Investments Flashcards

Question

Taxable Equivalent Yield (TEY)

Answer 1

**Compare municipal bonds to taxable bonds** *TEY = Tax Exempt Yield / (1 - Marginal Tax Rate)*

Answer 2

**Measure sensitivity of bond price to changes in interest rates** * **Bond Duration 3:** 1% Interest Rate increase leads to 3% bond price decrease * **Time to Maturity:** Longer TTM means higher duration * **Coupon Rate:** Lower Coupon means higher duration **SHORTCUT:** Interest Rates go up/down 1%, Bond Prices go up/down (inverse) 1% times years of duration * ΔP / P: Change in Bond Price * D: Duration * Δy: Change in bond price in decimal form (CAN BE NEGATIVE) * y: Origional yield in decimal form

Answer 3

* Sold at Deep Discounts to PAR * No Reinvestment Rate Risk * Duration equal to maturity * Fluctuates more than coupon bonds with same maturities (Investors stuck if Rates go up!) * No Coupon Interest, yet produces “phantom” income (Pay INCOME TAX each year on IMPUTED INTEREST and no Capital Gains at end unless you sell early) **Interest EXAMPLE:** 10-year zero coupon bond. Par value → $1,000; Purchased for $445. Taxable in Year 2? * **Calculate Yield:** PV=-445, N=10, PMT=0, FV=1000, I=? (I=8.4336) * **Find Bond Price End Year 1:** N=9 (10-1), FV=1000, I=8.4336, PMT= 0, PV=? (PV=482.53) * **Find Bond Price End Year 2:** N=8 (10-2), FV=1000, I=8.4336, PMT= 0, PV=? (PV=523.23) * **Income at End of Year 2:** 523.23 - 482.53 = $40.69

Answer 4

* If interest rates expected to RISE, shorten duration *(UPS → “up” + “S” shorten)* * If interest rates expected to FALL, lengthen duration *(FALLEN → “Fal” + “LEN” lengthen)*

Answer 5

**GREATER** price Fluctuations with: * Less money (smaller coupon) * Longer term to maturity (longer time) * Lower market interest rate (lower interest rates)

Answer 6

**Measures curvature of relationship between bond prices and interest rates (More Convexity is Better)** * When **interest rates increase**, bond prices **decrease at slower rates** * When **interest rates decrease**, bond prices **increase at faster rates** * Convexity GREATEST for low coupon and long-maturity bonds (allows investor to improve duration approximations for bond price changes)

Answer 7

**ROE = Company Profit (Net Income) / Shareholder Equity (Not affected by stock price) → Tell us how the business is growing** * Net Income = Profit After Expenses BEFORE dividends * Equity = Assets - Liabilities * Compare ROE to peers, evaluate if company is truly growing, and watch debt to equity * Example 1: Higher ROE → Profit growth without new assets/liabilities→ GREAT (more efficient) * Example 2: Higher ROE → No Profit growth with new liabilities→ BAD (only more debt)

Answer 8

**Dividend Payout Ratio:** Common Dividends Paid / Earning Available (ROE)

Answer 9

**Strong-Form:** Stock prices fully reflect all information, public & private. Inside info, fundamental or technical analysis DOES NOT produce superior investment results over time on a risk-adjusted basis. **Semi-Strong:** Stock prices reflect all publicly held information. Fundamental or Technical analysis DOES NOT produce superior investment results. Investors with inside information may consistently achieve superior results. **Weak Form:** Historical price data reflected in stock prices and no value in predicting future prices. Technical analysis WILL NOT produce superior results; Fundamental Analysis MAY.

Answer 10

**S&P 500 (large caps):** Broader measure of NYSE activity, value/cap weighted **Russell 2000 (small caps):** Smallest 2000 stocks of Russell 3000 index, value/cap weighted **NASDAQ:** Broadest mature of OTC trading, value/cap weighted. **Europe, Australia, and Far East (EAFE):** Equity performance of major foreign markets, value/cap weighted. **Wilshire 5000:** Broadest measure of activity and movement of overall stock market, value/cap weighted **Barclays Aggregate Bond:** More than 5000 US government, corporate, and mortgage-backed and asset-backed bonds, value/cap weighted **Dow Jones:** Tracks 30 large, publicly owned blue-chip companies, price weighted

Answer 11

**First-in, First Out (FIFO):** Method treated shares acquired first as sold first. **Specific ID:** Requires seller to identify shares of fund that are sold. Allows investor to create gain, neutralize gain, or create loss. **Average Cost:** Allows investor to divide total cost of all shares held by number of shares sold.

Answer 12

**SHARP:** Risk-adjusted return of a financial portfolio (**Over 1**--> Good) * **Ex:** sharp = 0.24% (0.24% of excess return for 1% exposure **total risk**) **M^2:** Portfolio performance to the market on risk-adjusted basis **SHARP:** Excess Returns (M^2) per unit of total Portfolio Risk * Step 1: Look for low R^2 (less than 60) or **non-diversified portfolio** * Step 2: Look for highest sharp number

Answer 13

**Jensen’s Alpha:** Return of a portfolio/investment based on its risk level (beta) and the market's performance (**POSITIVE**--> Good, **NEGATIVE** -->BAD) * **Ex:** alpha = 0.2 (0.2% better than expected based on **systematic risk**) **Treynor:** Portfolio's excess return per unit of **systematic risk** (beta) * **Ex:** Treynor = 4.64% (4.64% excess return for 1% of systematic risk) **Jensen/Treynor SHORTCUT:** Excess Returns (M^2) per unit of Systematic Risk * Step 1: Look for high R^2 (60+) or diversified portfolio * Step 2: Look for the highest positive alpha. If no alpha, highest Treynor.

Answer 14

**Margin Requirement is CASH NEEDED (Rest is LOAN)** **Formula:** Margin Call = Debt Balance/(1-Maintenance Margin %) **Q1:** ($50/share / 0.7) =$71.43 (Price at/below) **Q2:** ($5000 / 0.7) = $7,143 (Portfolio at/below) **Q3:** * Required Equity: $18/share ($60/share x 30%) * Current Equity: $10/share ($60/share - $50/share) * Deficit: $8/share * Deposit Required: $800 **Maximum Stock Margin:** 50% of Stocks

Answer 15

* Buy & Hold (EMH) * Dollar Cost Averaging * Index Investing * Strategic Asset Allocation (revised every few years)

Answer 16

* Market Timing * Tactical Asset Allocation * Technical Analysis * Fundamental Analysis

Answer 17

**Financial model that predicts an asset's expected return by considering its exposure to multiple risk factors (ALTERNATIVE TO CAPM)** * Unexpected Inflation * Unexpected Changes in Industrial Production * Unanticipated shifts in risk premium * Unanticipated changes in structure of yields **Calculation:** APT = rf + β1 * RP1 + β2 * RP2 + ... + βkn * RPn FOR EACH COMPARABLE FACTOR

Answer 18

* PDQ → Company name * 4s → 4% Interest Rate ($40/annually) * M’39 → Matures in 2039 * @96 → 96% of $1000 (PAR) → $960 * Current Yield = $40/$960 = 4.2%

Answer 19

**Example 1:** Intrinsic Value given 7% dividend, par value $35, priced at $33, required rate of return is 9%? * Dividend is percentage of par value (with no growth rate) → 0.07 *35 = $2.45 * V = D1/(r-g) → V =2.45 / 0.09 = $27.22 **Example 2:** Intrinsic Value given ROE of 12.5%, retention ratio of 50%, dividend of $3.50, required rate of return is 12%? * Dividend Growth Rate = ROE * Retention Ratio → 0.125 * 0.5 = 6.25% * First Year Dividend: $3.50; Second Year Dividend: $3.50 * 0.0625 + $3.50 = $3.72 * V = D1/(r-g) → V = $3.72 / (0.12 - 0.0625) = $64.70

Answer 20

Predicts the price of a company's stock based on the sum of present value of its expected dividends Po = D1 / (1+r)^1 + D2 / (1+r)^2 + ... + P4 + D4 / (1+r)^4

Answer 21

* PV = -140K (175K x 0.80), N=360, I/RR=0.4 (4.75/12), FV = 0, PMT= 730.27 * Total Amortization (Principal/Interest/Balance) 1 INPUT, 5, ORANGE, AMORT (Periods 1-5)

Investments Flashcards

(45 cards)