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63 Cards in this Set
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TBills
Quoted Yield 
[(Face Value  Purchase Price)/Purchase Price] x (365/days to maturity) x 100


Calculate Purchase price of TBill

**need to have quoted rate
Face Value/(1+[(quoted yield x (Days to Maturity)/365]) 

US Treasury Bills

**always use a base of 360 instead of 365. Therefore CDN TBills will have slightly higher yield


Why calculate Current Yield/Rate of Return on a Bond?

To assess current annual income from specific investment


Current Yield/Rate of Return on a Bond (formula)

(Annual Interest payments)/(Current Market price)x100


YieldtoMaturity

Total return on a bond over its lifetime.
Equal to coupon rate if bond held to maturity 

Calculate Yield to Maturity on a bond

P/YR
xP/YR PMT FV PV Mode END SOLVE FOR I/YR 

Yield to Call

Yield to maturity of a callable bond (assumes bond is called at the earliest call date)


Current Yield  Preferred Shares

[Annual Dividend Payment/Current Market Price] x 100


Market Price (Preferred Share)

(Dividend Payment)/(Prevailing Market Rate)


Holding Period Return

Total return on an investment  Income + Capital appreciation during specific holding period


Holding Period Return

[(Closing Value  Opening Value)/Opening Value] x 100


What is Duration?

used to predict expected changes in price of a fixedincome security relative to an interest rate change


Assumptions made when calculating hoding period return

1. Selection of specific time period
2. All income flows are used to buy additional units 

Duration

Price of fixedincome security will change x% give a 1% change in interest rate....where x = duration


Duration (Formula)

(PV of all timeweighted cash flows at discounted YTM)/current market price


Immunization

Matching duration of a bond to investors cashflow requirements.
Shield investor from interest rate risk. 

Mutual Fund Invstment Returns

[(Closing value Opening value)/opening value]x100


Stock Valuations

Method used to compare actual price of stock to its intrinsic value


Dividend Discount Model DDM

Based on the premise that the price investors will pay is driven by future cash flow


ZeroGrowth Model (DDM) Assumption

Assumes dividend is received forever and remains the same.


ZeroGrowth Model (DDM)

P = D/r
where: P = intrinsic value D constant Dividend amount r = discount rate for cash flows with similar investment risk. 

Constant Growth Model (DDM)Assumption

Assumes dividends grow at a constant rate


Constant Growth Model (DDM)
Formula 
P = Do x (1.0+g)/(rg)
where: Do = dividend in first year g = growth r = discount rate for cash flows with similar risk 

Three Stage DDM

Corresponds to the three stages that companies experience.
1.Growth 2.Transition 3.Maturity 

Finite Holding Period Model

Investors do not hold stocks forever


Terminal Price

Expected sale price of a stock


Price Earnings based Valuations

Relationship between earnings of a company and price of their stock


PriceEarnings Valuations  A stock is underpriced if...

Expected PE ratio > actual PE ratio


PriceEarnings Valuations  A stock is overpriced if...

Expected PE ratio < actual PE ratio


ZeroGrowth Model (PE Valuation)

Assumes 0 growth and payout ratio is always 100%


ZeroGrowth Model (PE Valuation)
Formula 
Expected PE ratio = 1/r
where r = discount rate Actual PE ration = CMV/Net Earnings per share 

2 forms of Security Analysis

1. Technical
2. Fundamental 

Technical Analysis

Deals with Mass psychology of investors
no interest in performance of the company 

Resistance

Stock rises in price but has trouble reaching or staying at a specific price


Support

Stocks price is falling but stalls a certain price level


Tools used for Technical Analysis

1. Moving Averages
2. Relative Strength Index 

Moving Averages

Average price over a specific time period ie:20 days.
Each day as new price is added the oldest price is dropped. 

Relative Strength Index (RSI)

100(100/1+RSI)
where RSI=(Avg of nday of up close)/(Avg of nday down close) Compares days price closed high and days it closed low 

Fundamental Analysis

Studies Economy, Industry and company


Topup Approach

begin a economic level, then industry level then company


Bottomup approach

Begin at corporate level, then industry and then the economy


7 Types of Diversification

1.Asset Classes
2. Company Size 3.Industry 4. Geographic 5. Management Style 6. FixedIncome Maturity dates 7. Credit Risk 

Active Investing

Buying and selling stock to capitalize gains


Passive Investing

Construct portfolio to mirrior an index.
Advantages 1.returns seldom deviate from benchmark 2.fully invested at all times 3.lower fees 

Asset Allocation

Segmenting funds into investments that are independent/different


Tatical Allocation

Deals with short term forecasts. Uses leading economic indicators.


7 Types of Diversification

1.Asset Classes
2. Company Size 3.Industry 4. Geographic 5. Management Style 6. FixedIncome Maturity dates 7. Credit Risk 

Active Investing

Buying and selling stock to capitalize gains


Passive Investing

Construct portfolio to mirrior an index.
Advantages 1.returns seldom deviate from benchmark 2.fully invested at all times 3.lower fees 

Asset Allocation

Segmenting funds into investments that are independent/different


Tatical Allocation

Deals with short term forecasts. Uses leading economic indicators.


Barbell Approach to Maturity Selection

Holding only short & long term bonds so one portion will benefit from higher rates.


2 Types of StyleBased Investing

1.Value
2. Growth 

Value Stocks

Priced below avg. levels relative to historical pricing.
3 Types 1.low P/E ratio 2.Contrarian mgr. (bookvalue) 3.Conservative yield  above avg. yields 

Growth Stocks

P/E ratio is above average
2 styles 1.Consistant Growth Mgr  high quality corp with consistant growth 2.Earnings momentum growth mgr 

Portfolio Insurance

Identifies a portion of assets for riskier investment
Constant multiple x an amt in ecess to floor amount 

Investment Objectives

1.Income
2.Security of Principle 3.Liquidity 4.Growth 

Investing in Business Cyles

Expansionown stocks instead of bonds
Peak  hold stock and shift to bonds Recession  Int. rate decreases making bonds more attractive Trough  move from bonds to stocks 

Hedging Strategies

1.Selling Short
2.Options 3.Arbitage 4.Event Specific 

Taxation of a leveraged Loan

Is tax deductable if borrowed for the purpose of earning income


Magnification

Returns can be much greater when using leveraged loans to invest.


Formula Investing

Based on a Set of rules. No investor emotions
1.DRIP 2.Dollar Cost Averaging 