Series 7

Front 1

Types of Risk

Back 1

* Inflationary
* Capital
* Timing
* Interest Rate
* Market/Systematic
* Credit
* Liquidity
* Political
* Call
* Currency

Front 2

Inflationary Risk

Back 2

Refers to the uncertainty of cash flows from a particular investment as a result of rising prices.

Front 3

Capital Risk

Back 3

Risk that an investor may lose all or part of the principal.

Front 4

Timing Risk

Back 4

The uncertainty that the investor will have to sell the investment for less than anticipated due to market timing.

Front 5

Interest Rate Risk

Back 5

Similar to inflationary risk; investment’s sensitivity to the cost of money.

Front 6

Market/Systemic Risk

Back 6

The chance that the whole economy goes sour. This risk underlies all other investment risks.

Front 7

Credit Risk

Back 7

The possibility that a bond issuer will default on a payment or that its credit rating will be downgraded.

Front 8

Liquidity Risk

Back 8

The possibility that you may not find a buyer at a fair market price at the same moment you want to sell.

Front 9

Political Risk

Back 9

risk that a piece of legislation or newly proposed regulation could create or outlaw an entire industry.

Front 10

Call Risk

Back 10

Risk that a bond issuer will buy back a current issue to reissue bonds at a lower interest rate.

Front 11

Currency Risk

Back 11

The risk that the exchange rate will change to your disadvantage.

Front 12

Covariance Formula

Back 12

Covariance = Cov (r1,r2) = 1/N * Σ (r1i - r1ave)*(r2i - r2ave)

Front 13

Variance Formula

Back 13

Variance = σ² = Σ (X - μ)2
N

Front 14

Investment Income

Back 14

Interest, dividends, capital gains and gains (or losses) from selling securities or property.

Front 15

Investment Income

Back 15

Salary, bonus, perquisites, fees for services and other remuneration for work you perform.

Front 16

Earned Income

Back 16

Salary, bonus, perquisites, fees for services and other remuneration for work you perform

Front 17

Cyclical stocks

Back 17

move with the broader market - and often with greater volatility - so they outpace the market during an expansion but whipsaw back during a contraction. Automotive stocks are one example.

Front 18

Counter-cyclical stocks

Back 18

or defensive stocks do better in bear markets, when investors are looking for safe places - that are not affected greatly by economic currents - to park their money. Companies in the food, health care and defense industries are all examples.

Front 19

Ex-dividend date

Back 19

By convention, this is two business days before the record date, the date by which an investor must own the share to be entitled to a dividend. If a seller wants to sell the stock and still be able to keep the dividend, he must do so no earlier than two business days before the record date. For transactions during the ex-dividend period, the seller will receive the dividend and the stock price for the buyer is reduced by the amount of the dividend.

Front 20

Types of Preferred Stock

Back 20

1. Cumulative preferred stock
2. Participating preferred stock
3. Convertible preferred stock
4. Callable preferred stock
5. Adjustable-rate preferred

Front 21

Participating preferred stock

Back 21

allows the holder to receive additional dividend distributions under specified conditions. The condition is, typically, if the dividend on the common stock rises above a defined threshold. Thus, participating preferred stock provides all the upside potential of common stock with all the steadiness of preferred. Companies that urgently need an infusion of money - early-stage start-ups looking for venture capital - might float participating preferred issues. Most preferred stock, however, is non-participating.

Front 22

Sinking fund

Back 22

Money that is taken from a corporation’s earnings and used to redeem preferred shares or corporate bonds periodically. If a preferred stock issue has a sinking-fund provision, it means a portion of the issue must be retired each year.

Front 23

Gearing Factor

Back 23

Leverage offered by Warrants, Options. The gearing factor is calculated by dividing the original share price by the original warrant price: $1.50 / $0.50 = 3.

Front 24

Ex-Rights Price

Back 24

Share Price that accounts for the dilution of a recent rights offering.

Front 25

Direct Participation Programs (DPPs)

Back 25

LLC's for example, enable investors to have an immediate claim on an enterprise's cash flow and tax benefits, typically as a passive investment.

Front 26

Three Main Benefits of LLCs

Back 26

1. Pass-through taxation
2. Limited liability
3. Flexible management structure and ownership

Front 27

Drawbacks of LLC's

Back 27

1. Often require more paperwork than corporations.
2. Org. structure not as familiar to the public - pool of potential investors - as publicly traded corporation.
3. Some states require that a dissolution date be listed in the articles of organization, and such events as the death or disassociation of a member can automatically trigger dissolution.

Front 28

RR responsibilities vis-a-vis recommending DPP investments

Back 28

* The economic soundness of the DPP and the expertise of the general partner, whose ongoing participation is generally the foundation of the entire enterprise.
* The enterprise's basic objectives, start-up costs, certainty of revenue and upside potential.

Front 29

Simple Yield Formula

Back 29

Yield = Coupon/Price

Front 30

Fixed-income securities classifications

Back 30

TBills - maturity of less than 1 year
Notes - Maturity of 1-10 years
Bonds - Maturity of 10+ years

Front 31

Corporate commercial paper

Back 31

Unsecured notes issued by corporations with a typical maturity of 30 days.

Front 32

Types of money market intstruments

Back 32

Repos
Fed funds
Commercial paper
Negotiable CDs
BAs

Front 33

Bond redemption mechanisms

Back 33

Call - right to buy back prior to maturity date
Sinking Fund Call - fund designated for redeeming bonds
Refunding - New issuance to retire previous bond issue

Front 34

Treasuries: maturity, tax status, par value and how bid

Back 34

- All: state/local tax-exempt; Fed non-exempt
- Tbills - < 1 year, $1,000, dollar
- TNotes - >1yr <10 yr, $1,000, yield
- TBonds - >10 yr, $10,000, Dollar now; yield pre-2002

Front 35

Corpus

Back 35

Portion of an interest bearing security that states principal owed.

Front 36

Coupon

Back 36

Portion of an interest bearing security that states interest payments.

Front 37

Benefits of STRIPS

Back 37

- Zero-coupon T-bonds; security
- Non-callable
- Earnings easily determined
- Liquid
- Tax deferred

Front 38

CMO's

Back 38

Collateralized Mortgage Obligations - Consolidated investment grade mortgage bonds. Used to mitigate prepayment risk by pooling securities.

Front 39

Computing a T-bill's discount yield, given its price

Back 39

1. (Price - 1000)/1000
2. 360/Days to maturity
3. step1*step2

Front 40

Computing a T-bill's price, given it's yield

Back 40

1. rate * number of days to maturity
2. step1/ 360
3. step2 - 1
4. step3 * 1,000

Front 41

Which debt securities use a 360 day convention when calculating accrued interest?

Back 41

Corporate, Municipal bonds + T-Bills.

Front 42

Accrued interest formula

Back 42

1. number of days prior to coupon payment / number of days in a year (fraction of year)
2. Step1*Principal.
3. step2* interest rate

Front 43

Characteristics of Muni maturity types

Back 43

1. Term (AKA dollar bonds): Entire issue matures simultaneously, after a long period; used to finance projects w/ uncertain short-term revenues - quoted as a price, or as a % of par.
2. Serial: Issue matures over a period of several years; used for projects with more predictable revenues - quoted in basis points.
3. Serial with balloon: hybrid of term and serial; most bonds mature in a single "balloon" year.

Front 44

Bond Type Characteristics Used in Valuation

Back 44

1. Issuer
2. Priority
3. Coupon Rate
4. Options

Front 45

Floating rate bonds are typically tied to which benchmarks?

Back 45

3, 6, 10 month T-Bills or
LIBOR

Front 46

Difference between American callable bonds and European callable bonds?

Back 46

American callable bonds can be called by the issuer any time after the call protection period while European callable bonds can be called by the issuer only on pre-specified dates.

Front 47

PV-of-ordinary-annuity formula

Back 47

PV = PMT * { 1 + (1 + i) ^-n} / i

Front 48

Future Value Equation

Back 48

FV = P * (1 + r)^t
OR
FV = P * (1 + i)^n

Front 49

Present Value Equation

Back 49

PV = FV * (1 + i)^-t
OR
PV = FV * (1 + i)^-n

Front 50

Stock screening criteria for Value Investing

Back 50

- Stock price 2/3 intrinsic value
- P/E in bottom 10% of equities
- PEG ratio < 1
- Price at/below tangible assets
- Debt < equity
- Cur. assets twice cur. liabilities
- Dividend >= 2/3 long-term AAA yield
- Earn. growth >= 7% compounded over last 10 years

Front 51

Stock screening criteria for Growth Investing

Back 51

- Strong EPS past 5 years:
Company >$4B >= 5%
>$400M<$4b >= 7%
<$400M = 12%
- Credible forward earnings > 10%, 15% ideal. Company size and industry growth stage key.
- Cost control; profit margin growth vs. past 5 yr. and competitors/industry.
- Efficiency; 5yr ROE & v industry
- Potential to double in 5 yrs.

Front 52

CAN SLIM

Back 52

C urrent earnings;
A nnual earnings
N ew
S upply & demand
L eader/Laggard; rel. price strength >70
I nstitutional sponsorship; 3-10 owners to avoid price volutillity
M arket direction;

C = Current qtr EPS >18-20%, ideally 50%
A = Annual earnings per share – These figures should show meaningful growth for the last five years.
N = New things - Buy companies with new products, new management, or significant new changes in industry conditions. Most importantly, buy stocks when they start to hit new price highs. Forget cheap stocks; they are that way for a reason.
S = Shares outstanding - This should be a small and reasonable number. CAN SLIM investors are not looking for older companies with a large capitalization.
L = Leaders - Buy market leaders, avoid laggards.
I = Institutional sponsorship - Buy stocks with at least a few institutional sponsors who have better-than-average recent performance records.
M = General market - The market will determine whether you win or lose, so learn how to discern the

Front 53

Dogs of Dow variations

Back 53

Dogs = Top 10 highest div. yield.
Dow 5 : equal weight of 5 lowest priced dogs
Dow 4: 4 highest priced of Dow 5
Foolish 4: 40% weight to lowest price dog, 20% to remaining 3.