BU - Investments Flashcards

Question

Currency Exchange

Answer 1

Devalue is when $1: 1 euro moves to $1.50: 1 euro. I have to use more $ to purchase euro Revalue is when $1: 1 euro moves to $1: 1.50 euro. I can get more for $1 Replace the exchange value with a product - ex: $1: 1 apple or $1: 2 apples

Answer 2

To Buy: to buy the power, do you want to control the outcome To Sell: to sell the power, do you careless Long: to buy the product Short: to sell the product

Answer 3

``` N = X x2 FV = X PMT= X /2 I= X /2 PV= ? ``` If the yield increases, then the price must decrease, and the other way around

Answer 4

``` N = X x2 FV = X PMT= X /2 PV= (X) I= ? x2 ```

Answer 5

``` N = # of years until called x2 FV = callable price PMT= X /2 PV= (current price) I= ? x2 ```

Answer 6

Upward sloping: positive, normal, where the rates of short-term paper are lower than the rates on longer term paper Flat: rates of short-term and long term are similar Downward sloping: negative, inverted, where the rates of short-term are higher than the rates on longer term paper

Answer 7

Looming recession in the next 6-12 months, has been 100% correct

Answer 8

Phases: expansion and contraction Points: trough and Peak Expansion: increasing GDP & decreasing unemployment Contraction: decreasing GDP & increasing unemployment

Answer 9

2 consecutive quarters with negative GDP

Answer 10

Controlled by Congress Tools are taxation and government spending Increasing government spending are used to promote economic growth and/or recovery Government will sell Treasury Securities to slow down economic growth

Answer 11

Controlled by the Federal Reserve Bank Mandates: sustainable long-term growth (GDP 2.5-3.5%), price levels (core inflation 2-2.5%) and full employment (unemployment 4% or less) Tools: Discount rate, Reserve Requirement and open market activities

Answer 12

Discount Rate will be increased, increasing the cost of borrowing Reserve requirements will be increased, decreasing the amounts that can be lent The Fed will sell treasuries, to pull money from the market

Answer 13

Decrease the discount rate - lowers the cost of borrowing Decrease the reserve requirements - increasing the amounts to be lent Buy securities from the market - this puts money back into circulation

Answer 14

Buy/sell securities Adjusting the discount rate Adjusting the reserve requirement

Answer 15

Calculates the time to recoup your money on a bond investment (effective maturity) Weighted average of the PV of the future cash flows of a bond or bond portfolio The higher the coupon the lower the duration Matching duration of fixed income to an investor's time horizon immunizes those assets Used to estimate changes in bond prices based on hypothetical changes in prevailing rates Overestimates risks from rising interest rates and underestimates benefits from lowering interest rates

Answer 16

The **longer** the duration and the **lower** the coupon - **more sensitive** to changes in rate The **short** the duration and the **higher** the coupon - **less sensitive** to changes in rate Duration is a linear estimate that tends to overestimate the impacts Convexity is more complex and more accurate

Answer 17

68% 95% 99%

Answer 18

Positively skewed has outliers in the upper or the right tail (stock market) Negatively skewed has outliers in the lower or the left tail Kurtosis is how high or low the peak is mesokurtic = normal distribution Leptokurtic = slender distribution (Lipo = skinny :) Platykurtic = broad distribution (play = broadway)

Answer 19

Trigged when a taxpayer realizes a loss on the sale of a security and acquires a "substantially identical" security within 61 days Ramifications: loss on a sold security will be disallowed, the disallowed loss will be added to the basis of the new securities purchased.

Answer 20

Bonds - difficult to violate unless you buy the exact same bond or bond fund Stocks - Convertible bonds and call options Convertible bonds can convert to the stock which was sold for a loss Purchasing a call option that can be exercised into the same stock that was sold

Answer 21

``` COME = Call Option MP - EP POEM = Put Option EP - MP ``` PIT = Premium - Intrinsic Value = Time Premium Intrinsic Value can never be zero When the intrinsic value is + then the contract is "in the money", when they are equal it is "at the money", otherwise it is "out of the money"

Answer 22

Buyer is the long or holder Seller is the short or writer Buyer of a call contract = has the right to purchase shares Buyer of a put contract = has the right to sell shares Seller of a call contract = has the obligation to sell shares Seller of a put contract = has the obligation to buy shares Covered Call = long the stock & short the call (hold the stock & selling the stock), used to generate income Naked Call = unlimited risk, you don't own the stock & selling it (short the call) Protective Put - portfolio insurance Collar: protects put protects against price decrease, the call premium use to offset the cost of the put Straddle: used to capitalize on volatility regardless of direction Spread: Benefit from stability

Answer 23

Spot Price: the current market value of the item in today's market Contracts are standardized Long Position: anyone who owns something Short Position: anyone who has to buy something If you are long - you need a short hedge so you sell future contracts If you are short- you need a long hedge so you buy future contracts

Answer 24

Intrinsic Value (market price of stock and exercise price of option contract) Time Premium (risk free rate of return, time to expiration and standard deviation of stock)

Answer 25

Constant Ratio: adjusts the portfolio back to its target weights Variable Ratio: stacks the proportions in favor of assets that have performed poorly in recent periods, This plan not only departs from your original plan, but is also a form of market timing.

Answer 26

* Interpret federal securities laws * Amend existing rules * Propose new rules to address changing market conditions, and/or * Enforce rules and laws. Federal securities legislation is created by Congress.

Answer 27

* The individual or firm advises as to the value of securities, or as to the advisability of investing in or selling securities, through publications or writings and, in fact, they hold themselves out to the general public as providing such advice. * The individual or firm is engaged in the business of advising others, by providing general or specific advice or issues reports about securities. * The individual or firm receives compensation for advisory services.

Answer 28

Series 6: Investment Company Product/Variable Contracts Series 7: General Securities Series 62: Corporate Securities Series 63: to sell securities in any of the 41 states that require state-level rep registration Series 72: Government Securities

Answer 29

* A description of the company's properties and business, * *A description of the security to be offered for sale,* * Information about the management of the company, and * Financial statements certified by independent accountants. Part I is the prospectus - the legal offering document that must be delivered to everyone who is offered or buys the securities and must include audited financial statements Part II contains add'l information and exhibits that the company does not have to deliver to investors but must file with the SEC Form S-1

Answer 30

The preliminary prospectus that is used by securities professionals to obtain indications of interest as the SEC reviews a registration statement 20-day waiting period

Answer 31

Small adviser is 0-25MM - prohibited to register with SEC, and must register in the state mid-size adviser is 25-100MM - if in NY or WY must register with SEC, otherwise register in the state Large adviser is 100MM+ - must register with the SEC when reaches $110M, and not register with the state

Answer 32

are large, short-term CDs denominated in U.S. dollars and issued by banks outside the United States. They are negotiable, meaning that they can be traded. they are not have federal deposit insurance Euro dollar deposits are not negotiable

Answer 33

TIPS’ **_principal_** is adjusted every six months to reflect the inflation rate.

Answer 34

T-Bills = less than 1 year *Current Price = Face Value × [1 - ((Days to Maturity ÷ 360) × Discount Yield)]* T-Notes = 1-10 Years T-Bonds = 10-30 years

Answer 35

* Denominations of $100,000 or more * Maturities of up to 270 days * Large institutional investors * Terms are non-negotiable * Issuer may prepay the note is an unsecured (not backed by any assets) short-term promissory note issued by both financial and non-financial companies.

Answer 36

Annual coupon rate / market price of bond

Answer 37

* financing publicly owned utilities, * financing quasi-utilities, like transportation, * financing by levying a tax on properties that benefit from the expenditure, for example a new sewer system, * Industrial Development Bonds are used to finance the purchase or construction of industrial facilities Revenue Bonds are backed by revenues from a designated project, authority, or agency or by the proceeds from a specific tax.

Answer 38

General Obligation Bonds: issued by state and local agencies and backed by the full faith and credit of the agency. Revenue Bonds: backed by the revenue from designated project, authority and agency

Answer 39

DOW Jones is price weighted Standard & Poors 500 is value weighted Russell 2000 is small companies Wilshire 5000 is a very broad-based index made up of stocks from NYSE, American Stock Exchange and NASDAQ

Answer 40

Rights: to information, to buy/sell, to dividends arrears & priority to dividends Participating preferred stockholders are entitled to fixed rate of cash dividends Cumulative preferred stock gives owner the right to accumulate dividend payments skipped

Answer 41

Market Book Par

Answer 42

grants existing stockholders the right of first refusal on any new stock and maintain previous fraction of outstanding shares; prevents dilution of control

Answer 43

Issued by the firm and allow the holder the ability to purchase additional shares They give the holder the option to purchase shares at an exercise price. The exercise price is set initially to be substantially **_higher_** than the prevailing market price. The value of the warrant will fluctuate along with the underlying stock and can be sold in a secondary market.

Answer 44

also known as *subscription warrants* issued to give existing stockholders their preemptive right to subscribe to a new issue of common stock before the general public is given an opportunity. Rights exercise prices are set below the current market prices

Answer 45

Arbitrage/Relative Value Quantitative Long/Short Macro funds

Answer 46

***90%*** of their income is distributed to shareholders And at least 75% of a REIT's assets and income must be derived from real estate equity or mortgages.

Answer 47

* **Investment Strategy:** Seek out basic mispriced securities. * **Use of Leverage:** A high degree of leverage is used to capitalize on otherwise small pricing differences. * **Risk Control:** Necessary to eliminate broad market risk in order to capitalize on relative mispricing.

Answer 48

market prices are published daily in the financial media a fund's net asset values are published weekly and are based on the closing market price for the previous Friday. A closed-end fund's shares are considered to be trading at **discount** when their market price per share is less than their NAV. The fund's shares are considered to be trading at a **premium** when the shares' market price is greater than the NAV.

Answer 49

**No-load funds**, charge lower transaction costs and generally provide fewer services, are beneficial for investors who have some investment knowledge and an understanding of how mutual funds work. Do not charge commissions **Load funds** are beneficial for investors who are seeking advice or guidance from a broker or adviser and do not mind paying a sales charge. Charge commission

Answer 50

* U.S. District Court* * U.S. Court of Federal Claims*

Answer 51

US Tax Court US Court of Federal Claims US District Courts

Answer 52

indicates the securities in the portfolio are moving in tandem movement of one security in comparison to the other in the portfolio is not predictable movement of one security as against the other is exactly opposite, indicating the most diversified situation.

Answer 53

that the fair value of an option is determined by the following five factors: stock price exercise price risk-free rate life of the option the volatility of the common stock

Answer 54

BAPM is based on the interaction between information traders and noise traders and also considers value expressive measures CAPM only considers information traders, and uses utilitarian factors in determining supply and demand for a stock

Answer 55

AKA "Truth in Securities Law" or "The Paper Act" Two basic objectives: 1. Requiring that investors receive financial and other significant information concerning securities being offered for public sale; and 2. Prohibiting deceit, misrepresentations, and other fraud in the sale of securities. The '33 Act applies to the **primary market**, where securities go through an initial public offering (IPO) process.

Answer 56

Congress created SEC to regulate the secondary market - Register, regulate and oversee: Brokerage Firms: firms that charge a fee/commission for executing orders submitted by another firm Transfer Agents: person who maintains the records of registered securities Clearing agencies: facilitate the validation, delivery and settlement of securities transactions Self Regulatory Organizations (SROs): FINRA is an SRO and is accountable to the SEC for the various stock exchanges: NYSE, American Stock Exchange. Empowers the SEC with disciplinary powers and to require parodic reporting by companies with public securities The Sarbanes-Oxley Act of 2002 recast and expanded the powers of the SEC, giving the SEC even more authority to regulate a larger group of professionals, including lawyers.

Answer 57

Created to promote stability and protect investors Comprises of 5 presidentially appointed Commissioners, 4 divisions and 18 offices; Has 11 regional and district offices Meet to interpret federal securities laws, amend existing rules, propose new rules to address changing market conditions and/or enforce rules and laws.

Answer 58

regulates investment advisors (ABCs) **_A**_dvice is given on investments and in the _**B**_usiness of offering advice and _**C_**ompensation is received for the advice regulates the organization of companies, including mutual funds, that engage in primarily in investing, reinvesting and trading in securities, and whose own securities are offered to the public In place to minimize conflicts of interest Requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and regular basis This act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments Does not include banks, lawyers, accountant, teacher, engineer, bona fide newspaper The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) passed in 2010, made important amendments to the registration rules outlined in the Investment Advisers Act of 1940.

Answer 59

under SEC oversight, protects investors and market integrity and administers exams and licenses must become securities licensed to buy/sell securities on behalf of clients RIAs under the Advisors Act of 1940 are held to fiduciary standard, FINRA licenses are held to a suitability standard 1938 Maloney Act Amendments to the Securities Exchange Act of 1934

Answer 60

Market Orders - instructed to buy/sell immediately, broker is obligated to act in “best efforts” Limit Order - investor sets a price to sell above or buy below, may or may not be executed Stop-Limit -activates a market order at a certain price and then limits the transaction from going beyond an unwanted price Fill-or-kill - get cancelled if the broker is unable to fully execute them immediately

Answer 61

the minimum percentage of the purchase price that must come from the investor's own funds

Answer 62

grants the brokerage firm the right to pledge the investor's securities as collateral for bank loans, provided that securities are purchased using a margin account. Most brokerage firms also expect investors to allow them to lend their securities to others who wish to sell them short.

Answer 63

Purchase of one option and sale of another with same expiration dates but different strike prices Long Strangles are debit transactions Short Strangles are credit transactions because premiums are received

Answer 64

Put and Call are bought with the same expiration date and exercise price Short straddles with profit from small price movements around the exercise price

Answer 65

Purchase of one option and sale of another similar but different option

Answer 66

*Face Value × [1 - ((Days to Maturity ÷ 360) X Yield)] = Current Price* $1,000 × [1 – ((*120* ÷ 360) × *0.0275*)] = **$990.83**

Answer 67

may be assessed to an investor that sells the fund prior to an agreed-upon holding period

Answer 68

90% At least 75% of a REIT's assets and income must be derived from real estate equity or mortgages.

Answer 69

CML standard deviation SML uses CAPM, Beta

BU - Investments Flashcards

(93 cards)