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Investments Flashcards

1
Q

What has the highest risk and lowest risk:

CD w 6 month maturity,

Tax-Exempt

MM acct,

T Bills,

MM Fund

A

Low: T Bill LOW

High Tax Exempt MMacct

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2
Q

What is a US Dollar deposited in a Hong Kong bank called

A

Euro dollar

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3
Q

What type of bonds have to be registered with the SEC

A

All bonds sold in the public in the US

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4
Q

If a bond is selling at a discount, its YTM is lower or exceed CY

A

Exceeds

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5
Q

When is an issuing corporation most likely to call its bonds

A

when they are selling at a premium

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6
Q

What is an OID- original issue bond

A

discounted from par
each year the portion of the discount that has been earned is incld as taxable income and the bonds basis is increased

discount must be accreted on a straight line basis over the life of the bond
the annual accretion amt is considered to be non-taxable interest income. if held to maturity there is no capital gain or loss

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7
Q

What is phantom income

A

ex when a 0 cpn bond must report interest income although the bond pays no interest until maturity.

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8
Q

T Bill

A
  • 3 6, 12 mo
  • 100 - 1M
  • risk : safest

Weekly Auction

Sold at a discount

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9
Q

T notes

A

2- 10 years

Risk: RIP (reinvestment, interest rate, purchasing power)

1000- 100K

Monthly Auction

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10
Q

T Bonds

A

10 - 30 yrs

Quarterly Auction

Risk: RIP. Reinvestment, Interest Rate, purchasing power

1000- 1,000,000

can be callable

sold YTM basis

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11
Q

TIPS

A

1000
marketable
inflation
Face Value (principle) is adj S/A to keep base w/ inflation.

The higher the inflation rate, the higher the face value of the bond, and the (FIXED % percent NOT THE FIXED AMT) S/A interest payment

SOOOO interest payments vary as the principal is adjusted for inflation and deflation
In any yr when the principal value of the bond increases due to the inflation adjustment, the gain is reportable income.

They are obligations of the fed govt.

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12
Q

What is a series EE bond

A
  • non traded debt not marketable, not transferable, non negotiable, cannot be pledged as collateral
  • savings bond
  • face value
  • fixed interest rate - declare annually or at redemption
  • 30 yrs (20 + 10)
  • interest mo; compounded s/a
  • hold a min for a yr
  • double w/in 20 yrs.
  • interest based on 10 yr T note
  • NO fed taxes UNTIL redeemed
    No state local tax
  • belong to parents for education funding
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13
Q

HH Bonds

A

only avail by exchanging EE (no longer)
interest s/a
non marketable

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14
Q

I bonds

A
  • can earn interest up to 30 yrs
  • at face value
  • accumulate interest monthly
  • interest is compounded every 6 months
  • no gtd IR (like EE)
  • 2 parts= fixed base rate (life of the bond) and an inflation adjustment (S/A)
  • dif between purchase px and redemption is taxabele intereest (redeemed or if it matures)
    interest is added to the bond mo and paid when the holder cashes the bond
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15
Q

GNMA

A

direct gty of US Govt NOT issued by treasury
taxable fed, state, local
25K

pass through certificates representing individual interest in the them into mortgage pools
default risk = 0
interest rate risk = fixed interest rate means price falls when interest rates rise
Reinvestment rate risk= reduced certainty of the mo payment due to HO repaying their mortgage loans prematurely when interest rates fall. (prepayment)

Yield- each payment is interest and return of principa;

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16
Q

GO

A 
Full faith credit and taxing power of muni
raise taxes (safest of all the muni)
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17
Q

Revenue bond

A

FFC- backed by spec source of revenue
higher yield then go

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18
Q

Insured muni

A

AMBAC
MBIA
BAM

typically AAA rated

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19
Q

Corp mortgage bonds

A

safest of alll long term corp issues sice they are backed by spec real estate

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20
Q

CMO

A

eliminate risk of HO refi
expected cashflow- tranches
multiclass pass- through securities
A-Z. representing fast pay, med pay and slow pay. Z tranches. no cpts. cash flow. yield is higher than any other longest duration- last to be paid

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21
Q

Mortgage backed certificate

A

security backed by mortgages
investors receive payments sourced from the interest and principal of the underlying mortgages
It is a pass through security
it represents polled debt obligations repacked as certificates

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22
Q

debenture

A

corp debt obligation backed by the integrity of the issuer

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23
Q

indenture

A

formal agreement- deed or trust
trustee acts on behalf of the bondholders

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24
Q

investment grade bonds risk

A

DRIP

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25
Q

DRIP

A

default risk -
reinvestment risk- when funds avail to reinvest, investor receives a lower yield
interest rate risk
purchasing power risk - inflation may lower the purchasing power of fixed bond interest

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26
Q

convertible bonds

A

hybrid pay interest- owner may convert the bond into a specific # of shares of the issuers common stock.
market price depends on value of stock and and the interest the bond pays

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27
Q

bonds intrinsic value

A

present value of the expected cashflows

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28
Q

BOND CONVERSION VALUE

A

CV = (PAR/CP) Ps

(1000/40) 50 = 1,250. if a bonds is convert (convsersion px) at 40 and the market px is 50, then the post conversion value is 1250

CP conversion px
Ps Current px of underlying stock
PAR par value of the bond

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29
Q

Floor Value (convertible)

A

every conv security has a flr. it will not sell for less than the larger of - value as a bond (debt) its conversion value

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30
Q

example of floor value- when to convert or not covert

A

bond selling at 1200

BOND- 10 yr 8% par 1000 comparible yield 7 = value of bond 1071.06

Convertible at $44

Current price of stock is $34

(1000/44) 34 = 772.73

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31
Q

callable bond

A
  • buyer right to redeem at predetermined px at a date prior to maturity
  • call bond if IR dropped
  • cost to issuer for early redemption is the call premium
  • sell new bonds at lower rate (like a refi)
  • typically callable in 10 yrs
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32
Q

put bond

A
  • holder can cell to issuer
  • issuer must redeem
  • if IR go up and px goes up they can sell
  • typically has a lower yield
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33
Q

OID

A

bonds interest could be accreted or paid. it could be an OID coupon bond not a pure zero. Therefore the interest may be paid out as well as accreted.

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34
Q

Yankee Bond

A

issued by a foreign bank in the US

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35
Q

Large Cap

A

$10 Billion market cap

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36
Q

Mid Cap

A

2-10 B market cap

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37
Q

Small Cap

A

less than 2B - small cap

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38
Q

Micro Cap Stocks

A

co w/ market values less than $300M

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39
Q

Annual report

A
  • for sh
  • previous yr results
  • financial data
  • done by auditors
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40
Q

10Qs

A

Quarterly reports

going to SEC

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41
Q

10Ks

A

annual reports going to SEC

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42
Q

Preferred Stock

A
  • hybrid- equity and debt
  • stated dividend rate
  • duration- infinite- perpetual. NO FIXED MATRITY DATE
  • when IR change px fluctuations in preferred stock exceed those of bonds
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43
Q

Cumulative Shares

A

when dividend payments are missed - pay all dividends in full before any payment of dividends to common sh are allowed.

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44
Q

Noncumulative shares

A

missed dividends do not have to be made up

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45
Q

Who buys preferred stock?

A

typical buyer- corp treasurer w/ excess funds - fully taxable

corp buys- 50% of dividends are excluded from taxation

own 90 days before ex-dividend date

low tax person

pension plan- wants the dividend $

46
Q

ADRs

A
  • foreign shares in the US
  • receipts for the shares of a foreign based (issued) corp held in the vault of a US bank
  • quoted in UD$
  • declared in country of origin
  • holders can receive tax credit for income tax paid in a foreign country
  • GENERALLY- satisfy the requirement for qualified foreign corporations to getthe 0% to 20% qualified dividend rate.
  • reciept for shares of a foregn based corp
47
Q

ETFs

A
  • basket of stocks or bonds
  • marketable
  • subject to makret risk
  • generally more tax efficient than traditional open end mutual funds
  • Open or closed
    • open- invt co or unit trust
    • traded on stock exchange
  • *mostly an open end but could be closed
48
Q

unit investment trust

A
  • investment co w/ no day to day portfolio management
  • unmanaged, passive
  • self lquidating
  • sponosr makes a market
  • NAV
    *
49
Q

mutual funds

A
  • open end
  • capitalization is always changing
  • non negotaible redeemable
  • mark to market - NAV
    *
50
Q

closed end investment company

A
  • public traded
  • issue stock once- no new shared
  • trade on exchange- negotiable
  • may hold illiquid securities
51
Q

Invt Vehicles classified s investment companies under the Invt Act of 1940

A
  • Open end fund
  • mutual fund
  • closed end fund co
  • UIT
  • Variable annuities
52
Q

accredited investor

A
  • earn a min amt annually or net worth of more than $1M Not incld home
  • sophisticated investor
53
Q

Limited partnerships

A
  • real estate, oil, gas drilling and other businesses may operate as limited partnerships
  • blind pool- know the objective but not the properties
54
Q

GICs

A
  • issued by insurance companies
  • 2-5 yrs
  • gtd interest rate- not subject to interest rates
  • value fluctuates - depending on financial strength of co
  • popular for DB plans
    *
55
Q

NOI Net Operating Income

Property Cash Flow

A
    • Gross rental receipts
    • non-rental income
  3. = PGI potential gross income
    • vacancy and collection losses
  5. = effective gross income
    • operating expenses
  7. NOI. *No depreciation or debt
56
Q

Intrinsic Value of Property

A

max px you would pay for real estate

Cap rate- given

NOI / cap rate = intrinsic value

57
Q

REIT

A
  • similar to closed end investment company
  • r/e/, short term contruction loans, and mortgages
  • listed on exchange or traded over the counter
  • cannot invest in limited partnership

non - public reits and r/e limited partnerships are not liquid or marketable

58
Q

Equity Reit

A
  • income producing properties
  • Too much leverage and high vacancy bad- effect dividend and nav
  • income is derived from the difference between net rental income and interest paid on the loans to acquire properties ]
59
Q

mortgage reit

A
  • make loans to develop property or finance construction
  • spread between lending rate and borrowing rate
  • VULNERABLE to purchasing power risk
  • 75% RE invt / 15% GNMA
  • If reit fails to distribute 90% then all net investment income is taxable to reit (equity reit too)
  • under the 2017 TCJA - sh can deduct 20% pass through income from reit
  • Top effective rate will now be 29.6%
60
Q

RELP

A
  • non public traded
  • illiquid
  • thin secondary mkt
  • 10-20 yrs until all properties liquidated
  • (no more passive losses)
61
Q

REIT VS RELP

A

REIT RELP

portfolio investment- tax like stock. subject to passive lpss rules

active traded not marketable

BOD GP

62
Q

REMIC

A
  • limited life self liquidating entity that invest exclusively in real estate mortgages or in securities backed by real mortgages
  • more flexibility than CMOs
  • sep mortgage pools not only into different maturity classes but also into different risk classes (CMOs generally AAA)
  • REMICS may replace CMOs
  • Taxed as pass through entity
63
Q

nominal yield

A

interest rate (coupon). You will likely never do a calculation to find the nominal yield, but you may be asked what the formula is.

For example:

> A $1,000 par, 4% bond

Nominal yield = 40 / 1000

64
Q

BA

A

used to finance import export

65
Q

Current Yield

A

6.6 cpn $800

$65/800 = CY

66
Q

Derivative

A

financial instrument whose value is based on an underlying asset (such as a stock) or group of assets (such as a benchmark)

67
Q

Intrinsic Value (option)

A
  • minimum price an option would command
  • difference between the market price of the underlying asset and exercise px of the option
68
Q

Time premium

A

the amt. the market price of an option exceeds its intrinsic value

69
Q

exercise px

A

aka strike px is the px at which the stock can be purchased or sold on exercise of the option

70
Q

Premium

A

market price (cost) of an option. as the option approaches its expiration date, the market price of the option (the premium) approaches the instrinsic value

71
Q

put option

A
  • right to sell a specific # of shares of common stock at a set price for a given period of time
  • Bearish
  • stock goes down- I can deliver it to the seller at the higher px
  • Writers want premium income
  • writers are bullish on the price of the underlying stock
  • they believe the stock will not decrease in value, and therefore, the options will not be exercised.
72
Q

Simple Return

A

Arithmetic Mean- avg obtained by dividing the sum of 2 or more items by the 3 of items

73
Q

Compound return

A

add interest to principal to calculate interest in the next period

74
Q

Geometric mean Return sample

A

Annual returns for XYZ common stock for the last 3 yrs +18%, +10%, -30% (put it in $s by adding the 1

1.18 X 1.10 X .7 = .9086

  • N= 3
  • I = solve for this (answer -3.14)
  • PV = 1 Change (alway -1)
  • PMT = NA
  • FV = .9086
75
Q

Geometric Mean

A

The main use of the Geometric mean (time weighted return) is to evaluate the performance of the portfolio manager. Unlike the rate of return (IRR) it is not affected by cash flows

76
Q

Time weighted return

A

measures investment performance (income and price changes) as a percentage of capital at work - eliminates effects of additions and w/d and their timing that distort dollar weighted return

stagent portfolio never touching

comparing manager s

77
Q

Dollar weighted returns

A

same as IRR

measures changes in total dollar value, treating additions, and w/d of capital as part of the return along w/ income and capital gains and losses.

biggest mistake is reinvestment rate (assumes its constant)

used for planning for clients

78
Q

Real rate of return

A

AKA inflation adjusted interest rate or rate of return is the nominal rate of return adjusted for inflation

79
Q

real rate of return formula

A

real rate of return =

[(1 + after tax return/1+inflation rate ) - 1] X 100

80
Q

IRR

A

dollar weighted return

81
Q

Real Rate of Return Example

A

If an investor can earn 6% nominal return on an investment and inflation is 2%, is the investor’s real rate of return 4%?

[1.06 / 1.02 -1] x 100 = 3.9216

82
Q

Nominal Return

A

actual returns produced over a given period computed w/o accounting for the purchasing power of the dollar inflation

83
Q

Total Return

A

the annual return of the investment incld appreciation or loss and dividends or interest

84
Q

Risk adjusted return

A

return has been altered to account for the differences in risk among variables of the same type.

85
Q

holding period return

A

total return (income plus px appreciation and dividends less margin interest) over the period from purchase to end of period or sale divided by the price of the investment (the out-of-pocket cost)

Total return between where you bought it and where you sold it (no timing of cash flows)

86
Q

Holding period return example

A

bought at 10,000. paid 3k in dividends, sold at 20K.

what is the holding period return

20,000 3000 10000

10000

= HPR

87
Q

HPR with Margin

A

buy 10,000 margin 50% interest 12% annually. sold 1 yr later 15,000

what did you buy it for- what did you sell it for

what happened in the middle

S15,000 - (B5000. +. i600) - B5000 =. 4400 B5000. 5000

=88%

88
Q

IRR

A

discount rate at which the present value of future cash flows equals the cost of the investment

WHEN NPV of the cash flow is 0, the discount rate being used is in the IRR. When IRR is greater than the required return, the invt is acceptable

89
Q

functions for IRR

A

1st # is g, CFO

then g, Cfj+ for inflows - for outflows

then f, IRR

90
Q

YTM

A
  • YTM is the effective yield of the bond
  • YTM is the compounded rate of return an investor will receive from a bond at the current market price if held to maturity
  • takes into acct the market price as well as capital gains or losses on the bond if held to maturity
  • when calc YTM use s/a compounding
91
Q

0 cpn bond- risk

A
  • no reinvestment risk since there is no cpn
  • there is an interest rate risk and reinvestment rate risk
92
Q

reinvestment risk

A

investing cpn different reinevstment rate

93
Q

YTC

A
  • presumes the bond will be redeemed by the issuer at the 1st call date specified in the indenture agreement.
  • YTC is same calc as YTM except that the principal value at maturity (FV) is replaced by the call price, and the maturity date (yrs) is replaced by the 1st call date
94
Q

Current Yield

A
  • takes into acct the interest in dollars and current market px of the bond
  • it does not fact any discount or premium that may affect total return from the bond.
  • whats happening TODAY
95
Q

CY Formula

A

Annual interest in $

bond current price

if a 1000 bond w/ a 10% cpn is now selling for $900, what is the current yield

100 / 900 = 11.11%

96
Q

Tax Equivalent Yield (TEY)

A

used in 2 different ways

  1. interest rate on taxable bonds necessary to provide the same after tax return on a muni
  2. TEY is taxable equivalent yield

NOTE- muni is exempt from fed taxes but subject to state and local

97
Q

TEY calculation

A

tax exempt yield = TEY

1 - tax rate

98
Q

What tax bracket for what TEY

A

your own state muni - none

treasury - fed tax

corp - fed & state tax

muni from other state - state

99
Q

Bond duration

A
  • the weighted avg maturity of the bond’s cash flow on a present value basis
  • able to compare bond volatility w/ equal coupons but different terms
  • risk averse- shorter term
  • aggressive- long term but IR are going up otherwise s/t
  • most important measure of how risky bonds are because it measures their sensitivity to interest rate changes.
  • duration reveals how a bond or bond fund will react to interest rate changes
100
Q

immunization

A
  • passive invt strategy
  • safeguard bond portfolio against interest rate volatility
  • duration is equal to a preselected time horizon
101
Q

type of risk w/ bonds

A

avoid by having the duration equal your time frame

interest rate risk-

reinvestment risk

102
Q

how to measure equal bonds in your portfolio

A

Bond X = 9 yrs

Bond Y = 5.6 yrs

you need the money in 7 yrs

what is proportion of the 2 bonds to immunize your portfolio if 40%X, 60%Y

  1. (9+5.6) / 2 = 7.3
  2. (40%* 9) + (60% of 5.6)
  3. (3.6) + (3.36) = 6.96
  4. SUPER CLOSE TO 7!!!
103
Q

what types of risk are you able to avoid by having the duration of the bond portfolio match the client’s financial goals?

A

reinvestment rate risk and interest rate risk

104
Q

Zero cpn bonds

A

have equal durations to their maturities

because they have no cpns their prices fluctuate more than those w/ cpns and the same maturities

most interest rate sensitive

105
Q

Duration formula

A

-duration (change in yield / (1+YTM)

interest rate increase of 1% for a 12% YTM bond and a bond duration of 2.75%

  • 2.75 (.01 / 1.12)
  • 2.75 (.0089)
  • .0246
  • 2.46%
106
Q

Duration- if bonds IR going up what do you buy

A
  • High Cpn w/ short duration
  • UPS Up- Short duration
107
Q

DURATION

if IR are expected to fall what do you buy

A

Buy low cpns w/ long maturities to lengthen your duration

FALLEN

Interest rates FALL, LENgten duration

108
Q

when the cpn is smaller

A

the relative price fluctuation is greater

109
Q

when the term to maturity is longer

A

the relative price fluctuation is greater

110
Q

when the market interest is lower

A

the relative price fluctuation is greater

Investments (2 decks)

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