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GTPR Flashcards > Investments: Money Market Securities > Flashcards

Investments: Money Market Securities Flashcards

1
Q

Securities Act of 1933

A

regulates issuance of new securities in the primary market
must be accompanied with a prospectus before purchasing

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2
Q

Securities Act of 1934

A

Regulates the secondary market and trading of securities
created the SEC to enforce compliance

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3
Q

Investment Company Act of 1940

A

Authorized the SEC to regulate investment companies
open, closed, and UITs

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4
Q

Investment Advisers Act of 1940

A

required investment advisers to register with the SEC or state

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5
Q

Securities Investors Protection Act of 1970

A

established SIPC to protect investors for losses resulting from brokerage firm failures
does not protect investors from bad investment decisions

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6
Q

Insider Trading and Securities Fraud Enforcement Act of 1988

A

defines an insider as anyone with info that is not available to the public
insiders cannot trade this info

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7
Q

T bills

A

Short term
maturity in 52 weeks
denominations in $100 increments

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8
Q

Commercial Paper

A

Maturities of 270 days
Short Term loans between corporations
has a denomination of $100,000 and are sold at a discount
does NOT have to register with the SEC

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9
Q

Bankers Acceptances

A

facilitates imports/exports
maturities of 9 mos or less
can be held until maturity or traded

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10
Q

Eurodollars

A

deposits in foreign banks that are denominated in US Dollars

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11
Q

Investment Policy Statement

A
  • establishes clients objectives and limitations on investment manager
  • used to measure investment manager’s performance
  • does NOT include investment selection
  • objectives: risk tolerance, return requirements
  • constraints: time horizon, liquidity, taxes, laws and regs, unique circumstances

RR TTLLU

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12
Q

Dow Jones Industrial Average

A
  • simple price-weighted average
  • does not incorporate market capitalization
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13
Q

S&P 500

A
  • value-weighted index that incorporates market cap of individual stocks into the average
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14
Q

Russell 2000

A

value-weighted index of the smallest market cap stocks in the Russell 3000

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15
Q

Wilshire 5000

A

broadest index that measures the performance of over 3,000 stocks
value-weighted index

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16
Q

EAFE

A

value-weighted index that tracks stocks in Europe, Australia, Asia, and far East

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17
Q

The only price weighted index

A
  • DJIA (not value-weighted)
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18
Q

Traditional Finance

A
  • investors are rational
  • markets are efficient
  • the mean-variance portfolio theory governs
  • returns are determined by risk
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19
Q

Behavioral Finance

A
  • investors are “normal”
  • markets are not efficient
  • the behavioral portfolio theory governs
  • risk alone does not determine returns
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20
Q

Affect heuristic

A

deals with judging something, whether good or bad
do they like/dislike some company based on non-financial issues

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21
Q

anchoring

A

attaching/anchoring ones thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question
also known as conservatism or belief perseverance

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22
Q

availability heuristic

A

when a decision maker relies upon knowledge that is readily available in their memory
this may cause investors to overweight recent events or patterns while paying little attention to longer term trends

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23
Q

bounded rationality

A

decision makers are limited by the available info
having additional info does not lead to an improvement in decision making due to the inability to consider significant amounts of info

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24
Q

confirmation bias

A

you do not get a second chance at a first impression
people tend to filter info and focus on info supporting their opinions

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25
Q

cognitive dissonance

A

tendency to misinterpret info that is contrary to an existing opinion or only pay attention to info that supports existing opinion

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26
Q

disposition effect

A

AKA regret avoidance or faulty framing where normal investors do not mark their stocks to market prices
investors create mental accounts when they purchase stocks and continue to mark their value to purchase prices even after market prices have changed

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27
Q

Familiarity Bias

A
  • investors tend to over/under estimate the risk of investments with which they are unfamiliar/familiar
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28
Q

gamblers fallacy

A
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29
Q

herding

A
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30
Q

hindsight bias

A
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31
Q

illusion of control bias

A
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32
Q

overconfidence bias

A
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33
Q

overreaction

A
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34
Q

prospect theory

A
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35
Q

recency

A
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36
Q

similarity heuristic

A
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37
Q

Naive diversification

A

the process of investing in every option available to the investor
common with 401k plans
AKA 1/n diversification
equally diversified in all funds

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38
Q

representitiveness

A

thinking that a good company is a good investment without regard to an analysis of the investment
Peleton!!

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39
Q

Familiarity

A

causes investment in companies that are familiar, such as an employer
Enron

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40
Q

loss aversion

A

suggests investors prefer avoiding losses more than experiencing gains
YOUR LOSSES ARE ALWAYS LARGER THAN YOUR GAINS
unwillingness to sell a losing investment, in the hopes that it will turn around

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41
Q

socialization

A

process of acquiring values, beliefs, and behaviors that are acceptable and expected by society

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42
Q

multicultural psychology

A

defined as an extension of general psychology that recognizes that multiple aspects of identity influence a persons worldview including race, ethnicity, language, sexual orientation, gender, age, disability, class status, education, religion, etc when psychologists are helping clients, training students, advocating for social change and justice, and conducting research

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43
Q

Social Consciousness

A

awareness of and sense of responsibility for problems or injustices that exist within society

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44
Q

Coefficient of Variation

A

useful in determining which investment has more relative risk when investments have different average returns
tells us the probability of actually experiencing a return close to the average return
the HIGHER the CV, the MORE RISKY an investment per unit of return

= Std Dev / Avg Ret

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45
Q

Distribution of returns

A
  • normal distribution
  • longnormal distribution
  • skewness
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46
Q

Normal Distribution

A

appropriate if an investor is considering a range of investment returns

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47
Q

Longnormal Distribution

A

not a normal distribution
appropriate if an investor is considering a dollar amount or portfolio value at a point in time
with a longnormal distribution, you are looking for a trend line or ending dollar amount

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48
Q

Skewness

A

commodities are skewed
Right Skewed = positive skewness
Left Skewed = negative skewness

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49
Q

Kurtosis

A

refers to variation of returns
little variation of returns = high peak = positive kurtosis = leptokurtosis = treasuries
greater variations of returns = low peak = negative kurtosis = platykurtic

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50
Q

Mean Variance Optimization

A

process of adding risky securities to a portfolio, but keeping the expected return the same
finding the balance of combining asset classes that provide the lowest variance as measured by std dev.

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51
Q

Monte Carlo Simulation

A
  • simulation that adjusts assumptions in order to reflect the probability of an event occurring
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52
Q

Covariance

A

measure of 2 securities combined and their interactive risk how price movements between 2 securities are related to each other measure of RELATIVE risk COV

= (std dev A) * (std dev B) * (correl coeff AB)

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53
Q

Correlation

A

ranges from -1 to +1 provides the investor with insight as to the strength and direction 2 assets move relative to each other +1: 2 assets are perfectly positively correlated

0: assets are completely uncorrelated
- 1: perfectly negative correlation

Diversification benefits begin anytime correlation is LESS THAN 1

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54
Q

Beta

A

measure of an individuals security’s volatility relative to that of the market used to measure the volatility of a diversified portfolio measures systematic risk meta of the market is 1

Beta is used for well-diversified portfolios

>1: stock fluctuates more than the market and has greater risk

=1: Beta of the market

<1: stock fluctuates less than the market and has less risk

= security risk premium / market risk premium

= fund return / market return

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55
Q

Standard deviation

A
  • measures total risk for a nondiversified portfolio
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56
Q

Coefficient of Determination (R^2)

A

measure of how much a return is due to the market or what % of a security’s return is due to the market

R^2 = squaring the correlation coefficient

R^2 = % of the fund’s return is due to the market

provides insight as to how well-diversified the portfolio is

if B > or = 0.70, then B is an appropriate measure of total risk

if B < or = 0.70, then B is not an appropriate measure of total risk and std dev should be used to measure total risk

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57
Q

Systematic Risk

A

the lowest level of risk one could expect in a fully diversified portfolio

non-diversifiable risk

market risk

economy-based risk

beta

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58
Q

Unsystematic Risk

A

exists in a specific firm or investment that can be eliminated through diversification

diversifiable risk

unique risk

company-specific risk

standard dev

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59
Q

Systematic Risks

A
  • Purchasing power risks
  • reinvestment rate risk
  • interest rate risk
  • market risk
  • exchange rate risk

systematic risk = market risk = PRIME

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60
Q

purchasing power risk

A
  • type of systematic risk
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61
Q

Reinvestment Rate Risk

A
  • type of systematic risk
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62
Q

Interest Rate Risk

A
  • type of systematic risk
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63
Q

Market Risk

A
  • type of systematic risk
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64
Q

Exchange Rate Risk

A
  • type of systematic risk
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65
Q

Unsystematic Risks

A
  • accounting risk
  • business risk
  • country risk
  • default risk
  • executive risk
  • financial risk
  • government/regulation risk

unsystematic risk = ABCDEFG = diversifiable risk

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66
Q

Account risk

A
  • type of Unsystematic Risk
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67
Q

business risk

A
  • type of Unsystematic Risk
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68
Q

country risk

A
  • type of Unsystematic Risk
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69
Q

default risk

A
  • type of Unsystematic Risk
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70
Q

executive risk

A
  • type of Unsystematic Risk
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71
Q

financial risk

A
  • type of Unsystematic Risk
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72
Q

government/regulation risk

A
  • type of Unsystematic Risk
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73
Q

Modern Portfolio Theory

A

the acceptance by an investor of a given level of risk while maximizing expected return objectives

investors seek the highest return attainable at any level of risk

investors want the lowest level of risk at any level of return

the assumption is also made that investors are risk averse

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74
Q

efficient frontier

A

curve which illustrates the best possible returns that could be expected from all possible portfolios

Risk and return comparison finding the most optimal portfolio

portfolios beneath the efficiency curve are inefficient

portfolios above the efficient frontier are considered unattainable

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75
Q

indifference curves

A

constructed using selections made based on this highest level of return given an acceptable level of risk

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76
Q

efficient portfolio

A

occurs when an investors indifference curve is tangent to the efficient frontier

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77
Q

optimal portfolio

A

the one selected from all efficient portfolios

the point at which an investors indifference curve is tangent to the efficient frontier, represents that investors optimal portfolio

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78
Q

Capital Market Line (CML)

A

macro aspect of the CAPM

specifies the relationship between risk an dreturn in all possible portfolios

CML becomes the new efficient frontier, mixing RF assets with a diversified portfolio

a portfolios return should be on the CML

inefficient portfolios are below the CML

is not used to evaluate the performance of a single security

Rp = Rf = std dev (p) * ((Rm - Rf)/ std dev (m))

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79
Q

Capital Asset Pricing Model (CAPM)

A

calculates the relationship of risk and return of an individual security using B as its measure for risk

often referred to as the SML

Ri = Rf + (Rm - Rf)B

Ri = required or expected rate of return

Rm - Rf = market risk premium

CAPM uses standard deviation as risk

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80
Q

Market risk Premium

A

(Rm - Rf)

how much an investor should be compensated to take on a market portfolio vs a rf asset

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81
Q

Security Market Line (SML)

A

CAPM = SML

the SML intersects the y-axis at the risk free rate of return

SML = Beta as risk

if portfolio return is above SML = considered undervalued and should be purchased

if portfolio return is below SML = considered overvalued and should not be purchased

SML can be used for individual securities

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82
Q

Information Ratio

A
  • a relative risk-adjusted performance measure
  • measures excess return and the consistency provided by a fund manager, relative to a benchmark
  • the higher the excessive return (information ratio), the better
  • can be either positive or negative

IR = (Rp - Rb)/ std dev (A)

Rp = portfolios actual return

Rb = return of the benchmark

Rp - Rb = excess return

Std dev A = tracking error of active return

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83
Q

Treynor Index

A
  • uses beta of a portfolio as its denominator, and the difference between the portfolio return and the rf return as the numerator
  • the higher the ratio, the better
  • risk-adjusted performance measure
  • measure of how much return was achieved for each unit of risk
  • measures the reward achieved

Tp = Rp - Rf / Bp

Rp = realized return on the portfolio

Rf = risk free rate of return

Bp = beta of portfolio

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84
Q

Sharpe Index

A
  • provides a measure of portfolio performance using a risk-adjusted measure that standardizes returns for their variability.
  • risk-adjusted performance measure
  • measure of how much return was achieved for each unit of risk
  • the higher the Sharpe ratio, the better
  • Sharpe uses Standard dev, treynor uses beta

Sp = (Rp - Rf) / std dev (P)

Rp = realized return on the portfolio

Rf = risk free rate of return

std dev (P) = standard dev of the portfolio

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85
Q

Jensen’s Alpha

A
  • is indicative of the level of a managers performance
  • higher the alpha, the better the performance
  • negative alphas = managers underperformed the market on a risk-adjusted basis
  • is the actual return of the fund less the expected return on the fund

ALPHA p = Rp - {Rf + (Rm - Rf)Bp]

Rp = realized portfolio return

Rf = risk-free rate of return

ALPHA p = alpha, the intercept that measures the managers contributions to the portfolio return

Bp = beta of the portfolio

Rm = expected return on the market

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86
Q

if Beta > 0.70

A

use beta as a measure of risk

portfolio is considered diversified

use Treynor and Alpha as appropriate risk-adjusted performance measures

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87
Q

if Beta < 0.70

A

use standard deviation as a measure of risk

portfolio is considered non-diversified, use standard deviation

Sharpe ratio uses std dev as its measure of risk

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88
Q

Geometric Average

A
  • a time-weighted compounded rate of return
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89
Q

NPV

A
  • used to evaluate capital expenditures that will result in differing CFs over the useful life of the investment period
  • if +: make investment
  • if 0: make investment
  • if -: do not make investment

NPV = PV of CFs - initial cost

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90
Q

IRR

A
  • the discount rate that sets the NPV formula = 0
  • can be thought of as a compounded rate of return
  • should be calculated with uneven CFs and are asked to calculate a compounded rate of return
  • if NPV +, IRR > Discount Rate
  • if NPV -, IRR< Discount Rate
  • if NPV 0, IRR = discount rate
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91
Q

Dollar Weighted Return

A
  • calculate the IRR!
  • Takes into account additional share purchases
  • looking for investor return
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92
Q

Time Weighted Return

A
  • Calculates the IRR using security’s CF
  • Only concerned with the activity of 1 share
  • assumes a buy and hold
  • does NOT take into account additional share purchases
  • concerned with the growth of a single purchase of a share
  • MFs report on a time-weighted return basis
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93
Q

Arbitrage Pricing Theory (ABT)

A
  • asserts that pricing imbalances cannot exist for any significant period of time
  • multi-factor model that attempts to explain return based on factors
  • when facto = 0, the factor has no impact on return
  • attempts to take advantage of pricing imbalances
  • inputs of factors: inflation, risk premium, and expected returns and sensitivity to those factors
    • std dev and beta are not input variables

Ri = a1 + b1F1 + b2F2 + b3F3 + e

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94
Q

Foreign Currency Translation

A
  • convert US dollars to the foreign currency to determine the cost
  • compute the return, typically utilizing the holding period return calc
  • convert the foreign currency back to US dollars
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95
Q

Dividend Discount Model

A
  • constant growth dividend discount model
  • values a company’s stock by discounting the future stream of cash flows

V = D1 / (r - g)

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96
Q

PE Ratio

A
  • represents how much an investor is willing to pay for each dollar of earnings
  • measures the relationship between a stocks price and its earnings
  • useful to value a stock if the firm pays no dividends
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97
Q

PEG Ratio

A
  • compares a stocks PE Ratio to the company’s 3-5 year growth rate in earnings
  • used to determine if the stocks PE Ratio is keeping pace with the firms growth rate in earnings
  • PEG = 1: the stock is fairly valued bc PE ratio is in line with the earnings growth rate
  • PEG > 1: the stock price is fully valued bc an expanding PE ratio is contributing to the stock price appreciating more than the growth rate of earnings
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98
Q

Book Value

A
  • represents the amount of stockholders equity in the firm or how much the company’s shareholders would receive if the firm was liquidated
  • if the stock price is significantly higher than the firms book value, it may indicate that the firm is overvalued
  • if book value per share is = or higher than the firm’s stock price, it may indicate the firm is undervalued
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99
Q

dividend payout ratio

A
  • the relationship between the amount of earnings paid to shareholders in the form of a dividend, relative to EPS
  • the higher the div payout ratio, the more the mature the company
  • high div ratio = indicate that the possibility of the dividend being reduced
  • low div payout ratio = may indicate the div may increase, increasing the stock price

common stock dividend / earnings per share

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100
Q

Return on Equity

A
  • measures the overall profitability of a company
  • there is a direct relationship between ROE, earnings and dividend growth

= EPS / stockholders equity per share

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101
Q

Dividend Yield

A
  • states the annual dividend as a % of the stock price

= dividend / stock price

  • a company will raise its dividend to match it’s EPS
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102
Q

Fundamental Analysis

A
  • process of conducting ratio analysis on the balance sheet and income statement to determine future financial performance and a forecasted stock price based upon that future financial performance
  • includes: liquidity, activity, profitability, and common stock measurements
  • looks at economic data to determine how the economy will impact various industries
  • includes: GDP, unemployment, interest rates, inflation
  • believe that a stock price performance is largely driven by the financial performance of the firm
  • assumes:
    • investors can determine reliable estimates of a stocks future price behavior
    • some securities may be mispriced and can be determined which are
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103
Q

Technical Analysis

A
  • the process of charting/plotting a stocks trading volume and price movements
  • these activities will predict the future direction of stock prices long before fundamental analysis will
  • does not involve ratio analysis
  • believe S & D drive a stock price
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104
Q

Resistance

A
  • may develop when investors who bought on an earlier high may now view this as a chance to get even
  • some may see as an opportunity to take a profit
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105
Q

Support

A
  • may develop when a stock goes down to a lower level of trading because investors may choose to act on a purchase opportunity that they previously passed
  • this is a signal that a new demand is coming into the market
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106
Q

Tools of technicians

A
  • charting
  • market volume
  • short interest
  • odd lot trading
  • dow theory
  • breadth of the market
  • advance decline line
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107
Q

charting

A
  • plotting of historical stock prices to determine a trading pattern
  • plotting 50-, 100-, or 200- day moving averages along with historical stock prices
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108
Q

market volume

A

gives investors insight into sentiment

if market volume is high and market goes up: positive indicator regarding investor sentiment

if volume is high and market goes down: negative indicator of investor sentiment

if volume is low and market goes up: negative indicator

if volume is low and market goes down: positive indicator regarding investor sentiment

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109
Q

short interest

A
  • # of shares sold short gives insight into future demand for a stock
  • stock that was sold short eventually needs to be purchased
  • high short interest = pent up demand
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110
Q

odd lot trading

A
  • trades less than 100 shares
  • done by small investors
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111
Q

dow theory

A
  • signals an end to a bull or bear market
  • does not indicate when it will happen, just confirms that it has ended
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112
Q

breadth of the market

A
  • measures the # of stocks that increase in value vs the # of stocks that decline in value
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113
Q

advance decline line

A
  • the difference between the # of stocks that closed up vs. the # of stocks that decreased in value
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114
Q

Efficient Market Hypothesis

A
  • investors cannot consistently achieve above-average market returns
  • prices reflect all information that is available and change very quickly to new info
  • stock prices will follow a “random walk”
  • investors who believe in the efficient market hypothesis believe a passive investment strategy is appropriate, such as a buy and hold index
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115
Q

Random Walk Theory

A
  • behavior of stock prices closely resembles a random walk
  • prices of stock are unpredictable but not arbitrary
  • its impossible to consistently achieve above-average market returns
  • at any given moment, prices that exist on securities are the best incorporation of all available info and a true reflection of the value of that security
  • prices are in equilibrium
  • changes in P and volume of trading are generated by changing needs of investors
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116
Q

3 Forms of the Efficient Market Hypothesis

A
  • Weak Form
  • Semi-strong form
  • strong form
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117
Q

Weak Form

A
  • Believes in fundamental analysis
  • historical info will not help investors achieve above-average market returns
  • rejects technical analysis and asserts that fundamental analysis will help an investor achieve above average returns
  • security prices reflect all price and volume data
  • in direct contradiction with technical analysis, which attempts to predict future pricing based on the study of past pricing and volume patterns
  • Price reflects = historical price data
  • advantage = fundamental analysis & inside info
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118
Q

Semi-strong Form

A
  • asserts that both historical and public info will not help investors achieve above-average market returns
  • rejects both technical and fundamental analysis, but inside info will lead to above average returns
  • Price reflects = public info
  • advantage = inside info
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119
Q

Strong Form

A
  • No above average returns, passive investment strategy
  • asserts that historical, public, and private info will not help investors achieve above-average returns
  • suggests that stock prices reflect all available info and react immediately to any new info
  • even with inside info, the market cannot be outperformed on a consistent basis
  • Price reflects = all info
  • advantage = none
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120
Q

Market Anomalies

A
  • January Effect
  • Small firm effect
  • value line effect
  • P/E effect

These do not support the EMH in any of the 3 forms

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121
Q

January Effect

A
  • jan tends to be a better month due to tax loss selling in Nov and Dec followed by investors getting back into the market in Jan
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122
Q

Small Firm Effect

A
  • small caps tend to outperform large caps
  • easier for them to grow revenue and earnings faster than a large cap
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123
Q

Value Line Effect

A
  • stocks that receive Value Line’s highest ranking outperform stocks that receive the lowest ranking
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124
Q

P/E Effect

A
  • stocks with a low PE ratio tend to outperform stocks with a high PE ratio
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125
Q

Investing Strategies

A
  • active
  • passive
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126
Q

Active Investment Strategy

A
  • investors believe that markets are efficient
  • investors can achieve above-average market returns through active investing and market timing
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127
Q

Passive Investment Strategy

A
  • Investors believe that markets are efficient
  • difficult difficult to achieve above-average returns
  • passive buy-and-hold investment strategy is best
  • ex: laddered bonds, ETFs, barbell bond strategy, UITs, and index investing
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128
Q

Strategic Asset Allocation

A
  • involves assessing the likely outcomes for various allocation mixes between asset classes
  • done every few years
  • an active allocation strategy
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129
Q

Tactical Asset Allocation

A
  • an active allocation strategy where the investor determines expected returns for asset classes, then rebalances the portfolio to take advantage of the expected returns
  • performed frequently
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130
Q

Expected Rate of Return

A
  • provides an investor with an approximation of the rate of return that a given security, meeting certain levels of pricing and divs, may be expected to provide
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131
Q

PE Multiplier

A
  • used to price or value a stock if that stock is a growth stock that pays no dividends
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132
Q

US Treasury Securities

A
  • not taxable at the state and local level
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133
Q

Nonmarketable US Treasury Issues

A
  • not easily bought/sold
  • Series EE Bonds
  • Series HH bonds
  • Series I Bonds
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134
Q

Series EE Bonds

A
  • sold at face value
  • $25 minimum purchase
  • offered at one half of face val
  • nonmarketable, nontransferable
  • do not pay interest periodically
  • bond slowly increases in value over 20 years based on a fixed rate at time of purchase
  • redeemable after 1 year with 3 months interest penalty if redeemed in less than 5 years
  • interest is not subject to fed income taxes until bond is redeemed
  • may qualify for tax free treatment if redeemed for education expenses
  • interest is not taxed at state/local level
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135
Q

Series HH Bonds

A
  • pay interest semi-ann
  • have not been issued since 2004
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136
Q

Series I Bond

A
  • inflation-indexed bonds issues by US gov
  • sold at face val and have no guaranteed rate of return
  • mitigates against purchasing power risk
  • interest consists of:
    • fixed rate of return
    • inflation component that is adjusted every 6 months
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137
Q

Marketable US Treasury Issues

A
  • Tbills
  • Tnotes
  • Tbonds
  • all bills, notes and bonds are sold in denominations of $100+
  • treasury securities are sold on an auction basis with the lowest yield winning the auction
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138
Q

T Bills

A
  • less than 1 year to maturity
  • sold on a discount yield basis, they do not pay interest, the bond just matures at par
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139
Q

T Notes

A
  • maturity between 2 - 10 years
  • interest is paid semi-annually
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140
Q

T Bonds

A

Maturity of > 10 years

interest paid semi-annually

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141
Q

Original Issue Discount (OID)

A
  • issued at a discount from par value
  • example is a zero coupon bond that is sold at a deep discount to par
  • a $1,000 par zero-coupon bond sells for $600
  • must recognize income each year even though no interest is received (phantom income)
  • semi-annual
142
Q

Treasury Inflation Protected Securities (TIPS)

A
  • provide inflation and purchasing power protection
  • par value adjusts for inflation and the coupon rate is applied to the new principal amount
  • coupon rate does not change
143
Q

Separate Trading of Registered Interest and Principal Securities (STRIPS)

A
  • periodic coupon payments are separated from the bond and each coupon payment including par trade separately
  • STRIPS create zero- coupon bonds
  • are highly liquid and appropriate for investors looking for a low risk, highly liquid net investment and with a specific time horizon
144
Q

Federal Agency Securities

A
  • agency bonds are moral obligations of the US gov but are not backed by the full faith and credit of the US gov
  • 1 exception: GNMAs are backed by full faith and credit of US gov
145
Q

On-budget debt

A
  • GNMA - Ginnie Mae, division of Department of Housing and Urban Development
  • Farmers Home Administration (FHA)
146
Q

Off-budget Debt of the Agencies

A
  • FNMA - Fannie Mae
  • FHLMC - freddie Mac
  • SLMA - Sallie Mae
  • Fed Farm Credit Banks - FFCB
  • Fed Intermed Credit Banks - FICB
  • Fed Home Loan Bank FHLB
147
Q

Mortgage Backed Securities

A
  • GNMA
    • Consists of a pool of FHA/VA guaranteed mortgages
    • each month GNMA distributes interest and principal payments to investors
  • FNMA and Fed Home Loan Mortgage Corp
    • historically not backed by the gov
  • biggest risk with MBS is falling interest rates
  • Mortgages could get repaid early, bond gets retired early, which leaves investors with a reinvestment problem
148
Q

Corporate Bonds

A
  • secured bonds
  • collateralized mortgage obligations (CMOs)
  • Unsecured Corporate Bonds
149
Q

Secured Bonds

A
  • MBS
    • backed by a pool of mortgages
    • payment consist of both interest and principal
    • prepayment risk is biggest risk to bond holder
  • collateral trust bond
    • backed by an asset owned by the company issuing the bonds
    • the asset is held in trust by a 3rd party
    • in the event of default on the debt payment, the bond holders are entitled to the asset being held in trust
150
Q

CMOs

A
  • investors are divided into tranches which determine which investors will receive principal repayment
  • investors are divided into tranches A-Z, which are short, intermediate, and long term tranches
  • interest from the pool of mortgages is distributed pro-rata and the principal repayments are used to retire tranches sequentially
  • investors in the ST tranches receive principal repayment before the intermediate and LT tranche
  • these are meant to mitigate against prepayment risk associated with MBSs
151
Q

Unsecured corporate bonds

A
  • debentures:
    • unsecured debt not backed by any asset
    • backed on the belief of the credit worthiness that the issuing company will repay the debt
  • Subordinate debentures:
    • have a lower claim on assets than other unsecured debt
    • have more risk because of the lower claim on assets if the company defaults on the bond repayments
  • Income bonds:
    • interest is only paid when a specific level of income is attained
152
Q

Bond Rating Agencies

A
  • Moody’s and S&P both rate bonds on the company’s default risk and investment quality
  • higher the bond rating, lower the yield
  • bond rating agencies analyze a firms:
    • liquidity
    • total amount of debt
    • earnings and stability of those earnings
153
Q

Moody’s Ratings

A

Aaa - C

Aaa - Baa: investment quality bonds

Ba and below are junk bonds

154
Q

S & P Ratings

A

AAA - D

AAA - BBB: investment grade bonds

BB and below: junk bonds

155
Q

Guaranteed Investment Contract (GIC)

A
  • issued by insurance companies with a guaranteed rate of return
  • insurance company agrees to repay the principal and guaranteed rate of return for a period of time
  • yield is higher than treasury securities
156
Q

Municipal Bonds

A
  • nontaxable at the fed, state, and local level if you live in the issuing state
  • bonds issued by territories of the US are not subject to taxes at the fed, state and loval levels
  • 3 types of muni bonds:
    • General obligation bonds
    • revenue bonds
    • private activity bonds
157
Q

General Obligation Bonds

A
  • backed by the full faith, credit and taxing authority of the muni that issued the bond
158
Q

revenue bond

A
  • backed by the revenue of a specific project
  • are NOT backed by the full faith, credit and taxing authority of the entity issued the bond
159
Q

private activity bonds

A
  • used to finance construction of stadiums
160
Q

Insured Municipal bonds

A
  • american municipal bond assurance corp (AMBAC)
  • municipal bond insurance association corp (MBIA)
  • if an insured muni bond is in default, the insurance company will pay the interest and principal amounts
161
Q

Fixed Income Risks

A
  • Corporate Bond risk
  • US Gov Bond Risk
162
Q

Corporate bond risk

A
  • default risk
  • reinvestment rate risk
  • interest rate risk
  • purchasing power risk
163
Q

US Gov bond risk

A
  • reinvestment rate risk
  • interest rate risk
  • purchasing power risk
164
Q

Tax equivalent and tax exempt yields

A
  • the yield a taxable corporate bond would need to pay for the yield on a tax-exempt muni to be equivalent to a taxable corporate bond
  • TEY is the after tax rate of return a taxable corporate bond pays
  • if a bond is double or triple tax free, simply combine fed state and local income tax rates
  • this is used for the marginal tax rate in the formula below
    • to be double TF the bond holder must love in the state that issued the muni bond
    • to be triple TF the bond holder must live in the local muni that issued a bond
165
Q

Tax Equivalent Yield (TEY)

A

= r / (1-t)

= corporate rate * (1 - marginal tax rate)

r= tax exempt yield

t = marginal tax rate

166
Q

Municipal Bonds

A
  • exempt from BOTH fed and state taxes
167
Q

Treasury Security

A

Exempt from ONLY state and local taxes

168
Q

TEY on a treasury security

A

= paid amount of a treasury security / ( 1 - (state income tax)

169
Q

TEY on a muni bond

A

= issue of a municipality / (1 - [fed tax rate + (state tax rate *(1 - fed tax rate))])

170
Q

coupon Rate

A

the periodic interest payment received by a bond holder

the annual payment

calculated as a constant $ payment

a bond with a 10% coupon pays $50 semi-annually each time

= PMT

171
Q

par value

A

the principal amount which is $1,000 on bonds unless stated otherwise

the amount that will be repaid to bond investors at the end of the loan period

= FV

172
Q

length of time to maturity

A
  • the time remaining until the bondholder receives par
  • described as the # of periods to maturity or that the loan will be outstanding

= N

173
Q

Market Interest Rates

A
  • the yield that is currently being earned in the marketplace
  • the rate used to discount a bond to determine what it is currently selling for in the market

= i

174
Q

YTM

A

compounded rate of return if an investor buys a bond today and holds it until maturity
assumes that an investor is able to reinvest the coupon payments at the YTM rate

= i

175
Q

YTM

A

ALWAYS ASSUME SEMI-ANNUAL COMPOUNDING UNLESS TOLD OTHERWISE

176
Q

Liquidity Preference Theory

A
  • lower yields for shorter maturities bc some investors prefer liquidity and are willing to pay for liquidity in the form of lower yields
  • LT yields should be higher than ST yields bc of the added risks associated with LT maturities
177
Q

Market Segmentation Theory

A

the yield curve depends on S and D at a given maturity and there are distinct markets for given maturities with distinct buyers and sellers at each maturity

when S > D at a given maturity, rates are low. Rates will then have to increase for D to increase

when D > S at a given maturity, rates are high. Rates will then begin to decrease to drive demand down

178
Q

Expectations Theory

A
  • since investors are uncertain or believe inflation will be higher in the future, LT yields are higher than ST yields
  • when inflation is expected to be lower in the future, LT rates will be lower than ST rates
179
Q

Unbiased Expectations Theory

A
  • related to the term structure of interest rates
  • today’s LT interest rates have embedded in them expectations about future ST interest rates
  • LT rates are geometric averages of current and expected future ST interest rates

1rN = [(1+1R1)(1+E(2r1)…(1+E(nR1))]^(1/n) - 1

Borrowing money for n years at the x rate today should be equivalent to borrowing money for 1 year for x # of years

180
Q

Bond Duration

A
  • weighted average maturity of all CFs
  • the bigger the duration, the more price sensitive/volatile the bond is to interest rate changes
  • the moment in time the investor is immunized from interest rate risk and reinvestment rate risk
  • a bond portfolio should have a duration = to the investors time horizon to be effectively immunized
  • underestimates the P appreciation when interest rates decrease
  • Overestimates the P depreciation when interest rates increase
181
Q

Modified Duration

A

a bond’s price sensitivity to changes in interest rates

182
Q

Calculating Bond Duration

A
  • Zero Coupon bond: bond will always have a duration = to its maturity
  • as the coupon rate increases, the duration decreases
  • as the YTM increases, duration decreases
  • As the term of a bond increases, duration increases

Bond A: 30 year zero coupon bond, duration = 30

Bond B: 30 year 5% coupon, duration = 27

Bond C: 30 year 10% coupon, duration = 25

183
Q

Vary INversely with duration

A

INterest rates

coupon rate and YTM

184
Q

Bond Strategies

A
  • Tax Swaps
  • Barbells
  • Laddered Bonds
  • Bullets
185
Q

Tax Swap

A
  • involves selling a bond that has a gain and a bond that has a loss which offset each other
  • involves sell a bond that has a loss and just buying a new one
  • similar to tax harvesting, offsetting the losses for tax purposes
186
Q

Barbells

A
  • involves owning both ST and LT bonds
  • when interest rates move, only 1 set of positions needs to be sold and restructured
187
Q

Laddered Bonds

A
  • requires purchasing bonds with varying maturities
  • as bonds mature, new bonds are purchased with longer maturities that what is outstanding in the portfolio
  • helps reduce interest rate risk bc bonds are held until maturity
188
Q

Bullet

A
  • have very little payments during the interim period and then a lump-sum at the specified date in the future
  • most of the bonds in this strategy will mature in or around the same time period
  • zero coups, treasuries, and corporates are most likely candidates for this strategy since they pay little or no coupon during the period and the payoff comes at some predetermined date in the future
  • used when the investor has a balloon payment due on a liability at some future date
189
Q

Preferred Stock

A

has both equity and debt features

  • debt:
    • par val
    • dividend rate as a % of par
  • Equity:
    • price of a preferred stock may move with the price of common stock
  • Differences:
    • divs do not fluctuate like common stock
    • no maturity date like a bond
    • price of preferred stock is more closely tied to interest rates than common stock
  • Corporate investors benefit most from the tax advantages of preferred stocks
  • they receive a 50-60% deduction of dividends based on a % of ownership of the company paying divs
190
Q

Convertible Bonds

A
  • conversion value is the value of the convertible bond in terms of the stock into which it can be converted
  • even if the stock does not perform well, the investor has a floor built in
  • the floor is the par value of the bond that the investor will receive if the convertible is held until maturity

CV = (Par / CP) * Ps

Ps = price of the common stock

CP = conversion price

(1,000 / CP) = conversion ratio or # of shares the convertible can be converted into

191
Q

Types of investment companies

A
  • closed end
  • open end
  • UITs
192
Q

Closed end

A
  • have a fixed initial market cap bc specific # of shares are initially sold to the public
  • those shares are then traded on an organized exchange
  • no new shares are issued by the fund
  • shares may trade at a premium or discount to NAV
193
Q

Open end funds

A
  • have unlimited # of shares
  • as long as open-end fund receives contributions the fund fam will continue to issue shares
  • shares are bought/redeemed directly from fund fam
  • shares trade at NAV = (assets - liabs) / shares outstanding
194
Q

Unit Investment Trust

A
  • can be equity or fixed income UIT
  • Typically fixed income trust
  • managed by a TTEE, there is no investment manager
  • self liquidating
  • have passive management and no trading of assets within the trust
  • issues units, not shares
  • can be sold back to the UIT at NAV
  • there is a very thinly traded secondary market
195
Q

no load funds

A
  • do not charge a sales commission when bought/sold
196
Q

load funds

A
  • charge a sales commission when bought/sold
  • include A, B and class C shares
197
Q

A shares

A
  • front-end load fund
  • small 12-b 1 fee (marketing fee used to pay distribution expenses)
  • no redemption fee or back-end load
  • appropriate for LT investors bc of low 12-b1 fee
198
Q

B shares

A
  • contain a back-end sales load
  • have high 12b-1 fee, max of 1%
  • do not have front end load sales loads
  • can be converted to A shares
  • advantage is that an investor would not pay the front-end load but they would pay the higher 12b-1 fee until the shares are converted into A shares
  • many funds no longer offer B shares
199
Q

C shares

A
  • do not chare a front load
  • usually charge a small back-end load and charge the max 12-b1 fee
  • usually most appropriate for ST investors
  • do not convert to A shares
200
Q

ETFs

A
  • portfolio of stocks that represent an index
  • traded on an exchange similar to stocks and can be traded intra-day unlike traditional MFs
  • investors do not have to buy and sell blindly
  • have a low cost of ownership bc they are typically passive investments
  • only when stocks are added/removed from an index is there actually selling of assets within an ETF
  • most ETFs are tax efficient bc of the low asset turnover and passive investment strategy
201
Q

Real Estate Investment Trust (REIT)

A
  • attractive bc of the low correlation with the stock market and the diversification benefit that the provide to portfolios
  • a hedge against inflation
  • must distribute 90% of investment income to shareholders to maintain tax-exempt status
  • 3 types: Equity, Hybrid, mortgage
202
Q

Equity REIT

A
  • invest in real estate for cap apprec
  • income is generated from rental income and apprec
203
Q

Mortgage REIT

A
  • invest mostly in mortgages and construction loans
  • make the spread between the lending and borrowing rate
204
Q

Hybrid

A
  • combo of both equity and mortgage
205
Q

American Depository Receipts (ADRs)

A
  • represent foreign stock held in domestic banks foreign branch
  • entitle the shareholder to divs and cap gains
  • cap gains include currency fluctuation
  • trade on US exchanges, are denominated in US $ and trade in US $
  • divs are paid in US $
  • do not eliminate exchange rate risk
  • There IS currency risk
206
Q

General investment

A
  • cash
  • equities
  • bonds
207
Q

Alternative investment

A
  • any asset that is not cash, equities or bonds
  • typically high risk w/ large min purchase reqs and high fees
  • actively managed
  • limited liquidity
  • no secondary market
  • REITs, CMOs, Limited Partnerships, hedge funds, collectibles, precious metals, crypto
208
Q

Options

A
  • derivative security
  • value depends on the value of another underlying asset
  • contract is an agreement btwn 2 parties, the seller (writer) or buyer
  • all transactions are handled through a clearing house
  • 2 types: calls and puts
209
Q

Call Option

A
  • right to buy specific # of shares @ specific price within a specific period of time or at a future date
210
Q

Put Option

A
  • the right to sell a specific # of shares at a specific price within a specific period of time or at a specific future date
211
Q

3 reasons people invest in options

A
  • hedging
  • speculation
  • income
212
Q

“ which option will provide the investor with the max gains if stock P appreciate”

A

Buy a call

213
Q

“ what option will maximize gains if the stock price falls”

A
  • buy a put
214
Q

Intrinsic Value of a call

A

stock price - strike price

stock price is the expiration stock price $

215
Q

Intrinsic Value of a put

A

strike price - stock price

stock price is the expiration stock price $

216
Q

time value

A

= premium - intrinsic value

217
Q

“STOPS” gain/loss on option position

A

St: stocks gain or loss - if you own the underlying stock

O: Option gain or loss (intrinsic value)

P: premium paid (-$)

S: # of shares (usually # but then multiply by 100)

218
Q

CANNOT HAVE NEGATIVE INTRINSIC VALUE

A

CANNOT HAVE NEGATIVE INTRINSIC VALUE

219
Q

Option Trading Strategies

A
  • Covered call
  • married put
  • straddles
  • collar/zero cost collar
220
Q

covered call

A
221
Q

married put

A
222
Q

“protecting profits” or “locking in gains”

A
  • BUY A PUT
223
Q

Long Straddle

A
224
Q

Short Straddle

A
225
Q

Collar or Zero-cost collar

A
226
Q

Option Pricing Models

A
  • Black/scholes
  • Put/call parity
  • binomial pricing model
227
Q

Black/scholes pricing model

A
228
Q

put call parity pricing model

A
229
Q

binomial pricing model

A
230
Q

Taxability of options

A
231
Q

long term equity anticipation securities (LEAPS)

A
232
Q

Warrants

A
233
Q

Futures Contracts

A
  • commodities futures: Copper, wheat, pork bellies, oil
  • financial futures: currency, interest rate, stock indices
  • obligate the holder to make to take delivery of the underlying asset
234
Q

Process of hedging a position

A
235
Q

an investors greatest loss

A

selling a naked call option

236
Q

Options contracts

A

give the holder the right to do something

237
Q

Players in the Futures Market

A

hedgers

speculators

238
Q

hedgers

A

producers and processors

protecting their interests in underlying commodity or financial instrument

provide the actual products being sold

239
Q

speculators

A

investors

trying to profit on expected swings in prices of futures contracts

long positions benefit if price increases, short position benefits if price decreases

240
Q

Bearer Bonds

A
  • these bonds are considered to be owned by whoever possesses them
241
Q

UITs

A

= low fees

242
Q

debenture

A
  • unsecured corporate debt
243
Q

a lower coupon rate

A
  • represents a more volatile bond
244
Q

Tax Exempt OID bond

A
  • bond basis increases at a set rate each year
  • difference between maturity value and the OID price is known as the OID
  • bonds earnings are treated as exempt interest income
  • bond was issued at a discount to its par value
245
Q

Risk of MBSs

A
  • actual maturity is not known with certainty
  • actual CFs are not known with certainty
246
Q

ideal correlation for portfolio construction

A

-1

247
Q

optimal portfolio on the efficient frontier

A

the best combo of risk and return for a given combo of investments

248
Q

stock that lies above the SML

A
  • has a positive alpha
249
Q

margin call

A

= required equity ( price per share * mm)

= actual equity (current price - current loan)

250
Q

Establishes the initial margin requirement

A

Federal Reserve

251
Q

triggers a margin call

A

= loan \ (1-mm)

loan = (price per share * initial margin)

252
Q

Dividend Discount Valuation

A

= (D1)/(r-g)

253
Q

Constant Growth Dividend Model

A

D1 / (r-g)

254
Q

Correlation

A
  • always the strongest determinant as to what should be added to the portfolio
255
Q

low PE Ratio stocks

A
  • an anomaly to the EMH
256
Q

alpha in a morningstar report

A
  • tells you the diff between a funds realized return and its risk-adjusted expected return
257
Q

Duration

A
  • the better indicator for evaluating a bonds sensitivity to interest rate risk
  • the time remaining when a securitys discounted FCF remains at risk
258
Q

Bond immunization

A
  • match the average weighted duration of the bond portfolio to the investment horizon
259
Q

Zero coupon

A
  • longest duration
260
Q

the duration of a bond is a function of its

A
  • current price
  • time to maturityYTM
  • coup rate
261
Q

duration

A
  • used to estimate the price of a bond, given a change in interest rates
262
Q

lower coupon rate but same maturity

A
  • more volatile
263
Q

same coupon rate, shorter maturity

A

less volatility

264
Q

the bond with the lowest coupon rate

A
  • will have the biggest duration
  • the bigger the duration, the more price sensitive the bond is to interest rate changes
265
Q

SELLING A NAKED CALL

A
  • most dangerous position
266
Q

Buying

A

Protects

267
Q

DCA

A

= sum of purchases / total # of shares = average price

268
Q

Muni Bond Insurance Association

A
  • One group that insures muni bonds
269
Q

insured muni bonds

A
  • have lower rates of return due to lower risk
270
Q

value line average

A
  • uses the geometric average to compute daily value
271
Q

DJIA

A
  • price weighted average
272
Q

NASDAQ, NYSE, and the Wilshire

A
  • price weighted average
273
Q

compounded rate of return

A

= IRR

274
Q

factors to consider when investing in a mutual fund

A
  • size of fund
  • amount of time until a distribution is made
  • amount of time the current portfolio manager has managed the fund
275
Q

Close-end funds

A

traded on the secondary market

276
Q

Mortgage REIT

A
  • receive monthly income from investing in real estate loans
277
Q

substitution swap

A
  • designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industty
278
Q

rate anticipation swaps

A
  • utilize forecasts of general interest rate changes
279
Q

yield pickup swap

A

designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates

280
Q

tax swap

A

replaces bonds with offsetting cap gains and losses

281
Q

Intrinsic Value Formula

A
  • used to determine whether a stock is overvalued or undervalued
282
Q

straddle

A
  • buying a put and a call on the same security at the same price for same period of time
283
Q

spread

A
  • purchasing a put and call on the same security at different prices for the same period of time
284
Q

strip

A
  • purchase a put and call at the same price and the time are the same, but 2 puts and 1 call are purchased
285
Q

strap

A

buys a put and a call on the same security 2 calls, 1 put at the same price for the same amount of time

286
Q

if you are in a profitable long position in an orange futures contract and do nothing as the contract expires

A
  • expect the oranges to be delivered to you
287
Q

lower call options on stock

A
  • if there is a cash dividend issued on underlying stock
288
Q

Buy Put

A

protects the downside

289
Q

Buy

A

protect

290
Q

Sell

A

hedge

291
Q

neglected firm affect

A
  • a market anomalie
  • if a stock produces superior earnings and rates of return but has gone unnoticed by securities analysts and is often considered underpriced
292
Q

bottom up analysis

A
  • analysts start with the company, then industry and finally the economic climate
293
Q

top down analysis

A
  • starts with the economic climate, moves to the industry and then the company
294
Q

income producing strategy

A
  • sell covered calls on the stock option
295
Q

preferred stock

A
  • market fluctuations are greater than the LT bond market fluctuations
  • more risky than debt
296
Q

Wilshire 5000

A

the best index to use capturing the overall US market

297
Q

Controlling volatility

A
  • 2 equally weighted investments with a correlation of -1
298
Q

“minimum Margin”

A
  • 50%
  • set by the federal reserve
299
Q

Beta Calculation

A

= COV (im) / std dev ^2 m

or

= (correlation coeff * std dev i) / (std dev m)

300
Q

high R^2

A

means that the fund’s performance patterns have been in line with the index

  • the higher, the less non-systematic risk is present
301
Q

Zero Coupon

A
  • investment with the greatest amount of price volatility due to interest rate changes
302
Q

Revaluation of the Yen

A
  • if there is a rise in the price of the Yen in relation to the US Dollar
303
Q

GO Bond

A
  • issued with a restrictive revenue base
304
Q

Advantage of Equity REITs over mortgage REITs

A

equity REITs participate in the appreciation of the underlying properties

305
Q

Top Down style managers

A
  • group rotation managers
  • market timers
306
Q

Bottoms Up Equity Managers

A
  • value managers
  • technicians
307
Q

Margin call

A

loan / (1-MM)

308
Q

Modified Duration

A

Macualay Duration / (1+YTM)

309
Q

Coefficient of Variation

A

standard dev / x

310
Q

information ratio

A

alpha / std dev

311
Q

Geometric mean

A

n sq rt (1 + R1)(1+R2)(1+R3) - 1 * 100

312
Q

Multi stage div discount model

A
313
Q

Holding Period Return

A
314
Q

PE Ratio

A
315
Q

EPS

A
316
Q

Risks that bonds are faced with

A

DRIP

  • default risk
  • Reinvestment rate risk
    • interest rate risk
    • purchasing power risk
317
Q

risks that GOVERNMENT bonds may be faced with

A

RIP

  • Reinvestment rate risk
    • interest rate risk
    • purchasing power risk
318
Q

T bill

A
  • = Risk free rate
  • is not subject to DRIP or RIP risks
319
Q

How much equity should an investor contribute

A

= (new Price - MM) - (new Price - loan)

320
Q

open end investment companies

A

MFs

321
Q

closed-end investment companies

A
  • traded on the exchange
322
Q

Bankers acceptance

A
  • financing exports
323
Q

Investment Policy statement includes

A
  • RRLLTU
  • risk, return, liquidity, laws, taxes, unique circumstances
  • does not include investment selection
324
Q

Tactical Asset Allocation

A
  • an active management portfolio strategy that rebalances the % of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors
325
Q

DCA

A

strategy for accumulating wealth

involves purchasing during market highs and lows

326
Q

Strategic Asset Allocation

A
  • a “buy and hold” strategy
327
Q

Value investing

A
  • represents the purchasing of stock with low PE ratios to hold over a long time horizon
328
Q

Tactical Asset Allocation

A
  • repositioning assets during economic downturn
329
Q

if interest rates increase, the price of a bond will

A
  • decrease by the # of years of duration but in % form
330
Q

Conversion Value

A

= (par / conversion price) * price of the stock

331
Q

conversion price

A

= par / # of convertible shares

332
Q

when adding new investments to a portfolio, always add the one with

A
  • the lowest correlation coefficient
  • -1 is always the best
333
Q

international mutual funds

A
  • are less efficient that US markets
  • due to lower correlation with US stocks, foreign stocks can lower total portfolio risk
334
Q

best performance measure to evaluate the return of 2 investment managers

A
  • time weighted return
335
Q

Market Value

A

= Net operating income / capitalization rate

336
Q

Net Operating Income

A

= net income + interest + depreciation

337
Q

PE Multiplier

A

= price per share / EPS

338
Q

expected market price

A

projected earnings * PE multiplier

339
Q

NPV

A

is a better method for evaluating projects that the IRR method

340
Q

NPV vs IRR

A
  • npv has more realistic reinvestment rate assumptions
  • is a better indicator of profitability and shareholder wealth
  • always choose the higher NPV over the IRR option
341
Q

odd lot theory

A
  • these purchase levels indicate the # of small investors in the market
  • says that small investors are always wrong
342
Q

Technical indicator signaling a bear market

A
  • moving average chart indicates that actual prices have dropped through the moving 200 day average line
343
Q

Forward contract

A
  • requires a buyer and seller
344
Q

Buyer of an orange grove

A
  • should LONG the commodity and SELL a futures contract
345
Q

Call

A
  • created by individuals
  • have shorter durations than warrants
  • receives the stock shares from a seller of the option when exercised
346
Q

warrant

A
  • issued by corporations
  • longer durations than calls
  • receives the stock shares from the seller of the warrant when exercised
347
Q

value of a firm

A

= net earnings / capitalization rate

348
Q

information Ratio

A

= ALPHA / std dev

349
Q

lowest coupon bond

A

= highest duration

350
Q

lower the coupon rate

A
  • higher the volatility
351
Q

“Riding the Yield Curve”

A

refers to the purchase of debt instruments in anticipation of fluctuations in the rates of return on both long and short-term instruments.

352
Q

Correlation

A

is always the strongest determinant as to what should be added to a portfolio

GTPR Flashcards (11 decks)

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