CFP - 3 Investments Flashcards
(191 cards)
1
Q
What are the possible maturities for T-bills?
A
4, 13, 26, 52 weeks
2
Q
How often are T-bills auctioned?
A
Weekly except 52s are every 4 weeks
3
Q
T-bill increments and minimum purchase
A
$100, $100
4
Q
Are t-bill subject to OID rules?
A
No
5
Q
How are T-bills taxed?
A
Interest income in the year of maturity equal to the maturity price minus the purchase price
6
Q
How are T-bills sold before maturity taxed?
A
Short-term cap gain or loss
7
Q
Who issues cash management bills?
A
US Treasury
8
Q
Are cash management bills auctioned?
A
No
9
Q
Do cash management bills have variable or fixed terms?
A
Variable
10
Q
How long is the usual maturity of a cash management bill?
A
a few days
11
Q
What do companies use commercial paper to finance?
A
Accounts receivable and inventories
12
Q
What are commercial paper denominations?
A
$100,000 or more
13
Q
What is commercial paper a substitution for?
A
Short term bank financing
14
Q
What is the range for commercial paper maturities?
A
1 to 270 days
15
Q
What is CP usually backed by?
A
Lines of credit from banks
16
Q
Who usually issues CP?
A
Large, financially strong corporations
17
Q
Who usually buys CP?
A
Money market funds
18
Q
How is CP taxed?
A
Interest is ordinary income in the year earned
19
Q
What usually has a higher yield?
CP
T-bills
CDs
A
CP
20
Q
What is the min for negotiable CDs?
A
$100,000
21
Q
Who buys negotiable CDs?
A
Large institutional investors
22
Q
Are CDs highly liquid?
A
Yes
23
Q
Who buys non-negotiable CDs?
A
Individuals
24
Q
Which type of CD has deductible early withdrawal penalties?
A
Non-negotiable
25
What type of interest rates do money market deposit accounts offer?
Variable, short-term interest rates
26
Are MMDA's FDIC insured?
Yes
27
How many withdrawals can you make from an MMDA per month?
Usually no more than 6
28
What are repos used for?
Used by securities dealers to finance large inventories of marketable securities
29
What is a repo?
An agreement to purchase an underlying security back at a specific price on a specific date
30
A dealer uses a repo to finance a $5mm position. The repo term is 1 day and the repo rate is 4%. What is the interest due and how does this work?
Interest due = 5mm x 0.04 x (1/360) = $555.55
Dealer would sell repo for $5,000,000 then buy it back for $5,000,555.55 the next day.
31
How does a reverse repo work?
Dealer buys a security then sells it back at a higher price.
32
Reverse repos are AKA
Repurchase agreements
33
Repurchase agreements are AKA
Reverse repos
34
What are banker's acceptances?
Securities acting as a line of credit issued from a bank
35
Are banker's acceptances negotiable?
Yes
36
What are banker's acceptances used for?
Smaller companies to fund short-term debt needs
37
What is a Eurodollar?
US dollar denominated deposits in foreign banks
38
Eurodollar maturities are less than...
6 months
39
Are Eurodollar CDs more liquid than domestic?
No
40
What is the duration of a zero-coupon bond?
The time to maturity
41
How are zeros taxed?
Interest accrued during a given year is taxed in the year earned even though the interest in not received until maturity
42
Where are registered bonds registered?
With the issuer
43
Where are bearer bonds registered?
They aren't. The holder receives payments
44
Where are book-entry bonds registered?
With a depositor (DTCC for example)
45
What is a sinking fund?
Funded by the bond issuer to accumulate sufficient funds to pay off the debt upon maturity
46
Who holds the sinking fund?
Trustee
47
When do T notes and bonds pay interest?
Semi
48
What is the best investment to use as collateral for a loan?
Treasury note or bond
49
What is the longest maturity T bond?
30 years
50
What are the T note maturities?
2, 3, 5, 7, 10 years
51
What are T note mins?
$100
52
What are T bond mins?
$100
53
Is interest on T notes and bonds subject to state and local tax?
No
54
Are capital gains on T note/bond sales subject to state and local tax?
Yes
55
What are the terms for TIPS?
5, 10, and 30
56
What is the min/increment for TIPS?
$100
57
How does CPI affect TIPS?
Adjusts the principal value of the bond
58
Are TIPS interest rates based on the CPI?
No, just the principal is. The interest will accrue on the new inflation adjusted principal
59
How often do TIPS pay?
Semiannual
60
What is the maturity face for TIPS?
The greater of the inflation adjusted principal or the original principal
61
How is interest on TIPS taxed?
State and local exempt. Federally taxed as interest income in the year earned. Principal increase is taxed in the year earned and increases basis.
62
What are Treasury STRIPS?
Separate Trading of Registered Interest and Principal of Securities
63
How do STRIPS work?
The principal payment and each interest payment is separated into individual zero-coupon securities by a financial institution then sold
64
How are STRIPS taxed?
Like zeros
65
Series EE bonds issued after _____ earn a fixed interest rate
5/1/2005
66
What are series EE face values?
$25 to $10,000
67
How long must EE bonds be held?
At least 1 year
68
What is the penalty for EE bonds redeemed early and what is the cutoff?
5 year cutoff, 3 month interest penalty
69
EE bonds issued after _____ are excluded from gross income if used for higher education, if they are registered in the _______'s name, and the bond purchaser is ______ or older.
1989, parent, 24
70
Series HH bonds were discontinued on
9/1/2004
71
Series I bonds are inflation linked based on ____-
CPI-U - urban consumers CPI
72
How are series I bonds taxed?
Same as EE
73
Which US government agency bonds are backed directly by the US gov?
GNMA
74
What is a unique risk to MBS?
Prepayment risk
75
Private activity bonds must use more than ____% of the proceeds for ______
10%, private business use
76
Qualified private activity bonds are tax exempt if _____% or more of the net proceeds are used for IRS qualified purposes
95%
77
How are serial bonds usually called?
Oldest maturities first, as they have higher interest rates
78
Formula for tax equivalent yield =
TEY = r / (1 - t)
r is the nominal rate of return
t is the tax rate
79
Collateral trust bonds are backed by...
stocks and bonds of other companies held in trust
80
What are debentures?
Bonds not backed by collateral
81
What does conversion ratio mean? (convertible bonds)
The number of shares of issuer's stock that will be acquired at exchange
82
What is the conversion ratio formula?
Par value of convertible security / conversion price
83
Is the conversion of a senior security into common stock taxable?
No
84
Is systematic risk diversifiable?
No
85
How do you decrease unsystematic risk in a portfolio?
Diversification
86
What are the 5 systematic risks? (PRIME)
```
Purchasing Power
Reinvestment
Interest Rate
Market
Exchange Rate
```
87
Unsystematic risk can be significantly reduced with portfolios containing as few as _____ stocks
10
88
A positively skewed distribution is ____ tailed
Right
89
A positively skewed distribution has a high _____ and a low _____
Mean, mode
90
A negatively skewed distribution is _____ tailed
Left
91
A negatively skewed distribution has a high _____ and a low _____
Mode, mean
92
What does Kurtosis measure?
Whether a distribution is more or less peaked than a normal distribution
93
Leptokurtic has a _____ peak than a normal distribution
Higher
94
Platykurtic has a _____ peak than a normal distribution
Lower
95
Which type of kurtic distribution is better for investors who want to minimize volatility?
Leptokurtic
96
Lognormal probability distributions are skewed _____
Right
97
A lognormal probability distribution has a greater than 50% chance that an observation will fall to the _____ of the mean
Left
98
What is the formula for covariance?
Correlation coefficient of XY times St Dev of X times St Dev of Y
99
What is the formula for the coefficient of determination?
R squared, correlation coefficient squared
100
What is the formula for Beta?
Correlation coefficient of the market and the stock times the st dev of the stock divided by the st dev of the market
101
What is the short formula for covariance?
Standard devation squared
102
____% of outcomes fall within 1 st dev of the mean
____% of outcomes fall within 2 st devs of the mean
____% of outcomes fall within 3 st devs of the mean
68
95
99
103
What is the formula for z-score?
(Value - Mean)/Standard Deviation
104
Why is holding period return inferior?
Doesn't consider the amount of time and ignores the time value of money
105
What is the formula for holding period return (%)?
(( 1 + r1) x (1 + r2) x ... (1 + rn) ) -1
106
What is the arithmetic mean?
Average
107
What is the geometric mean forumla?
nth root of
1 + r1 times 1 + r2 .... all the way to rn
minus 1
108
What is the difference between APR and EAR?
APR is just the interest charged during a time period. EAR takes compounding into account
109
If APR is 9.99% compounded daily, what is the EAR?
( 1 + (0.0999/365) ) ^365 -1 = 10.50%
110
What is the difference between time weighted return and dollar weighted return?
Time weighted is the return over a certain period, no respect to cash flows (ie mutual fund returns reported)
Dollar weighted is the investor's actual performance
111
Connie bought 1 share of XYZ for $50. One year later she received a dividend of $4 and bought a second share for $65. At the end of the second year, she sold the stock for $75 per share. There was no dividend in the second year.
What was the time-weighted return of the XYZ stock?
CF0 -50
CF1 4 (does not take into account the second purchase)
CF2 75
IRR = 26.54%
112
Connie bought 1 share of XYZ for $50. One year later she received a dividend of $4 and bought a second share for $65. At the end of the second year, she sold the stock for $75 per share. There was no dividend in the second year.
What was her dollar-weighted return?
CF0 -50
CF1 4-65 = -61
CF2 150
IRR = 22.63%
113
What does the Markowitz Efficient frontier use as a measure of risk?
Beta
114
What does the Capital Market Line use as a measure of risk?
Standard deviation
115
Systematic or unsystematic?
Business risk
Un
116
Systematic or unsystematic?
Financial risk
Un
117
Systematic or unsystematic?
Default risk
Un
118
Systematic or unsystematic?
Political risk
Un
119
Systematic or unsystematic?
Reinvestment rate risk
Sys
120
Systematic or unsystematic?
Exchange rate risk
Sys
121
Calculate the standard deviation of the following returns:
```
13.5
12
5
-2
7
23
6
10
45
10
0.5
14
```
Put in each one then hit the E+ button. At the end, hit Shift Sx, Sy
=12.2938
122
Are portfolios below the efficient frontier attainable?
Yes, but they are not preferred as they are inefficient
123
Are portfolios above the efficient frontier attainable?
No
124
What two points connect the Capital Market Line?
Risk free rate and portfolio "M" on the Markowitz Efficient Frontier
125
How can portfolios on the Capital Market Line be above the efficient frontier?
Left of M is a lending portfolio, right of M is a borrowing portfolio. Using leverage allows you to have a portfolio above the efficient frontier
126
What is the formula for market risk premium?
market rate of return - risk free rate of return
127
What is the formula for stock risk premium?
market risk premium (rm - rf) times Beta
128
What is the equation for SML?
Security Market Line = same as CAPM
129
Mike has a portfolio. It returned 16% last year. The market returned 12%. The risk-free rate was 7% and Mike's portfolio had a Beta of 1.25. Did his portfolio do well on a risk adjusted basis?
E(r) = 7 + (12 - 7)(1.25) = 13.25%
13.25% was expected and his returned 16% so it did great
130
What are the 3 factor breakdowns for Arbitrage Pricing Theory?
1. Some factors affect all securities: inflation, interest rates, population growth
2. Some factors affect specific sectors
3. Some factors affect a single company
131
What is the Arbitrage Pricing Theory (APT) formula?
ri = a0 + b1F1 + b2F2 ... + e
```
ri = expected return
a0 = risk free return
bn = sensitivity to factor n
Fn = factor that affects the security (i.e. GDP)
e = error term (should drop out if all relevant factors are captured)
```
132
Howie uses multiple regression to determine the sensitivity of a certain stock to various factors.
Inflation: 1.1 Factor Beta, 5% factor risk premium
Unemployment: 0.8, 7%
Industrial Production: 0.5, 6%
If the rate on 90 day T-bills is 2%, what is the expected return of his stock?
= 0.02 + (1.1*0.05) + (0.8*0.07) + (0.5*0.06) = 0.1610
16.10%
133
Which form of EMH?
Holds that current stock prices have already incorporated all historical market data, such as prices, trading volume, and published financial information?
Weak
134
Which form of EMH?
Technical analysis is already priced in.
Weak
135
Which form of EMH?
Fundamental analysis and inside information may produce above-market returns.
Weak
136
Which form of EMH?
The current stock price reflects all past historical price data and data from analyzing financials, industry, and current economic outlook.
Semi-strong
137
Which form of EMH?
Insider information is the only way to outperform.
Semi-strong
138
Which form of EMH?
Using inside information is unlikely to produce consistent out performance.
Strong
139
Which form of EMH?
Fundamental, technical, and insider info is already reflected in price.
Strong
140
What is the January effect?
Stocks have a tendency to decline during December and go up during January
141
What is a collar?
Selling an option and buying an opposite option.
Ex. Writing a covered call (establishes a ceiling) and using the premium to pay for a put (establishes a floor)
142
Private placements are limited to ______ unaccredited investors.
35
143
What makes an accredited investor?
Income of more than $200k (or $300k with a spouse) in each of the last two years
OR
Net worth over $1 million
144
What are the 4 types of markets?
First (Exchange)
Second (OTC)
Third (Overlap of Exchange and OTC)
Fourth (Large volume institutions, within 3rd)
145
Limit order purchase a security at or (above/below) a certain price or sell at or (above/below) a certain price.
purchase below
sell above
146
What is a stop order?
An order to create a market order if the price reaches a specific level
147
What is a stop limit order?
An order to create a limit order if the price of a security reaches a specific level.
148
What is a bond's current yield?
Annual interest payment / current market price
149
Jeff has a bond with a coupon rate of 4.25% trading at $965. What is the current yield?
42.50 / 965 = 4.40%
150
A 3 year bond has a coupon of 8% paid semi. If the yield for a comparable bond increases to a 10% rate, what will this bond trade at?
```
FV = 1000
PMT = 40 (8% * 1000 / 2)
I/Y = 5 (10% / 2)
n = 6 (3 * 2)
```
PV = $949.24
151
What is the YTM of the following bond?
Price = $750
3 Years to maturity
6% annually paid coupon
```
PV = -750
PMT = 60
n = 3
FV = 1000
```
I/Y = 17.385%
152
What is the YTC of the following bond?
Price = $1000
Callable @ $1050 in 5 years
6% coupon (semi)
```
PV = -1000
FV = 1050
n = 10
PMT = 30
```
I/Y = 3.4276 * 2 =6.8553%
153
What does the unbiased expectations theory state?
Long-term rates consist of many short-term rates and long-term rates will be the geometric mean of short term rates
154
What does the liquidity preference theory state?
Long term bonds are more price sensitive and investors pay a premium (lower yield) for short term bonds. Argues that the yield curve should always slope upward.
155
The market segmentation theory breaks borrowers up into short, intermediate, and long. Who borrows in each camp?
Short = commercial banks lend, consumer finance firms borrow
Int = Savings and loans lend, manufacturers borrow for working capital
Long = Life insurance companies lend, expansion of plant/equip/property are the borrowers
156
In the duration equation, what are the variables?
Y
C
D
T
```
Y = YTM
C = Coupon
D = Duration
T = Term to maturity
```
157
What is an alternate way to calculate duration?
NPV / current market price of the bond.
Each cash flow equals the cash flow for that year (including principal) times the number of that year
158
What is convexity?
The degree to which duration changes as a result of changes in the YTM. (same relationship to factors as duration)
159
What reflects an investor's willingness to take risks?
Indifference curves
160
An investor selects an appropriate portfolio by choosing the portfolio:
represented by the highest point attainable on the indifference curve, the point of tangency between the indifference curve and efficient frontier
161
What is the sales comparison approach to real estate valuation?
Finding several properties in a market that have been sold with similar characteristics
162
What is the cost approach to real estate valuation?
Estimates the value of a property by determining how much it would cost to replace the property and then make adjustments for depreciation or deterioration
163
What is the income valuation approach to real estate valuation?
Bases the value of the property on the income that can be generated from it
164
What is the direct capitalization formula for valuing real estate?
V = net operating income / discount rate
165
What is NOI?
Net operating income, net income before depreciation and mortgage debt service
166
How do you calculate the implied capitalization rate?
Annual NOI / Cost of property
167
What is M1 money supply?
Sum of demand deposits, coins, traveler's checks, and currency
168
What is M2 money supply?
M1 plus savings accounts, time deposits under $100k, and balances in retail MM funds
169
Current ratio
Current assets / current liabilities
170
Quick ratio (acid test)
(Current assets - inventory) / current liabilities
171
Inventory turnover ratio
COGS / average inventory
172
Accounts receivable turnover
Sales / average accounts receivable
173
Fixed asset turnover
annual sales / fixed assets
174
Operating profit margin
EBIT / sales
175
Net profit margin
net income / sales
176
ROA
net income / total assets
177
ROE
net income / equity
178
Debt ratio
total debt / total assets
179
Debt equity ratio
total debt / total equity
180
Times interest earned ratio
EBIT / annual interest expense
the number of times a company can service its debt
181
Dividend payout ratio
dividends / net income
182
PEG ratio
Price / earnings / growth
PEG < 1 is a possible value company
183
What is the information ratio and what does it measure?
Alpha / Standard Deviation
Measures the consistency with which a manager beats a benchmark
184
Coefficient of variation (CV) equals...
standard deviation / expected return
185
What happens when a shorted stock pays a dividend?
The short seller is required to make payment in lieu of dividends to the investor who's stock was borrowed
186
Formula for margin call =
debit balance / (1 - maintenance margin)
187
What is the formula for debit balance?
Price per share times initial margin (50%)
188
What is a substitution bond swap?
Swapping bonds with identical characteristics but different prices as an arbitrage opportunity
189
What is an intermarket bond swap?
swapping one type of bond with another (i.e. government bond for corporate bond)
190
What is a rate anticipation swap?
Swapping for more or less duration based on beliefs in change of interest rate
191
What is the formula for current yield?
Coupon payment $ amount divided by price of bond
