Investments Quizzes Flashcards
(119 cards)
1
Q
If a question asks for constant dividend growth value and does not provide required rate of return, you must calculate it using…
A
CAPM
R = Rf + (Rm - Rf)B
2
Q
Expected rate of return in a constant dividend growth calculation
A
Use the Constant Dividend Growth formula to solve for R, using current price in place of V
3
Q
The lower the coupon rate, the more ____ the bond
A
Volatile
4
Q
The longer the maturity, the more ____ the bond
A
volatile
5
Q
What elements of risk make a mortgage-backed securities can be difficult to determine?
A
Maturity is not known with certainty (prepayment risk)
Cash Flows are not known with certainty (prepayment risk)
6
Q
Treasury Security Risks
A
Long maturities means purchasing power risk (fixed coupon rates)
Interest rate risk if sold prior to maturity
No default risk
No country risk
7
Q
Treasury Bills Maturity
A
Variety up to 52 weeks max
8
Q
Treasury Notes Maturity
A
2 to 10 years
9
Q
Treasury Bonds Maturity
A
Greater than 10 years (typically 30)
10
Q
Highest and Lowest Rating in Moody’s Bond Rating System
A
Aaa - C
11
Q
Highest and Lowest Rating in S&P’s Bond Rating System
A
AAA - D
12
Q
Lowest Rating in Moody’s Bond Rating System that is considered investment grade
A
Baa
13
Q
Lowest Rating in S&P’s Bond Rating System that is considered investment grade
A
BBB
14
Q
The lower the bond rating…
A
The higher the risk
15
Q
An airline is considering issuing bonds to finance eight new airplanes that will be delivered in six months. Which type of bond will the airline issue?
A
Equipment trust certificate - airplanes will serve as collateral
16
Q
Interest rate risk does not effect the bond investor if…
A
If he holds the bonds to maturity
17
Q
Financial Risk
A
Measures the extent to which a firm uses debt securities and other forms of debt in its capital structure - leveraging
18
Q
Premium factors considered in nominal rate of interest
A
Risk
Default
Liquidity
Risk-free Rate
19
Q
An investor who searches for stocks selling at a low price to earnings (P/E) ratio believes that…
A
Anomalies to EMH exist
20
Q
Mary Grabowski owns an LMN, Inc. bond with a par value of $1,000. LMN is a AA-rated bond that matures in 7 years. Mary receives $55 of interest income from LMN semi-annually. Comparable debt, i.e., is AA-rated, 7-year maturity, yields 12%. The bond’s duration is 5 years. If the bond’s current price is $920, what is the yield to maturity of the bond?
A
N = 7 × 2
i = ?
PV = <920>
PMT = 55
FV = 1,000
21
Q
My margin requirements are 50% initial margin and 25% maintenance margin. I purchase a total of 200 shares at $100 per share using full margin amount for the 200 share purchase. Shortly thereafter, share prices fall to $50 per share. What will my margin call be?
A
Required equity: $50 × .25 = 12.50 per share
Actual equity: $50 - $50 = 0 (current price- loan amount)
To meet required equity: $12.50 per share × 200 shares = $2,500
22
Q
Call options are created by ____; warrants are issued by ____.
A
Individuals
Corporations
23
Q
Call options generally have ____ durations than warrants.
A
Shorter
24
Q
When an investor exercises either a call option or a warrant, he or she receives…
A
The stock shares from a writer of the option or warrant.
25
An option premium is paid to the writer upon...
Purchase
26
A warrant does not increase company profit until...
The warrant is exercised
27
Whenever there is a cash dividend issued on an underlying stock, the price (or premium) for a call option available on that stock tend to be...
Cash dividends will generally tend to drive the price of the underlying security lower and along with it, the call option prices
28
Put option sellers do best if the market price of the stock...
Rises or stays the same
29
Since the client has the oranges in the trees, she should...
Be long the commodity (oranges) and sell a contract (short)
30
One who is long on a contract at the expiration should expect...
Delivery of the commodities at the stated contract price
31
Question
Using the following information, what is the duration of the bond being described?
Maturity is 11 years.
Par value is $1,000.
The coupon rate is 8.25%.
The bond is currently selling in the market at $1,094.
The bond pays interest annually.
Step 1) Calculate Yield to Maturity
Step 2) Duration Formula
Answer: 7.795
32
The duration of a bond is a function of its...
Current Price
Time to Maturity
Yield to Maturity
Coupon Rate
33
The smallest denomination of T-Bills is...
$100
34
Physical assets might be suitable as an investment in the portfolio of an investor looking for...
Hard assets are generally considered a hedge against inflation, which will lead to price appreciation and potential capital gains
34
Physical assets might be suitable as an investment in the portfolio of an investor looking for...
Hard assets are generally considered a hedge against inflation, which will lead to price appreciation and potential capital gains
35
An investor may use options on debt instruments to protect against...
Interest Rate Risk
36
Long Hedge
Investor owns (buys) the futures contract to insure a certain price of a commodity that he or she does not yet own
37
The Federal Reserve is currently tightening the money supply. As the treasurer and CFO of your company, which of the following best describes the hedge position that you should undertake and the reason for taking it to protect your company's long-term bond inventory
A short position to hedge against decreases in bond prices - You own a long position on the bonds. A tightening of money will cause a rise in the interest rates, thus exposing your bonds to a loss in value when bond prices decrease as a result. You should undertake a short (sell) position in interest rate futures to protect your position.
38
A substitution swap is designed to...
Take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industry
39
Rate anticipation swaps utilize...
Forecasts of general interest rate changes
40
A yield pickup swap is designed to...
Alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates
41
A tax swap replaces...
Bonds with offsetting capital gains and losses
42
Convertible bonds offer...
Income as a bond and growth potential when converted to a stock
43
Which method of portfolio evaluation allows the comparison of a portfolio manager's performance to that of the over-all market using just one calculation?
Jensen's Alpha
44
Insured municipal bonds usually...
Have lower rates of return because they have lower risk
45
Limited general obligation bonds
issued by an entity that has some ability to levy taxes to support itself (for example, a school district)
Restricted revenue base compared to general taxing power of the state
46
DCA average cost per stock calculation
Step 1) Calculate number of shares for each lot
Step 2) Divide total amount spent by the total number of shares purchased in all lots
47
What is the minimum information needed to calculate the weighted average rate of return for a portfolio?
Current market price of each security.
Number of shares of each security.
Percent return of each security
48
The market where exchange and broker dealer services are eliminated entirely is...
The fourth market
49
Primary market is where...
investment bankers and corporations meet to arrange offerings to the public
50
The fourth market is the market where...
corporation and institutional investors deal directly with one another
51
American Depository Receipts (ADRs) are for what purpose?
Trade foreign securities in U.S. markets.
52
The Federal Reserve Board is expected to sell large quantities of Treasury securities in the near future. What impact will these sales likely have on stock prices?
Stock prices will decrease because the required rate of return for investors will increase
53
Which of the following have been repurchased by the corporation?
Treasury shares
54
If the market risk premium were to increase, the value of common stock (everything else being equal) would...
Decrease in order to compensate the investor for increased risk
55
Conversion Value Formula
Conversion Value = (Par Value / Conversion Price) x Current Price
56
Conversion Ratio Formula
Conversion Ratio = Par Value / Conversion Price
This is the number of shares able to be converted
57
What is one reason a company may call bonds that were previously issued?
The bonds are currently selling at a premium - interest rates have decreased since the bonds were issued. The company would be motivated to retire the higher yield bonds and issue new bonds at lower market interest rates.
58
Barbara Reed owns an LMN, Inc. bond with a par value of $1,000. LMN is a AA-rated bond that matures in 7 years. Barbara receives $55 of interest income from LMN semiannually. Comparable debt, i.e., is AA-rated, 7-year maturity, yields 12%. The bond's duration is 5 years. What is the intrinsic value of the bond?
N = 7 × 2
i = 12 ÷ 2
PV = ?
PMT = 55 ($110 ÷ 2)
FV = 1,000
59
Tax Equivalent Yield Formula is used to calculate...
the corporate equivalent of a tax-free bond
= Tax Exempt Yield / (1 - Marginal Tax Rate)
60
When using TEY formula, what taxes do you use in denominator?
Any taxes that you SAVE - add state taxes if applicable
61
What is the standard deviation of a stock with the following returns?
Year Return
1 5.75%
2 12.23%
3 11.16%
4 <3.94%>
5 9.37%
.0575 ∑ +
.1223 ∑ +
.1116 ∑ +
.0394 +/- ∑ +
.0937 ∑ +
Orange Shift
SxSy
62
If the risk/return performance of a stock lies above the Security Market Line, the stock is said to have a...
Positive Alpha
63
The standard deviation of the returns of a portfolio of securities will be _______________ the weighted average of the standard deviation of returns of the individual component securities
less than or equal to (depending upon the correlation between securities0
64
Which of the following reveals the relationship of a given security's movement relative to that of the market?
Beta
65
What law governs an IPO?
Securities Act of 1933
66
The SEC and FINRA require arbitration if...
voluntary negotiation fails.
67
What requires registration under disclosure rules with the Securities and Exchange Commission?
Sale of an entire issue of securities in an IPO.
68
SIPC insures investors against losses due to...
bankruptcy or insolvency of brokerage firms
69
What established the organized securities exchanges?
Securities Act of 1934
70
What regulates both initial public offerings and subsequent secondary offerings by a public company?
Securities Act of 1933
71
The Securities Investor Protection Act of 1970 is designed to...
protect individual investors from losses as a result of brokerage house failures.
72
The Investment Advisers Act of 1940 requires that person or firms advising others about securities investment must...
register with the Securities and Exchange Commission.
73
Of the following indexes, which is the only one that uses the geometric average to compute its daily value?
Value Line
74
The NASDAQ, the NYSE Composite, and the Wilshire all use...
value weighted average
75
The Dow Jones Industrial is a simple ____ average
Price Weighted Average
76
Potential Gross Income of Real Estate Formula
= Rental Receipts + Non-Rental Income (parking, laundry, etc.)
77
Effective Gross Income of Real Estate Formula
= Potential Gross Income - Vacancy and Collection Losses
78
Net Income of Real Estate Formula
= Effective Gross Income - Expenses
79
Net Operating Income of Real Estate Formula
NOI = Net Income + Mortgage Interest + Depreciation
80
Market Value of Real Estate Formula
= Net Operating Income (NOI) / Capitalization Rate
81
Developing cash flow projections and valuations for real estate can be difficult due to...
Changes in demographic and economic variables.
82
An investor in improved land (with an office building) is concerned most with which one of the following factors?
Cash flow expected to be generated by the property.
83
Attributes of Equity REITs
They receive income from the rental or lease of real estate properties.
They provide more opportunity for capital gains.
They frequently invest in commercial properties.
84
Attributes of Mortgage REITs
They receive monthly income from investing in real estate loans.
More volatile than equity REITs
85
Raw land is considered to be among the riskiest real estate transactions because...
Frequently offers little to no income during ownership, and yet creates expenses.
It may be illiquid in difficult financial times.
It often must be held for prolonged periods before a gain can be realized.
86
Which one of the following is an advantage of equity REITs over mortgage REITs?
Equity REITs can participate in the appreciation of the underlying properties.
87
International markets are less ____ than U.S. markets.
Less efficient - means greater potential opportunity for profitability
88
Which of the following are advantages of dividend reinvestment plans (DRIP)?
They help firms raise new capital.
They give investors a systematic way to accumulate capital.
Companies build goodwill by offering these plans to shareholders.
89
Which of the following are factors to consider when investing in a mutual fund?
The size of the fund.
The amount of time until a distribution is made.
The amount of time the current portfolio manager has managed the fund.
90
A mutual fund investor who is looking for the opportunity to buy investments at a discount, so as to capture a greater portion of any capital gains, would probably decide to invest in a(n)...
Closed-end fund.
91
12b1 fees are used for...
marketing and distribution costs.
92
The primary difference between open-end and closed-end investment companies would be...
Closed-end funds sell only a limited number of shares.
93
Close-end funds are not ____ managed.
Passively
94
A 39 week moving average of a company's stock prices is a tool used by...
Technicians (charting)
95
Odd lot purchase levels indicate...
the number of small investors in the market - small investors are always wrong, if odd lot purchases are falling, signal for bull market
96
Bottom up analysts start with...
the company, then the industry and finally the economic climate
97
Top-down starts with...
the economic climate, moves to the industry and then the company.
98
Advances and Declines (also known as Breadth of the Market) is a ____ indicator
Price
99
Bottom-up equity managers include...
Value managers.
Technicians
100
Top-down equity managers include...
Group rotation managers.
Market timers.
101
4 Qualities of Preferred Stock
Its market fluctuations are greater than the long-term bond market fluctuations.
It is more risky than debt.
Dividends are set at issue by the Board as a percent of par value and do not change
Changes in interest rates directly impact preferred stock
102
Similarities between Preferred Stock and Debt Instruments
Preferred stock pays a fixed income in its dividend.
Preferreds are purchased for their income stream.
Preferred stock is subject to interest rate and purchasing power risks.
103
Preferred stocks are ____ than debt due to ____
riskier
the lack of a maturity date on preferred issues.
104
What type of investor benefits most from the tax advantage of preferred stocks?
Corporate
105
The cumulative feature on a preferred stock is best described as...
If dividends are not paid in a given cycle, they cannot be paid to anyone else until they are paid to preferred shareholders.
106
Using the price/earnings multiplier, to what level might your client expect to see market prices move in a year?
Step 1) Price / Earnings Multiplier just means the P/E Ratio
Step 2) Calculate projected earnings (Current EPS * (1 + Earnings Growth Rate))
Step 3) Projected Earnings * P/E Multiplier = Projected Stock Price
107
A rise in the price of the Japanese Yen in relation to the U.S. Dollar results in...
A revaluation of the Yen - when it costs more dollars to buy a Yen, this is considered an appreciation or revaluation of the Yen
108
Selling of dollar-denominated assets by foreign investors would indicate...
interest rates might rise - Foreigners selling dollar-denominated assets are preparing to take advantage of higher rates by increasing their liquidity
109
Decreasing United States government deficits would indicate...
decrease in interest rates
110
Weak credit demand by the private sector of the United States economy would indicate...
decrease in interest rates
111
The bond investment strategy of "riding the yield curve" involves...
Investing either short-term or long-term to take advantage of anticipated interest rate changes.
112
A yield curve normally is upward sloping because
Long-term bonds are, by their nature, more risky than short-term bonds.
113
A yield curve can be described as a curve that...
Shows the term structure of interest rates on government debt.
114
Characteristics of Government National Mortgage Association (GNMA) securities
The amount received by the investor each month may vary due to prepayment by homeowners.
The realized yield on the certificates can be somewhat variable because of the principal prepayments.
If mortgage rates decrease, prepayments may increase.
115
When an investment banker agrees to purchase an entire issue of securities from the issuing corporation and sell them to the general public, the agreement is called...
A firm commitment.
116
A ____ offering occurs when an underwriter forms a team of brokerage firms
Syndicte
117
A ____ agreement is a standby commitment.
Green Shoe
118
A stock that has produced superior earnings and rates of return but has gone mostly unnoticed by securities analysts and is often considered underpriced is said to benefit from the...
Neglected firm effect.
