305 test 1 Flashcards
(178 cards)
1
Q
agency problems
A
conflicts of interest between managers and
stockholders
2
Q
proxy
A
right to vote the shares of other shareholders
3
Q
sarbanes-oxley act
A
requires corporations to have more independent directors who are not themselves mangers…requires cfo to be in chargeif accting satements
4
Q
portfolio
A
collection of investment assets
5
Q
passive management
A
buying and holding a diversified portfolio without attempting to identify mispriced securities
6
Q
primary market
A
a market in which new issues of securities are offered to the public
7
Q
secondary market
A
previously issued securities are traded among investors
8
Q
American Depository Receipts (ADR)
A
domestically traded securities that represent claims to shares of foreign stocks…still expose investors to exchange rate risk
9
Q
world Equity benchmark shares (webs)
A
allow investors to exchange portfolios of foreign stocks in a country
10
Q
pass through securities
A
pools of loans sold in one package…owners of the passthrus receive all of principal and interest payment
11
Q
securitization
A
pooling loans into standardized securities backed by those loans, making them tradeable
12
Q
Treasury Bills (T-Bills)
A
• gov raises money by selling them to public,• investors buy the bills at a discount from the stated maturity value
13
Q
BANK DISCOUNT METHOD
A
the bill’s discount from par value is annualized based on a 360-day year, and reported as a percentage of par-value
14
Q
Certificates of deposit (CD)
A
Time deposit with a bank,• Bank pays interest and principal to the depositor ONLY at the end of the fixed term,• CDs larger than 100,000 can be sold to another investor if the owner needs to cash the certificate before maturity
15
Q
Commercial Paper (CP)
A
when large, well-known companies issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks,• Fairly safe asset, trades in secondary market, very liquid
16
Q
Eurodollar
A
• Dollar-denominated deposits at foreign banks or foreign branches of American banks
17
Q
Repurchase agreements
A
short term, usually overnight, borrowing
18
Q
LIBOR Market
A
• London Interbank Offer Rate- rate at which large banks in London are willing to lend money among themselves,• Serves as reference rate for European market,• Cannot be tied to US $
19
Q
• T-NOTES
A
issued with maturities of up to 10 years,increments of $100, semi-annual interest payments
20
Q
• T-BONDS
A
range from 10-30 years,increments of $100, semi-annual interest payments,prices quoted as a % of par value
21
Q
• TIPS(treasury inflation protected securities
A
principal amount is adjusted in proportion to increases in the Consumer Price Index,• Provide constant stream of real income, and interest earned is risk free if you hold them til maturity
22
Q
Municipal Bonds (munis)
A
• Issued by state and local govs,their interest income is exempt from fed income taxation, state and local taxes,• Only tax is capital gains taxes if bonds mature or are sold for more than original purchase price
23
Q
capital gain
A
diff between the basis of an investment asset and its sales price
24
Q
value stock
A
stock of a company whose market price is low compared to its net earnings, net worth, sales and other fundamental characteristics
25
• REVENUE BOND
issued to finance particular projects and are backed by either revenues from that project or by the municipal agency operating the project
26
Corporate bonds
• Means by which private firms borrow money directly from the public, • Pay semi-annual coupons over their lives and return the face value to the bondholder at maturity
27
• Secured bonds
have specific collateral backing them in the event of firm bankruptcy
28
• Unsecured bonds, debentures
have no collateral
29
• Fixed rate mortgages can create considerable difficulties for banks in years of high interest rates
because of adjustable rate mortgage, which require borrower to pay an interest rate that varies with some measure of the current market interest rate
30
Common Stock
• Equities
31
• Residual claim-
stockholders are last in line of all those who have a claim on the assets and income of the corporation
32
• P/E ratio
how much stock purchasers must pay per dollar of earnings the firm generates for each share
33
Preferred Stock
* Pays a fixed stream of dividends for the life of a firm perpetuity
* Unpaid dividends cumulate
34
Dow Jones (DJIA
measures the return (excluding dividends) on a portfolio tha holds one share of each stock called price weighted avg
35
Standard and Poors (s&P 500)-
based on 500 firms. Is a market value-weighted index reflect the returns to straightforward portfolio strategies
36
Net asset value (NAV)
= market value of assets – liabilities
| Shares outstanding
37
Unit Investment trusts
pools of money invested in a portfolio that is fixed for the life of the fund.• Make money by selling shares
38
• Open-end fund
issues or redeems its shares at net asset value
39
• Closed-end fund
shares may not be redeemed but instead are traded at prices that can differ from net asset value
40
Hedge funds
* Allow private investors to pool assets to be invested by a fund manage
* Commonly structured as private partnerships and thus are not subject to many SEC regulations
41
• Lock-ups
periods as long as several years in which investments cannot be withdrawn
42
Mutual Funds
• Open end investment company
managers buy and sell assets in the same portfolio
gains and losses accrue to owners
43
• Money market funds
invest in money market securities such as commercial paper, repurchase agreements, CDS
44
• Equity Funds
- invest primarily in stock, but sometimes hold fixed-income or other types of secruities
45
• Index Funds
tries to match the performance of a broad market index. Buys shares in securities included in a particular index in proportion to the securities representation in that index
46
How funds are Sold
* Generally marketed to the public by fund underwriter or through brokers
* Distributed through sales force
* Revenue-sharing – fund companies pay a brokerage firm for the preferential treatment when making investment recommendations
* Funds are also sold through financial supermarkets (Charles schwab)
47
• 12b-1 charges
- annual fees charged by a mutual fund to pay for marketing and distribution costs
48
• Front (back) end load
commission or sales charge before you pruchase (front) or after you sell (back)
49
Late Trading
* Practice of accepting buy or sell orders after the market closes and NAV is determined
* Closes at 4 pm
* Violates securities laws
50
Unique risk
you invest in dell and Exxon, when oil prices fall, it hurts exxon, but is good for dell, so the risk is low
51
• Market risk
affects every firm, such as the stock crash
52
The key determinant of portfolio risk
the extent to which the returns on the two assets tend to vary in tandem or in opposition
53
Declines of more than 25% in the S&P 500 Index have occurred
5 times in the past 83 years (1930, 1931, 1937, 1974, 2008)
54
The low risk of a portfolio
due to the inverse relationship between the performance of the stock and bond funds
• For example, in a mild recession, stocks fare poorly, but this is offset by a large positive return of the bond fund…opposite for boom
55
Opportunity set
all attainable combinations of risk and return offered by portfolios formed when using the available assets in differing proportions
56
indicators of US expansion
average workweek, housing market on the rise(record low interest rates), higher stock prices, 0.5% INCREASE, fewer jobless claims
57
Topdown
broad environment in which investment operates - state of economy and and financial markets.
58
worlds largest economy grew
1.2% in 4th qtr
59
tax boost will reduce what % income after taxes
1.3%
60
tax boost will effect who the most
low income workers
61
sequester-
group of cuts to federal spending set to take effect March 1, barring further congressional action.
1.2 trillion cut, defense, social.
both sides are far apart and will not come to deal
62
only bank to survive financial meltdown
jp morgan chase
63
London whale (2007)
JPM tried to buy bonds and hedge transfers...got London banks to hedge them (if something went wrong, would benefit hedges)...market saw JPM had good position so people doubled down twice for larger position...deal got too big, hedge funds dropped out...JPM lost 6millions
64
London whale transcripts
people had no clue what was about to happen
65
high frequency trading
buy and sell to make make small profits on large amount of trades. enhance market liquidity but withdrawals cause volatility
66
High frequency trading regulation fight
to fend off regulations. benefits of hft: tech innovations, foster competition, efficient trading. No hft: makes market less stable and less fair-> caused flash crash, facebook public offering
67
Insider trading rules
focus on hedge funds...problematic for ceos...using information that that is relevant and not public to take advantage of market. ceos selling stocks when smell trouble
68
10B5-1 Plan
put plan into place to sell w/out insider info, then you get info it is okay to sell...subject to abuse b/c people wait to sell when not supposed to
69
Doug Whitman
portfolio manager charged, convicted for insider trading, biz failed, 2 yrs prison
70
citi pulling money out of sac capital
k
71
chicago mayor want to pull funding of gun companies
k
72
growth stock
companies that are expected to achieve rapid growth. above average risk and pe ratios
73
why apple value stock?
growth slow down, rise of samsung, smaller earnings
74
Pensions and private equity
pensions underfunded and ROR not good enough for obligation, private equity may be a better option
75
private equity
takes over whole company and sells at higher price, buys through debt, fixes existing companies
76
venture capitaliss
take new company and bring to market
77
stock index
artificial constructs designed to capture whats happening in broad or segment of the market
78
S&P 500 be
better than dow, has some smaller companies, valuated by every company own stock
79
keep bond-buying?
fed is divided, could cause inflation, only cause moderate growth
80
banks have too much cash b/c of deposits
k
81
Great rotation
shift of investors from bonds to stocks
82
junk bond
high risk high potential return, risk of default
83
looks like hedge fund but isn't
58% stocks, 30 bonds, 12 alternative
84
S&P 500 in 2012
9/10 sectors end the year in positive, due to fed stimulus, only utilities di bad
85
S&P return 2012
14%
86
Hedge funds did not do good 2012
5.5% gain, too cautious approach by managers. volatile markets
87
NIM
the sum between what banks collect by pocketing the difference between the interests they pay to depositors and the rate they charge borrowers.
88
3 indicators whether the “rotation” will continue
1) A rallying unemployment rate
2) A continued drop in returns from fixed-income investments
3) A growing belief among investors that the Fed by end QE (bond buying)
89
portfolio pumping
bidding up the value of a fund's holdings right before the end of a quarter, when the fund's performance is measured. This is done by placing a large number of orders on existing holdings, which drives up the value of the fund.
Read more: http://www.investopedia.com/terms/p/portfoliopumping.asp#ixzz2LsbJICb4
90
Herballife
fight between Ackman and loeb about whether to invest or sell short
91
loeb herbalife
hedge fund owns 8.2% stake, wants people to invest, will survive and thrive
92
Ackman herbalife
betting against, thinks its a pyramid scheme and will drop, selling short, army of indy resellers recruit members to sell for them
93
• Unemployment is about 8%, healthy economy is usually around 5%
1
94
• The economy has 3 streets
o Main Street: The factories, where people go to work, retailers, “consumers”
o Wall Street: Financial Center, Stocks & Bonds “businesses” (although businesses are all over
o Kay Street: The government and lobbyists in DC “government”
The big issue right now in gov’t policy is the budget
95
• The government could stimulate the economy by spending more and taxing less to try and aid the economy
1
96
BRICs (Brazil Russia India China) have come out of the recession quite well, particularly China
o China buys a lot of raw materials from the rest of the world
1
97
• GDP in countries in Europe has suffered since 2007 for the most part
1
98
Verizon and AT&T
got charges for changing discount rate for calculating pension obligations
99
Defined Contribution Plan
Risk is now on the employee, companies have not been successful at covering costs causing the switch. Employers use a formula to calculate what the employer deposit will be for the plans
100
• Why have stock prices done better than the economy
o Stock prices look ahead, and thought the economy in the future
o Businesses have also been cutting costs, earnings are better, profit margins are wider
101
Buybacks
they can go the other way and perform stock buybacks to increase their earnings amongst other things...announce share buybacks, typically the stock price appreciates
102
SAC capital
* The most valuable asset you have after graduation is your good name
* SAC capital is being investigated for insider trading
* SAC has averaged 30% annualized returns since inception, • SAC capital only allows you to take a quarter of your money out every quarter
103
black edge
knowing news before the market
104
current FED policy does not focus on...
inflation
105
euro zone doing better
1
106
• Socially Responsible Investing
people only invest in what they believe in
107
• Selling short
selling a stock you don’t own using a brokerage account because you believe the stock is going lower
108
Icahn herbalife
activist, backs herbalife
109
against 60-40 portfolio
its one size fits all, interest rates are too low
110
maximum capital gains tax rate
39.6%
111
• Q4 increased
1.2%
112
• 2013 GDP forecast
2% (also too low)
113
o FOMC (Federal Open Market Committee) believes economy and employment are
getting better, as opposed to pausing
o Business fixed investment has slowed since last release
due to fiscal cliff
114
fed dual mandate
Price stability, Low unemployment
115
• Auto sales, housing
rising demand
116
• Improving housing sector is helping other industries
power tools, air conditioners, carpet fibers and cement mixers, for example
117
• Better bet to invest in
housing itself than housing stocks
118
who is fueling rises in stock market
small individual investors
119
bears vs. bulls
bears= pessimists, only temporary improvement, corporate earnings are peaking when many think it is a rise
Bulls=optimists, good signs from central bank efforts, improve of leading economic indicators, price to earnings ratio is low
120
FED CONtinues to buy debt and hold down borrow costs
could lead to high inflation, and unstable market
121
if interest rates rise (bonds)
bond holders will face huge losses....right now all types of bonds have low yields, great for borrowers, terrible for lenders
122
retirees are at risk b/c...
low interest rates causing bad yield, and retirees depend on low risk communities
123
ladder
series of bonds that mature in succesion
124
• “Short Squeeze
a sharp rise in the price of the stock forces those who have short positions to post margin calls (buy the stock), thus further driving up the price of the stock
125
, the economy grew what %
2.2%
126
The median duration of unemployment fell in Jan
to 16 weeks from 18 weeks a month early
127
underemployment rate, which includes part time workers that would rather be working full time is
14.4%.
128
consumer confidence levels fell to 58.6 b/c of
argument over fiscal cliff
129
fed is making lots of money from bonds returns
sends money to treasury
130
when economy is stronger fed sells
bonds
131
fed earned 91 bn last year`
sent 89 bn to treasury
132
europes generation negative equity
homeowners in their 30s, 40s, and 50s who bought houses during a property bubble that burst.
133
• UNDER SPANISH BANKRUPCY – unpaid debt
never goes away
134
REIT
real estate inv. trust....a security that sells directly in real estate
135
master limited partnership (MLP)
a limited partnership that is publically traded...general partner has most of liablility, ownership is traded in mktplace
136
why renewable energy companies use MLPS REIT
can reach broader range of investments b/c both do not pay coporate income taxes, passing most of their income to their investors who must pay their own personal taxes.
137
The london whale is Brune Iksiil
Said bets were getting scary...warned people
138
JPMorgan had some people bet agains it in London whale, why?
was it too big to manage
139
secular bull markets stocks have averaged annual returns of 18%
secular bear markets yield returns of about 1%.
140
• The cost of insurance (put options) has come down b/c
the volatility of the market has declined.
141
• Investors can find insider buying and selling activity for specific companies by searching for
Form 4
142
• Stocks with high dividends
perfect balance for investors seeks a middle ground between bonds and stocks.
143
ETF (exchange traded fund)
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange (example spider)
144
Total Return on Stocks
Dividend/Price+Change in Price/Price
145
• The most important asset in your portfolio
human capital, you have conrol over human capital.
146
Borrowing from the Future
• Early withdrawals from 401(k) and 403(b) can have significant effects on a nest egg. 1 out of 4 household’s dips into such accounts
. People should not participate in their company’s 401k plans until they have a sufficient amount of emergency savings.
emergency fund = 3 months pay saving
HelloWallet as “a technology-based financial guidance software application.”
147
• 4th Quarter GDP (originally stated at 0.1%) expected to be favorably revised
to about 0.6%
148
US lost how much from 2007-2009
16 trillion...regained 13.5 trill tho
149
labor force expected to rise how much %
1.2%
150
• Fed will not try to raise interest rates until
unemployment is under 6.5%
151
• “Goldilocks” economy
not too hot for fed to be worried about inflation and not too cold to have investors worry about relapse into recession
152
eurozone contracted 3rd straight quarter...including
germany
153
eurozone shrank what percent
2.3
154
• VIX Index:
Measures expected price swings in the S&P 500 by tracking option prices
o Higher the VIX, higher the expected volatility of markets
o With volatility comes uncertainty
VIX also known as “Fear Index”
155
• Value stocks have outperformed growth stocks, on average, by
4%
156
• Stock buybacks
companies buy back its own stock from shareholders
157
Target Date Fund
retirement vehicle programmed to select a mix of stocks, bonds, and other assets based on the owner’s age.
• As you get older, the fund automatically shifts from risky to less risky assets (commonly from stocks to bonds)
158
• Current problems with peoples’ retirement plans
o Too little % of pay is being directed into retirement accounts
o People are taking money out of their accounts before retirement
Penalties for early withdrawal
159
“Pump and Dump”
an investor takes a large position in a company, talks up the stock price with misleading or false information and then sells their position before the price falls
160
Icahn holds 12.98% of herbalife
stocks jumped 21%
161
dark pool
order is entered but is not visible...large investors do not want to show market their doings
162
Stop order
once price drops below what you specify, it automatically sells at that point
163
Lessons from MF global
1) know where you stand continuous, MF global lost track
2) must be right in direction and time
3) never bet the bank
164
LBO leverage buyout
take over of a company financed largely through the use of debt that is secured by the acquired firms own assets
165
sharpe ratio
compares how much risk is needed for high return
166
rating agencies in trouble
gave okay to bad debt portfolios
167
LIBOR
used as index for other rates..generated by large intnl banks and what they have to pay to borrow from each other
168
agency theory
managers of a company have interests that are not the same as shareholders when they should
169
real asset
assets used to produce goods and services (determine wealth of economy)
170
topdown portfolio construction
start with allocation, use big picture, and eventually pick individual securities
171
red herring
preliminary prospectus w/ a statement in red saying the company is not attempting to sell the security b4 the registration is approved
172
4 types of markets
1) direct- buyers/sellers seek each other
2) brokered
3) dealer
4) auction (NYSE)
173
packaging mortgages and junk bonds
great way to leverage both and make less risky portfolio
174
book got wrong
liklihood mkt has bad year is equal each year
175
passive investment strategy
buying well diversified portfolio without attempting to search for mispriced securities
176
Efficient Market hypothesis
Weak- stock price history has no bearing on future price
semistrong- stock prices include all price history and public info
Strong- stock prices represent all relevant and inside info
177
Arithmetic average v. Geometric Average
the sum of the returns in each period divided by the number of periods v.the single per-period return that gives the same cumulative performances as the sequence of actual returns.
178
CAPM
relationship between time value of money and risk
