Book 2 Flashcards
Book 2 concepts (282 cards)
1
Q
Options: Contract writer = ?
A
Contract writer = Contract seller = Short position
2
Q
Options: Contract holder = ?
A
Contract holder = Contract buyer = Long position
3
Q
Mgmt companies: Expense ratio = ?
A
Expense ratio = (Total expenses / Total Net Assets)
4
Q
Mgmt companies: Sales Charge % = ?
A
(Ask - Bid) / Ask
5
Q
Muni Bonds: Equivalent Tax-Free Yield = ?
A
Taxable Yield x (100% - Tax Bracket)
6
Q
Muni Bonds: Equivalent Taxable Yield = ?
A
Tax Free Yield / (100% - Tax Bracket)
7
Q
Convertible Corp Debt: Parity Price of Stock = ?
A
Bond Market Value / Conversion Ratio
8
Q
Convertible Corp Debt: Parity Price of Bond = ?
A
Conversion Ratio x Stock Market Price
9
Q
Convertible Corp Debt: Conversion Ratio = ?
A
Par Value of Bond / Conversion Price
10
Q
Invest vehicles: Parity Price of Preferred = ?
A
Market Price of Common x Conversion Ratio
11
Q
Stocks: Conversion Ratio = ?
A
Par / Conversion Price
12
Q
Stocks: DDM = Dividend Discount Model = ?
A
Expected Next Year Dividend Rate /
Required Rate Return of Equity Investors - Dividend Growth Rate
13
Q
Stocks: EPS = ?
A
Market Price / “Multiple”
14
Q
Stocks: P/E Ratio = ?
A
Market Price / EPS
15
Q
Stocks: Current Yield = ?
A
Annual Income / Market Price
16
Q
Open-End Management company shares are ___ issued, and ___ redeemed?
A
- continuously issued.
- continuously redeemed.
17
Q
A client is short stock and wants to protect his position. the option strategy that should be used is to ____ ?
A
BUY a CALL.
18
Q
TIPS:
- An annual upwards adjustment to inflation is taxable ____ when?
- An annual downward adjustment due to deflation is tax-deductible ____ when?
A
IN THAT YEAR.
19
Q
TIPS are usually purchased in ____ plans that are ____.
This avoids having to pay tax each year on the upwards principal adjustment.
A
- tax-qualified retirement plans.
- tax-deferred.
20
Q
A discount corporate bond that is CALLABLE would be quoted on a yield basis, based upon ____ ?
A
YTM = Yield to Maturity
- A discount bond will NOT be called by the issuer.
- A discount bond will therefore be held to maturity.
21
Q
An investor in a “Ginnie Mae” mutual fund assumes which 4 risks?
A
- Prepayment Risk
- Extension Risk
- Fluctuation of NAV
- Reinvestment Risk
22
Q
Repurchase Agreements are initiated by the Federal Reserve to ____ the money supply.
A
LOOSEN.
23
Q
Repurchase Agreements are used by dealers to ____ the carrying cost of government securities held in their inventory.
A
REDUCE.
24
Q
Equity-Indexed Annuities (EIAs) have annual cap of ____%, and guarantee yearly minimum of ____%
A
annual cap of 7-9%
and guarantee a yearly minimum of 1-3%
25
Equity-Indexed Annuities (EIAs) are an ____ product, and are currently ____ defined as a "security".
insurance product.
NOT defined as a "security".
26
Cumulative Voting = (def) ?
Minority shareholders have the ability to elect the director of their choice.
27
Parity price: (Convertible bonds & Convertible preferred stock): Equation = ?
Parity price =
Par Value, the Market Trading Value
_______________________________
Conversion Ratio
28
Parity (options) = def ?
Parity = for options; when the premium of the option is exactly equal to the options intrinsic value
29
Parity (convertible bonds & convertible preferred stock) def = ?
Parity = for convertible bonds & convertible preferred stock, when total market value of common shares into which a security can be converted equals market value of convertible security.
30
conversion price = equation ?
Conversion price =
Par Value
_______________
Conversion Ratio
31
conversion price (def) = ?
conversion price = stated price at which security is convertible into common stock of the issuer.
32
Treasury stock does NOT earn ___ and does NOT receive ___ ?
does NOT earn interest. does NOT receive dividends.
33
Ginnie Mae: GNMA: Has pass-through ____. And is backed by ____.
pass-through certificates
backed by guarantee of US government
34
Which agency security has the highest credit?
Ginnie Mae, GNMA
35
Which agency security is fully-taxable by Federal, State, and Local tax?
Ginnie Mae, GNMA
36
What are the min certificates for Ginnie Mae?
$25,000
37
Where does GNMA debt trade?
OTC "over the counter"
38
GNMA buys ___ and ____ guaranteed mortgages from financial institutions for repackaging as pass-through certificates.
FHA and VA
39
GNMA: monthly mortgage payments are "passed through" to ____ holders?
certificate holders
40
Fannie Mae = FNMA = ?
Federal National Mortgage Association
41
FNMA is public or private?
publicly traded corporation
42
FNMA pass thru certs are ___ guaranteed by US federal govt?
NOT guaranteed
43
Federal Farm Credit Consolidated System bonds - list 3 banks
1. Federal Intermediate Credit Banks
2. Banks for Cooperatives
3. Federal Land Banks
44
Agricultural Credit Corporations are ___ part of obligations of Federal Farm Consolidated System Bonds, and _____ issue notes.
NOT part of obligations of Federal Farm Consolidated System.
do NOT issue notes.
45
Federal Farm Credit System backed by _____
Federal Farm Credit System Banks
46
Federal Farm Credit System interest exempt from ___ and ___ taxes
state
local
47
Federal Farm Credit System only has ___ backing of US govt
implicit
48
Federal Farm Credit System has ___ tax
federal
49
Federal Farm Credit System has ___ and ___ discount obligations issued
long term and short term
50
Federal Intermediate Credit Bank has ___ discounted notes
short term
51
Federal Intermediate Credit Bank is usually ____ in nature
seasonal
52
Federal Intermediate Credit Bank issues ____ term loans to farmers
short term
53
____ ____ _____ ____ makes loans to, and buys agricultural and livestock paper of:
1. Commercial Banks
2. Production Credit Association
3. Agricultural Credit Corporations
4. Incorporated Livestock Loan Companies
Federal Intermediate Credit Bank
54
Treasury Receipts are a ___ coupon bond
zero coupon
55
Treasury receipts does ___ pay interest at regular intervals between issue and maturity.
does NOT pay interest at regular intervals between issue and maturity.
56
Treasury Receipts are sold by an ____
intermediary (brokerage firm)
57
Treasury Receipts are sold at a ___ ___ to par
deep discount
58
Treasury Receipts, are they stable?
NO, the fluctuate wildly
59
Treasury Receipts, what is the reinvestment risk
NONE
60
Treasury Receipts are subject to federal income tax, when?
annually
61
zero coupon bonds trade ___ and ___ accrued interest
FLAT
and WITHOUT accrued interest
62
zero coupon bonds have ___ semi-annual payments
have NO semi-annual payments
63
1. BOTH are exempt from registration under Securities Act of 1933
2. BOTH are interest bearing obligations quoted in 32nds
3. Both are trades settled in federal funds
4. Both are eligible for trading in Federal Reserve Open Market Operations
what are they?
government and agency securities
64
1. Bond is negotiable.
2. interest payments can be redeemed by anyone
3. at maturity, registered owner receives face amount of bond
4. registered in owner's name
5. bearer coupons attached
6. anyone can clip the coupons and receive interest payments
7. principal amount only repaid to registered holder
8. no such bonds issued since 1983 (they still trade in the market)
what are they?
Bond - "Registered to Principal Only)
65
Industrial Development Bonds: Final responsibility for debt service rests with ___ ?
corporate lessee of facility
66
Industrial Development Bonds are backed by the ____ paid by the corporate lessee, as well as the ____ of the corporate lessee
rental revenues
guarantee of the corporate lessee
67
Industrial Development Bonds take on credit rating of _______
the corporation leasing the facility
68
Industrial Development Bonds: This bond may; be subject to what tax?
Alternative Minimum Tax (AMT) or regular tax.
69
Industrial Development Bond, also called ?
Industrial Revenue Bond
70
treasury stock = how much = equation?
Treasury stock = Issued shares - Outstanding shares
71
Municipal Bond Funds - Taxation - Distributions:
Dividend distributions representing interest are ____
Dividend distributions representing capital gains are ____
tax-free
taxable
72
Warrants and Rights - Dividends:
Warrants and Rights ____ pay dividends.
Only if ____ , resulting in purchase of common shares, would _____ be received.
do NOT pay dividends
only if EXERCISED, would DIVIDENDS be received
73
Are hedge funds regulated as investment companies?
NOPE
74
1. company assumes mortality risk
2. company assumes expense risk
3. annuitant assumes investment risk
4. annuitant assumes purchasing power risk
5. annuitant assumes market risk
what product?
variable annuity
75
common dividends are declared and paid when?
quarterly
76
Which types of ownership have equity position? name 3.
1. common shareholders
2. preferred shareholders
3. convertible preferred shareholders
77
Repurchase agreements (Repo): US govt ___ securities, to Fed Reserve or another dealer, promising to ___ them back at a later date.
SELLS to fed reserve, promising to BUY them back at a later date.
78
Repurchase agreements (Repo): interest, how to calculate?
Interest = (Sales price - Purchase price)
79
Repurchase agreements (Repo) = The Fed is ____ cash to banks and ___ credit
INJECTING cash
INCREASING credit
80
Repurchase agreements (Repo): dealer ___ securities to Fed, to get liquid
dealer SELLS to fed
81
Repurchase agreements (Repo), interest rates do what after?
DECREASE
82
Repurchase agreements: (Repo) -- public customer is ___ of monies ?
LENDER
83
Repurchase agreements (REPO) -- government dealer is ___ of govt securities?
SELLER
84
Repurchase agreements (REPO) -- dealer is "___ ___" , by selling government securities to customer, with agreement to buy them back at a later date.
"getting liquid"
85
Repurchase agreements (REPO), customer is ___ of cash to govt dealer
LENDER
86
Repurchase agreements (REPO), government securities dealer is ____ from federal reserve
SELLER
87
Repurchase agreements (repo), government securities dealer will ____ back, later.
government securities dealer, will BUY back, LATER
88
Municipal bond, backed by municipality. cities and towns, interest paid by "ad valorem". states, interest paid by income and sales taxes. "GO" called what?
General obligation bond
89
Example of this bond, public schools, do not produce revenue and are not funded by revenue bond issues. "carried on the backs of the taxpayers".
General obligation bond
90
Municipal bond, used to build revenue producing facility
Revenue Bond
91
Municipal bond, paid from NON ad-valorem (eg ETOH, tobacco, gas tax)
Special tax bond
92
Muni bond, state legislature has moral obligation (not legal) to pay debt
Moral Obligation Bond
GO - debt limit - voter approval needed for non-self-supporting debt
93
Income bond issued by ___
corporatoin
94
Revenue bond issued by ____
municipality
95
Endowment bonds issued by ____
Hospitals and Colleges
96
Revenue bonds vs GO, which has higher risk of default?
Revenue bonds have higher risk of default than general obligation bonds.
97
NON self-supporting debt, due to paid fm tax collections and NOT revenues, what type muni bonds?
Special Tax Bonds
98
Default-Moral Obligation Bond -- payment made by?
Legislative Apportionment
99
Bonds:
1. long term = "serial maturies" (sequence of years)
2. issued at par
3. pay interest semi-annually
Long Term Serial Bonds
100
Bonds:
1. "serial maturities" (sequence of years)
2. discount from par
3. mature at par value
Short Term Serial Bonds
101
Defease. def?
to void a bond or a loan, when the borrower sets aside cash or bonds sufficient enough to service the borrower's debt.
102
escrow. def?
(verb) place in custody or trust.
| (noun) Bond/deed/document kept in custody of 3rd party.
103
Equivalent Taxable Yield: eqn?
Tax Free Yield
_______________
(100% - Tax Bracket%)
104
Equivalent Tax-Free yield: equn?
Taxable Yield x (100% - Tax Bracket%)
105
taxable distributions from municipal bond funds:
dividend distributions representing interest are ____
dividend distributions representing capital gains are _____
interest tax free
capital gains taxable
106
Investment Vehicles: Money market debt:
unsecured short term money market debt, issued by corporation with max maturity 270 days. issued at discount and matures at face value.
what is it?
commercial paper
107
TAN: Tax Anticipation Note, is issued when?
issued in advance of taxes
108
RAN: Revenue Anticipation Note: issued when?
issued in advance of revenues, NOT taxes
109
1. interim financing when long term bond about ot be issued.
2. less than one year
3. no periodic interest payments
4. payment at maturity = (Repayment Principal + Interest)
what is it?
BAN: Bond Anticipation Note
110
Investment vehicles: money market debt
1. matures on pre-set date at pre-set price
2. quoted on a yield basis
3. unsecured promissory note
4. NOT funded debt of issuer
5. money market instrument
6. unfunded debt
what is it?
commercial paper
111
Lead Liquid Money Market Instrument is what?
Banker's Acceptance
112
What is the highest quality banker's acceptance, which is eligible for trading by Fed Trading Desk?
Prime Banker's Acceptance
113
Reverse Repurchase Agreements:
1. Fed is ____ credit
2. Fed fund rate changes to ____
Fed is TIGHTENING credit.
Fed funds rate GOES UP.
114
Mgmt companies:
POP = Public Offering Price = eqn?
Net Asset Value + Sales Charge
115
Mgmt companies:
POP : Public Offering Price: Max Sales charge:
FINRA rules, max sales charge on mutual fund purchases is _____ of POP ?
8.5%
116
Mgmt companies:
Sales charge percentage calc = ?
(Ask - Bid) / Ask
117
Contingent Deferred Sales Charge = CDSC = when?
if customer redeems shares before stated time period
118
Mgmt companies:
1. Breakpoints
2. Letter of Intent
3. Rights of accumulation
4. Dividend Reinvestment at NAV
FINRA requirements for what?
Max Sales Charge
119
Mgmt companies:
Breakpoint. def?
Reduced sales charge for large dollar purchase.
120
Mgmt companies:
Offering price = eqn?
NAV / (100% - Sales Charge%)
121
Mgmt companies:
Max sales charge for 12b-1 funds?
7. 25% max
| 6. 25% max if fund imposes service fees for account maintenance
122
max total 12b-1 fee?
0.75% of average annual net assets
123
Mgmt companies:
Share classes:
- - high "up front", low 12b-1
- - good for long term
which share class?
Class A
124
Mgmt companies:
Share classes:
- - contingent deferred sales charge
- - 0/50% 12b-1
- - good for intermediate term
which share class?
Class B
125
Mgmt companies:
Share classes:
- - No upfront sales charge
- - smaller "rear load"
- - 0/75% 12b-1
- - short term investment
which share class?
Class C
126
Mgmt companies:
- - publicly traded
- - purchaser can sell share to someone else
- - cannot be redeemed by the fund
which type fund?
closed-end fund
127
Mgmt companies:
Registered fund under Subchapter M MUST distribute ____ percent of NII ?
90% of NII
Investors = "Regulated" under (M) by IRS
Fund = no tax on distributed NII ("flows thru")
Fund = taxed on retained income
128
Most funds distribute ____ of NII and ____ of capital gains
97% of NII
98% of capital gains
IRS Tax Code imposes tax surcharges on funds that do not distribute at least 97% of NII and 98% capital gains to shareholders.
129
Mgmt companies - funds - distributions - tax cost basis = investor "cost" = ?
investor "cost" = (Original Purchase Price + All Reinvested Distributions)
130
Mgmt companies - funds - distributions - tax cost basis = Taxable gain, or Tax-deductible capital loss = ?
Taxable Gain, or Tax-Deductible Capital Loss =
| Sale Proceeds - Investor Cost
131
Mgmt companies:
- - continually issues new shares
- - redeems its own shares
- - redeemable with sponsor
- - non-negotiable and do NOT trade
- - must be sold thru prospectus offering
- - may issue new shares continuously
- - must redeem outstanding shares based on NAV
- - share price = NAV
what type of fund?
Open-End Management Company
Mutual Fund
132
Mgmt companies:
- - buying shares in secondary market = (Ask Price + Commission)
- - "Publicly-Traded Fund"
- - Fixed number of negotiable shares --> public
- - Shares NOT redeemable by the fund
- - Securities portfolios = ILLIQUID
- - Redemption = difficult
- - Trade in secondary market exchange or OTC
- - NAV = Investor sentiment may push share price higher or lower than the NAV
what type of fund?
Closed-End Management Company
133
Which is the only fund that can sell for less than NAV, if investors are bearish on that fund's prospects?
Closed-End Management Company
134
Agency Bonds:
- - Backed by full faith of USA
- - No Credit Risk
- - Only issues mortgage backed pass-through certificates
- - Prepayment risk = if decreased interest rates
- - NAV risk = if increased interest rates
what type of agency?
GNMA = Ginnie Mae
135
Investment vehicles -- Insurance Based Products
Perpetuity Value = eqn ?
Perpetuity value =
Annual payment
_________________
Market Rate of Interest
136
How to calculate payment for variable annuity?
Payment = Annuity Units x Unit Value
137
How to calculate number of variable annuity units?
Number of annuity units =
Value of separate account interest
___________________________
"annuity unit factor"
138
annuity term = conservative estimated annual return needed for constant annuity payments = set when contract annuitized = chosen by customer = based on earnings in separate account
AIR = Assumed Interest Rate
139
Variable annuity is defined legally as what type product?
"security"
140
Investment vehicles -- insurance based products
- - whole life policy
- - cash --> designated separate account
- - premium amount fixed and level
- - policy guarantees minimum fixed death benefit
- - death benefit can increase over fixed amount, if separate account increases
- - "security" and sold with prospectus
what type product?
VARIABLE LIFE
permanent insurance with cash value invested in separate account.
141
Tax-Free exchange of insurance for another policy type or annuity.
"Exchange" for another policy without tax consequence.
Name that exchange?
1035 Exchange
142
- - Annuity contract = regulated as insurance product
- - annuity contract NOT defined as "security"
- - annuity payments will NOT increase if inflation increases
- - investment risk borne by insurance company
- - investments held in general account
Name that annuity?
Fixed Annuity
143
- - Developed in 1980s, source of liquidity for terminally ill AIDSs patients with short life expectancy (2-3 years)
- - One can invest in another's life insurance
- - Buyer = Viatical settlement provider
- - Seller = original owner of life insurance policy = Viator
- - Viator = gets cash at decreased value
- - buyer = pays premiums and gets insured person's death benefit
name that product?
Viatical Settlement
144
Investment Vehicles - Insurance based products:
- - between fixed and variable annuity
- - return linked to well-known index
- - capped to a max interest rate/year
- - non-qualified plans --> NO deduction for contributions
- - regulated as INSURANCE
- - min rate of return given
- - NOT guaranteed by PBGC (Pension Benefit Guarantee Corporation)
name that investment vehicle?
Equity Indexed Annuity (EIA)
145
- - point-to-point method
- - annual reset method
- - high-water-mark method
these are methods to credit change to what insurance based product?
Equity Indexed Annuity (EIA)
146
Life annuity payment ends when?
Person dies
147
A life annuity usually pays the ___ amount of all annuity payment options.
LARGEST
148
- - taxed at LIFO
- - capital gains tax
- - 10% penalty tax before age 59.5
- - non-tax qualified retirement plan
- - original non-tax-deductible contribution
- - reinvestment of dividends, interest, capital gains, over time --> tax deferred
- - market participation and tax-deferred-growth
- - contributions to non-qualified contracts are NOT deductible.
- - payments are guaranteed for life of contract holder
- - separate account growth is tax-deferred until distributions commence
- - no limits on amount individual can invest
name that type of annuity?
Variable Annuity Contract
149
insurance based products:
- - minimum guarantee lower than fixed annuity
- - *piece* of gains of S&P 500
- - inflation hedge, but protected against bear market
- - high expenses and surrender fees
name that insurance based product?
Equity-Indexed Annuity (EIA)
150
- - buying put options to protect downside
- - selling calls for extra income, to offset cost of put options (limits upside growth)
this is called?
"collaring" investment portfolio
151
insurance based product:
- - "pure insurance"
- - no cash value
- - non-renewable after certain age
- - if premium is NOT paid, policy lapses
name that insurance based product?
term life
152
insurance based product:
- - higher premium than term life, level each year
- - does NOT increase with age
- - fixed coverage
- - "straight life"
- - cash value invested in general account
- - cash value can be used to pay premiums
name that insurance based product?
whole life
153
insurance based product:
- - flexible policy -- allows policy owner to change both the premium payments and death benefit
- - minimum payment amount
- - minimum = term life insurance
- - increased minimum = excess invested in general account and builds cash value (like whole life)
- - cash value = buy additional insurance or decrease premiums
name that insurance based product?
Universal Life-Flexible Insurance
154
insurance based product:
- - guaranteed rate of return
- - only subject to state insurance regulations
- - "investment risk" = assumed by insurance company
- - state insurance regulations = YES
- - federal and state securities laws = NOPE
name that insurance based product
Fixed Annuity
155
"extra" payments if insured lives longer than "mortality tables"
name that insurance term?
Mortality Risk
156
Fixed Annuity -- who assumes the inflation risk?
Annuitant.
purchasing power risk assumed by annuitant.
157
Periodic Certain Annuity -- why used?
usually to bridge a gap in time
early retirement --> social security payments
158
Perpetuity value = eqn?
Annual payment
_______________
market rate of interest
159
- - no guarantee of specific rate of return
- - annuity investments increase better than expected, annuity increase
- - annuity investments decrease worse than expected, annuity amount decreases
- - new non-exempt issues sold with prospectus
name that annuity?
variable annuity
160
investment vehicles - other investments:
- - structured product offered by banks
- - tied to benchmark index
- - debt of the bank
- - minimal liquidity risk
- - no interest or dividend payments
- - value grows based on benchmark index
- - capital gains tax = good
name that investment vehicle?
Exchange Traded Notes (ETNs)
161
- - charge one-time up-front sales charge reduced by breakpoints for larger dollar purchases
- - usually have no 12-b-1 fees
name that mutual fund share class?
Class A
162
- - no up-front sales charge
- - redemption fee within 7 years, declining
- - fee zero redemption --> convertible to Class A
- - 12b-1 fee (0.50%)
- - convert to Class A --> (no 12b-1 fee then)
name that share class?
Class B
163
- - no upfront sales charge
- - no redemption fee
- - level annual 12b-1 fee (0.75%)
name that share class?
Class C
164
what is the primary reason for selection of a particular Tax Sheltered Investment?
1. Primary reason = Economic viability
| 2. Secondary reason = tax benefits.
165
Options:
Short stock : Short Put --> breakeven =?
short sale price + premium
166
when is short stock & short put used = ?
- - used in a flat market
- - income strategy
- - collects income from sale of put
- - covered put writer
167
options:
- - "protect the gain", after 1st buying the stock
- - sells a call at a strike price, just above market price of stock
- - buys a put at a strike price, just below market price of stock
stock rises --> called away
stock falls --> put is exercised, limiting downside loss.
(because premium was received and a premium was paid, the cost of the downside protection is oven "0")
name that option strategy?
Collar
168
what type of option can be traded or exercised at any time?
American Style option
169
what type of option can be traded any time, but only exercised at expiration?
European Style option
170
what type of style options are Index Options?
Institutional money managers, hedge portfolios with index options. Didn't want unintended exercise.
European Style
171
Income Bonds (Adjustment Bonds) -- why are they known as "scary bonds" ?
If no income, doesn't need to make interest payment.
172
economic climate situation:
- - investors sell corporate bonds
- - investors buy government bonds
- - government bonds yields decrease
when would this occur?
pending recession expected
173
economic climate situation:
- - interest rates rise
- - stock prices fall
when would this occur?
during extended periods of high inflation.
174
Rising inflation is a "lose-lose" situation for both the ___ and long-term ___ markets?
stock market
long-term-bond market
175
economic climate situation:
- - short term rates higher than long term rates
- - federal reserve is tightening credit
this occurs along with ___ yield curve?
inverted yield curve
176
____ measures a stock's price volatility relative to stock-specific (non-market) factors.
Alpha
177
____ measures a stock's price volatility relative to the market as a whole.
Beta
178
Dividend or current yield formula =
Annual income
____________
Market price
179
Dividend discount model = DDM = eqn = ?
Expected Next Year Dividend Rate
_____________________________
(Required Rate of return for Equity investors - Dividend Growth Rate)
180
Parity price of preferred stock = eqn?
Market price of common x Conversion Ratio
181
type of stock:
1. does NOT vote
2. does NOT receive dividends
3. deducted from outstanding shares
4. earnings per share then increase
what type of stock?
Treasury stock
182
this type of payment can be:
1. cash or company products
2. common shares
3. common shares of another company
4. but NOT listed options of that company
what type of payment is this?
Corporate Dividend Payments
183
1. stock split
2. reverse stock split
3. issue convertible shares
4. repurchase shares for Treasury
5. declaring a cash or stock dividend
which of these does NOT require stockholder approval?
repurchase shares for Treasury
184
1. transfer shares
2. dividends
3. vote
these are rights of whom?
common shareholder
185
corporate debt:
premium corporate bond (that is callable) would be quoted on a yield basis, based upon ___ ?
yield-to-call
186
treasury bonds "stripped" of their coupons
"zero coupon" treasury obligations
separate trading of registered and principal security
name that debt instrument?
STRIPS
187
how long are STRIPs usually held for?
usually held to maturity.
high level of interest rate risk, but purchasers not worried about this.
188
broker-created, zero-coupon treasury bonds = called wut?
treasury receipts
189
debt vehicle:
- - fixed interest rate
- - principal amount adjusted every 6 months = based on CPI
- - interest paid semi-annually, based upon Interest Amount = (fixed rate x adjusted principal amount)
- - Interest will increase if principal amount increases (due to CPI)
- - interest will decrease if principal amount decreases (due to deflation)
- - lower interest rate than similar maturity bonds, due to the inflation protection
- - as inflation rises, the return rises, and the bond price will not fall.
name that debt vehicle?
TIPS: Treasury Inflation Protected Securities
190
Earned income on STRIPS is taxable annually unless ?
in a retirement plan
STRIPS & TIPS only best for: retirement plans, IRAs, Keoghs, and Pensions.
annual "earning" of discount reported as taxable income each year.
owner does NOT get money until maturity
191
bond product:
- - over 1-10 yrs
- - quoted in 32nds
- - semi-annual interest
- - quoted as percent of par value in 32nds
- - minimum $100.00 par value
name that debt product?
Treasury NOTES
192
debt product:
- - up to 12 months
- - yield basis quote
- - 1, 3, 6, 12 months
- - 4 weeks, 13 weeks, 26 weeks, 52 weeks
- - discount from par ($100.00) minimum
- - mature at par
- - discount earned = interest income
- - quoted on a discount yield basis
name that debt product?
Treasury BILLS
T-Bills
193
GNMA = Ginnie Mae = interest income is fully taxable. why?
mortgage interest was deductible by mortagee, on federal and state returns, and "passed-through".
194
1. T-Bills
2. T Notes
3. T Bonds
NOT treasury stock
what is the minimum denomination of par value?
$100.00
195
- - T Notes
- - T Bills
- - T Bonds
what entry form?
book entry
196
- - government national mortgage association (1968)
- - directly owned and backed by government
- - created to give credence to mortgage backed securities (MBS)
- - only buys government insured mortgages (FHA/VA/Farms Home FmHA)
- - mortgage pools --> securitized --> sold to investors
name that govt agency?
Ginnie Mae = GNMA
197
- - student loan marketing association
- - purchases insured student loans from qualified lending institutions
- - purchased from: colleges/universities/state agencies/banks
- - sells normal debentures at semi-annual interest
name that organization?
Sallie Mae = Student Loan Marketing Association
198
- - denominated in US Dollars, issued by foreign countries
- - backed by zero coupon treasury bonds, purchased by Latin American country, matured at par
- - backed by US Govt
- - Gave Latin American countries 30 years to get their acts together and reduce their govt spending and institution pro-growth policies
- - goal was --> 30 year bonds --> give Latin America time --> bring them back to normal bond market
name that type of bond?
Brady Bonds
199
debt vehicle:
- - minimum denomination $25.000.00
- - higher minimum to discourage small investors
- - difficult to quantify risk of short/long maturity (due to falling/rising interest rates)
- - securities backed by mortgages
- - pass-through undivided interest on pool of mortgages
- - pro rata of monthly mortgage --> certificate holder
name that debt vehicle?
Mortgage Backed Pass-Through Certificates
200
- - Buys VA and FHA guaranteed mortgages
- - buys conventional mortgages
- - income = from spread
- - privatized
- - debt obligations still implicitly backed by federal govt and rated AAA by Moody's and AA by S&P
FNMA = Fannie Mae
201
- - Federal Home Loan Mortgage Corp (FHLMC)
- - buys conventional mortgages that do NOT carry government insurance or guarantee
- - Buys conventional mortgages from banks --> mortgage pools --> securitized --> investors
- - still (implicitly) backed by US govt, and has AAA Moody's and AA by S&P.
- - buys conventional mortgages NOT insured by VA or FHA
Freddie Mac = FHLMC
202
1. short term loans -- planting & harvest
2. intermediate loans -- buy equipment
3. long term loans -- buy land and buildings
these are part of what credit system?
Federal Farm Credit System
203
Federal Farm Credit System
- - short term -- 1 year or less
- - discount from $5,000 minimum
- - yield more than T-Bills
these are what type of debt vehicle?
Federal Farm Credit System
Discount Notes
204
Federal Farm Credit System
- - traditional non-callable bonds
- - pay interest semi-annually in 2-10 year maturities
- - minimum $5,000
name that type of debt vehicle?
Federal Farm Credit System
Designated Bonds
205
Federal Farm Credit System
- - traditional callable bonds
- - up to a 30 year maturity
- - semi-annual interest
- - fixed rate bonds, minimum $5,000, or, Floating rate bonds minimum $1,000.
name that type of debt vehicle?
Federal Farm Credit System
Farm Bonds
206
Federal Farm Credit System
- - Designed for retail investors
- - minimum $1,000 denominations
- - unique estate planning feature
- - "Survivor's Option", bond may be redeemed at par plus accrued interest upon death
- - estate taxes due 9 months after death --> these bonds can be redeemed and used to pay death tax liability.
name that type of debt vehicle?
Federal Farm Credit System
Retail Bonds
207
-- Yield 0.25% more than US Treasuries, no direct US guarantee (but same credit rating).
what are they?
Farm Bonds
208
- - $25,000 minimum
- - $1 billion pool --> $25,000 pass-thru --> investors
- - $25,000 minimum = so as to be unattractive to the small investor
- - Unusual risks = prepayment risk and covered following
- - mortgage payments --> pooled mortgages --> payments --> certificate holders
- - payments made monthly (principal and interest)
name that debt product?
MBS = Mortgage Backed Securities
209
Federal Home Loan Bank (FHLB)
- - 1932, great depression, loans to Savings & Loans
- - one-year or less, minimum $100,000
- - yield more than T-Bills
name that debt instrument?
Discount Notes
Federal Home Loan Bank (FHLB)
210
Federal Home Loan Bank (FHLB)
- - up to 30 year maturity
- - interest semi-annually
- - fixed rate bonds
- - $10,000 minimum face amounts
what are they called?
"Bullet Bonds"
(bullet next to listing)
Federal Home Loan Bank (FHLB)
211
Bonds:
If interest rates FALL, yields on existing securities will FALL and the price will go UP. This is when issuers will do what?
CALL IN the CALLABLE securities.
212
Sharpe Ratio equation
Rm-Rf
______________
Std Dev
213
bonds
1. yield to call is lower than YTM
2 YTM is lower than current yield
this is true when bond is purchased at what?
premium
214
Fed Actions
what is DORM?
```
D = Discount rate
O = Open market operations
R = Reserve requirements
M = margin on securities
```
215
YTM for discount bond?
Annual interest + Annual capital gain
___________________________________
(Bond cost + Redemption price)/2
216
Coupon payment + [(F-P)/n]
__________________________
Average value of bond
YTM = Yield to Maturity
C = coupon payment
F = Face value of bond
P = Price investor paid for bond
n =# years to maturity
217
Beta comparison of 2 different stocks or portfolios
divide both by their Beta and compare
218
Bonds
Macaulay Duration
The longer the maturity, the ___ the duration.
the lower the coupon, the ___ the duration.
longer
lower
219
Bonds
Macaulay Duration
Duration = def?
Duration is the weighted average term-to-maturity of a security's cash flows.
Duration is the length of time for price of bond to be repaid by its internal cash flows.
220
Zero coupon bond duration is the ____ ?
time to maturity
221
Current yield = ?
Annual interest in dollars
___________________
Bond's market price
222
YTM = Yield to Maturity = ?
Annual Income + Annual capital change
_____________________________
Average price
223
Internal Rate of Return (IRR) on an Investment = Rate of Interest Implicit in the Investment = ?
Yield to Maturity (YTM)
224
Rule of 72
72 / Interest Rate Return = ?
Years to double in value
225
Rule of 72
72
_______________
# years
= what ?
IRR = Internal Rate of Return
226
Yield to Maturity also known as
True Yield = rate of return on bond, if held to its maturity date
includes: compounding of semi-annual interest payments, and discount or premium price of bond at time of purchase.
227
Current Yield = def?
return relative to security's market price
228
Nominal yield = def?
coupon rate = stated yield = fixed annual rate of interest (as % of par value)
229
Premium bonds:
what is the highest and lowest yield types?
Highest = Nominal yield
Mid = Current yield
Lowest = YTM = Yield to Maturity
230
Discount bonds:
what is the highest and lowest yield types?
Highest = YTM = Yield to Maturity
Mid = Current yield
Lowest = Nominal yield
231
Discount bond:
how to calc YTM ?
Annual Income + Annual Capital Gain
______________________________
Average Bond Value
232
Current Yield = how to calc?
= Annual coupons
___________________
Current Bond Price
=
Annual Interest Earned
______________________
Current Market Price
233
Annual Accretion of Bond Discount = Annual Earning of Discount = ?
Bond Discount
_________________
# years to maturity
234
Bonds:
Yield to Call Date:
eqn?
= Annual Income = Annual Capital Gains or loss to the call date
___________________________________
Average Price
235
Bond current yield = ?
Annual Income
______________
Market Price
236
Calling a bond:
Issues are likely to call bonds when interest rates ____, because then they can call on the issue and refund at ____ market rates.
DROP.
current market rates
237
Calling a bond:
Discount bond, if called early:
____ customer's yield to call date.
IMPROVES
238
Calling a bond:
Premium bond, called early:
____ customer's yield when called at call date.
DETERIORATES.
239
Corporate to Govt yield spread = eqn ?
AAA Corporate Bond Yield - U.S. govt bonds
"Spread" around 5% = "Risk Premium"
240
Widening corporate bond to govt bond spread = sign of ___ ?
coming recession ("flee to safety")
241
narrowing corporate bond to govt bond spread = sign of ___ ?
coming expansion
sell governments = increase yields
buy corporates = decrease yields
242
fed tools = DORM = wut?
```
D = discount rate
O = open market operations
R = reserve requirements
M = margin on securities
```
243
Sharpe Ratio = eqn?
(Rate of return - Risk Free Rate of Return)
_________________________________
Std Dev
244
bonds = the yield curve = ascending curve = sign of wut?
normal economic expansion
245
bonds = yield curve = flat curve = sign of wut?
economy peaking
246
bonds = yield curve = inverted curve = sign of wut?
economy "overheating" --> short-term credit is severely tightened
247
Discount bond:
when pricing a discount bond quoted on a yield basis, the redemption date used in the calculation is the ____ date?
maturity date
248
Premium bond:
When pricing a premium bond quoted on a yield basis, the redemption date used in the calculation is the ____ ___ ___ ?
earliest call date
249
- - long-term maturities
- - low coupon rate bonds
- - deep discount bonds
these have ___ ___ risk ?
interest rate risk
250
ex date
1 business day prior to record date
day price of stock reduced by dividend amount
purchasers of stock won't be eligible for dividend
251
- - contracts cannot be closed by trading on an exchange
- - are not standardized
- - require delivery of an asset at fixed price and date
- - custom contracts between 2 institutions
- - NOT standardized and only trade OTC
name that type of contract?
forward contracts
252
annuity concepts:
- - annual rate of return in prospectus of variable annuity
- - illustrates compounding effect of contributions over life of contract & resultant value of annuity at retirement
- - conservatively presented for illustrative purposes only; not a guaranteed rate of return
- - used to determine initial monthly payment to annuitant
- - only applies during annuity period
- - no meaning during accumulation period
name that term?
AIR = "Assumed Interest Rate"
253
why would a company buy a futures contract?
to protect against rising prices before a future purchase.
regulated by CFTC
254
duties of mutual fund "sponsor"
1. establishes fund
2. registers fund w/ SEC
3. aka "fund underwriter"
does NOT manage fund
255
what happens if death of majority corporate shareholder?
1. corporate's life is unaffected
2. deceased shares pass to beneficiary by will
3. deceased shares pass under terms of that state's law if individual died "intestate"
256
market-linked investment = pre-packaged investment strategy based on a single security, or basket of securities, options, indices, commodities, debt issuance, or foreign currencies, and to a lesser extent, derivatives.
name that thingy?
structured products
257
calculate tax equivalent yield for municipal bonds?
= Yield
_________
(1 - tax rate)
258
options straddle is what type of strategy?
neutral (long straddle)
259
double-barreled bond is backed by?
revenue bond:
backed by:
1. revenue
2. taxing power of municipality (ad valorem)
260
municipal bond secured by taxes OTHER than ad valorem taxes = ?
special tax bond
261
1. Federal Land Bank Bonds
2. Banks for Cooperative Notes
3. Federal National Mortgage Association Bonds
4. Federal Home Loan Bank Bonds
are these "direct" obligations of the US govt?
NOPE
262
type of trusts
unmanaged
portfolio cannot be changed
what is it?
Fixed Unit Investment trusts (UITs)
263
What are debentures backed by?
"full faith and credit"
264
conversion ratio for convertible preferred stock?
Par value
_________
conversion price
265
Callable bonds quoted on a yield basis:
1. Discount bonds are priced based on yield to _____.
2. Premium bonds are priced based on yield to _____.
Discount bonds are priced based on yield to MATURITY.
Premium bonds are priced based on yield to CALL.
266
Type of security:
1. issued in serial maturities.
2. secured by specified corporate assets.
3. commonly issued by transportation companies.
4. default NOT common during recessionay periods.
name that type of security?
Equipment Trust Certificates (ETCs)
267
Federal Farm Credit Funding Corporation Note is subject to ____ income tax, but is EXEMPT from ____ tax ?
subject to federal income tax
exempt from state and local tax
268
1. user fees
2. special taxes
3. lease rentals
but NOT capitalized interest
these are sources of income for what type of debt?
Municipal Revenue Bond
269
Dividend Payout Ratio
Common Dividend Paid
_________________
EPS
270
CAPM = Expected Return = ?
Rf + B(Rm - Rf)
271
Most volatile bonds are?
long term zero coupon bonds
272
Least volatile bonds are?
short term high coupon bonds
273
I am the annual % return based on buying a bond at par.
What am I called?
nominal yield
274
I am the annual percent return based on buying a bond at the current market price.
What am I called?
current yield
275
Annual percent return based on buying a bond at current market price and also includes pro-rated gain if bond bought at a discount. or annual pro-rated loss if bond bought at a premium.
YTM = Yield to maturity
276
If a discount bond:
Yield to call is ____ than Yield to maturity
Yield to call is GREATER than Yield to maturity
277
If a premium bond:
Yield to call is ___ than Yield to maturity
Yield to call is LESS than Yield to maturity
278
- - Nominal Yield
- - Current Yield
- - Yield to Maturity (YTM)
- - Yield to Call (YTC)
From top to bottom, this shows from lowest to highest, the yield measures for a market ____ bond ?
DISCOUNT bond
279
- - yield to call (YTC)
- - Yield to maturity (YTM)
- - current yield
- - nominal yield
From top to bottom, this shows from lowest to highest, the yield measures for a market ____ bond ?
PREMIUM bond
280
If you buy a muni in the state you live, it is ____ tax free?
TRIPLE tax free
281
an annuity option where, if the annuitant dies before receiving the full investment value of the annuity contract, the remainder is refunded to his or her estate.
Unit Refund Annuity
282
Investment Vehicles: Corporate Debt: Convertible Debt: Conversion Ratio:
per share parity price = ?
per share parity price =
premium price
____________
conversion ratio
