a share of common stock is:

A

The discounted value of all future dividends.

147
Q

How does interest rate risk impact a bond that is held to maturity?

A

It doesn’t! Because the investor gets full par value at maturity.

148
Q

What is the intrinsic value of a put?

A

Intrinsic value of a put = Strike price - stock price

Can’t be less than $0!

Don’t include the cost of the put

149
Q

What is a spread?

A

Purchasing a put and a call at different prices

150
Q

What is a strip?

A

Two puts are purchased and one call. The price and time are the same

151
Q

What is a strap?

A

Two calls and one put are purchased at the same price and time

152
Q

What is a straddle?

A

A put and a call are purchased for the same price and time

153
Q

What are types of annuities?

A

Immediate: purchase and start receiving payments

Deferred: Two phases, accumulation then annuitization. You pay for it over x years then get paid for remainder

Flexible premium deferred annuity (FPDA): Allows insured to vary the premiums paid. Retirement income function of what they paid into it

Single Premium Annuity (SPDA): Lump sum. Can use LIF proceeds

154
Q

What is the securities investors protection act of 1970?

A

SIPC

protects the investor for losses resulting from broker firm failures

$500k in total, $250k in cash

Does not protect from incompetence or bad investment

155
Q

What are features of certificates of deposits?

A

Time deposit at a bank

set interest rate

set maturity rate

Also jumbo CDs but these aren’t available through banks

156
Q

What is a bankers acceptance?

A

Facilitates imports/exports

Ex: bank backs a transaction between brand and manufacturing company

157
Q

What is systematic risk?

A

Purchasing power
Reinvestment rate
Interest rate
Market
Exchange rate

158
Q

What is the CAPM model?

A
159
Q

What does a steep indifference curve?

A

This person is more risk adverse - would need more return to take on just a bit of risk.

160
Q

What is strategic versus tactical asset allocation?

A

Strategic asset allocation is concerned with allocating the wealth of a client among various asset classes, consistent with the clients’ investment objectives, time horizons and risk preferences.

Tactical asset allocation is concerned with shifting wealth between asset classes to take advantage of expected price level changes (timing) arising from broad movements in the business cycle.

161
Q

What’s the difference in calculating time weighted versus dollar weighted return in a cash flow calculation?

A

Time weighted only looks at security’s cash flow.

162
Q

What are collateralized mortgage obligations?

A

Has Tranches

Tranche A has the earliest payment

163
Q

Yield summary chart

A
164
Q

What is and when do you use a limit order?

A

Use when you want to buy sell at a specific price.

Most appropriate for extremely volatile stocks that are not frequently traded.-

165
Q

What are Eurodollars

A

Deposits at foreign banks that are denominated in US dollars

166
Q

Variability versus volatility?

A

Variability is measured using standard deviation. It is a measure of how far a return varies from what is expected- the average.

Volatility is measured by beta- relative relationship between a benchmark and the investment

167
Q

What is the difference between TIPs and I Bonds?

A

TIPS: par value is adjusted for inflation

I Bonds: Adjust the coupon rate

168
Q

Formula for coupon rate versus Current yield

A

AKA nominal yield

Coupon Rate= Coupon payment/Par

Current yield = coupon payment/current price of bond

169
Q

Relationship between coupon rate, current yield, yield to maturity, and yeild to call

A

If selling at a premium - the price of the bond is over $1000.

So the coupon rate is the biggest - Coupon rate =rate over/bond par value

Current Yield would be next - coupon rate over / PREMIUM bond value (bigger denominator)

Yield to maturity - next. because you’re paying a premium for the bond, your yield isn’t that high

Yield to call - at the bottom

170
Q

Treasury zero coupon bonds are best suited for what type of account?

A

IRA

They generate phantom income so put them in an IRA to avoid current taxation

171
Q

Treasury zero coupon bonds are best suited for what type of account?

A

IRA

They generate phantom income so put them in an IRA to avoid current taxation

172
Q

What are c shares?

A

Best for short term investors

no front load

small back end

1% 12b 1 fee!`

173
Q

What are b shares?

A

Back end fee

no front load

max 12b1- 1%

Many funds don’t offer any more

174
Q

What are A shares?

A

Appropriate for long term investors bc of low 12 b 1

front load - upfront sales commission

Small b1

no back end

175
Q

Long straddle versus short straddle

A

Long: INvestor buys a put and a call - expects volatility

Short: Investor SELLS a put and a call - expcts not volatility just wants the premium

176
Q

How is a put premium earned taxed?

A

Short term gain

177
Q

How are call premiums paid taxed?

A

If you paid a premium, and contract expired, it’s a loss

If the contract was exercised, the premium is addded to basis then LTCG or STCG depending on when you sell

178
Q

Describe hedging

A

Do the opposite of what you already have.

If you own oranges, sell a futures contract

179
Q

Are collatorazed mortgage obligations liquid? Would they be in a money market fund?

A

No! They are not liquid. CMOs are not short-term or highly liquid, safe securities and, therefore, are not likely investments for a money market mutual fund.

180
Q

What is the max deduction on a rental unit?

A

$25k if AGI is below $100k

181
Q

If you’re a partner at a company, and the company takes out a loan, your basis…

A

increases based the loan amount times your percent ownership

182
Q

When do you buy a straddle?

A

When you are expecting volatility – straddling that volatility

A long straddle is a combination of buying a put option and a call option on the same stock and is used when a very volatile market is expected. In this case, the investor expects widely different outcomes, so the straddle provides the possibility of gain from either outcome. The client can gain from the call if the new product is successful, and the client can gain from the put if the new product is a failure. The client will only lose with the straddle if the stock does not rise or fall much.

183
Q

When do you buy a collar?

A

Put a collar around the price

A collar is created by selling a call and buying a put. The collar is used typically when an investor wants to lock in a price and does not expect the stock to move much higher. The investor locks in the gain by purchasing the put, and the investor gains premium income from selling the call. The collar strategy would not be recommended to the client in this case because if the product is successful, the investor will lose money from the sale of the call. Similarly, buying the stock and selling a call will not provide gains if the stock rises substantially. The purchase of a stock and sale of a call is only designed to make the investor a small gain and premium income. It provides little protection against the possibility that the new product is unsuccessful.

184
Q

Geometric mean is always (><) arithmatic mean?

A

Less than!

root of (1+X)…

185
Q

What are Equipment Trust Certificates?

A

Bonds with equipment that serves as collateral

186
Q

What are Equipment Trust Certificates?

A

Bonds with equipment that serves as collateral

187
Q

How are time weighted and dollar weighted return different?

A

Time just looks at the changing price and return of the security. So you can assume just one share..

188
Q

What is odd lot theory?

A

Odd lot purchase levels indicate the number of small investors in the market. Odd lot theory says that small investors are always wrong. If odd lot purchases are falling relative to odd lot sales, it indicates the little guy thinks the market will fall. Since the little guy is always wrong, this would indicate a rally is coming, not a bear market.

189
Q

The form of technical analysis that utilizes Advances and Declines (also known as Breadth of the Market) as an indicator is known as:

A

Price Indicator

190
Q

Short-term debt securities issued by corporations in the open market usually less than 270 days maturity to avoid the necessity of SEC registration, are known as:

A

Commercial paperwork

191
Q

How do you remember the Bond see saw chart?

A

Dont CyCRY MC!

CFP Exam (6 decks)

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