FIN3244 Last EXAM!

real rate of return + expected inflation premium + risk premium for investment

real rate of return + Expected inflation premium

- most commonly a 3-month US T-bill

Additional return an investor requires on an investment to compensate for higher risks based upon issue and issuer characteristics

the period of time over which an investor wishes to measure the return on an investment vehicle

return that has been achieved but not yet realized

current income during period + capital gains (loss) during period
______________________________
beginning investment value

rate of return earned on interest or other income received from an investment over its investment horizon.

the rate of return that includes interest earned on interest.

relationship between risk and return, in which investments with more risk should provide higher returns, and vice versa

degree of uncertainty associated with an investment’s earnings and the investment’s ability to pay the returns owed to investors.

degree of uncertainty of payment resulting from a firm’s mix of debt and equity; the larger the proportion of debt financing, the greater this risk.

- • debt financing obligates the firm to make interest payments as well as to repay the debt, thus increasing risk

chance that changing price levels (inflation or deflation) will adversely affect investment returns.

- investments whose values move with general price levels have low purchasing power risk and are most profitable during periods of rising prices
- and vice versa

chance that changes in interest rates will adversely affect a security’s value.

- securities that offer purchases a fixed periodic return are affected by interest rate risk.

risk of not being able to liquidate an investment conveniently and at a reasonable price.

- investment vehicles traded in THIN markets, where demand and supply are small, tend to be less liquid than those traded in BROAD markets.

chance that Congress will make unfavorable changes in tax laws, driving down the after-tax returns and market values of certain investments.

risk of decline in investment returns because of market factors independent of the given investment.

- risk is reflected in the price volatility of a security – th

unexpected event that has a significant and unusually immediate effect on the underlying value of an investment.

a statistic used to measure the dispersion (variation) of returns around an asset’s average or expected return

- the higher the number the greater the risk

sq root of the sum of return for outcome minus the expected return all over the total number of outcomes minus 1

measures the relative dispersion of an asset’s returns; it is useful in comparing the risk of assets with differing average or expected returns

- the higher the number the greater the risk

take into account both price changes and dividend income

drop of 5% or more in one of the major market indexes, like the Dow Jones Industrial Average (DJIA)

a drop of 10% or more in one of the major market indexes

drop of 20% or more in one of the major market indexes

offering of a new issue of stock to existing stockholders, who may purchase new shares in proportion to their current ownership

conversion of one of a firm’s subsidiaries to a stand-alone company by distribution of stock in the new company to existing shareholders

common stock issued in different classes, each of which offers different privileges and benefits to its holders

- the amount of stockholders’ equity
- The difference between the company’s assets minus the company’s liabilities and preferred stock

the current price of the stock in the stock market

the overall current value of the company in the stock market
Total number of shares outstanding multiplied by the market value per share

the amount that investors believe the stock should be trading for, or what they think it’s worth

date on which an investor must be a registered shareholder to be entitled to receive a divident

3 business days up to the date of record
- determines whether is an official shareholder and can receive dividends
- if you buy a share AFTER this date, the previous owner still gets the dividend

the amount of annual earnings available to common stockholders, stated on a per-share basis

net profit after taxes - pref. dividends
______________________________
# of common stock outstanding

measure to relate dividends to share price on a percentage basis
- calculated by taking dividend divided by stock price

the portion of earnings per share (EPS) that a firm pays out as dividends

calculated by dividing DPS over EPS

payment of a dividend in the form of additional shares of stock

plans where cash dividends are automatically reinvested into additional shares of the firm’s common stock

financially strong, high-quality stocks with long and stable records of earnings and dividends

stocks with long and sustained records of paying higher-than average dividends

- some pay high dividends because of limited growth potential

stocks that experience high rates of growth in operations and earnings

stocks representing the technology sector of the market

- difficult to put value on due to erractic or no earnings

stocks that offer potential for substantial price appreciation, usually due to some special situation such as a new product

stocks whose earnings and overall market performance are closely linked to the general state of the economy

stocks that tend to hold their value, and even do well, when the economy starts to falter

- Products are staples that people use in good times and bad times, such as electricity, beverages, foods and drugs

risk that a bond will be “called” (retired) before its scheduled maturity date

amount of annual interest income

measure of the annual interest income a bond provides relative to its current market price

amount of capital that must be repaid at maturity

debt security originally issued with a maturity from 2 to 10 years

backed by pledged collateral

backed by legal claim to specific assets

backed by real estate.

backed by securities (stocks, bonds) held in trust by a third party

requires interest to be paid only after a specific amount of income has been earned

- Treasury notes: mature in 2 to 10 years
- Treasury bills: mature in 20 and 30 years
- considered risk free
- exempt from state and local taxes

type of treasury security that provides protection against inflation by adjusting investor returns for the annual rate of inflation.

- debt securities issued by various agencies and orgs of the US gov't.
- ex GNMA, FNMA, FHLC
- usually provide yields that are comfortably above the market rates for treasuries

- debt securities issued by states, counties, cities and other political subdivision
- free from federal income tax

return a fully taxable bond would have to provide to match the after-tax return of a lower-yielding, tax-free municipal bond

bonds with no coupons hat are sold at a deep discount from par value.

- Interest must be reported as it is accrued for tax purposes, even though no interest is actually received.

debt issue secured by a pool of home mortgages
- Principal and interest are paid monthly
- Self-liquidating investment since portion of principal is received each month

mortgage-backed bond whose holders are divided into classes based on the length of investment desired; principal is channeled to investors in order of maturity with short-term classes first.

backed by a pool of bank loans, leases, and other assets

Bonds issued by foreign governments or corporations and denominated in dollars

registered with the SEC and issued and traded in U.S.

not registered with the SEC and are issued and traded outside of the U.S.

Fixed-income security that allows holder to convert the security into a specified number of shares of the issuing company’s common stock

an investment company that invests its shareholders’ money in a diversified portfolio of securities

Investors buy and sell shares directly with the mutual fund company without a secondary market

underlying value of a share of stock in a particular mutual fund.
- NAV = total market value of all assets held by the fund, less any liability and dividing this amount by the# of shares outstanding.

A basket of securities designed to track a specific market index

mutual fund that charges a commission when shares are bought

mutual fund that does not charge a commission when shares are bought

commission charged on the sale of shares in a mutual fund

fee charged by some mutual funds to cover management and other operating costs; amounts to as much as 1% of the average net assets; can be charged regardless of the performance of the fund

Mutual funds do not pay taxes if income and capital gains are passed on to shareholders
Shareholders are taxed on their share of income and capital gains annually

Closed-end investment company that invests in mortgages and various types of real estate investments

unregulated investment, vehicle that invest money for a select group of high-net worth people.

primary goals are capital gains and long-term growth
- little or no dividends

highly speculative mutual fund that seeks large profits from capital gains

seeks stocks that are undervalued in the markete

emphasizes current income and capital preservation

generates a balanced return of both current income and long-term capital gains

- used both stocks and bond

seeks both long-term growth and current income, with primary emphasis on capital gains

- only use stocks

invests in various kinds and grades of bonds, with income as primary objective

invests in short-term money market instruments

buys and holds a portfolio of stocks (or bonds) equivalent to those in a specific market index