Terms  Definitions 

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 shortterm promissory notes issued by corporations
small risk of default only firms with excellent credit ratings are allowed to issue 
Bankers acceptance 
shortterm promissory note guaranteed by a bank

Repurchase agreements (or repos) 
sales of shortterm 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 CDs 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
discount 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

TIPS 
coupon payments periodically adjust to changes in inflation rate
changes in inflation are represented in the principle rather than coupon calculated by multiplying the inflationadj 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

Debetures 
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
OR 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 exdividend 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) Interestsensitive 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

Exdividend date 
set 2 business days before the date of record
if stock was purchased before the exdividend 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

Warrants 
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

Derivatives 
securities that have a value ties to the value of some underlying securities

Options 
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 highlevel 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 passthrough 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: 
Rsquared

What kind of risk is Rsquared? 
systematic risk

What kind of risk is 1 minus Rsquared? 
unsystematic

Beta coefficient: 
the volatility of a given return relative to the market

Covariance: 
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 
Variance: 
The standard measure of total risk
the measure of the dispersion of returns around the expected return 
Semivariance 
measure of downside risk
dispersion of returns that occur below a certain target return like zero or Tbills 
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 (inflationadjusted) 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 riskfree asset and a risk premium (Treasury Bill is used as riskfree 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: 
perpetuities

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 oneyear 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 pershare 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 pershare 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 riskfree 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 riskadjusted 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 riskadjusted performance of a portfolio based on market risk
more appropriate for using on diversified portfolios 
Dollarweighted rate of return 
applies the concept of internal rate of return to investment portfolios, taking into account all of the cash inflows and outflows

Timweighted 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? 
Timeweighted 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 longterm and shortterm 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

Pureyeild pickup swap 
when a lowyield bond is sold and a highyield bond purchased
usually longer maturity 
Rate anticipation swap 
swap designed to handle an expected interest rate change

BOND SWAPS 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 
Contrarians: 
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: 
SLOWLY

Fundamentalists believe that new information affects price: 
QUICKLY

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 topgrade corporate bonds to the yield on the DowJones average of 40 bonds
measures difference between high quality bonds and a large crosssection 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

Strongform 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. 
Semistrong 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

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

CAPM 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 
Putcall 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? 
1099DIV

What tax form is interest recieved reported on? 
1099INT

What tax form are capital gains reported on? 
1099B

An exercise of a warrant is considered taxable OR nontaxable? 
NonTaxable

Conversion of convertible bonds to common stock is considered taxable OR nontaxable event? 
Nontaxable

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