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Port Mgmt 2
Chap 2
| Question | Answer |
|---|---|
| asset allocation | determining the amount of money that you will place in each asset or each financial instruments such as bonds, stocks, precious medals, etc. |
| money market instruments | also called cash equivalents, highly liquid, include short term marketable liquid low-risk debt securities. |
| capital markets | include longer term and riskier securities, these securities are much more diverse than those found within the money market |
| t or f the money market is a sub-sector of the debt market. | true |
| What type of money market funds are available to small investors? | money market mutual funds. |
| Treasury bills | t-bills, or bills are most marketable of all money mrkt instrs. They are the simplest form of borrowing. Gov. raises money by selling these bills to the public. Bought at a discount from stated maturity value, @ maturity, investor recv's face value |
| investors earnings on a T-bill | the difference between the purchase price and the ultimate maturity value represents the investor's earnings. |
| how often are T-bills issued? | weekly can buy directly from the treasury or from secondary market. |
| Are T-bills liquid? | yes, they are highly liquid |
| what is the min. denom of a t-bill | $1000 |
| What are the tax advantages to T-bills? | while they are subject to federal taxes, they are not subject to any state or local taxes |
| ask price | is the price you would have to pay to buy a t-bill |
| bid price | slight lower price you would receive if you wanted to sell a bill to a dealer. |
| bid-ask spread | the difference between the ask price and bid price--this is the dealer's source of profit. |
| bank discounted method | the bill's discount from par value is annualized based on a 360 day year, and then reported as a percentage of par value. |
| what are two flaws with the bank discount method? | 1. it assumes that the year has only 360 days. 2. it computes the yield as a fraction of par value rather than the price the investor paid to acquire the bill. |
| bond equivalent yield | called ask yld in WSJ, uses 365 days to calculate instead of 360 (pg 27) |
| CD | certificate of deposit, this is a time deposit with a bank. Not able to w/d on demand. Pays interest and principle only at the end of term. (short term are highly marketable (< 3 mos) |
| Commercial Paper | short term unsecured debt issued by large corporations. These are issued directly to the public. Sometimes backed by banks. |
| How long can Commercial paper be issued for without registering it with the Securities and Exchange Commission | 270 days. |
| Can small investors invest in commercial paper? | Because CP is issued in multiples of $100,000 small investors can invest in these through money market funds. |
| Is CP safe and liquid? | yes |
| bankers acceptance | an order to a bank by a customer to pay a sum of money at a future date normally within 6 mos, this is like a post dated check, considered very safe because bank's credit stands in for the customer, sell at a discount from face value. |
| Eurodollars | dollar-denominated deposits at foreign banks of foreign branches of American banks. American banks outside US escape the regs of the Fed Review board. |
| How long are Eurdollars usually for? | most are time deposits for less than 6 mos. |
| repurchase agreements | short term sales of government securities with an agreement to repurchase the securities at a higher price. (also called repos or RP's) |
| how long do repos ususally last | 1 day, usually over night. |
| term repo | same as a repo except that the term of the implicit loan can be 30 days or more. considered very safe because they are backed by government securities |
| reverse repo | mirror image of a repo, the dealer finds an investor holding government securities and buys them with and agreement to resell them at a specified higher price on a future date. |
| buying stocks on margin | individuals borrow part of the funds to pay for the stocks from their broker. |
| broker's Calls | brokers loan money to their clients to allow them to buy stocks on margin...brokers in turn borrow money from the banks, the rate is ususally 1 % point higher than t-bills. |
| federal funds (fed funds) | funds in the accounts of commercial banks at the federal reserve bank. The total reserve required by each bank depends on the total deposits of the bank's customers. |
| can banks with a shortage of funds borrow from those banks with extra funds? | yes, these loans are generally overnight and are arranged at a rate called the federal funds rate. |
| t or f the federal funds rate is used as one of the barometers of the money market so is watched by many investors | true |
| LIBOR | London Interbank Offer Rate, rate which large banks in London are willing to lend money among themselves, has become premier short term interest rate quoted in the European money market. Like the fed rate, the LIBOR is a statistic that investors follow. |
| EURIBOR | European Interbank Offer Rate, rate in which banks in the Euro zone are willing to lend euros among themselves |
| treasury notes or bonds | debt obligations of the federal government with original maturities of one year or more. |
| fixed income capital market | instruments promise either a fixed stream of income or steam of income that is determined according to a specifies formula. |
| what kind of instruments are included in the bond market | treasury notes and bonds, corporate bonds, municipal bonds, mortgage securities, and federal agency debt. |
| what is the difference in the maturities terms of a t-note and t-bond | noet up to 10 years, and bond range from 10-30 years. Both are issued in $1000 or more. |
| coupon payments | semi annual payments made by the government on T-notes and bonds. |
| TIPS | Treasury inflation protected securities. The principle amount on these bonds is adjusted in proportion to increases in the consumer price index. (risk free if held to maturity) yield is lower than that of another bond. |
| why were Freddie Mac, Ginnie Mae and Fannie Mae created? | To provide liquidity to the mortgage market allowing investors to invest in this market. |
| What was one of the most significant financial innovations of the 80's? | The creation of the pass-through financing allowing investors to invest in the real estate market. |
| Eurobond | a bond denominated in a currency other than that of the country in which it is issued. Ex. dollar-denom. bond sold in Britain. Not to do with euro, should be thought of as an international bond. |
| yankee and samurai bonds | yankee-sold in U.S. but by a different country samurai-sold in Japan but by a different country |
| Tax exempt bonds | also called munis, issued by state and local governments. Tax-exempt bonds. Must however pay capital gains taxes if the bond sells for more than the purchasers purchase price. |
| What are the two types of municipal bonds? | general obligation bonds and revenue bonds |
| general obligation bonds | backed by the full faith and credit (ie taxing power) of the issuer |
| revenue bonds | issued to finance particular projects and are backed either by the revenues from the project or by the municipal agency operating the project. |
| who are typical users of revenue bonds? | airports, hospitals, turnpike or port authorities |
| Industrial development bond | a revenue bond that is issued to finance commercial enterprises, such as the construction of a factory that can be operated by a private firm. the fed gov limits the amount of these bonds that may be issued |
| t or f because tax payers neither pay fed or state taxes on the interest proceeds of munis they are willing to accept lower yields | true |
| how do you figure (formula) the rate of return on a taxable bond? | r(1-t) r=total return (before tax) |
| what formula do we use to determine if a taxable bond is a better deal than a muni | r(1-t) = Rm (set the taxable bond = to muni to see if it has > rate. |
| t or f the equivalent taxable interest rate increases with the investors tax bracket; the higher the bracket the more valuable munis are | true, so for this reasons, high bracket individuals tend to hold municipals. |
| how does an individual higher tax bracket affect municipal tax exempt bonds? | the higher the tax bracket, the higher the taxable rate of return will have to be to match returns on a muni. This makes munis more attractive |
| corporate bonds | the means by which private firms borrow money directly from the public. Bonds are structured like treasury bonds issues in that they typically pay semiannual coupons over their lives and return the face value. They differ from T-bonds in risk |
| secured bonds | have specific collateral backing them in the event of bankruptcy |
| unsecured bonds (debentures) | have not collateral backing them |
| subordinated debentures | have a lower priority claim to the firm assets in the event of bankruptcy |
| what are some option with corporate bonds? | Callable bonds and convertible bonds |
| callable bonds | issued by a corporation who is able to repurchase the bond from the holder at a stipulated call price |
| convertible bonds | issued by a corporation and give the bondholder the option to convdrt each bond into a stipulated number of share of stock. |
| Who are the major rating agencies for bonds? | Moody's Standard & Poor's, and Fitch. |
| high yield junk bonds | bonds with a rating below Baa (Moody and Fitch) or BBB (S&P) |
| bonds that are above Baa and BBB | Invest grade bonds, said to be low in terms of default or credit risk |
| conventional mortgages | fixed term, fixed payments |
| why did fixed rate mortgages become a problem for the banks? | because banks commonly issue fhort-term liabilities (deposits of their costomers) and hold long-term assets, such as fixed-rate mtgs they sufffer losses when int rates increase. The rates they pay on depos increase, while mtg income stays the same |
| ARM (adjustable rate mtg) | this loan was created to help banks with the problems that occur due to fixed rate mtgs. This mtg loan shifts the risk of the fluctuations in interest rates from the bank to the borrower. (rates are lower on arms then conventional mtgs) |
| mortgage backed security | an ownership claim in a pool of mortgages or an obligation that is secured by such a pool. |
| common stocks | also known as equity securities, equities that represent ownership share sin a corporation. Each share of common stock entitles its owners to one vote on any matters of corp governance put to a vot at the corps annual meeting. share in financial benef. |
| who elects board of directors of corp? | shareholders |
| who selects managers to direct a corp? | Board of directors (BOD) |
| What does the BOD do overall in a corp? | Select managers and oversee management to ensure that it acts in the best interests of shareholders. |
| What are some ways to control agency problems? | compensation schemes that link the success of the mgr to the firm, oversight of board and outsiders like security analysts, creditors, large institutional investors. threat of shareholders overthowing mgt, or takeover by another firm |
| closely held stocks | not publicly traded, owners are generally the mgrs, with them, take-over is not normally an issue. |
| residual claim on stocks | stockholders are the last in line of all those who have a claim on the assets and income of the corporation |
| limited liability | the most shareholders can lose in the event of the failure of the corp is their original investment. |
| P/E ratio | ratio of current stock price to last year's earnings. tells you how much stock purchsers must pay per dollar of earnings the firm generates for each share. |
| preferred stock | like a bond, it promises to pay holder a fixed stream of income each year, gives holder no holding power, dividends are cumulative & MUST be paid in full before any dividends may be paid to holders of common stock. |
| t or f unless you can use 70% exclusion, generally you will find preferred stocks unattractive | true |
| redeemable | callable preferred stock |
| can you convert preferred stock into common stock? | yes at some specified conversion ratio. |
| what are the dividend rates on preferred stocks an d adjustable rate bonds often tied to? | to current market interest rate |
| ADR's (American Depository Receipts) | certificates traded in U.S. markets that represent ownership in shares of a foreign company. |
| Dow Jones | best measure of the performance of the stock market among many. |
| Nikkei Avedrage of Tokyo or the Financial Times indes | foreign stock exchange indexes |
| How many and what kind of companies does the Dow Jones Industrial Average consist of? | 30 blue chip corporations. The DJIA only have 20 stocks in the beginning until 1928 |
| t or f the Dow measure the return (excluding dividends) on a portfolio that holds one share of each stock. | true |
| price weighted average | an average computed by adding the prices of the stocks and dividing by divisors |
| what method is used in the Dow to compute the average | price weighted average |
| t or f price weighted averages give higher priced shares more weight in determining the performance of the index. | true meaning that the larger stock will dominate the price weighted average |
| why does the Dow Jones Indus average no longer equal the average of 30 stocks? | because the averaging procedure is adjusted whenever a stock splits, pays a stock dividend or more than 10%, or when one company in the group of 30 is replaced. |
| how do you find the new divisor when a stock splits | 1. find index value before stock split 2. take (other stock + price of stock after split/d)=index value before stock split solve for d |
| outstanding market values | price per share * number of shares |
| What other entities does the Dow Jones average besides the 30 blue chip companies | 1. Transportation Avg of 20 airline, trucking and railroad stocks 2. public utility avg of 15 elec and natural gas util 3. Composite avg combining the 65 firms of the three separate avgs |
| market value weighted index | computed by calculating a weighted average of the returns of each security in the index, with weights proportional to outstanding market value |
| How is S&P 500 an improvement over the Dow? | it is more broadly based index of 500 firms and second it is a market value weighted indes. |
| t or f value weighted indexes are unaffected by stock spits | true |
| index funds | yield a return equal to that of the particular index and so provide a low-cost passive investment strategy for equity investors. |
| Exchange traded fund (ETF) | a porrtfolio of shares that can be bought or sold as a unit, just as a single share would be traded. |
| What other indexes do Standard and Poor publish/ | 400-stock industrial index. 20-stock transportation Index, 40-stock financial Index. |
| what rating system is used for the nyse? | value weighted. |
| whatis the ultimate equity index and why? | Wilshire 5000 index, it includes about 6000 stocks. |
| equally weighted index | and index computed brom a simple avg of returns. You start with equal dollar investmenst. But as your investmenst lose and gain, you will have to buy and sell to maintain the equal weighted balance |
| DAX | German Index |
| Hang Sang | Hong Kong Index |
| TSX | Toronto index. |
| Who has been the leaderin the construction of international indexes? | Morgan Stanley Capital International who compute over 50 country indexes. |
| Derivative asset or Contingent claim | a security with a payoff that depends on the price3s of other securities |
| call option | the right to buy an asset at a specified price on or before a specified expiration date. |
| excercise or strike price | used with a call option which gives the holder the right to buy at a specified price this is called the exercise or strike price. |
| How many share does an options contract contain? | 100 shares |
| Are calls representative of a bullish investment vehicle? | yes |
| put option | the right to sell an asset at a specified exercis price on or before a specified expiration date. |
| When are put options of value, when the stock rises of falls? | FALLS |
| futures contract | obliges traders to purchase or sell an asset at an agreed upon price at a specified future date. |
| future long position | trader doing the buying |
| future short positon | trader doing the selling |
| CBT | Chicago Board of Trade. |
Created by:
delorya