Investments Flashcards
(110 cards)
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
2
Q
What is a US Dollar deposited in a Hong Kong bank called
A
Euro dollar
3
Q
What type of bonds have to be registered with the SEC
A
All bonds sold in the public in the US
4
Q
If a bond is selling at a discount, its YTM is lower or exceed CY
A
Exceeds
5
Q
When is an issuing corporation most likely to call its bonds
A
when they are selling at a premium
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
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.
8
Q
T Bill
A
- 3 6, 12 mo
- 100 - 1M
- risk : safest
Weekly Auction
Sold at a discount
9
Q
T notes
A
2- 10 years
Risk: RIP (reinvestment, interest rate, purchasing power)
1000- 100K
Monthly Auction
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
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.
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
13
Q
HH Bonds
A
only avail by exchanging EE (no longer)
interest s/a
non marketable
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
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;
16
Q
GO
A
Full faith credit and taxing power of muni raise taxes (safest of all the muni)
17
Q
Revenue bond
A
FFC- backed by spec source of revenue
higher yield then go
18
Q
Insured muni
A
AMBAC
MBIA
BAM
typically AAA rated
19
Q
Corp mortgage bonds
A
safest of alll long term corp issues sice they are backed by spec real estate
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
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
22
Q
debenture
A
corp debt obligation backed by the integrity of the issuer
23
Q
indenture
A
formal agreement- deed or trust
trustee acts on behalf of the bondholders
24
Q
investment grade bonds risk
A
DRIP
25
DRIP
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
26
convertible bonds
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
27
bonds intrinsic value
present value of the expected cashflows
28
BOND CONVERSION VALUE
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
29
Floor Value (convertible)
every conv security has a flr. it will not sell for less than the larger of - value as a bond (debt) its conversion value
30
example of floor value- when to convert or not covert
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
31
callable bond
* 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
32
put bond
* holder can cell to issuer
* issuer must redeem
* if IR go up and px goes up they can sell
* typically has a lower yield
33
OID
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.
34
Yankee Bond
issued by a foreign bank in the US
35
Large Cap
$10 Billion market cap
36
Mid Cap
2-10 B market cap
37
Small Cap
less than 2B - small cap
38
Micro Cap Stocks
co w/ market values less than $300M
39
Annual report
* for sh
* previous yr results
* financial data
* done by auditors
40
10Qs
Quarterly reports
going to SEC
41
10Ks
annual reports going to SEC
42
Preferred Stock
* 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
43
Cumulative Shares
when dividend payments are missed - pay all dividends in full before any payment of dividends to common sh are allowed.
44
Noncumulative shares
missed dividends do not have to be made up
45
Who buys preferred stock?
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
ADRs
* 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
ETFs
* 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
unit investment trust
* investment co w/ no day to day portfolio management
* unmanaged, passive
* self lquidating
* sponosr makes a market
* NAV
*
49
mutual funds
* open end
* capitalization is always changing
* non negotaible redeemable
* mark to market - NAV
*
50
closed end investment company
* public traded
* issue stock once- no new shared
* trade on exchange- negotiable
* may hold illiquid securities
51
Invt Vehicles classified s investment companies under the Invt Act of 1940
* Open end fund
* mutual fund
* closed end fund co
* UIT
* Variable annuities
52
accredited investor
* earn a min amt annually or net worth of more than $1M Not incld home
* sophisticated investor
53
Limited partnerships
* real estate, oil, gas drilling and other businesses may operate as limited partnerships
* blind pool- know the objective but not the properties
54
GICs
* 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
NOI Net Operating Income
Property Cash Flow
1. + Gross rental receipts
2. + non-rental income
3. = PGI potential gross income
4. - vacancy and collection losses
5. = effective gross income
6. - operating expenses
7. NOI. \*No depreciation or debt
56
Intrinsic Value of Property
max px you would pay for real estate
Cap rate- given
NOI / cap rate = intrinsic value
57
REIT
* 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
Equity Reit
* 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
mortgage reit
* 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
RELP
* non public traded
* illiquid
* thin secondary mkt
* 10-20 yrs until all properties liquidated
* (no more passive losses)
61
REIT VS RELP
REIT RELP
portfolio investment- tax like stock. subject to passive lpss rules
active traded not marketable
BOD GP
62
REMIC
* 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
nominal yield
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
BA
used to finance import export
65
Current Yield
6.6 cpn $800
$65/800 = CY
66
Derivative
financial instrument whose value is based on an underlying asset (such as a stock) or group of assets (such as a benchmark)
67
Intrinsic Value (option)
* minimum price an option would command
* difference between the market price of the underlying asset and exercise px of the option
68
Time premium
the amt. the market price of an option exceeds its intrinsic value
69
exercise px
aka strike px is the px at which the stock can be purchased or sold on exercise of the option
70
Premium
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
put option
* 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
Simple Return
Arithmetic Mean- avg obtained by dividing the sum of 2 or more items by the 3 of items
73
Compound return
add interest to principal to calculate interest in the next period
74
Geometric mean Return sample
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
Geometric Mean
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
Time weighted return
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
Dollar weighted returns
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
Real rate of return
AKA inflation adjusted interest rate or rate of return is the nominal rate of return adjusted for inflation
79
real rate of return formula
real rate of return =
[(1 + after tax return/1+inflation rate ) - 1] X 100
80
IRR
dollar weighted return
81
Real Rate of Return Example
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
Nominal Return
actual returns produced over a given period computed w/o accounting for the purchasing power of the dollar inflation
83
Total Return
the annual return of the investment incld appreciation or loss and dividends or interest
84
Risk adjusted return
return has been altered to account for the differences in risk among variables of the same type.
85
holding period return
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
Holding period return example
bought at 10,000. paid 3k in dividends, sold at 20K.
what is the holding period return
_20,000 3000 10000_
10000
= HPR
87
HPR with Margin
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
IRR
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
functions for IRR
1st # is g, CFO
then g, Cfj+ for inflows - for outflows
then f, IRR
90
YTM
* 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
0 cpn bond- risk
* no reinvestment risk since there is no cpn
* there is an interest rate risk and reinvestment rate risk
92
reinvestment risk
investing cpn different reinevstment rate
93
YTC
* 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
Current Yield
* 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
CY Formula
_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
Tax Equivalent Yield (TEY)
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
TEY calculation
_tax exempt yield_ = TEY
## Footnote
1 - tax rate
98
What tax bracket for what TEY
your own state muni - none
treasury - fed tax
corp - fed & state tax
muni from other state - state
99
Bond duration
* 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
immunization
* passive invt strategy
* safeguard bond portfolio against interest rate volatility
* **duration is equal to a preselected time horizon**
101
type of risk w/ bonds
*avoid by having the duration equal your time frame*
interest rate risk-
reinvestment risk
102
how to measure equal bonds in your portfolio
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
what types of risk are you able to avoid by having the duration of the bond portfolio match the client's financial goals?
reinvestment rate risk and interest rate risk
104
Zero cpn bonds
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
Duration formula
-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
Duration- if bonds IR going up what do you buy
* High Cpn w/ short duration
* **UPS** Up- Short duration
107
DURATION
if IR are expected to fall what do you buy
Buy low cpns w/ long maturities to lengthen your duration
FALLEN
Interest rates FALL, LENgten duration
108
when the cpn is smaller
the relative price fluctuation is greater
109
when the term to maturity is longer
the relative price fluctuation is greater
110
when the market interest is lower
the relative price fluctuation is greater
