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216 Cards in this Set

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  • Back
Negotiable CDs
those that can be sold by the depositor in the open market at any time before maturity
NonNegotiable CDs
the maturity date must be reached befor funds can be recieved
Commercial Paper
-unsecured short-term promissory notes issued by corporations
-small risk of default
-only firms with excellent credit ratings are allowed to issue
Bankers acceptance
short-term promissory note guaranteed by a bank
Repurchase agreements (or repos)
-sales of short-term securitity in which the seller pledges to buy it back at a specified price and date
What types of investments are found in money market mutual funds? (5)
-Treasury bills
-commercial paper
-bankers acceptances
-repurchase agreements
US Treasury Bills
-issued by Fed govt.
-sold in denominations of $1,000 to $100,000
-muturity periods of 3 to 12 months
-sold at a discount
-subject to fed tax / no state
Series E bonds
-small denominations
-no interest payments
Series EE
-replaced E
-variable rate of interest
-allows investors to participate in rising rates
-not taxable (E & EE) until cashed in
-EE bond interest can be deffered by exchaging for HH
Series HH
-larger denominations
-maturity 20 years
-interest is taxable in year it is payable
-state tax free / no FED
Treasury Notes
-denominations ranging from $1,000 to $100,000
-2 to 10 year maturities
-coupon security
Treasury Bonds
-maturity periods longer than 10 years
-coupon security
General Obligation Bonds
-not as risky as REVs
-backed by full taxing power of municipality
Revenue bonds
-only supported by revenue of a project
-coupon payments periodically adjust to changes in inflation rate
-changes in inflation are represented in the principle rather than coupon
-calculated by multiplying the inflation-adj principal by the real rate (which represents the fixed coupon rate net of inflaiton)
High Yield Corporate Bonds
-Junk Bonds
-usually rated below BBB
Convertible Bonds
-give the holder the right to convert a bond into shares of common stock.
-investors have to pay for privellege
-investors like because offers safety of debt along with potential for capital gains
Conversion Ration (Convertible Bonds)
-the number of sharesa bond may be converted into
-found by taking the face value of the bond and dividing it by the conversion price
Secured bonds
-claims to the assets of a corporation in the event of insolvency, liquidation or default
Unsecured bonds
-not backed by collateral
-promissory notes not backed by collateral, but by reputation of firm
-during bankruptcy debentures can only be redeemed after all other secured debt has been paid off
Serial bonds
-iuuses in which specified bonds will mature every year
-interest paid off at different intervals
-popular among local govt's seeking to finance capital improvements
Bullet Maturity
-entire pricipal is paid off in one payment at the maturity date
Amortizing securities
-those which may BOTH pricipal and interest payments
Sinking funds
-series of staggered payments that retire a portion of the bond issue prior to maturity
Refunding (bonds)
-when new debt is issued in order to generate proceeds for paying off old debt
Are all bonds refundable?
NO - though they may still be callable
Promissory notes
-documents that have been signed by a borrower opledging to repay a loan under certain stated terms
Insurance based contacts may be either:
1) Gauranteed investment contracts
2) Annuities
Guaranteed investment contracts
-commonly known as Stable value funds
-sold to pension plans by insurance companies
When common stock is said to be NONCUMULATIVE:
-then each share gives the holder one vote for each member of the board of directors
When common stock is said to be CUMULATIVE:
-then the shareholder has a number of votes that is equal to the number of position on the board multiplied by the number os shares owned
What happens to a stock on the ex-dividend date?
-price of stock will decrease by the amount of dividend per share
Six catagories of common stock
1) Blue chip
2) Income stocks
3) Growth stocks
4) Cyclical stocks (perform in a manner consistent with market)
5) Interest-sensitive stocks
6) Defensive stocks (unaffected by changes in market
Stock splits
-Reduce the par value
-do not affect the common equity part of the balance sheet
-no overall change in equity after split
Declaration date
-date the board of dir passes a resolution to pay a dividend
Ex-dividend date
-set 2 business days before the date of record
-if stock was purchased before the ex-dividend date then the shareholder is entitled to the dividend
Date of record
-day on which the holders are supposed to recieve the dividend
Date of payment
-day when dividends are mailed to the stockholders
-equity call options issued by corp that give purchaser right to purchase stock at a specified price over specified period
-unlike call options, exercise of warrant increases number of shares outstanding (dillutes earnings)
-actual price paid for warrant is usually higher than the theoretical price
-warrants tend to have more precentage change in price because of leverage effect
Preferred stock
-pays a fixed dividend that is not guaranteed
-dividend expressed as % to par or $ amount
--dividends paid from earnings and given preference over common stock div.
-dividends are not perpetual
Cummulative Preferred stock
-dividends are not paid but accumulate
Noncumulative preferred stock
-dividends do not accumulate and are paid
-securities that have a value ties to the value of some underlying securities
-contracts that give the owner the right to trade in an asset for a predetermined price at a later date
Call option (definition)
-holder right to buy an asset at a predetermined price
Put option (definition)
- holder the right to sell the asset at a predetermined price
Option writer
Person who sells an option contract
Strike price
predetermined price
Expiration date
date at which the option can no longer be exercised
Preemptive rights
-rights held by current stockholders to maintain their proportion of wonership in the firm
Rights offering
-if a firm decides to issue new stock it will hold a "rights offering"
-existing shareholders are allowed to buy new shares before shares are made avaliable to general public
Futures contracts
-formal agreements between a buyer, seller, and commodity exchange
When purchasing a futures contract:
-the buyer agrees to accept a specific commodity at a predetermined price
When a futures contract is sold:
-the seller agrees to accept a specific commodity at a predetermined date
The buying position (futures) is also known as:
-the long position
Future price
-price in the contract for the future delivery of a commodity
Spot price:
-current price of the commodity
To purchase a futures account one must:
1) have a margin account
2) initial deposit
3) minimum balance
When do all listed stock options expire?
on the Saturday after the third Friday of the expiration month
When can American and European options be exercised?
1) American - any time

2) European options - only on date of expiration
The intrinsic value of an option is:
-the minimum price for which it can be bought
The intrinsic value of a call option is calculated as:
-the stock price less strike preice
The instrinsic value of a put option is calculated as:
-strike value less the stock price
The time value of an option is the:
Premium minus the intrinsic value
Real estate properties can either be classified as: (2)
1) income properties (residential or commercial)

2) speculative properties (raw land and investment)
To determine value in a real estate investment analysis, a FA needs to consider: (4)
1) objectives of investor
2) features of property (geographic area, time horizon, property rights)
3) determinants of value (supply & dem)
4) local valuation of property
Cost approach (real estate):
-evaluates the value of property by considering the cost of rebuilding it
-works best for evaluating newer properties
Comparative sales approach (real estate)
-evaluates a piece of property by by comparing it to other recently sold properties in the area
Income approach (real estate)
-evaluates a property at the present value of all future cash flows
Equity REITs:
-aquire ownership interests in commercial, industrial and residential properties
Mortgage REITs:
-lend the funds for construction and mortgages
Hybrid REITs
-combination of equity and mortage REITs
Private placements:
-operate by selling securities to high-level investors
-may only operate for predetermined length of time
-no not require SEC license
Rule 505 of section D
exempts the issuance of securities of up to $1 million in a year to an unlimited number and type of investor
Rule 505 of Regulation D
exempts issuance of up to $5 million in a year
Rule 506 of Regulation D
exempts the issuance of an unlimited amount of securities in a private placement
Collateralized mortgage olbligations (CMOs)
-derivitaves of pass-through securities held by a trust
-divided into different classes (tanches) which receive different cash flow payments
Inflation risk
-purchasing power risk
-when the cash flows from a security vary because of inflation
Interest rate risk
-when market interest rates go up, prices of stocks and bonds tend to go down
Tangible assets:
-things like collectibles that have a strong secondary marketplace
-little or no govt regulation
-risk of liquidity and fraud are high
Systematic risk:
-risks that affect the entire market
-cannot be avoided through diversification
-can be determined by beta when calculating risk for an entire portofolio
Unsystematic risk
-thoser that only affect a particular business or industry
-can be avoided through diversification
Marketability risk
-the relative eash with which a security may be bought or sold
Liquidity risk
-refers to the relative ease with thich a security can be sold at a fair price without risk of loss
-best measure of this is the spread between bid and ask
Coefficient of determination is also referred to as:
What kind of risk is R-squared?
systematic risk
What kind of risk is 1 minus R-squared?
Beta coefficient:
the volatility of a given return relative to the market
-the degree to which any two variables move together over time
-positive cov = move together
-negative cov = move apart
Correlation coefficient:
measures the relationship of returns between two stocks
A correlation coefficient of +1 indicates:
-indicates that returns move in the same direction
-perfectly positively correlated
A correlation coefficient of -1 indicates:
-the returns move oppisitely
-perfectly negatively correlated
Coefficient of zero means:
two uncorrelated returns
Reinvestment risk:
-getting your money back and being forced to reinvest at lower rates
Political risk:
regulatory or country risk
Exchange (currency) risk:
-when interest and dividend payments are affected by originating countries fluctuation in currency
Standard deviation for individual stocks and portfolios:
-standard deviations for the individual stocks in a portfolio is not the same as the standard deviation of the portfolio
-standard deviation of a portfolio is usually less than the average standard deviation of the stock that make up the portfolio
-The standard measure of total risk
-the measure of the dispersion of returns around the expected return
-measure of downside risk
-dispersion of returns that occur below a certain target return like zero or T-bills
Standard deviation is the measure of:
variability of returns of an asset compared with the mean or expected value of that asset
-usually a bell shaped curve for standard deviation meaning that reading will tend to cluster around the expeted mean
Annual rate of return or Annual Percentage rate (APR) is calculated by:
-Multiplying a given rate by the number of compunding periods needed to annualize it
Real (inflation-adjusted) return
-earnings from an investment that are above inflation
What are the major composite performance measures used to see whether a given stock actually beat the market?
1) Treynor index
2) Sharpe index
3) Jensen index
Coefficient of variation
is a measure of relative dispersions (unlike standard deviation which is a measure of absolute dispersion)
-calculated by dividing the standard deviation by the mean
A larger value for the coefficient mean indicates:
-a greater dispersion relative to the arithmetic mean of the return
The beta coefficient is the most common measure of:
-systematic risk
Beta coefficient is usually used for analyzing a:
-diversified portfolio
A well diversified portfolio will only contain systematic risk and so the beta coefficient can be described as:
the measure of volatility for a diversified portfolio
A beta of 1.0 indicates:
-that the stock is moving exactly with the market
A beta of higher than 1 indicates:
-that the stock is more risky than the market
Expected rate of return is the:
-anticipated growth from an investment
The required rate of return for a risky asset can be calculated using the:
-the capital asset pricing model
Capital Asset Pricing Model(CAPM) specifies that
-the return on an investment (r) depends on the return the individual earns on a risk-free asset and a risk premium (Treasury Bill is used as risk-free asset)
Current yield
-only considers the coupon component of the bond
-DOES NOT INCLUDE: reinvestment income, price appreciation, or price depreciation
Internal rate of return is:
the discounted cash flows that allows the present value of the cash outflows to equal the initial cash outflows, such that the net present value equals zero
Yield to maturity
the internal rate of retun of a bond if the bond is held until maturity
Yield to call
used to determine the IRR earned by a bond until it is called or retired by firm
duration of a bond is:
the avg amount of time that it takes to capture interest and principle repayments
realized compound rate is also known as:
-the time value of money
TMV or realized compound rate is:
-the actual return based on the present value of future cash flows
Name the 5 systematic forms of risk (5):
1) Purchasing power risk
2) Reinvestment Rate risk
3) Interest Rate risk
4) Market risk
-remember that systematic risk is not diversifiable
5) Exchange Rate risk
Name the 5 unsystematic forms of risk (5):
1) Business risk
2) Country risk
3) Default risk
4) Financial risk
5) Government (Regulation) risk
-remember that unsystematic risk is diversifiable
Capitalization treats both earnings and dividends as:
Preffered stock is an instrument of:
perpetual debt
Difference between duration and convexity in bond pricing:
-Duration is used to calculate the first percentage change in price
-Convexity is used to calculate the second and is added to duration
Actual price change (in bonds) will be greater than estimated price change when:
yeilds decrease
Actual price (in bonds) will be less than estimates price change when:
yields increase
The greater the change in yields:
-the less exact will be the measure of duration
What is difference between P/E ratio and dividend discount model?
-P/E ratio can be applied to stocks that are not paying cash dividends
-P/E ratio cannot tell an investor whether a stock is overvalued in relation to its market price (have to look at historical PE's to figure this out)
When valuing stock with no dividend growth:
-one can use the same equation as when valuing preferred stock
When valuing stock with a one-year holding period:
-one can calculate it as the present value of any dividend received during the year, plus the present value of the price of the stock at the end of the year
Dividend growth model:
-model used for considering stocks with a constand dividend growth
-suggests that dividends will increase at a fixed rate on an annual basis in the future
According to the Dividend Discount Model the intrinsic value of a stock is:
-the present value of the stock's expected future dividends, discounted at the stock's required rate of return
Efficient markets tend to value stocks at their:
intrinsic value
WHen a stock trades above its intrinsic value it should:
-be sold
Book value:
-the equity of a stockholder divided by his outstanding shares
Value investors look for stocks trading below their:
book value
Price/Book value:
the firm's stock price divided by its per-share book value
A low price/book vaue indicates:
-that a stock is undervalued
Price to cash flow ratio:
-defined as the market value divided by the per-share cash flow
Price/sales ratio:
-the firms stock price divided by its per share sales
Price/Earnings/Growth Ratio (PEG):
-found by dividing the PE ratio by the estimated earnings growth rate
-when dividends are significant, the dividend yield should be added to the growth rate
Capital market theory builds on the work done by
Markowitz portfolio theory
Capital Markets Theory / Markowitz Theory assumes that investors are:
-efficient and have the same expectations and freedom in the market
In graphical form the combination of a risk-free asset and a risky asset will produce a:
-linear risk/return line
A linear efficient fronteir line is called a:
-capital market line
-any two assets that fall on this line will be perfectly correlated
Any securities that are below the capital market line are considered:
-inefficient and will not be bought
The proper relationship between risk and return is
-systematic risk and return
Beta is the proper measure of
-systematic risk
Portfolio theory strives to understand the relationship between:
-portfolio risk and correlation
Markowitz portfolio assumes that a portfolio is efficient if:
-no other portfolio offers a higher expected return with the same of lower risk
The standard deviation of a portfolio will be less thatn the:
-weighted average standard deviation of the individual stocks in the portfolio
Modern portfolio theory has taught us that the correlation coefficient:
drives the theory of portfolio diversification
Markowitz efficient frontier is:
-the set of portfolios that will give the investor the highest return at each level of risk
In the Jensen ratio:
-alpha is used as an absolute measure of performance
-specifically compares the performance of a managed portfolio with unmanaged
-measures how much the realized return differs from the required return
An investment policy statement does 4 things in order to create a structure for making sound investment statements
1) establishes risk/return objectives
2) determines constraints
3) establishes set agreed upon goals and other criteria for measuring performance
4) reduces professional liability
Sharpe ratio is the measure of:
-the risk-adjusted performance of a portfolio based on total risk
The measure for total risk is the:
-standard deviation
Treynor ratio is:
-the relative measure of the risk-adjusted performance of a portfolio based on market risk
-more appropriate for using on diversified portfolios
Dollar-weighted rate of return
applies the concept of internal rate of return to investment portfolios, taking into account all of the cash inflows and outflows
Tim-weighted rate of return
-doesn't weigh all of the dollar flows in each time period
-computes the return for each period and averages results and holding periods
What is the most common measure of performance in the investment mgmt profession?
Time-weighted rate of return
In the investment strategy known as market timing (active mgmt), investors:
-adjust their portfolios based on changes they predict in the market
-strategy conflicts with efficient market hypothesis
-used by investors who think market is inefficient
Passive investing
-investors seek to protect their portfolios from market change
-keep transaction costs down
Fundamental analysis
-investments are based on evaluation of financial strength
Bond barbells
-portfolios consisting of long-term and short-term bonds
-if investor can correctly predict rate change, barbells can offset fluctuating int rates
Substitution swap
-bonds with virtually identical characteritics but different yields are swaped
When the difference in yields between bonds is huge, it is called an:
intermarket spread swap
Pure-yeild pickup swap
-when a low-yield bond is sold and a high-yield bond purchased
-usually longer maturity
Rate anticipation swap
-swap designed to handle an expected interest rate change

When an investor seeks to lock into a loss he or she may execute:
a tax swap
Difference between passive investing and buy and hold:
Passive - will rebalance to keep with allocation strategy

Buy & Hold - does not not include regular rebalancing
What is portfolio immunization?
-investor seeks to balance his portfolio to avoid suffering from any changes in int rates
-can be done buy purchasing zero's with maturities cooresponding to time horizon
-do the opposite of general investor (as general investor is wrong most of the time)
WHen investors use technical analysis they assume that prices are determined by:
-supply and demand which is driven by rational and irrational behavior
The major challenge to technical analysis is:
efficient fronteir hypothesis
Technicians believe that new information affects price:
Fundamentalists believe that new information affects price:
Strategic asset allocation
when an investor selects a suitable mix of assets based on their own portfolio
What type of trader studies the Confidence Index?
Smart money trader
(Barron's) Confidence Index:
ratio of Barron's average yield on 10 top-grade corporate bonds to the yield on the Dow-Jones average of 40 bonds
-measures difference between high quality bonds and a large cross-section of bonds
Dow Theory
-tries to identify trends in markets
breadth of the market
theory that predicts the strength of the market according to the number of stocks that advance or decline in a particular trading day.
short interest ratio
A sentiment indicator that is derived by dividing the short interest by the average daily volume for a stock.
Resistance levels
The price at which a stock or market can trade, but which it cannot exceed, for a certain period of time.
Support levels
The price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock.
Relative strength ratio
-A measure of price trend that indicates how a stock is performing relative to other stocks in its industry.
-It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period.
Efficient Market Theory (Hypothesis)/(EMH)
An investment theory that states that it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information
Strong-form of EMH
-The strongest version of market efficiency. It states all information in a market, whether public or private, is accounted for in a stock price. Not even insider information could give an investor the advantage
-This degree of market efficiency implies that profits exceeding normal returns cannot be made, regardless of the amount of research or information investors have access to.
Semi-strong form of EMH
-implies all public information is calculated into a stock's current share price. Meaning that neither fundamental nor technical analysis can be used to achieve superior gains.
-suggests that only information that is not publicly available can benefit investors seeking to earn abnormal returns on investments
Weak form of EMH
-claims all past prices of a stock are reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat a market.
-fundamental analysis can be used to identify stocks that are undervalued and overvalued.
Tactical asset allocation
uses security selection as the main determinant in developing a portfolio
Passive portfolio management strategy begins by:
-establishing specific percentages for each asset class
-regular rebalancing
Random walk theory
-idea that stocks take a random and unpredictable path
-supports weak form EMH
Capital asset pricing model calculates:
-what return you deserve for putting your money at risk.
CAPM is often used to identify:
-overvalued and undervalued assets

If expected return is greater than required return:
-the asset is undervalued

if a stocks expected return falls below the security market line, the stock is:
- overvalued
Strong form academic tests indicate that:
-Stock exchange analysts have an access to information that is essentially monopolistic
Option pricing model goal is to:
-determine the value of a call option
-model assumes European option style
Option pricing model 4 variables: (4)
1) time to maturity
2) interest rates
3) price of stock
4) volatility
Put-call parity
-determines value of a put option
-indicates that there is a close relationship between the prices of puts and calls and the value of a stock
Multifactor asset pricing model is also known as:
-arbitrage pricing theory
Initial margin requirement:
-Set by the Federal Reserve at 50%
Maintinance margin requirement:
-Set by brokerage houses as a minimum equity position an investor must have for a margin position
Investors will seet to buy calls when they anticipate:
-that the underlying stock or index will rise
Investors will seek to buy puts when they anticipate:
-that the underlying stock or index will fall
What is the potentail gain / loss for naked call writing?
-Max gain is the premium recieved

-Max loss is unlimited
What is the potential gain / loss for naked put writing?
-Max gain is the premium recieved

-Max loss is the cost of buying the stock at strike price
What are the 3 technical points that bear on short selling? (3)
1) short sells can only be made on an uptick or zero uptick
2) have to pay all dividends owed to lender of security
3) short sellers must deposit margin money to cover repurchase
What tax form are stock dividends reported on?
What tax form is interest recieved reported on?
What tax form are capital gains reported on?
An exercise of a warrant is considered taxable OR non-taxable?
Conversion of convertible bonds to common stock is considered taxable OR non-taxable event?