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Flashcards in Investments Deck (24)
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Unsystematic Risk

Diversifiable Risk

- Business Risk: refers to the nature of the firms operation (loss due to new technology)
- Financial Risk: refers to how the firm finances its assets (loss due to heavy debt financing)


Systematic Risk

Non-diversifiable Risk: (PRIME)
- Purchasing Power Risk: inflation
- Reinvestment Risk: risk that proceeds available for reinvestment must be reinvested at lower rates than the instrument that generated the proceeds
- Interest Rate Risk: risk that change in rates will cause value of fixed income securities to fall
- Market Risk: overall market
- Exchange Rate Risk: associated with changes in values of currencies


I Bonds and EE Bonds

- non-marketable, nontransferable, cannot be used for collateral
- sold at face value
- rate based on 10-year note yield
- fixed interest rate that is in effect at time of purchase (EE)
- interest rate is composed of: a fixed base rate (remains the same for life of bond) and inflation adjustment (every 6 months) (I)
- subject to federal tax when redeemed (unless used as education bonds)
- not subject to state and local tax


Types of Municipal Securities

GO Bonds: backed by full faith, credit, and taxing power of the issuer. Safest muni bond.

Revenue Bonds: backed by a specific source of revenue which the full faith and credit of issuer has not backed. (toll roads, hospitals, power plants). Riskier. Higher yields.

Insured Muni Bonds: insurers pay timely interest and principal when the issuer is in default (AMBAC and MBIA)


Corp, Muni, Gov Bonds (DRIP) Risks

Default Risk: creditor may seize the collateral and sell it to recoup the principal (not with gov bonds)

Reinvestment Risk: as payments are received, interest rates fall, and funds reinvested at lower yields

Interest Rate Risk: rising rates may cause bond prices to fall

Purchasing Power Risk: inflation lowers value of payments

*greatest risks to bonds could be said to be price volatility*


Capitalization Market Value of Company

Large ($10B)
Mid ($2-$10B)
Small (less than $2B)
Micro (less than $300M)


American Depository Receipt (ADR)

- Prices of ADR's quotes in USD
- Dividend paid in USD
- Dividends declared in foreign currency
- Exchange rate risk
- Investors get foreign tax credit


Warrants vs Call Options

- warrants are issued by corporations, calls are created by individuals

- warrants typically have maturities of several years

- warrant terms are not standardized, calls are


Futures Contracts

Long Commodity Position: if a farmer is long corn he needs to short hedge and will sell a futures contract

Short Commodity Position: if Kellogg's is short corn, they need a long hedge and will buy a futures contract


Regulation D: Accredited vs Non Accredited

Accredited (unlimited) (123 Test):
1) net worth of $1m or
2) individual with an annual income of $200k
3) couple with joint income of $300k

Non Accredited (max 35):
1) sold to a max of 35 investors
2) must use a purchaser representative if not "sophisticated"


Zero Coupon Bonds

- duration = maturity
- no coupon interest, yet produces phantom income
- no reinvestment risk
- sold at deep discount
- fluctuate more than bonds with similar yields



- the degree which duration changes as YTM changes
- largest for low coupon bonds, long maturity bonds
- allows investor to improve the duration approximation for bond price changes.


EMH (three types)

Strong: prices fully reflect all information. no analysis can produce superior returns over time. (random walk)

Semi: prices reflect all public information. insider info can achieve superior results. no analysis can help.

Weak: historical data is reflected. technical analysis will not help. fundamental analysis can help


Tax Basis of Mutual Funds

- FIFO method treats shares aquired first as being sold first45
- specified ID requires seller to identify shares of funds that are sold (allows investor to create gain, neutralize gain, or loss - most flexible)
- Average cost method allows investor to divide the total cost of all shares held by number of shares held


Passive Investment Strategies

- buy and hold
- index investing
- strategic asset allocation (review every few years)


Active Investment Strategies

- market timing
- tactical asset allocation
- technical analysis (charts and trends)
- Fundamental analysis (interest rates, GDP, ect.)
- Ratio analysis (company ratios)


Arbitrage Pricing Theory (APT) Keys

Price movements are explained by:

- Unexpected inflation
- Unexpected changes in industrial production
- Unanticipated shifts in risk premium
- Unanticipated shifts in structure of yields.


Asset Backed Securities (MBS)

- GNMA: purchase a pool FHA/VA mortgages, guaranteed by US government

- FNMA/FHLMC: not guaranteed, mortgages and student loan bundles

- CMO: bundle mortgages, separated into tranches based on risk and speed of payment, Z tranche has no coupon (risky) but receives income from the collateral remaining after other tranches are paid


Ex-Dividend Date

To be listed on corporations books as a holder (eligible for dividend), you need to own the stock on the records date. You must purchase the stock before the ex-dividend date (1 business day before record date)

Essentially: Buy 2 business days before record


Preferred Stock Keys

- Hybrid of Equity and Fixed Income
- fixed dividends
- cumulative dividends (before common)
- Typical purchaser would be treasurer
- For test, think this has little chance of any growth...
- warrants can be added


Eurodollar vs Yankee Bonds

Eurodollar: a deposit in any foreign bank that is denominated in USD. Any country.

Yankee Bond: dollar-denominated bonds issued in the US by foreign banks and companies



EFT: index, traded on exchange, tax efficient
UIT: unmanaged, no new, units not shares, income distrib, NAV
OEMF: continue sell, NAV
CEMF: no new, trade on exchange at premium or discount of their NAV


Call and Put Bonds

Callable: issuer has right to redeem bond at specific price and date. Likely to happen if interest rates have dropped. To do this the issuer pays a call premium. Investors are protected from this for a stated period.

Put: permits the holder to sell the bond back to the issuer at specific price and date. If rates were to rise (dropping price) a holder would exercise the put to get the higher stated par value. For this option, the holder sacrifices some yield.


CD’s and Brokered CD’s

CD: You buy a CD and the bank promises to pay it back with interest at maturity. Must hold until term or penalty (you wont get full amount). Liquid.

Brokered CD: A CD that was bought by a wire house and is not being bought and sold on the secondary market by individuals. You do not need to hold until term. Marketable.