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63 Cards in this Set
- Front
- Back
T-Bills
Quoted Yield |
[(Face Value - Purchase Price)/Purchase Price] x (365/days to maturity) x 100
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Calculate Purchase price of T-Bill
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**need to have quoted rate
Face Value/(1+[(quoted yield x (Days to Maturity)/365]) |
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US Treasury Bills
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**always use a base of 360 instead of 365. Therefore CDN TBills will have slightly higher yield
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Why calculate Current Yield/Rate of Return on a Bond?
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To assess current annual income from specific investment
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Current Yield/Rate of Return on a Bond (formula)
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(Annual Interest payments)/(Current Market price)x100
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Yield-to-Maturity
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Total return on a bond over its lifetime.
Equal to coupon rate if bond held to maturity |
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Calculate Yield to Maturity on a bond
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P/YR
xP/YR PMT FV PV Mode END SOLVE FOR I/YR |
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Yield to Call
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Yield to maturity of a callable bond (assumes bond is called at the earliest call date)
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Current Yield - Preferred Shares
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[Annual Dividend Payment/Current Market Price] x 100
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Market Price (Preferred Share)
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(Dividend Payment)/(Prevailing Market Rate)
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Holding Period Return
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Total return on an investment - Income + Capital appreciation during specific holding period
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Holding Period Return
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[(Closing Value - Opening Value)/Opening Value] x 100
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What is Duration?
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used to predict expected changes in price of a fixed-income security relative to an interest rate change
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Assumptions made when calculating hoding period return
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1. Selection of specific time period
2. All income flows are used to buy additional units |
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Duration
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Price of fixed-income security will change x% give a 1% change in interest rate....where x = duration
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Duration (Formula)
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(PV of all time-weighted cash flows at discounted YTM)/current market price
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Immunization
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Matching duration of a bond to investors cash-flow requirements.
Shield investor from interest rate risk. |
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Mutual Fund Invstment Returns
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[(Closing value -Opening value)/opening value]x100
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Stock Valuations
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Method used to compare actual price of stock to its intrinsic value
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Dividend Discount Model DDM
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Based on the premise that the price investors will pay is driven by future cash flow
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Zero-Growth Model (DDM) Assumption
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Assumes dividend is received forever and remains the same.
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Zero-Growth Model (DDM)
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P = D/r
where: P = intrinsic value D- constant Dividend amount r = discount rate for cash flows with similar investment risk. |
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Constant Growth Model (DDM)Assumption
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Assumes dividends grow at a constant rate
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Constant Growth Model (DDM)
Formula |
P = Do x (1.0+g)/(r-g)
where: Do = dividend in first year g = growth r = discount rate for cash flows with similar risk |
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Three Stage DDM
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Corresponds to the three stages that companies experience.
1.Growth 2.Transition 3.Maturity |
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Finite Holding Period Model
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Investors do not hold stocks forever
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Terminal Price
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Expected sale price of a stock
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Price Earnings based Valuations
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Relationship between earnings of a company and price of their stock
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Price-Earnings Valuations - A stock is underpriced if...
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Expected PE ratio > actual PE ratio
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Price-Earnings Valuations - A stock is overpriced if...
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Expected PE ratio < actual PE ratio
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Zero-Growth Model (PE Valuation)
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Assumes 0 growth and payout ratio is always 100%
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Zero-Growth Model (PE Valuation)
Formula |
Expected PE ratio = 1/r
where r = discount rate Actual PE ration = CMV/Net Earnings per share |
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2 forms of Security Analysis
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1. Technical
2. Fundamental |
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Technical Analysis
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Deals with Mass psychology of investors
no interest in performance of the company |
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Resistance
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Stock rises in price but has trouble reaching or staying at a specific price
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Support
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Stocks price is falling but stalls a certain price level
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Tools used for Technical Analysis
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1. Moving Averages
2. Relative Strength Index |
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Moving Averages
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Average price over a specific time period ie:20 days.
Each day as new price is added the oldest price is dropped. |
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Relative Strength Index (RSI)
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100-(100/1+RSI)
where RSI=(Avg of n-day of up close)/(Avg of n-day down close) Compares days price closed high and days it closed low |
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Fundamental Analysis
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Studies Economy, Industry and company
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Top-up Approach
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begin a economic level, then industry level then company
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Bottom-up approach
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Begin at corporate level, then industry and then the economy
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7 Types of Diversification
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1.Asset Classes
2. Company Size 3.Industry 4. Geographic 5. Management Style 6. Fixed-Income Maturity dates 7. Credit Risk |
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Active Investing
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Buying and selling stock to capitalize gains
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Passive Investing
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Construct portfolio to mirrior an index.
Advantages 1.returns seldom deviate from benchmark 2.fully invested at all times 3.lower fees |
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Asset Allocation
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Segmenting funds into investments that are independent/different
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Tatical Allocation
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Deals with short term forecasts. Uses leading economic indicators.
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7 Types of Diversification
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1.Asset Classes
2. Company Size 3.Industry 4. Geographic 5. Management Style 6. Fixed-Income Maturity dates 7. Credit Risk |
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Active Investing
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Buying and selling stock to capitalize gains
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Passive Investing
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Construct portfolio to mirrior an index.
Advantages 1.returns seldom deviate from benchmark 2.fully invested at all times 3.lower fees |
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Asset Allocation
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Segmenting funds into investments that are independent/different
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Tatical Allocation
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Deals with short term forecasts. Uses leading economic indicators.
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Barbell Approach to Maturity Selection
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Holding only short & long term bonds so one portion will benefit from higher rates.
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2 Types of Style-Based Investing
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1.Value
2. Growth |
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Value Stocks
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Priced below avg. levels relative to historical pricing.
3 Types 1.low P/E ratio 2.Contrarian mgr. (bookvalue) 3.Conservative yield - above avg. yields |
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Growth Stocks
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P/E ratio is above average
2 styles 1.Consistant Growth Mgr - high quality corp with consistant growth 2.Earnings momentum growth mgr |
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Portfolio Insurance
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Identifies a portion of assets for riskier investment
Constant multiple x an amt in ecess to floor amount |
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Investment Objectives
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1.Income
2.Security of Principle 3.Liquidity 4.Growth |
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Investing in Business Cyles
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Expansion-own stocks instead of bonds
Peak - hold stock and shift to bonds Recession - Int. rate decreases making bonds more attractive Trough - move from bonds to stocks |
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Hedging Strategies
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1.Selling Short
2.Options 3.Arbitage 4.Event Specific |
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Taxation of a leveraged Loan
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Is tax deductable if borrowed for the purpose of earning income
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Magnification
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Returns can be much greater when using leveraged loans to invest.
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Formula Investing
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Based on a Set of rules. No investor emotions
1.DRIP 2.Dollar Cost Averaging |