CH13-ST investing and borrowing Flashcards

1
Q

An investment report should illustrate the composition of a portfolio according to: (3 things)

A
  1. Maturity distribution
  2. Quality ratings
  3. Security classes
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2
Q

The purchase price an INVESTOR would pay for a T-bill is based on ____?

A

Ask Discount

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3
Q

What is a Bid Discount on a T-bill?

A

The discount at which the DEALER will purchase the T-bill

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4
Q

Both Bid and Ask Quotes are based on a ### day year basis?

A

360 day year basis because they are given in terms of a discount

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5
Q

What is the key difference in the determination of a Money Market Yield (MMY) and the Bond Equivalent Yield (BEY)?

A

MMY is based on 360-day year, while the BEY is based on a 365-day year.
i.e. Day-Count Convention

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6
Q

What is holding period yield and how calculated?

A

HPY=return earned by investor during the period the investment is held.

HPY=(Cash Rx’d at Maturity - Amount Invested) / Amount Invested

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7
Q

How to convert MMY to BEY?

A

MMY * (365/360) = BEY

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8
Q

How to convert BEY to MMY?

A

BEY * (360/365) = MMY

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9
Q

What is nominal yield?

A

Coupon rate of a bond.

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10
Q

What is Yield Curve?

A

Plot of yields to maturity on the same investment instrument as of a specific date

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11
Q

What type of yield quoting convention is needed to compare investments held for different time periods?

A

An annualized return, like BEY or MMY
BEY is based on 365
MMY is based on 360

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12
Q

How to find discount rate when given:

$100,000 182-day T-bill sold for $96,982

A

FIRST:
Dollar Discount = Par Value - Purchase Price

SECOND:
Discount Rate = (Dollar Discount / Par Value) * (360 / Days to Maturity)

100,000 - 96,982 = 3,018 Dollar Discount

(3,018 / 100k) * (360 / 182) = 0.05969 = 5.97%

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13
Q

inverted yield curve means

A

Downward sloping
Investors prefer LT securities
Issuers prefer ST borrowing

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14
Q

Any organization’s investment reporting should illustrate the composition of a portfolio according to:

A
  • maturity distribution
  • quality ratings
  • security classes
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15
Q

T/F: third-party custodians are often required for investors using outsourced investment management

A

True
Keeping securities at the institution from which they were purchased is considered somewhat more risky than using a fee-based, third-party custodian because there may be a potential for fraud

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16
Q

Define Active Investment Strategy

A

AKA Total Return Strategy: pursues enhanced returns by capturing capital gains that may arise on longer-dated maturities
pg404

17
Q

Define Buy and Hold Strategy for investments

A

goal of capital preservation by purchasing securities that can be held to maturity, eliminating price risk.
pg404

18
Q

Define Tax Based Strategy for investments

A

goal of minimizing income taxes on investment return

pg405

19
Q

What is the most important tool an investment manager possess to protect the organization from investment risks?

A

Diversification

20
Q

4 Diversification approaches for investments:

A
  • Allocate by asset type or among a variety of investment management firms
  • Hold a percentage of foreign instruments so the company can minimize the impact of specific currency movements
  • Limit investments in issues from the same organization
  • Limit investment from specific issuers and/or instruments in order to limit concentration risk
21
Q

Define Price Risk

A

an INCREASE in interest RATES causes the bond value to decrease if SOLD PRIOR to maturity

  • investor demand decreases
  • a component of interest rate risk
22
Q

Define Reinvestment Risk

A

after market interest rates drop, the proceeds from a maturing investment will be reinvested at a lower rate.
-a component of interest rate risk

23
Q

exposure horizon within an investment policy is a function of

A

organization’s risk philosophy and the total interest rate exposure already present

24
Q

Portfolio performance should be evaluated against ______

A

benchmarks based on permitted investment vehicles, such as:
US Treasury securities,
30-day commercial paper,
market segment indices

25
Q

When should a security holding be considered impaired and a write-down taken?

A

When the organization’s valuation and impairment policies indicate to do so

26
Q

formula for

Annual Interest Rate =

A

(Interest Paid + Fee on the unused portion) / used portion of the line

[ (Average borrowing * All-in rate) + (Unused portion * Commitment Fee) ] / used portion

27
Q

formula for

Interest Paid =

A

Average borrowing * All-in rate

28
Q

formula for

Fee on the unused portion =

A

Unused portion * Commitment Fee

29
Q

3 basic cost components for lines of credit

A
  1. all-in rate of interest
  2. commitment fees (for used and unused balances)
  3. upfront and arranger fees on loan syndication
30
Q

What type of commercial paper (CP) issuance specifies that the face value be in amounts higher than $250,000, has a maximum maturity of 397 days, and no restrictions on how the proceeds may be used?

A

4(2) Commercial Paper

31
Q

T/F: Revolving credit lines can be carried as long-term liabilities on the balance sheet

A

True

32
Q

Committed or Uncommitted:

terms are for one year and the bank can cancel the line of credit at any time

A

Uncommitted

33
Q

Underlying cost of debt formula (r) =

A

r = Real Risk Free rate + Inflation prem. + Default prem. + Liquidity prem. + Maturity prem.

34
Q

Rate demanded by Lenders, investors, or savers

A

Real Risk-Free Rate

35
Q

What is assumed to be True when determining components of interest rates?

A
  • US Treasuries are perceived to be risk-free, with no default risk
  • US Treasuries are highly liquid and thus have no liquidity risk
  • Both corporate and municipal bonds have default and liquidity risk
  • Maturity risk increases with the issue’s time to maturity
36
Q

What rate of return is the basis for all other borrowing rates?

A

real risk-free rate