Portfolio/ Fixed Income Basics

C The sponsor makes an OTC market in trust units Fixed Unit Investment Trusts are investment company securities that are initially sold with a prospectus at the POP. Thereafter, the sponsor makes a market in trust units, and will buy back trust units from investors that wish to get out of them. The sponsor will then resell these "used" trust units for their remaining value to other investors. Also note that in the prospectus, the wording covering this typically goes "the sponsor currently makes a market in trust units and intends to continue making a market in trust units, but is under no obligation to make a market in trust units."

What is the trading characteristic of a Fixed UIT? A They trade on exchanges like any other stock B They are securities which are redeemable with the sponsor C The sponsor makes an OTC market in trust units D The securities are illiquid and cannot be traded

Coupon Rate of TIPS

What rate would be used to find the present value of a TIPS?

A Growth

What style of investing justifies paying a premium for companies that have good future potential?

$1,000 The bond matures in 5 years. At maturity, the bondholder receives par from the issuer. The 3.50% coupon ($35 in interest) is paid to the bondholder annually, divided into semi-annual payments. The inflation rate has nothing to do with this question.

A $1,000 par bond is issued with 5 years to maturity. The coupon rate on the bond is 3.50%. If the inflation rate for the next 5 years is 2.50%, the bond will be worth how much in 5 years?

A redemption date to find the number of years over which the discount would be earned

A 20-year, 5% bond is quoted by a dealer on a 6% basis. The bond is callable in 10 years at par. To calculate the dollar price for the bond, the dealer would use the:

decrease This is pretty simple. A basis quote is a yield to maturity quote. If market yields are rising, the basis quote will rise, forcing the bond's price down. If market yields are falling, the basis quote will fall, forcing the bond's price up.

A 5% coupon bond is being offered on a 6% basis. If interest rates for similar bonds fall below 6%, the basis for this bond will:

If the bond is called in 5 years If a customer buys a bond at a premium, he or she is paying more than par for the bond. This will happen if market interest rates have dropped after the bond was issued or if the bond's credit quality improves after issuance. The premium is "lost" as the bond is held, since the bond is redeemed at par at maturity. The yield to maturity formula takes this into account by taking an annual deduction for the pro-rata loss of the premium - this is called the annual amortization of the bond premium. If the bond is called early, this loss in compressed into a shortened time frame, and this reduces the yield. Thus, any premium bond will give the lowest yield if it is called at the earliest call date.

A customer buys a premium bond with 20 years to maturity that is callable at par at any time during its life. In which situation will the customer earn the lowest yield on the bond?

index fund (This customer believes in efficient market theory - that asset managers cannot outperform the market.)

A customer who believes in efficient market theory would invest in a(n):

Treasury Notes Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, but not as marketable as Treasury securities, making Treasury securities the better choice. So we are left with either a T-Bill or a T-Note. Treasury notes pay interest semi-annually; while Treasury Bills do not provide a regular income stream, so a T-Note is the better choice.

A customer who is retired wants to select an investment that is liquid, marketable, and that provides regular income. The BEST choice would be to recommend: Incorrect answer A. You did not choose this answer. A Treasury Bills B Treasury Notes C Preferred Stock D Certificates of Deposit

A Treasury Note

A customer wishes to make an investment that provides liquidity, marketability and current income. The BEST recommendation is:

A stock with a 10% growth rate and a beta of .8 The portfolio has generated a 12% return by taking on extra risk (beta of 1.2 is .2 above the market risk level of 1). If we divide the return by the beta, the market return for the portfolio would be 12% / 1.2 = 10%. Any investment that exceeds this amount (risk adjusted) is a good one for the portfolio. Choice A: 6% / .7 Beta = 8.57% risk adjusted returnChoice B: 10% / .8 Beta = 12.50% risk adjusted returnChoice C: 12% / 1.3 Beta = 9.23% risk adjusted returnChoice D: 14% / 1.5 Beta = 9.33% risk adjusted return

A portfolio of securities with a beta of 1.2 has produced an average annual return of 12%. Which investment should the portfolio manager consider adding? A A stock with an 6% growth rate and a beta of .7 B A stock with a 10% growth rate and a beta of .8 C A stock with a 12% growth rate and a beta of 1.3 D A stock with a 14% growth rate and a beta of 1.5

EAFE

An investment adviser has its model portfolio structured to match a blend of the major U.S. based equity indexes, using index ETFs as the investment vehicle. To further diversify the portfolio against market risk, the adviser could include an ETF based on which index?

-2 To compare "apples with apples," a portfolio with a beta of 1.4 should return 1.4 times the benchmark index return of 12% = 1.4 x 12% = 16.80%. This manager produced a return of 14.8%, so the "alpha" (value of the active manager's expertise over investing in an index fund) is actually negative. This manager did worse, producing a negative alpha of -2%.

An investment portfolio indexed to the S&P 500 Index produced a return for the year of 12% with a beta of +1. Investment Manager "A" has an actively managed stock portfolio that produced at return for the year of 14.8% with a beta of 1.4. The "alpha" produced by Investment Manager "A" is:

purchasing power risk

An investor that purchases 10 year zero-coupon Treasury bonds with the intention of holding them to maturity should be MOST concerned with:

C the price of Bond B will fall faster than the price of Bond A (As market interest rates rise, the prices of fixed income securities fall, but not at equal rates. As market interest rates rise, the longer the maturity of the bond, the faster the price will fall; and the lower the coupon rate, the faster the price of the bond will fall. Since the coupon is the same for both bonds, the price of the longer maturity bond (B) will fall faster as market interest rates rise.)

Bond A and Bond B both have an 8% coupon. Bond A matures in 2 years, while Bond B matures in 10 years. If market interest rates rise:

Agency trades where the customer is charged a fair and reasonable mark-up or mark-down (It is prohibited to charge a commission in a principal transaction. Similarly, it is prohibited to charge a mark-up in an agency transaction.)

Broker-dealers are permitted to execute all of the following over-the-counter transactions EXCEPT:

A Nominal; Current; Yield to Maturity; Yield to Call (See Bond weigh)

For bonds trading at a discount, rank the yield measures from lowest to highest?

required rate of return

The "hurdle rate" is the same thing as the:

B required rate of return

The Dividend Discount model values common stock by discounting future dividends by the:

A rate of return from the investment is greater than the discount rate used in the computation

The Net Present Value of an investment is greater than "0." This means that the:

geometric mean return considers compounding while arithmetic mean return does not

The essential difference between the arithmetic mean return and the geometric mean return is:

90-dayTreasury Bill rate

The interest rate that is used as the "risk free" rate of return is the:

net present value Net present value uses compound interest to discount future cash inflows and outflows to their "net present value" - that is, their value in today's dollars. The rate of interest used to discount the cash flows to be received is the current market rate of interest.

The quantitative method of evaluating investments that uses periodic cash inflows and outflows is:

nominal rate of return minus the inflation rate

The real rate of return is the:

B current securities prices reflect all publicly available information

The semi-strong version of the efficient market hypothesis states that:

C Higher investment yield

Which of the following is NOT a benefit of making an investment in an emerging markets fund? A Diversification B Liquidity C Higher investment yield D Reduced investment risk