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CFP Extra > Investment > Flashcards

Investment Flashcards

1
Q

Convertible bonds

A

Hybrid
Pay interest
Can convert to specific number of shares of common stock

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2
Q

GNMA

A

DIR risk
Buys insured mortgages from
banks and put into pools
US gov guaranteed
Taxes at all levels

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3
Q

CMO

A

Mortgage payments equals cash flow and received in different tranches

Multi class pass thru

A-Z Tranches with Z tranche riskiest and 0 coupon

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4
Q

TIPS

A

Protects against inflation
Marketable
Sold at $1k
Taxes annually on appreciation phantom income

2nd interest will be calculated using CPI adjusted price (par * 1/2 CPI) plus par

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5
Q

STRIPS

A

zero coupon treasury securities
Discount treated as taxable income
Produce phantom income

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6
Q

Bond features

A

Callable: issuer has right to redeem bond at predetermined price at a date prior to maturity
Usually called if bond interest rates FALL since issued. Issuer can then sell new bonds to replace old ones at lower interest rates.
Investors are protected for at least 10 years.

Put: permits holder to sell the bond back to the issuer
Issuer must redeem at a specific date for par.
Do this if interest rates go UP

Put and convertibility features decrease bonds yield

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7
Q

LEAPS

A

Matures up to 2 years and hedge against indices

Buyer will be taxed at long term rates if held contract for a year and a day. If exercised the buyer need to hold the shares for more than 12 mins for LTCG.

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8
Q

Futures terminology

A

Spot price: current market price of commodity

Open interest: # of futures contracts trading at any given day

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9
Q

Negatively correlated to markets

A

Collectibles and natural resources

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10
Q

Preferred stock

A

Both equity and debt
Stated dividend rate
Doesn’t mature
Corp, pension and low bracket individuals most likely to buy
Risker than bonds longer duration
Little growth

Warrants can be attached adding long term value

Rights can be attached adding short term value

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11
Q

REIT

A

Invests in real estate, short term construction loans and mortgages
Marketable
There are non public ones that’s aren’t liquid or marketable

Use for tax deferred accounts

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12
Q

Mortgage REIT

A

Make loans to finance construction
Higher default and purchasing power risks

Inflation is bad for these REITS

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13
Q

Taxation of REITs

A

75% of all REIT income must come from real estate and 15% can come from equities
Then if 90% of all REIT net investment income is distributed only pay tax on non distributed portion

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14
Q

Real Estate LPs (RELPS)

A

Non publicly traded
Illiquid
Passive loss rules
Last about 10-20 years

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15
Q

Real estate mortgage conduits (REMIC)

A

Limited life and self liquidating
Invests in real estate, mortgages or securities
Large range of risks
Pass through income

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16
Q

UITS

A

No day trading
Unmanaged
Handled by independent trustee
Passive stately
Securities rarely sold
Self liquidate
Redeemed at NAV trade on secondary market

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17
Q

Closed end funds

A

Publicly traded
No new issues
Limited shares
Sold in open market

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18
Q

Modern portfolio theory

A

Seeks to quantify relationship between risk and return
Investors should be compensated for risk

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19
Q

Capital market line

A

Marco view
Relationship between variability of returns and risks
Diversified portfolio lies on the line
Inefficient portfolios fall below CML
Can’t be used on single security or undiversified port
Intersection on CML is called risk free or 100% Tbills

Point b is the optimal risky portfolio all risky assets or the tangent of the CML and the Markowitz efficient frontier

Point A less risky

Point c 100% risky

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20
Q

Efficient Market Frontier

A

Evaluate portfolios based on expected returns and risk
Efficient portfolio =lower risk for given level of return or higher return for any given risk

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21
Q

Security market line (SML)

A

Micro view
Relationship between risk and return for an individual asset doesn’t matter if portfolio is diversified

Use beta

Market risk premium is (Erm -rf) it is the slope of SML

stock risk premium is (Erm-rf)B

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22
Q

Anomalies to efficient market

A

P/e effect: stock with low P/E ratios perform better than ones with high

Small firm effect: stock with small firms perform better than large

January effect: stocks decline at year end and rebound in January

Neglected firm: unknown stocks perform better than popular ones

Value line phenomenon: stocks rated 1 outperform those rates 5

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23
Q

Duration

A

Measure the weighted average maturity of bonds cash flow on PV

risk averse: bonds with short durations
Aggressive: long durations

Interest rates increase buy HIGH coupon with short maturities to shorten duration

Interest rates FALL buy LOW coupon with long maturities to lengthen duration

Calculate duration: shortcut look at the maturity and if it is coupon laying look for a number close to the maturity

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24
Q

Convexity

A

Degree to which duration changes
Largest for low coupon, long maturity and low YTM

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25
Q

Immunization

A

Passive investment strategy to safeguard against interest rate volatility

A portfolio is immunized if the average duration of the bonds in the portfolio is equal to a pre selected time horizon

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26
Q

ADR

A

Americans buying foreign shares in US form

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27
Q

Fundamental analysis

A

Economic research to predict economy interest rates, GDP, inflation, unemployment and inventories

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28
Q

Top down (fundamental analysis)

A

Looks at trend in select industries and then companies that will benefit from trends

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29
Q

Bottom up (fundamental analysis)

A

Searches for individual stock with great performance before considering economic trends. The individual will do well even if the industry does not.

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30
Q

Technical analysis

A

Use of charts and computers programs to ID and project price trends

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31
Q

Resistance (technical analysis)

A

The price ceiling at which analysts note persistent selling of security
Sellers expected to enter market in sufficient numbers to lower price. When stock breaks through a resistance level it will go on to new high prices = bullish

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32
Q

Support (technical analysis)

A

Security tends to stop falling because there is more demand than supply. It becomes a temporary price floor. If it continues to drop through the support level the outcome is bearish.

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33
Q

Dow theory (technical analysis)

A

Aggregate measure of securities prices and doesn’t predict direction of changes in individual stock prices. Shows the direction of overall market.

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34
Q

Baron’s confidence index (technical analysis)

A

The differential between the returns on quality bonds and bonds of lesser quality will forecast future price movements.

35
Q

Dividends

A

Date of record: first business day after ex dividend
Ex dividend: ppl must buy shares a day before ex dividend date to get the dividend

36
Q

Stock spilt

A

Make ownership more affordable
Increases number of shares and lowers price

Ex: 3 for 2 stock spilt
New share count: (Number of shares * 3) divided by 2
New price: (price *3) divided by 2

37
Q

Reverse stock spilt

A

Reduces number of outstanding sutras price increases

38
Q

Laddered bonds

A

Bonds are purchased with different maturity dates. As each bond matures a new longer term one is purchased.

39
Q

Bond bullets

A

Only intermediate bonds

40
Q

Bond barbells

A

Half short half long requires rebalancing

41
Q

Margin

A

Options and mutual funds CAN’T be bought on margin

42
Q

Arbitrage pricing theory

A

Movements are NOT explained by risk or return.

If unexpected value is 0 factors have no effect

If factor is 0 it is expected or anticipated

43
Q

Black Sholes options valid model

A

5 Variables:
Price of stock
Strike price
Time remaining
Interest rate
Volatility of stock

Call = increase in exercise price decrease in value

Put = increase in exercise price increase in value

All other variables have a direct relationship with both

44
Q

Liquidity

A

Transaction speed and stability of price
Can’t lose money
Includes savings accounts, money market accounts and treasury bills

45
Q

Marketability

A

Only transaction speed
Cash and cash equivalents aren’t marketable because they are NOT redeemed or sold

46
Q

Normal distribution

A

Mean value = return
Symmetric

47
Q

Log normal distribution

A

Upper limit limited
Positively skewed

48
Q

Correlation coefficient

A

Movements of stocks in same portfolio are similar or not within specific range positive 1 to negative 1

Correlation coefficient is pij in covariants formula

Max risk is 1.0 = Add risks and divide by number of risks to get to risk of portfolio or average

Less than max but positive= needs to be less than the formula above

Negative = pick a number near zero

49
Q

Covariance

A

How 2 stocks are related or how price movements of one is related to another

50
Q

Coefficient of variation

A

Relative variability used to compare with investments with widely varying risks
Higher the greater the relative risk

Risk per unit of expected return

Standard deviation divided by the average mean

51
Q

Brokered CDS

A

issuer by a commercial bank rather than a savings institution

SUBJECT to interest rate risk, reinvestment and market

Regular CDS are subject to reinvestment and market risk

52
Q

Current yield

A

Annual interest in dollars divided by bonds market price

53
Q

Bonds market price

A

Annual interest in dollars divided by current yield

54
Q

Guaranteed investment contracts (GICS)

A

Similar to CDs but they are issues by insurance companies

Subject to default risk

55
Q

Black scholes option valuation model

A

Considers five variables to value the option of a non-dividend paying stock (think call up)

  1. Exercise price (non direct relationship)
  2. Time remaining to expiration
  3. Interest rate
  4. Volatility of underlying stock
  5. Price of underlying stock

All variables have a direct up relationship for calls except the exercise price

56
Q

Call options

A

The greater the volatility the higher the price of a call option

57
Q

Devaluation

A

Is the lowering of the value of currency relative to currencies of one or more other nations.

Can occur from rise in value of other currencies relative the the currency of a particular country.

58
Q

Revaluation

A

Refers to an increase in currency’s value

59
Q

Risk adjusted return

A

To standardize risk divide a specific funds realized return by its beta coefficient

60
Q

Geometric mean or time weight return

A

Percentages
1+gain(loss) multiple by next years 1+gain(loss) and keep multiplying

Evaluate performance of manager

Then use the number above put into FV
PV= -1
N= number of years
I/YR = solve

61
Q

Dollar weighted return

A

Also called the IRR

Cash flow

Type in all cash flow select IRR on calculator

If quarterly payments multiple IRR by 4

62
Q

Return on equity

A

EPS divided by common equity per share or book value ( take book value divided by shares outstanding)

63
Q

Dividend payout ratio

A

Common dividends per share / EPS

64
Q

Yankee bonds

A

Dollar denominated bond issues in us by foreign banks and corporations

65
Q

Original issue tax exempt OID

A

No phantom income
Tax exempt

66
Q

Investment income

A

Interest
Dividends (if elects not to use reduced rates)
Royalties
Short term gains

67
Q

Home office deductions

A

Suspends unless you are self employed and satisfy the qualifying rules.

Deduction is calculated by taking the gross income minus expenses for business. Whatever amount that is you can deduct home office expense up to that amount no more can’t create a loss

68
Q

Meals and entertainment expense

A

Business meals are 50% deductible

  1. Salaried employee: can be reimbursed for full expense anything not reimbursed can’t be deducted on personal return. Corporate tho can deduct 50%
  2. Corporation pays for 100% of event but CANT deduct expense on corporate return
  3. The self employed person must pay 100% of expense but can only deduct 50% of meals on schedule C.

Tickets to sporting and cultural events are no longer deductible

69
Q

Straddle

A

Buy a call buy a put

Believes that there will be future price movements but unsure of direction

70
Q

Collar

A

Sells a call and buys a pit at a lower amount

Owns stock hedging against decline

71
Q

Holding period return timing

A

If time period is greater than a year annualized return is overstated

If time period is less than a year than annualized return is understated

72
Q

How to reduce overall portfolio risk

A

Look at portfolio and determine which fund makes up smallest piece of portfolio. If that fund is different from the rest of the funds you would had to it. Add to the lowest correlation coefficient fund to reduce overall portfolio risk.

73
Q

Disqualified ISO

A

Creates deduction for employer and doesn’t count for AMT.

74
Q

Real return

A

Spread between interest rates and inflation

75
Q

Munis and raising top marginal income tax bracket

A

This would create a demand for minus because they are tax exempt. Greater demand would push price up and municipalities could then issued new bonds with lower coupons.

76
Q

Not considered compensations

A

ISOs unless disqualify and deferred compensation

77
Q

Owning foreign bonds

A

What will increase price:
Devalue of the dollar
Decline in US interest rates (weaker dollar)
Increase in foreign currency

78
Q

Uneven cash flow

A

Difficult to determine what discount rate to use

79
Q

Tactical allocation

A

Changing market conditions justify changes to portfolio

80
Q

P/E valuation model formula

A

Future earnings * P/E

81
Q

Dividend growth rate with multiple growths

A

Use the final growth rate when using the formula

82
Q

Estimating duration

A

Callable bonds: take the years to call and pick the next lowest number

Regular: take the years to maturity and pick the next lowest number

83
Q

Mortgage rate

A

SOFR

Secured overnight financing rate

CFP Extra (8 decks)

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