Investments Flashcards

Question

Annual Reporting for Corporations

Answer 1

Annual report needs to be written for shareholders 10Qs needed quarterly from corporate to the SEC 10Ks needed annually from corporate to the SEC

Answer 2

Hybrid security Sold at a par value with a stated dividend rate Usually perpetual in length (infinite duration) Interest rate changes often change the price of preferred stock more than debt Cumulative or noncumulative dividends: cumulative missed dividends have to be paid back first where noncumulative do not have to be paid back Usually for corporate treasurer with extra cash - if the corporation buys preferred stock then 50% of the dividends are excluded from taxation

Answer 3

Invest in stocks and/or bonds that are parts of indexes Emphasize tax efficiency through minimal turnover

Answer 4

Aggressively managed investment portfolio using advanced strategies to generate high returns Operate as private investment partnerships that require a very large initial investment Investments are often illiquid and usually require a year commitment Need to be an accredited investor and a sophisticated investor to invest Not required to register with the SEC unless you have over $100M AUM

Answer 5

- Net worth of $1 Million (excluding value of primary residence) - Single earning $200k annually - Couple earning $300k annually

Answer 6

Can be real estate, oil, gas, etc. Sometimes with blind pool, actual properties have not been added yet Need to look to general partner past performance

Answer 7

Similar to CDs, issued by commercial banks Guaranteed interest rate (no interest rate risk) Value fluctuates with financial strength of issuer

Answer 8

Unimproved Land: Cannot generate income or depreciation, only hope is appreciation, can have negative cash flow Improved Land: Includes rental income

Answer 9

NOI / Cap Rate

Answer 10

REITs are portfolio investments subject to tax like a stock (similar to closed-end investment company) and managed by board of directors Good way to get diversification in an otherwise illiquid market, REITs are liquid and marketable - actively traded on markets Equity REITs - Invest mainly in income producing properties like office buildings and hotels and own the property (can be leveraged and good inflation hedge) Mortgage REITs - Make loans to develop property (cannot be leveraged and not a good inflation hedge) REITs need to have 75% of their income from real estate investments, 15% can come from securities REITs need to distribute 90% of their income or else all of it is taxable. If 90% is distributed then only the amount not distributed is taxable. Investor gets a 20% deduction of the pass-through income

Answer 11

Non-publicly traded and subject to passive income loss rules Generally not marketable and not liquid Managed by a general partner

Answer 12

Invests exclusively in real estate mortgages More flexible than CMOs, where CMOs provide timing flexibility, REMICs provide timing and risk flexibility Entity is taxed as a pass-through entity

Answer 13

Volatility will keep the premium high even if close to the end of the option period because of variability in stock price Time always gives a way for the price to change

Answer 14

Options - Expire in 9 months Put - Right to sell Call - Right to buy Warrants - Issued with no intrinsic value Warrants - Issue new outstanding stock when exercised

Answer 15

Long term options Maturities range from 2 years to longer Lets buyers hedge long term movements Great to hedge indices

Answer 16

Spot price (price currently) Open interest (number of futures contracts trading on a day) Daily limit (max price increase or decrease to settlement price) Commodity, financial, and currency futures Can deliver or offset by buying opposite position

Answer 17

Collectibles are rare objects and usually rise in value in inflationary periods Trading is difficult because of the little amount of buyers/sellers Negatively correlated with financial assets - good diversification All gain taxed at LTCG 28% Natural Resources add diversification because of the negative correlation to the stock market Highly responsive to price changes with elastic products Precious metals are an inflation hedge Treated as collectibles for tax reasons Can be simpler to invest in than real gold

Answer 18

Qualified purchaser owns at least $5M in investments Sophisticated investor knows his stuff

Answer 19

Total Risk = Standard Deviation Systematic Risk = Beta

Answer 20

Devaluation is the devalue of a country's currency Revaluation is a increase in the value of a country's currency

Answer 21

International investing adds diversification Emerging markets are less correlated to US markets than international International markets are less efficient because there are less analysts

Answer 22

Liquidity means a security can be sold without delay and without a substantial change in price. This describes both transaction speed and stability of price. Recent maturing CDs, laddered CDs, Money Market mutual funds and life insurance cash value are liquid Open-end funds, ETFs, closed-end funds, and brokered CDs are not liquid because they have possible loss in principle Marketability refers to only speed. Savings, checking, Money Market Accounts, CDs, and mutual funds are redeemed rather than marketable (marketability refers to people trading usually) REITs, closed-end funds, ETFs, and brokered CDs are marketable

Answer 23

Client needs investment manager if they cannot handle it on their own

Answer 24

Risk associated within a certain country due to changing economic or political circumstances

Answer 25

Normal is the bell curve Period returns and leverage $ Lognormal is skewed (positive is to the left) Ending portfolio value $ with no margin

Answer 26

Standardized version of covariance Range of +1 (perfectly correlated) to -1 (perfectly negatively correlated) Corr = COV / (std. dev 1 * std. dev 2)

Answer 27

Extent to which two stocks are correlated to each other Unlimited amounts of possibilities COV = correlation coefficient * std. dev 1 * st.d dev 2

Answer 28

Measures variability used in a nondiversified portfolio measuring total risk.

Answer 29

Measures volatility of returns in a diversified portfolio and is a measure of systematic risk. B = (correlation coefficient * std. dev i) / std. dev m

Answer 30

Measures of relative variability used to compare investments. CV = Standard deviation / mean return This is risk per unit of return, higher the result the greater the relative risk

Answer 31

1x: 68% 2x: 95% 3x: 99%

Answer 32

Take the weighted average standard deviation If the correlation coefficient is less than 1, then the answer is the next lowest value of the weighted average

Answer 33

Divide a funds realized return by its beta coefficient

Answer 34

R squared shows how much of the change in value can be predicted by the market and how much is not. This is the square of the correlation coefficient, if it is above 60% then it is diversified

Answer 35

Return is 10%, 15%, -10%, and 17% (1.1)*(1.15)*(.9)*(1.17) = 1.332 (FV) PV = -1 N = 4 PMT = 0 I = 7.43% Not affected by cash flows (eliminates additional and withdrawals and their timing) Used to assess fund manager performance Purely evaluate fund performance

Answer 36

Mistake is that reinvestment rate is constant. Measures change in total dollar value treating additions and withdrawals as part of the return along with income and capital gains and losses. Same as IRR/NPV Used to compare absolute dollar returns.

Answer 37

Total Return: Annual return including appreciation or loss and dividends or interest. Risk-Adjusted Return: Return has been altered to account for different in risk.

Answer 38

HPR fails to consider timing. Overstates return greater than 1 year and understates returns under 1 year.

Answer 39

IRR is the discount rate at which the present value of the future cash flows equals the cost of the investment. When NPV is 0, the discount rate is the IRR. If NPV is over 0, IRR is greater and under 0 is less. Over 0 is good, under is bad

Answer 40

Always compound semi-annually even with zero coupons. Zero's always avoid reinvestment rate risk. YTM assumes that all coupons are reinvested at the same rate.

Answer 41

CY = Annual interest / Current bond price If specified that they want “current” TEY or something else, then do this: annual coupon / current value

Answer 42

Investors can compare the volatility of bonds with equal coupons but different terms. Risk averse seek low duration, high risk seek high duration when interest rates drop and short duration when interest rates increase. Measures sensitivity of bond prices to change in interest rates

Answer 43

When you match duration with your investment time horizon This eliminates interest rate risk and reinvestment rate risk Passive investment strategy

Answer 44

Earnings divided by cap rate Only good for large companies that have stable earnings, growth, and risk

Answer 45

D / Required Return Good for no growth in dividends like preferred stock

Answer 46

P = D1 / R - G If market lowers the R then value of stock will rise If market increases the R then value of stock will fall If investors expect higher G then stock will rise

Answer 47

Shortcut #1 1st growth rate is lower than the second Do the DDM for the second growth rate Choose the next lowest option from the rate found Shortcut #2 1st growth rate is higher than the second Do the DDM for the second growth rate Choose the next highest option from the rate found

Answer 48

DDM does not work with no dividends Current Market Price = Earnings * P/E ratio

Answer 49

Instead of using the DDM, use this model exactly the same way

Answer 50

ROE = EPS / Book value per share EPS = ROE * Book value per share

Answer 51

Dividends paid per share / EPS

Answer 52

Seeks to estimate the relationship between risk and return. Assumes the investor is compensated for assuming risk. Involves determining the relationships between securities that comprise the portfolio to add diversification. 1. Security Valuation 2. Asset Allocation 3. Portfolio Optimization 4. Performance Measurement

Answer 53

Expresses macro aspect of MPT and CAPM. Specifies relationship between risk and return for a diversified portfolio (not individual positions or undiversified portfolios as those would fall under the CML). Tangent to the efficient frontier at the optimal risky portfolio (all risky assets that are available). Most portfolios are allocated between optimal risky portfolio and risk free portfolio (T-Bills are risk free) with 100% risk free portfolio being 100% T-Bills Represents highest return for a given pool of risk and becomes the new efficient frontier with risk free assets. Shows variability between all possible portfolios. CML shows: expected return on diversified portfolio and diversified portfolio should be on CML

Answer 54

Markowitz approach was to look at combinations of risky assets that would give the lowest risk for a given level of return or the highest return for a given level of risk. Efficient portfolios would fall on the efficient frontier, inefficient would be under and unattainable would be over. Most important factor is risk. Does not include Beta

Answer 55

With the efficient frontier everyone would have their own indifference curve that would be tangent to the efficient frontier (not intersect). More risk averse people would have a steep indifference curve with risk tolerant investors having a flatter indifference curve. These show how much more return is needed to take on more risk.

Answer 56

Second part of CAPM looks at the relationship between risk and return for an individual asset or at the micro level. Does not matter whether it is diversified or not. Security markets in equilibrium are on the SML. Expected return should be equal to the required rate of return. If above, then that stock is undervalued because it gets a higher return for its level of risk. People would buy and it would increase value and drop return to the SML. If below, the stock is overvalued because it gets a lower return for its level of risk. People would sell, decrease value, and move to SML. Above the SML has less risk per return and below has more risk per return.

Answer 57

Finds required rate of return R = Rf + (Rm-Rf)*B MRP = Rm - Rf SRP = (Rm - Rf)*B

Answer 58

Suggests that investors cannot beat the market consistently on a risk-adjusted basis. Passive is the best. Contends that security pricing reflects all known information and enables a stocks price to change quickly. Day to day prices change randomly in a random walk over time. Patterns are unpredictable. Any active strategy is pointless.

Answer 59

These cannot be explained easily and operate in contrast to the EMH PE Effect: Low P/E stocks do better than high P/E stocks Small-Firm Effect: Small firms do better than large January effect: stocks drop in Dec and do better in Jan Neglected-Firm effect: neglected firms do better than known firms Value Line Phenomenon: stocks rated well by the value line survey do better than those rated 5

Answer 60

Examining balance sheets and income statements to forecast future stock price movements. Current and past company records are used to see future trends.

Answer 61

Top Down: Start with economy, then sector, then stock Bottom Up: Start with stock and move up

Answer 62

Ratio: Studies relationships between financial ratios and trends in ratios Liquidity: looks at current ratio to see if a firm is good Activity: how quickly a firm converts its activities into cash, faster is better Profitability: Ratios compare two or more financial variables relative of a firms income earning performance

Answer 63

Looks as charts to project price trends and mostly short-term. Not concerned with specific finances. Looks at trends over time

Answer 64

Charting involves looking at price movements to predict buys or sells Resistance is the upper level, once hit there should be sellers who sell, if its breaks through then it should keep going up Support is the lower level, once there buyers will come in to buy, if it breaks through should keep going down

Answer 65

Sentiment: Look at the mood of investors and go the opposite Dow: Use the DOW as a way to look at the total market movements and make trades off that (active) Barron's: Difference in good and bad bond return differences. When investors are scared they go into high yield which increases value and drops yield, gap gets bigger from that to bad bonds; vice verse Others

Answer 66

Objectives are return and risk Constraints are liquidity, time, and tax

Answer 67

Gross: Interest paid before expenses Net: Interest paid after expenses

Answer 68

If it is 3/2 then divide the 3/2 to get 1.5 and multiple by the number of shares to get the new amounts. Reverse splits work in the opposite way.

Answer 69

No deduction is allowed for a loss from the sell of a security if within 30 days before or after the sale you buy a substantially identical security. If that happens it is added to the basis of the new buy. Different accounts or spouses still count for this. Bond with different terms is not identical.

Answer 70

Date of record is the first business day after the ex-dividend date Corporation pays the dividend to the person who owns the stock the on the ex-dividend date. So... Need to buy the stock the day before the ex-dividend date (2 days before record date) to get the dividend. Be sure to think about business days and holidays for the test.

Answer 71

Sharpe = (Rp - Rf) / Std. Dev

Answer 72

Treynor = (Rp - Rf) / Beta

Answer 73

Alpha = Rp - (Rf + (Rm - Rf)*B)

Answer 74

If the coefficient of determination (correlation coefficient squared) is greater than 60, then use the highest alpha. If alpha is not available then use the highest Treynor. If the coefficient of determination is lower than 60, use the highest Sharpe. If the R^2s are mixed then use the highest Sharpe ratio.

Answer 75

IR = (Rp - Rb) / Std. Dev Return of the portfolio is subtracted from the benchmark return and divided by the std. dev to get the returns above the benchmark. This shows how consistent a fund manager is. Sometimes std. dev is called tracking error for this.

Answer 76

Sharpe ratio compares excess return over the risk free rate Information ratio compares excess return over a benchmark that a fund manager is responsible for

Answer 77

Normal, lognormal, triangular, uniform And many others

Answer 78

Buying and selling securities based on short-term price patterns and asset values

Answer 79

Selling a bond and replacing it with another Executed to change maturities or quality Investors with bond losses usually swap for higher yielding bonds and tax loss harvesting

Answer 80

Long the stock Short call (out of the money) Long put (out of the money) Hedge against stock declining

Answer 81

This specifies a max and min interest rate that will be paid Floating rate note is a debt instrument with a variable interest rate and interest adjustments are made periodically. Tied to money market or T-Bill and mature in 5 years Provide protection against higher interest rates but pay lower yields than fixed rate notes

Answer 82

Invest equal amount at each time period (protects more against down moves) To find average dividend amount invested by price at each period to get number of shares then divide entire amount by the number of shares for average basis Passive

Answer 83

Stockholders choose to automatically reinvest dividends into additional shares No cash is received but dividends are fully taxable (phantom income) No sales commissions for purchasing additional shares

Answer 84

Ladder: bonds are purchased with different maturities spread out equally, as one matures another is bought Bullet: all the bonds are set for one date, intermediate duration Barbell: half in short term and half in long term

Answer 85

Regulation T is 50% for initial (set by the Federal Reserve Board by 1934 exchange commission) FINRA and exchanges set 25% for maintenance margin (ongoing requirement to keep it

Answer 86

Margin-able Securities: - securities listed on stock exchange (stocks, etfs, etc) - NASDAQ issues Securities not allowable under margin: - mutual funds - options These would need to pay full amount because no margin is available

Answer 87

Margin Requirement = (1-initial margin %) / (1-maintenance margin %) * purchase price If price drops questions: Find current total value (shares * new price) Equity required (current value * maintenance margin %) Actual equity (current value - amount borrowed) Equity required - actual equity = maintenance call

Answer 88

You borrow stock and sell it today and buy it at a later date to cover the trade (profit if fund drops in value) Need margin to sell because of borrowing Net proceeds plus margin are held by broker No funds are immediately received by short seller No time limit on short sell Dividends declared must be covered by short seller (expense)

Answer 89

Don’t know which direction but think price will be volatile Buy a put and a call on same price for same expiration If price moves in either direction more than 2 premiums combined then you make money

Answer 90

Long on a position (own it) Buy a put Insurance on decline but costs a premium

Answer 91

Contracts of future delivery of currencies, corporations do this to lock in a price If US man is doing business in Japan then: - if the yen revalues then the return will be greater - if the yen devalues then the return will be lower In this case they would be long the yen so you would short a yen future to hedge

Answer 92

Particular investors possess some advantage relative to others. Believe that markets are not efficient and that a particular strategy can earn superior returns.

Answer 93

This is done once every few years. Simulations are done to generate projected outcomes for a series for each mix of securities and most optimal path is chosen. Long-run or strategix asset mix. Passive

Answer 94

As someone approaches retirement, they become more risk averse. With age investors lose the opportunity to recover from large losses. Overriding consideration is the client's stage of life with asset allocation beingly largely tied to age.

Answer 95

Problems that arise when trying to figure out risk tolerance: - Client may not know - Different tools and surverys say different things - As ages and level of wealth changes, risk tolerance changes - As experience changes, risk tolerance changes

Answer 96

High Risk Tolerance: - High debt - Low levels of insurance - Changes jobs often (not secure) - Quick decisions - High wealth for age - Optimistic - Handles stress - Experienced Low Risk Tolerance: - No debt - High levels of insurance - Stable income or job - Deliberate with choices - Low level of wealth for age - Pessimistic - Does not handle stress well - Inexperienced

Answer 97

Tolerance: Amount of risk a client is comfortable to assume or accept. How much can you take and still sleep at night. Emotional Propensity: Client willingness to take risk Recongition: How much risk the client "thinks" there is Capacity: How much risk you need to achieve your goals If client takes less risk than they need to achieve goals there will be a shortfall and if they take more risk than they need they take uneccessary risk

Answer 98

Rebalancing is performed to reestablish intial asset mix. When is it needed: - Change in wealth - Change in liquidity needs - Change in legal environment - Change in time horizon (goals) - Change in tax - Change in needs

Answer 99

Performed routinely in asset management. Changes in asset mix are based off predictions concerning returns. As predictions of expected returns change, the asset allocation mix actually held in the portfolio change accordingly. Market timing approach meant to increase exposure when expected returns are expected to be good.

Answer 100

Sell and recognize LTCG at favorable rates Setting up hedge with the current position like long puts or collars

Answer 101

Pricing of securities cannot differ for any significant length of time. Securities movements are not explained by risk and return but rather the result of arbitrage as investors seek to take advantage of perceived differences in prices. Factors: - Unexpected inflation - Unexpected changes in levels of industrial production - Unanticipated shifts in risk premium - Unanticipated changes in structure of yields If any of these factors are expected to happen, then the value of that change is 0

Answer 102

Options valuation stratgies Black-Scholes uses five variables to value an option (call or put) - Price of underlying stock - Exercise price - Time remaining - Volatility of the stock - Interest rates Essentially an increase in any of these increases the option value (direct relationship) except for stock price (put only) and exercise price (call only) Binomial option valuation Assumes a stocks price can move to 2 possible values at expiration and either increase or decrease. Those values will be discounted back using the risk free rate. If this theory is correct then the investor has formed a riskless portfolio or a perfect hedge.

Answer 103

R = (D1 / P) + G

Answer 104

In a way yes, they are subject to market and exchange rate risk

Answer 105

If they give you the clients required rate of return, use that unless told to use CAPM Be sure to look at the wording like current for TEY they want the current ratio rate of the current value of the bond

Answer 106

When the bonds are trading at a premium because that means the interest rates are lower than the current rate of the bonds.

Answer 107

Amount payable to you is taxable to you and amount held by another is taxable to them. Amount taxable to another that you need to give them decreases your basis by that much.

Answer 108

Not sold at par Sold on a discounted yield basis Sold in denominations of $100 Sold by competitive bids

Answer 109

Determined by the holder but usually no one elects to be taxed on it.

Answer 110

Guardian of the student, student has to be their dependent. For grandparent to deduct the interest the student must be a dependent of the grandparent.

Answer 111

Pay it semi-annually by check.

Answer 112

CD's are insured up to $250k and are more short term so if there are not a lot of funds that can we worked with. Treasury bonds are subject to more RIP risk.

Answer 113

Most but not all!

Answer 114

Yes with commissions and bid-ask spreads. ETFs do not have sales loads.

Answer 115

When you see high-yield bonds think about their income level, if low then think about it If the answer feels weird, lots of aggressive growth, real estate stuff, stuff that is very correlated, probably not correct

Answer 116

Calculate NOI but subtract financing and depreciation costs.

Answer 117

Have balanced fund (40/60) or so or split annuity with immediate and growth

Answer 118

SEP or qualified plan to defer income

Answer 119

No-load mutual funds (open end companies)

Answer 120

10Qs and 10Ks

Answer 121

100 shares

Answer 122

Futures contracts

Answer 123

Invest in negatively correlated items like collectibles and natural resources

Answer 124

If you are long - you want a short hedge (sell futures and protect against lower prices)) If you are short - you want a long hedge (buy futures and protect against higher prices)

Answer 125

Revalued because it takes less Yen to buy the same dollar. The dollar devalued because it buys less Yen for the same dollar. If you are doing business abroad you want the currency of the country you are doing business in to revalue, you are long that currency. To hedge you sell the country's currency to protect against devaluation. Short hedge

Answer 126

Double country taxation is a potential disadvantage.

Answer 127

Emerging markets

Answer 128

NO but they do have RIP risk No marketability risk because you can just sell them

Answer 129

It will decrease the covariance Standard deviation can remain the same but correlation coefficient can decrease the covariance

Answer 130

Whatever the gain is don't forget to take out the tax looking at the capital gain tax on the gain Don't forget the capital gain tax bracket amounts 0%, 15%, 20% based on income that we are given

Answer 131

When asked for the best bond choice or return they are asking for tax exempt yield. So multiply each of the taxable bonds by the tax to equalize all of the tax-exempt yields and choose the highest yield. If asked for best return on a tax-equivalent basis then divide the muni bond by 1-the tax rate Tax Equivalent yield you divide Tax Exempt yield (best return) you multiply

Answer 132

= return / (1-tax rate)

Answer 133

= return * (1-tax rate)

Answer 134

They are looking for geometric or time-weighted return

Answer 135

They want you to find the I of the problem (using calculator) and that is your return. To make it real then do the real return process If they want holding period return they will specifically ask for that

Answer 136

N = 4 I = 12/4 = 3% PV = 10,000 PMT = 0 FV = $11,255 - $10,000 = $1,255 of interest

Answer 137

Compound semiannually

Answer 138

Change the ratio up to get as close to your target as possible

Answer 139

Low duration because bonds will decrease OR you could short long-term bonds Shorting works if interest rates are increasing

Answer 140

Utility stocks

Answer 141

Dividend / Price

Answer 142

Probably has a moderate risk tolerance

Answer 143

NO, they just have to be less than 1

Answer 144

Risk, return, and standard deviation (therefore covariance)

Answer 145

CML is looking at diversified portfolios added with T-bills and looks at relationship between risk and return as you take more risky assets on Efficient frontier is looking at adding only risky assets together to decrease the risk while keeping the return high so correlation coefficient plays a big role here because it matters that stocks are not perfectly correlated

Answer 146

CML and Efficient Frontier, Y is Return and X is risk SML, Y is return and X is Beta

Answer 147

Purpose is to reduce default risk Sinking fund may allow the issuer to retire a portion of debt each year until entire issue matures (but not mandatory) Periodic payments required to source the sinking fund are generally the same each period

Answer 148

Should not worry about making too much income because he is in a low tax bracket and can take the income

Answer 149

Common stock SEC prohibits use of leverage on Mutual Funds

Answer 150

NO, full amount of the option cost must be paid in cash

Answer 151

Use hedges or insurance to smooth out market volatility

Answer 152

Expected value of each factor is zero

Answer 153

They have no management expenses - that is NOT true No load funds DO: - have no sales charges - sold or redeemed at NAV - continuous offering and redemption - have management expenses

Answer 154

(Income plus growth or appreciation) / basis

Answer 155

Choose growth mutual fund, not enough info is given on the annuity and the mutual fund seems to fit the person well giving them moderate-high levels of growth and risk

Answer 156

Yes, they are subject to PRIME risk because that is systematic risk (not diversifiable)

Answer 157

Always look at the time it is needed. Because it is needed in a year it does not make sense to buy something that could substantially change in value over a year. T-bill with a max length of 1 year is a better option

Answer 158

Maturities Risk levels Callability Interest paid They are not different in terms of taxation

Answer 159

Because the corporate bond is specified as long-term then that makes it a more legit answer A zero coupon would be a better answer if time was mentioned but because it was not then the long-term is better.

Answer 160

Equity REITS Mortgage REITs do not provide this

Answer 161

Stock with the highest dividend yield

Answer 162

Find current yield which is (coupon/current price) and then take this yield and divide it by 1-tax rate to find the tax equivalent yield

Answer 163

He is young so he could take some risk. The growth and S&P 500 fund are too similar so the target-date seems best.

Answer 164

30 year t bond because it gets her very close to the amount she needs and is safe

Answer 165

If you get a 5%-9% collar on the SOFR you will receive payments if it’s above 9% and pay if it’s below 5%

Answer 166

Reinvestment rate and purchasing power risk. Non-negotiable CDs do not have inflation rate risk. They don’t have market risk because not really affected by market.

Answer 167

$50/4% = $1,250 $1,250-900+50/900 = 44.44%

Answer 168

Purchasing power and reinvestment rate risk. Since these are not negotiable CDs they are not subject to interest rate or market risk.

Answer 169

Discount is accreted and you pay tax on the interest phantom income earned. That increases the basis. With munis the OID accrection is tax free. Upon sale or redemption, any gain attributed to the OID is tax exempt. For other bonds that would be taxable (capital gain) but for Munis that is not taxable.

Answer 170

Return projections

Answer 171

If sold after holding for a year then it is LTCG. If exercised and you acquire shares then that is not a taxable event. When you exercise that is when the timer starts for the holding period of the stock. If you exercise and sell the stock within 1 year it is STCG. Exercised vs Sold (DIFFERENCE)

Answer 172

Offered as a sweetener with debentures.

Answer 173

$45k - $2k = $43k of gain

Answer 174

Correlation coefficient is 1 then weighted average If less than 1 then find weighted average and next lowest If negative then find something close to 0 If 0 then plug into the formula its easy If it is 90% one variable then choose a standard deviation close to that number.

Answer 175

Moves opposite to the market.

Answer 176

NO, only cash flow

Answer 177

Educate him. You already got his risk info to make the curve but now you need to educate him.

Answer 178

Highest Sharpe

Answer 179

Look at R^2 and if you do not see that look for what they tell you. If diversified then go off greater than 60 rule and if not diversified then go off lower than 60 rule. Index funds are diversified but sector funds are NOT.

Answer 180

All except that they are callable is true. They are issued in 3, 6, and 12 month increments.

Answer 181

NO only up to 15%

Answer 182

The max permissible price increase or decrease relative to the settlement price the previous day.

Answer 183

Non-diversifiable risk.

Answer 184

You should educate him on risk and reward. Just because he is a difficult client does not mean you should decline him and your go to should be education clients.

Answer 185

Because the account is a JT account, both of them are your clients. You need to talk to them both to figure this thing out.

Answer 186

Harry's taxable interest would be $200. Because the bonds pay out in October that means he will have held it for 3/6 months before the payment (July, August, September). So $200 of the interest is his and the other amount is paid to the previous holder and decreases his basis. Further, he paid $10,800, had $100 of fees, so the other $200 was the interest to get him to $10,500.

Answer 187

OID tax-exempt bonds are not subject to phantom income because the OID portion is tax exempt income. On sale or redemption, any gain attributed to the OID is tax-exempt. Tax-exempt zeros are not subject to phantom income.

Answer 188

Treasury bonds, blue chip stocks, and T-Bills are all marketable but CDs (negotiable CDs would be) and MM funds are not marketable. CDs, MM accounts, and T-Bills are liquid Treasury bonds, blue chip stocks, and T-Bills are marketable. Brokered CDs would be marketable.

Answer 189

Strong form

Answer 190

Usually it is the next lowest one from what makes sense, think 10% is 3-4% coupon and think 15%-20% for 6-8% coupons.

Answer 191

Zeros avoid reinvestment rate risk. CDs (not brokered) avoid interest rate risk. Immunization portfolios avoid both reinvestment and interest rate risks.

Investments Flashcards

(223 cards)