What is Unsystematic Risk?
Diversifiable
- Business risk
- Financial risk
What is Systematic Risk?
NOT diversifiable
No matter how well difersified, risk of the overall market cannot be avoided.
Types of systematic risk (P.R.I.M.E.)
- Purchasing power risk: inflation
- Reinvestment risk: reinvested funds invested at lower rate
- Interest rate risk: Rise in rates causes value of fixed income assets to fall
- Market risk: risk of the overall market
- Exchange rate risk: risk associated with changes in currency value.
FDIC Insured Amounts (per bank/type of account)
Individual: $250k
Joint: $250k
Trust (per bene): $250k
IRA/Keogh: $250k
EE Bonds
- Non-marketable, nontransferable, can’t be used for collateral
- Sold @ Face value
- Interest rate based on 10yr treasury note yields
- Fixed interest rate that’s in effect at the time of purchase
- Subject to federal taxation when redeemed (unless used as education bonds)
- Not subject to state or local taxes
I Bonds
- Non-marketable, nontransferable, cannot be used for collateral
- Sold @ Face value
- interest rate composed of:
- fixed based rate (same for life of bond)
- inflation adjustment (adj every 6 months)
- Subject to federal taxation when redeemed (unless used for education)
- Not subject to state or local taxes
What is a GO bond?
General Obligation bond.
- Backed by full faith, credit, taxing power of issuer.
- Generally considered safest type of municipal credit
What is a revenue bond?
- Backed by specific source of revenue (ex: toll road, hospital, nuclear power plant)
- Full faith and credit NOT pledged by issuer
- Greater credit risk than GO bonds, thus higher yielding
What are insurer municipal bonds?
Insurers pay timely interest and principal when issuer is in default.
Municipal bond insurers:
- AMBAC (American Muni Bond Assurance Corp)
- MBIA (Muni Bond Insurance Association Corp)
What does an indenture agreement cover?
- Form of bond
- Amount of issue
- Property pledged
- Protective covenant, including any provision for a sinking fund
- Working capital and current ratio
- Redemption rights, call, put or conversion provisions
Corporate and Municipal Bonds (D.R.I.P.)
- Default risk: A creditor may seize the collateral and sell it to recoup the principal
- Reinvestment risk: Funds reinvested at lower rate
- Interest rate risk: Rising rates may cause bond prices to fall
- Purchasing power risk: bond interest may not keep up with inflation
Government bonds (R.I.P.)
No: default risk
Yes: Reinvestment risk, interest rate risk, purchasing power risk
Company market caps
Large: >$10B
Mid: $2-10B
Small:
American Depository Receipt (ADR)
- Prices of ADRs quoted in US dollars
- Dividends paid in US dollars
- Dividends declared in foreign currency
Attain diversification and risk reduction due to lower correlation of foreign securities with US securities
Real Estate (land - improved) NOI
Improved land is normally income producing. Income properties include residential rental, commercial and industrial.
Intrinsic value of real estate property can be computed using NOI computation:
Gross rental receipts \+ Nonrental income (laundry, etc) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Potential gross income (PGI) - Vacancy and collection losses - Operating expenses (excluding depreciation and interest) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ = Net Operating Income
What is the intrinsic value of an option?
The minimum price the option will command as an option.
The difference between the market price and exercise (strike) price of the stock
What is the exercise (strike) price of an option
The price which the stock can be purchased or sold to exercise the option
What is the option premium?
The market price of the option. Closer the option gets to expiration date, market price gets closer to intrinsic value
What is time premium of an option?
The amount the market price of an option exceeds its intrinsic value.
IV + TV = Premium
How are call options taxed?
- At time of purchase: non-deductible capital expenditure
- To writer due to to lapse: premium paid is ST gain
- To writer due to exercise: premium received is
