Unit01. Introduction, Creation of Financial Assets, and Security Markets

Transcription

1 FCS 5510 Concept Review Notes: Midterm Review Notes Unit01. Introduction, Creation of Financial Assets, and Security Markets Chapter 01. Definition of investment Portfolio Primary and secondary markets Value and valuation Return: income gains (e.g. dividends) vs. capital gains, dollar amounts vs. percentage Risk: sources of risks: unsystematic risks vs. systematic risks Unsystematic risks: business risk and financial risk Systematic risks: market risk, interest rate risk, reinvestment risk, purchasing power risk, exchange rate risk Diversification and assets allocation Efficient markets Chapter 02 Financial claims: Debt claims (bonds) and equity claims (stocks) Transfer methods: direct vs. indirect through a financial intermediary Initial Public Offerings (IPOs) The role of investment bankers Underwriting IPO pricing: the tendency to underprice IPOs Regulation of IPOs: SEC s role, prospectus, shelf registrations, lock-ups Financial intermediaries (e.g. commercial banks) vs. investment bankers Investment instruments: checking, saving, CDs, money market instruments (negotiable CDs, Eurodollar CDs, U.S. Treasury bills, commercial papers, repos, bankers acceptances, tax (or revenue) anticipation notes). FDIC Chapter 3. Secondary markets: organized exchanges (e.g., NYSE, AMEX) or over-the-counter (NASDAQ) Third and fourth markets: bulk trades Security dealers (specialists on NYSE and Market makers in NASDAQ) Bid and ask prices Round lot vs. odd lot Full service vs. discount service brokerage firms Difference between security dealers and brokers Long and short position Types of orders: market orders, limit orders, stop orders Cash vs. margin: margin requirement, maintenance margin, margin call Delivery of securities: street name 1

2 Regulations: Securities Act of 1933, Security Exchange Act of 1934, SIPC, Sarbanes- Oxley Act of 2002, Blue Sky laws Unit 02. Tax Environment and Risk Management Chapter 5 Tax philosophies: progressive, regressive, proportional Tax shelter vs. tax fraud Capital gains and losses: short term vs. long term Capital gain and loss offsetting rules and wash sale rule Tax shelter: Tax deferred pension plans (Traditional IRA (deductable), Roth IRA(nondeductable), Keogh accounts, 401K and 403b), tax deferred annuities, life insurance, stock option plans Taxation on wealth: estate tax, gift tax, inheritance tax, and property tax Chapter 6. Return: Expected return, required return, realized return Portfolio return: weighted average Total risk = systematic risk (non-diversifiable) + unsystematic risk (diversifiable risk) Measurement of risk: Standard Deviation (SD) and Beta Portfolio theory: Markowitz model, Capital Assets Pricing model (CAPM), Arbitrage Pricing theory (APT) Markowitz model: efficient frontier, risk indifference curves, and optimal portfolio choice CAPM: capital market line or security market line, beta (individual security and portfolio beta) APT: arbityrage Unit 3. Investment companies: Mutual funds and closed-ended investment companies Chapter 7 Advantages of mutual funds Mutual fund net assets value (NAV) Mutual fund prospectus Load funds vs. no-load funds Mutual fund portfolios: types of funds and investment style Morningstar style box Mutual fund fees and expenses: load, redemption fee, exchange fee, 12b-1 fee, etc. Mutual fund returns: adjusting for fees and loads, before- and after-tax returns Tax efficiency index Performance evaluation adjusting for risk: Jensen index, Treynor index, and Sharpe index. Chapter 8. Differences between mutual fund and closed-ended investment companies Cost of investing in closed-ended mutual funds Unit Trusts (UITs) Exchange-Traded Funds (ETFs) 2

3 Assets allocation over life cycle Unit 4. Common Stock: Valuation and Measures of Stock Markets Chapter 9. Corporation Rights of stockholders Dividend growth valuation model Estimating required return in dividend growth valuation model Alternative valuation methods: P/E ratio, cash flow, P/B ratio, P/S ratio PEG ratio, adjusted PEG ratio The efficient market hypothesis: the weak form, the semi-strong form, and the strong form, anomalies Chapter 10 Measures of stock performance: price-weighted averages, value-weighted averages, equal-weighted averages, and geometric weighted averages. Comparison of prices over time: Graphic illustration, rate of return computation Common stock market indexes: Dow Jones Industrial average, S&P 500, Nasdaq composite index, Dow Jones Wilshire 5000 index Bond averages: Dow Jones Corporate Bond index Rate of return on investments: holding period return, dollar-weighted return, timeweighted return Averaging strategies: dollar cost averaging and averaging down Unit 5. Common stocks: Dividends and macroeconomic environment Chapter 11. Cash dividend vs. stock dividend Dividend payout ratio and retention ratio Distribution of dividends: declaration date, ex-div date, date of record, distribution date Stock split Dividend reinvestment plan Estimation of dividend growth rate method 1: using return on equity and retention ratio Estimation of dividend growth rate method 2: using past data: arithmetic average, geometric average, future value approach, regression approach Chapter 12. Two approaches to stock analysis: fundamental and technical Process of fundamental analysis: 1. economic environment, 2. industry analysis, and 3. individual firm analysis. Business cycle: peak, contraction, trough and expansion GDP Index of leading economic indicators Measures of consumer confidence: Consumer confidence index and Consumer Sentiment index 3

4 Measures of inflation: CPI and PPI Monetary policy the Federal Reserve: reserve requirement, discount rate, and federal fund rate, open market operations Monetary policy expansion policy vs. contractionary policy The impact of interest rate change on stock prices Money supply: M1 vs. M2 Fiscal policy: taxation, spending and debt management Industrial life cycle Cyclical vs. non-cyclical industries Unit 06. Fundamental Analysis and Technical Analysis Chapter 13. Ratio analysis: time-series vs. cross-sectional Data source for ratio analysis: balance sheet and income statement Balance sheet: assets=liability +equity Income statement: revenues and expenditures Five types of ratios: liquidity ratios, activity ratios, profitability ratios, leverage ratios, and coverage ratios Liquidity ratios: current ratio and quick ratio Activity ratios: inventory turnover, average collection period, receivable turnover, fixed asset turnover Profitability ratios: gross profit margin, operating profit margin, net profit margin, return on assets, return on equity, return on common equity, DuPont system return on equity Leverage or capitalization ratios: debt to equity ratio, debt to total assets ratio Coverage ratios: times-interest-earned Ratios important to creditors: expanded coverage ratio Ratios important to stockholders: payout ratio Cash flow statement: operating activities, investment activities, and financing activities Cash inflows and outflows The relationship between fundamental analysis and efficient markets Chapter 14 Behavioral finance concepts: overconfidence, disposition effect, house money effect, familiarity, mental accounting, cognitive dissonance, herding. Technical analysis The Dow theory Barron s confidence index Advisory opinion theory Advance-Declines Cumulative series Point-and-figure charts (X-O charts) Bar graphs: head and shoulder pattern Candlestick graph Moving averages Volume analysis Short sales by specialists 4

5 Verification of technical analysis are they useful? The dogs of the Dow Final Review Notes Unit 7. The Bond Market and Bond Evaluation Coupon rate Principle amount Maturity date Yield curve Indenture Bearer bonds vs. registered bonds Bond investment risks and bond ratings Investment grade bonds vs junk bonds (i.e. high yield bonds) Accrued interest owed by the buyer to the seller Corporate bonds: mortgage bonds, equipment trust certificates, other asset-backed securities, debentures, income bonds, convertible bonds, variable interest bonds, zerocoupon bonds and discount bonds, Eurobonds Retiring debt: serial bonds, sinking funds, repurchasing debt, call feature Principle of bond evaluation: future cash flows discounted back to the present Perpetual security valuation: p=pmt/i (pmt=annual interest payment, i=discount rate) Inverse relationship between discount rate (current interest rate) and the value of a bond Price of bond with a maturity date (application of PVFS and PVF) Zero-coupon bond valuation Current yield Yield to maturity: reinvestment assumption Yield to call Risk and fluctuations in yields Duration method of bond comparison Passive and active strategies bond portfolio management Preferred stock Unit 8. Government Securities U.S. national debt Nonmarketable federal government instruments: series EE bonds, series I bonds Marketable federal government instruments: Treasure bills, Treasury notes, Treasure bonds, Treasure inflation-protected securities (TIPS) Strips Federal debt and risk Federal debt and tax implications Federal government agency debt: Freddie Mac, Fannie Mae, Farmer Mac, Sallie Mae Mortgage backed securities: securitization, risk, 2007/2008 subprime crisis Ginnie Mae, Freddie Mac, and Fannie Mae Collateralized mortgage obligations (CMOs) State and local government debt: types (GOs and revenue bonds), risk, tax implications 5

6 Foreign government bonds: Brady bonds Unit 9. An Introduction to Options Derivative securities Call options vs. put options Strike price, premium, intrinsic value of call options and put options In the money, out of the money, at the money options Leverage The time premium of an option call and put Writing calls covered call vs. naked call Writing puts covered put vs. naked put Profits and losses of buying and selling (writing) call options Profits and losses of buying and selling (writing) put options Puts compared to short sales Protective put Stock index options Currency and interest rate options Warrants and rights offerings Unit10. Commodity and Financial Futures Difference between futures and options Speculators vs hedgers Futures price, spot price, option interest Long position, short position Units of trading Commodity futures trading commission Futures and leverage Margin: initial margin, maintenance margin, and margin call Marking to the market and daily limit Hedging Technical and fundamental approaches to selection of futures contracts Non-commodity futures: financial futures, currency futures Programmed trading and index arbitrage Futures pricing and price disclosure Swap agreements: currency swap, interest rate swap, equity swap Unit11. Portfolio Planning and Management in an Efficient Market Context The process of financial planning The specification of financial goals Financial life cycle: accumulation, preservation, depletion Balance sheet: assets, liabilities, net worth Cash budget: cash receipts, cash disbursement Pro Forma financial statements Priority setting Importance of asset allocation and diversification Efficient market and investment strategies 6

7 Unit12. Life Insurance Speculative risk vs. pure risk Two dimensions of pure risk: severity of loss and frequency of loss Strategies of dealing with pure risks Terminologies of life insurance: insured, owner, beneficiaries, face value, premium, cash value Determining the amount of life insurance needs: income approach and expense approach Inflation effect and term effect of life insurance Types of life insurance policies: protection only, and protection + investment Types of protection only policies: renewable term, level term, decreasing term, adjustable premium term, convertible term Types of protection+invesetment policies: whole life (participating and non-participating), modified or graded premium whole life, economatic whole life, limited payment whole life, single premium whole life, indexed whole life, universal life, variable universal life, endowment life Life insurance premium structure Mortality table Comparing policies: Interest adjusted net cost and interest-adjusted net cost index Tax advantages of life insurance policy Life insurance company risk characteristics 7