Book 3 Pages 101 - End Flashcards

1
Q

an index in which the value of the index is equal to the sum of the prices of the securities in the index divided by a pre-determined dvisior

A

price weighted index

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2
Q

true or false?

a price weighted index accurately reflects the movement of the underlying market values

A

false

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3
Q

true or false?

an equal but opposite change in the prices of two stocks would offset each other in a price weighted index

A

true

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4
Q

which index is an example of a price weighted index?

A

Dow Jones Industrial Average

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5
Q

the dow jones industrial average consists of mostly ____ _____ stocks

A

blue chip

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6
Q

true or false?

the dow jones industrial average fails to account for shares outstanding

A

true

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7
Q

which index is an example of a market capitalization weighted index?

A

S&P 500

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8
Q

what is the S&P 500 mostly used as a benchmark for?m

A

US large cap equity

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9
Q

what index is used as a benchmark for small cap stocks?

A

russell 2000

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10
Q

used as a measure of the US Broad Market securities

A

Wilshire 500

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11
Q

used as a measure for international securities

A

Morgan Stanley International Eurpoe, Australia, and Far East Index (MSCIEAFE)

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12
Q

an index based on geometric returns from ~1,700 stocks

A

value line index

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13
Q

indices that track emerging markets, government debt, and corporate debt asset classes

A

JP Morgan Indices

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14
Q

first offering of stock to general public by a corporation

A

IPO - initial public offering

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15
Q

group of investment banks that collectively underwrite a new issue

A

Syndicate

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16
Q

what is the primary market in regards to issuing securities?

A

where the initial sale of new securities to the public takes place

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17
Q

what is it called when you assist in the sale of new issues?

A

underwriting

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18
Q

when the underwriter purchases the entire issue of securities at a specified price and resells at a higher price

A

firm commitment

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19
Q

when an underwriter purchases securities remaining after an initial offering at a predetermined price

A

standby underwriting

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20
Q

when an underwriter sells as much of the issue as possible and remainder to the issuing company

A

best efforts underwriting

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21
Q

true or false?

under firm commitment the risk is shifted to the underwriter

A

true

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22
Q

true or false?

under standby underwriting all the risk if shifted to the underwriter

A

false, it is shared between the underwriter and issuing corp

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23
Q

true or false?

under best-efforts underwriting no risk is shifted to the underwriter

A

true

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24
Q

avoids registration requirements of an IPO

A

private placement

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25
Q

what is the most popular security when dealing with private placements?

A

bonds

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26
Q

provides investors with a method of buying and selling previously issued securities

A

secondary market

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27
Q

an exchange market where listed securities are traded

A

first market

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28
Q

give an example of first markets

A

NYSE

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29
Q

an over the counter market with unlisted securities

A

second market

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30
Q

give an example of a second market

A

NASDAQ

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31
Q

when stocks trade on both the organized exchanges and OTC

A

third market

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32
Q

traders who trade without the help of brokers

A

fourth market

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33
Q

true or false?

fourth market is generally used by institutions who deal in very large volume

A

true

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34
Q

give an example of a fourth market

A

INSTINET

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35
Q

executed immediately at the market price

A

market order

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36
Q

true or false?

market orders have the highest priority

A

true

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37
Q

order to purchase security at or below specified price or to sell security at or above specified price

A

limit order

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38
Q

___ priced purchase limit orders take priority over ___ priced limit orders

A

higher ; lower

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39
Q

___ priced sale limit orders take priority over _____ priced limit orders

A

lower ; higher

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40
Q

an order to create a limit order if the price of the security reaches a specified level

A

stop limit order

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41
Q

stocks trading in amounts evenly divisible by 100

A

round lots

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42
Q

any trade less than 100 shares

A

odd lot

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43
Q

what is this called .01%

A

1 basis point

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44
Q

if a bond’s yield drops from 3.35% to 3.22% how many basis points did the bond’s yield drop?

A

13 basis points

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45
Q

how do you calculate current yield on a bond?

A

annual interest payments / market price

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46
Q

if Jeff has a bond with an annual coupon of 4.25% that is currently trading at $965, what is the bond’s current yield?

A

42.5 / 965 = 4.40%

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47
Q

the internal rate of return for cash flows associated with the bond, including the purchase price, coupon, and maturity value

A

yield to maturity

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48
Q

the longer the term to maturity, the ___ a bond’s price volatility

A

greater

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49
Q

bonds with ___ coupon rates are more stable when interest rates change than bonds with ____ coupon rates

A

higher ; lower

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50
Q

a zero coupon bond will be ___ price volatile than a bond with a 4% coupon

A

more

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51
Q

if a bond gets its rating improved (AA to AAA or other) then the bond’s yield will ____

A

decrease

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52
Q

bonds with ___ coupon rates and ____ maturities will be most price sensitive to interest rate changes

A

lower ; longer

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53
Q

states that long term rates consist of many short term rates and their long term rates will be the average or geometric mean of short term rates

A

unbiased expectations theory

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54
Q

what is the most volatile bond?

A

a long term zero coupon bond

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55
Q

argues that the yield curve should always slope upward and that any other shape is only a temporary aberration

A

liquidity preference theory

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56
Q

based on the concept that longer term bonds are more price sensitive to interest rate changes than shorter term bond

A

liquidity preference theory

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57
Q

implies that investors pay a premium (i.e. lower yields) for shorter maturity bonds to avoid the higher interest rate risk associated with long-term bonds

A

liquidity preference theory

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58
Q

relies on the concepts of supply and demand for various maturities of borrowing and lending ; these different maturities of borrowing and lending make up different markets

A

market segmentation theory

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59
Q

states that different institutional investors have different maturity needs that lead them to restrict their bond selections to only predetermined maturity segments

A

market segmentation theory

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60
Q

determines the weighted average number of years until an investment is recovered

A

duration

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61
Q

how do you calculate the duration of a bond?

A

taking the time weighted present value of all cash flows and divide it by the current market price

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62
Q

the coupon rate and duration of a bond have a(n)____ relationship

A

inverse

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63
Q

true or false?

zero coupon bonds will always have a duration equal to their time to maturity

A

true

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64
Q

true or false?

a bond with coupon payments will always have a duration less than its time to maturity

A

true

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65
Q

the duration and YTM of a bond have a(n) ____ relationship

A

inverse

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66
Q

higher quality bonds (lower yield) will have ____ duration than lower quality bonds (high yield)

A

greater

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67
Q

an absolute measure of the interest sensitivity of a bond

A

Macaulay duration

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68
Q

refers to the degree which duration changes as a result of changes in YTM

A

convexity

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69
Q

the larger the convexity the ___ the change in duration

A

larger

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70
Q

when is convexity likely to be the greatest?

A

low coupon bonds
long maturity bonds
low YTM bonds

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71
Q

the coupon rate and convexity of a bond have a(n) ______ relationship

A

inverse

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72
Q

the term to maturity and convexity of a bond have a(n) ______ relationship

A

direct

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73
Q

the YTM and convexity of a bond have a(n) ______ relationship

A

direct

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74
Q

how do you calculate a percent change in the price of a bond?

A

negative Duration x [ the change in YTM as decimal / (1 + YTM)]

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75
Q
calculate the percent change in the price of the following bond:
maturity = 5 years
YTM changes from 4.5% to 3.5%
annual Coupon rate is 6% (paid annual)
Current price is $1,065.85
face value is $1,000
A

first calculate duration using CF Keys

CF 0 = 0
CF 1 = 60
CF 2 = 120
CF 3 = 180
CF 4 = 240
CF 5 = 300
I = 4.5%
NPV = $4,779.28

NPV / Current Price = 4.484 = duration

-4.484 x [ change in YTM / (1+.045) = 4.29%

or you could also use TVM keys

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76
Q

a relative measure for comparing different durations of bonds

A

modified duration

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77
Q

how do you calculate modified duration?

A

regular duration / (1 + (YTM / # of coupon payments in a year)

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78
Q

Jose’s bond has a current market value of $821.87 and Macaulay duration of 4.6. If the bond’s yield changes from 3.5% to 4%, what is the percent change in price of the bond?

A

-2.2%

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79
Q

the present value of future cash flows discounted at a risk adjusted interest rate (IRR)

A

intrinsic value of a stock

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80
Q

assume an investor can invest in a company who will pay a dividend of $1 in year 1 and increase the dividend by $1 for each of the next 3 years. Assume the stock can be sold at the end of year 4 for $40. How much would an investor be willing to pay if their required rate of return was 12%

A

use CF keys and NPV

$32.58 is the answer

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81
Q

used to determine the price for a security in which dividends are growing at a constant rate

A

constant growth dividend discount model

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82
Q

what is the formula for the constant growth dividend discount model?

A

D1 / (r-g)

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83
Q

assume francis corp stock is currently paying a dividend of $2 and the dividend will grow at a constant 7% rate. What should be the security’s intrinsic value if the investor’s required return is 11%?

A

d1 = $2 (1+.07) = 2.14

2.14/ (.11-.07) = $53.50

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84
Q

under the constant growth dividend discount model, the value of the common stock will ____ if the required rate of return increases

A

decrease

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85
Q

under the constant growth dividend discount model, the value of the common stock will ____ if the required rate of return decreases

A

increase

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86
Q

under the constant growth dividend discount model, the value of the common stock will ____ if the dividend growth rate increases

A

increase

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87
Q

under the constant growth dividend discount model, the value of the common stock will ____ if the dividend growth rate decreases

A

decrease

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88
Q

assume francis corp pays a $2 dividend and the investors required return is 11%, what is the value of francis corp’s stock

A

$18.18

$2 / 11%

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89
Q

how do you calculate the intrinsic value of a stock if there is no dividend growth rate?

A

Dividend paid / rate of return

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90
Q

assumes the growth rate of the stock’s dividend is not constant but rater changes

A

multistage growth dividend discount model

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91
Q

when is the multistage growth dividend discount model most appropriate to use?

A

when a company is going through it’s growth phase

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92
Q

XYZ corp has a current dividend of $2 per share. This dividend is expected to increase 6% for the next 3 years and then 7% thereafter. Assume the investor’s required rate of return is 9%. What is the intrinsic value of the stock?

A
first find the dividend in year 4
D1 = $2 x 1.06 = $2.12
D2 = $2.12 x 1.06 = $2.25
D3 = $2.25 x 1.06 = $2.39
D4 = $2.39 x 1.07 = $2.56

$2.56 / (.09 - .07) = $128

then plug into cash flow keys
CF 1 = D1
CF 2= D2
CF 3 = D3 + Value of stock at year 4 ($128)

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93
Q

this model should be used when a firm is not currently paying a dividend

A

Discounted Free Cash Flow Model

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94
Q

what is the formula for the discounted free cash flow model?

A

Free cash flow to equity(1) / r - g

free cash flow to equity(1) = FCFE(0) x (1+g) / (r-g)

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95
Q

PLV corp has an estimated FCFE for next year of $3 per share. In addition its FCFE is expected to grow at a constant 3% per year. The client’s required rate of return is 10%, what is the stock’s intrinsic value

A

$3 / (.10-.03) = $42.86

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96
Q

how do you calculate the value of a stock using the capitalized earnings approach?

A

earnings of company / discount (AKA capitalization) rate

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97
Q

refers to the amount of equity within a company

A

book value

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98
Q

true or false?

book value depicts an accurate measure of the value of the company

A

false

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99
Q

a real estate valuation approach that is most appropriate when there are several properties in a market that have been sold that have similar characteristics as the property being valued

A

the sales comparison approach

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100
Q

a real estate valuation approach that estimates the value of the property by determining how much it would cost to replace the property and then making any adjustments for depreciation or deterioration of the property

A

the cost approach

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101
Q

when is the cost approach most appropriate to use?

A

when evaluating special use buildings such as a church or when evaluating newly constructed property

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102
Q

bases the value of the property on the income that can be generated from the property

A

the income capitalization approach

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103
Q

what are the two methods under the income capitalization approach?

A

direct capitalization

discounted cash flow analysis

104
Q

how do you calculate the direct capitalization method?

A

net operating income / discount rate

where net operating income is the net income before depreciation and mortgage debt service

105
Q

what is the implied capitalization rate of a property that recently sold for $12 million and generated net operating income of $2.16 million per year?

A

18%

$2.16 million / $12million

106
Q

when is the discounted cash flow analysis for real estate most appropriate?

A

when it is not reasonable to assume income will remain constant for the foreseeable future (i.e. when income is expected to fluctuate)

107
Q

the process of determining the FMV or intrinsic value of a security

A

fundamental analysis

108
Q

analyzing, in order, the economy, the specific industry, then the specific company

A

top down

109
Q

analyzing, in order, a specific company, specific industry, then the economy

A

bottom up

110
Q

what are some factors considered by fundamental analysis?

A
economy
stock market tendencies
monetary policy
fiscal policy
money supply
interest rates and business cycles
industry analysis
111
Q

stocks that can be drastically affected by changes in the economy

A

cyclical stocks

112
Q

stocks that are relatively unaffected by changes in economic conditions

A

defensive stocks

113
Q

true or false?

declines in interest rates have preceded many of the economic recoveries

A

true

114
Q

true or false?

rises in interest rates have preceded many of the recessionary periods

A

true

115
Q

the sum of demand deposits, coins, traveler’s checks, and currency

A

M1

116
Q

the sum of demand deposits, coins, traveler’s checks, currency, savings accounts, time deposits under $100k, and balances in retail money market mutual funds

A

M2

117
Q

who controls the money supply?

A

the federal reserve bank

118
Q

when the money supply increases resulting in the circulation of more money

A

loose/expansionary monetary policy

119
Q

when the money supply decreases resulting in less circulation of money and less money for banks to lend

A

tight/restrictive monetary policy

120
Q

federal government taxation, expenditures, and debt management are called ____ policy

A

fiscal

121
Q

as tax rates increase, a corporation’s after-tax income will _______

A

decline

122
Q

as tax rates increase, a corporation may not be able to pay ______ which may cause the stock price to _____

A

dividends ; decline

123
Q

as tax rates increase, the demand for tax free investments ____

A

increases

124
Q

occurs when government expenditures exceed revenues

A

deficit spending

125
Q

corporate earnings will benefit from a(n) ____ in government expenditures

A

increase

126
Q

under easy or loose fiscal policy taxation ______

A

decreases

127
Q

under easy or loose fiscal policy government spending ______

A

increases

128
Q

under tight or restrictive fiscal policy taxation ______

A

increases

129
Q

under tight or restrictive fiscal policy government spending ______

A

decreases

130
Q

what are the stages of an industry life cycle?

A
rapid growth
declining growth
maturity 
decline 
deletion
131
Q

what happens to debt management under easy or loose fiscal policy?

A

buy government securities

132
Q

what happens to debt management under tight or restrictive fiscal policy?

A

sell government securities

133
Q

provide insight into a company’s ability to convert assets into cash without sustaining a loss on the transaction

A

liquidity ratios

134
Q

how to calculate the current ratio

A

current assets / current liabilities

135
Q

measures the ability of a firm to meet its short term obligation

A

current ratio

136
Q

how to calculate the quick ratio

A

(current assets - inventory) / current liabilities

137
Q

measures the company’s effectiveness in managing its business operations

A

active ratios

138
Q

indicates the speed with which inventory is turned into cash

A

inventory turnover ratio

139
Q

how to calculate inventory turnover ratio

A

cost of goods sold / average inventory

140
Q

companies that have low inventory turnover may have ___ inventory costs

A

higher

141
Q

measures how often the company is able to turn over its receivables

A

accounts receivable turnover

142
Q

how to calculate accounts receivable turnover

A

sales / average accounts receivable

143
Q

the higher the accounts receivable ratio, the ____ the company receives cash to service its short term obligations

A

quicker

144
Q

indicates the sales per dollar investment of fixed assets

A

fixed asset turnover

145
Q

how to calculate fixed assets turnover

A

sales / fixed assets

146
Q

provide different measures of a company’s earning capacity

A

profitability ratios

147
Q

how to calculate operating profit margin

A

earnings before interest and taxes / sales

148
Q

how to calculate net profit margin

A

net income / sales

149
Q

how to calculate ROA

A

net income / total assets

150
Q

how to calculate ROE

A

net income / equity

151
Q

ratio that indicates the net income generated per dollar of investment in the company

A

ROE

152
Q

how to calculate the debt ratio

A

total debt / total assets

153
Q

how to calculate the debt to equity ratio

A

total debt / total equity

154
Q

what are 3 important ratios for bondholders to pay attention to?

A

inventory turnover
accounts receivable turnover
times interest earned ratio

155
Q

indicates the number of times a company can service its debt

A

times interest earned ratio

156
Q

how to calculate the times interest earned ratio

A

earnings before interest and taxes / annual interest expense

157
Q

what are 5 important ratios for stockholders to pay attention to?

A
ROE
ROA
Gross profit margin
dividend payout ratio
P/E ratio
158
Q

indicates what portion of earnings has been paid to stockholders in the form of dividends

A

dividend payout ratio

159
Q

how to calculate the dividend payout ratio

A

dividends / earnings

160
Q

calculate the dividend payout ratio in the following example:
ABC pays a dividend of $1 per share
ABC earns $4 per share

A

1/4 = 25%

161
Q

indicates what the market is willing to pay for a dollar of earnings

A

P/E ratio

162
Q

how to calculate P/E ratio

A

price per share / earnings per share

163
Q

a higher P/E ratio could indicate a(n) ____ stock

A

overpriced

164
Q

indicates how much an investor is paying for a specific revenue stream

A

price/sales

165
Q

a measure of relative valuation that can be used to compare companies with different growth rates

A

PEG ratio

166
Q

how to calculate the PEG ratio

A

(price/earnings) / growth

167
Q

proponents of the PEG ratio believe that companies with a low PEG ratio will have ______ rates of returns

A

higher

168
Q

an attempt to determine the demand side of the supply/demand equation for a particular stock or set of stocks

A

technical analysis

169
Q

based on the belief that studying the history of security trades will help predict future price movements

A

technical analysis

170
Q

true or false?

technical analysis and the efficient market hypothesis are in direct contradiction with each other

A

trueq

171
Q

type of movement that represents large trends that last anywhere from 1-4 years

A

primary moves

172
Q

moves that are considered bull/bear markets

A

primary moves

173
Q

moves that are temporary, generally less than two months

A

intermediate moves

174
Q

used as indicators of trends in the market

A

moving averages

175
Q

what is on of the more popular moving averages to follow?

A

200 day moving average

176
Q

states that a trend will generally continue until a major event occurs to change the direction of the market

A

relative strength analysis

177
Q

states that most of investors are generally wrong regarding investment decisions and predictions

A

contrary opinion theory

178
Q

theory/indicator based on the assumption that the small individual investor is always wrong

A

odd lot theory

179
Q

under odd lot theory, if a small investor is selling a security its is probably a good time to ____ the security

A

buy

180
Q

theory that states that increased short selling is a sign that the market is near a trough and will soon turn around

A

short interest theory

181
Q

how to calculate the confidence index

A

average yield of high-grade bond / average yield of low grade bonds

182
Q

bondholders have a tendency to shift their bond holdings to a higher graded bond when the market is _____

A

weak

183
Q

the closer the confidence index gets to 1, the ____ the market is getting

A

stronger

184
Q

increasing levels of debt (margin) in brokerage accounts is an indicator that investors believe the market to be ____

A

strengthening/bull

185
Q

value investing focuses on the ____ in the P/E ratio

A

Price (numerator)

186
Q

growth investing focuses on the ____ in P/E ratio

A

earnings (denominator)

187
Q

true or false?

growth stocks usually have a high dividend payout ratio

A

false

188
Q

a written document that sets forth a client’s objectives and limitations on the investment manager

A

investment policy statement

189
Q

the process of comparing the performance of an investor’s portfolio with the relevant market’s performance over the same period of time

A

benchmarking

190
Q

states that the composition and weighting of the components of the benchmark must be clearly delineateed

A

unambiguous

191
Q

states that the option to invest in the benchmark is available

A

investable

192
Q

states that analysts should be able to calculate the benchmark’s return on a frequent basis

A

measurable

193
Q

states that the benchmark must be consistent with the manager’s investment philosophy and style

A

appropriate

194
Q

states that the manager has current investment knowledge of the securities that make up the benchmark

A

reflective of current investment opinions

195
Q

states that the benchmark should be constructed before the beginning of the evaluation period

A

specified in advance

196
Q

a method of financial analysis that attempts to forecast how investment returns on different asset classes vary over time by using thousands of simulations to produce probability distributions for various outcomes

A

stochastic modeling

197
Q

a computer generated distribution technique used to model uncertainty

A

monte carlo analysis

198
Q

measures the relative measure of risk adjusted performance of a portfolio based on total risk

A

sharpe ratio

199
Q

sharpe ratio uses _____ as a measure of portfolio risk

A

standard deviation

200
Q

how to calculate the sharpe ratio

A

(return of portfolio - risk free rate) / standard deviation of portfolio

201
Q

the treynor ratio uses _______ as a measure of porfolio risk

A

beta

202
Q

how to calculate the treynor ratio

A

(return of portfolio - risk free rate) / beta

203
Q

measures how well the managed portfolio performed to an unmanaged portfolio of equal risk when comparing actual return to expected return

A

alpha

204
Q

how to calculate alpha

A

return of portfolio - [risk free rate + (return of market - risk free rate) x beta]

205
Q

true or false?

alpha is a relative measure of performance

A

false, it’s an absolute measure

206
Q
calculate alpha on the following portfolio:
portfolio return = 12%
beta = .6
market return = 15%
risk free return = 3%
A

1.8%

207
Q

measures the portfolio’s average rate of return in excess of a comparison (benchmark) portfolio divided by standard deviation of the excess return

A

information ratio

208
Q

how to calculate the information ratio

A

alpha / standard deviation

209
Q

measures the consistency with which a manager beats a benchmark

A

information ratio

210
Q

a relative measure of total risk per unit of expected return

A

coefficient variation

211
Q

used to compare investments with varying rates of return and standard deviations

A

coefficient of variation

212
Q

how to calculate the coefficient of variation

A

standard deviation of asset / expected return of asset

213
Q

which of the following stocks has more total risk per unit of expected return:

ABC stock has an expected return of 5.95% and standard deviation of 4.35%
XYZ stock has an expected return of 10% and standard deviation of 6%

A

calculate the coefficient of variation (standard deviation / expected return)

4.35 / 5.95 = .7311
6 / 10 = .6

so ABC is more risky per unit of expected return

214
Q

true or false?

a positive alpha indicates the portfolio manager outperformed the benchmark

A

true

215
Q

Franklin has a separately managed account with a large cap growth investment objective. The account returned 7.75% over the past year. During the same time period, the DJIA has returned 6.45%. The risk free rate is 1.85%. The account has a beta of 1.12. Did the managed portfolio outperform the benchmark return on a risk adjusted basis, if so by how much?

A

Yes by .75%

calculate alpha

7.75% - (1.85% + (6.45% - 1.85%) x 1.12))

216
Q

the process of purchasing securities over time by investing a predetermined amount at regular intervals

A

dollar cost averaging

217
Q

what is the goal of dollar cost averaging?

A

to reduce the effects of market price fluctuations

218
Q

purchasing additional shares only when the market price of the shares declines

A

averaging down

219
Q

the investor purchases the same number of shares everytime

A

share averaging

220
Q

plans where dividends are reinvested back into the investment from which they were earned

A

Dividend reinvestment plans (DRIPs)

221
Q

accomplished by establishing a portfolio of bonds with staggered maturities

A

laddered portfolio

222
Q

initially acquiring a portfolio of bonds consisting of both very long-term and very short-term maturites

A

barbell/dumbbell strategy

223
Q

investors purchasing a series of bonds with similar maturities that are focused around one point in time

A

bullet strategy

224
Q

an active portfolio management strategy that emphasizes and over allocates certain economic sectors or industries in response to the next expected phase of the business cycle

A

sector rotation

225
Q

individuals who engage in short selling are ____ about the future direction of the marke

A

bearish

226
Q

what is Elayne’s profit in the following scenario:

she believes that ABC stock is overpriced. She short sell 20 shares when ABC is trading at $100 per shares. 3 months later ABC can be purchased at $85 per share. Elayne repurchases 20 shares at that time

A

$100 - $85 = $15

$15 x 20 shares = $300

227
Q

when an investor takes a short position with the same market value as a long position

A

shorting against the box

228
Q

give an example of shorting against the box

A

Larry owns 100 shares of ABC stock, he then sells 100 shares of ABC stock short

229
Q

when is a short sell considered not constructive?

A

short sale is closed on or before the 30th day following the tax year that the short sale was entered into and
the long position is held (unhedged) for a period of at least 60 days after the close of the short postion

230
Q

represents the amount that the investor is required to fund in the margin account

A

initial margin

231
Q

who sets the initial margin requirement

A

federal reserve

232
Q

what does the federal reserve set the initial margin requirement to

A

50%

233
Q

the level at which an investor will be required to add funds to the margin account

A

maintenance margin

234
Q

the loan amount owed to the broker ; this amount includes the original amount borrowed plus any accumulated interest

A

debit balance

235
Q

the value of the security less the debit balance

A

equity

236
Q

what is the formulate for determining when a margin call will occur

A

debit balance / (1 - maintenance margin)

237
Q

Harry pays $20,000 to purchase shares of ABC company trading at $25. If Harry uses a margin account (50% initial margin) to purchase this stock, he can buy 1,600 shares (20,000 x 2 / $25). An amount of $20,000 is borrowed from the broker. Harry is concerned about receiving a margin call. At what point would he receive a margin call if the maintenance margin is 35%?

A

$25 x 50% / (1 - 35%) $19.23

$19.23 is the price per share

238
Q

Harry pays $20,000 to purchase shares of ABC company trading at $25. If Harry uses a margin account (50% initial margin) to purchase this stock, he can buy 1,600 shares (20,000 x 2 / $25). An amount of $20,000 is borrowed from the broker. If the stock priced dropped to $15, how much money would Harry be required to deposit to meet the margin call?

A
first find required equity
$15 x .35 = $5.25 
next find current equity
$15 - $12.50 (initial margin or loan amount) = $2.50
then find the difference between the two
$5.25 - $2.50 = $2.75

$2.75 is the price per share to maintain the equity postion

239
Q

used to protect a bond portfolio from interest rate risk and reinvestment rate risk

A

portfolio immunization

240
Q

true or false?

for a bond portfolio to be immunized the duration should be equal to the time horizon of the investor’s goals

A

true

241
Q

the process of selling one debt instrument and replacing it with another with the goal of increasing the overall rate of return

A

bond swapping

242
Q

a swap that involves exchanging bonds with identical characteristics (credit rating, maturity, coupon payment, call features, etc.) selling for different prices

A

substitution swap

243
Q

a swap that involves the exchange of one type of bond (example: government bond) with another type of bond (example: corporate bond)

A

intermarket spread swap

244
Q

when does an intermarket spread swap occur?

A

when investors believe one type of bond is currently mispriced in relation to the other

245
Q

a swap that involves exchanging long term bonds for short term bonds or vice versa

A

rate anticipation swap

246
Q

if interest rates are expected to increase then you should swap ______ term bonds for _____ term bonds

A

long term ; short term

247
Q

if interest rates are expected to decrease then you should swap ______ term bonds for _____ term bonds

A

short term ; long term

248
Q

a swap that involves exchanging a lower YTM bond with a higher YTM bond

A

pure yield pickup swap

249
Q

swaps that are motivated by current tax law

A

tax swap

250
Q

occurs if the taxpayer sells or exchanges stock or securities for a loss and within 30 days before or after the date of the sale or exchange, acquires similar securities

A

a wash sale

251
Q

used to manage risk associated with changes in interest rates

A

interest rate swaps

252
Q

Company A enters into a fixed for floating swap with Company B on $100,000 of notional principal. Company A agrees to pay a fixed 5% ; Company B agrees to pay one-year London Interbank Offered Rate (LIBOR) less 1%. At the end of the first year, one-year LIBOR is 6.8%. What will each company have to pay each other?

A

Company A’s liability = 5% x $100,000 = $5,000
Company B’s liability = 5.8% x $100,0000 = $5,800

So company A nets $800

253
Q

true or false?

Liability investing is usually better used in non-taxable accounts

A

true

254
Q

true or false?

it makes the most sense to hold non-taxable bonds such as muni bonds in a tax-deferred account

A

false

255
Q

what are the 6 steps of the investment planning process?

A
  1. determine if client has means and commitment to invest
  2. Determine the time horizon for investment based on the client’s financial objectives
  3. Determine the appropriate level of risk and return for the portfolio based on the investor’s risk tolerance and required return
  4. Select investments suitable to the investor’s time horizon, return requirements, and risk tolerance
  5. compare actual returns vs. expected returns
  6. adjust and rebalance the client’s porfolio
256
Q

the _____ _______ of the client are the driving force behind an investment plan

A

financial goals