1.
1: the beta of the market is
2.
4 types of bonds: national, munis, corporate, and international
3.
attainable, unattainable: Re: efficient frontier, securities located below and to the right are ______, while those above & to the left are said to be ______
4.
away from it: when diversified, in relation to the market, you are __________. It is now just a small piece of your portfolio
5.
bond, note, bill: A ____ is a treasury lasting more than 10 years, a ____ is greater than 1 year, and a ____ is up to 1 year
6.
bonds, stocks: in bad economies _____ do well & _____ do poorly
7.
CAPM assumes: all market investors are small so there is no change in price, 1 period HPR, access to all risky assets, all investors can borrow/lend at the risk free rate, no taxes/transaction costs, and all investors agree upon the E(r) and SD
8.
conversion premium: bond price - conversion value
9.
conversion ratio: the amount of shares received per convertible bond
10.
convertible bonds: can be converted into shares, good for companies with low credit rating to borrow, also seen as a position in an option
11.
correlation: between -1 & 1. -1 being perfectly negatively correlated (rare), 1 being perfectly positively correlated, and 0 being uncorrelated
12.
credit and interest rate: what are two bond risks
13.
diversification benefit: when you take the SD received from the correlation less than 1, and compare it to that same portfolio with 1
14.
E(r), SD, risk: Portfolio A is said to be better than B if _____ is greater and it has less than or equal to the amount of __, also known as ____.
15.
efficient frontier: the set of dominant portfolios
16.
euro bonds: issued in other currency than it was issued, sold in UK, but issued in US
17.
excess returns: what does CAPM meausre
18.
falling angel: investment grade downgraded to junk bond
19.
foreign bonds: issued in country other than purchased, currency in which it was issued, and those sold in US are known as "Yankee bonds"
20.
good, your favor: In most cases, duration error is ____ b/c it is in _______. The actual is greater than predicted b/c it is more conservative
21.
immunization: "fantasy" goal of interest rate risk management; a portfolio of this sort is not sensitive to changes in interest rates. Realistically, portfolio risk must be monitored with periodic rebalancing, especially in regards to changes in interest rates
22.
interest rate risk: losses coming from unexpected changes in market interest rates (forward looking)
23.
interest rates, dropping, lower: Someone would want to buy a callable bond if they know _______ ______ are ________ so they can issue a new bond at a ______ rate. This is an example of the downside for bond holders
24.
linear: duration is a ______ approximation, whereas actual is not.
25.
low correlations compared to others: why would there be securities with high risk and low expected returns trading at higher values
?
26.
lower: which correlation is better- higher or lower
27.
lower duration: higher coupon rates means _______
28.
lower, higher: According to bond management theory, if 'i' goes up, then duration should go ____. Conversely, if 'i' goes down, then duration should go ____
29.
Macaulay's Duration: the price elasticity with respect to interest rates. It measures the interest rate sensitivity and the equally weighted average maturity of the security
30.
N(N-1)/2: how do you calculate the number of correlations
31.
negative: short positions have a _____ weight. This allows you to provide a portfolio with more than 100%
32.
No, only hedges against risk: Does diversification determine and correlate with expected returns?
33.
only one security: you willl have high variance and high risk when you invest in
34.
portfolio return: value weighted - average of individual security returns
35.
portfolios: are efficient frontiers portfolios or individual assets
36.
price risk: risk that a security hasn't matured at date of need and must be sold
37.
put options: which securities have negative correlations
38.
ratings: o Investment grade- AAA,AA,A,BBB or Aaa, Aa, A, Baa
o Speculative Grade- BB & Lower or Ba & lower
o C - Missed PMT's
o D- basically in default
39.
realized compound yield: aka HPR, depends on reinvestment income earned, may be more than or less than YTM or YTC
40.
reinvestment risk: risk of cash flow before date of need that must be reinvested
41.
short, option: callable bonds would be equivalent to having a ____ position in an ____
42.
sinking fund: Avoids large balloon payments by paying larger chunks throughout the life, all future debt is subordinate, protects on risk/default
o Many restrictions- dividends, collateral, etc
o Most Common- Subordinated Debentures
o Least Common- Mortgages
43.
sources of lost value for interest rate risk: change in discount rate (inverse relationship), contractual features (floating rate), and embedded options (call feature)
44.
stop diversifying: what do you do when the marginal costs exceeds the marginal benefit
45.
systematic risk: this type of risk cannot be diversified
46.
systematic risk: type of risk known as the horizontal line that the risk of the portfolio gets closer to as you diversify more
47.
that it is random: what is the common misconception made in diversification
48.
transaction costs: what are the only costs associated with diversification
49.
treasuries, junk bonds: YTM is great for ____, but terrible for ____
50.
ways to counteract changes in i: hedging through the use of derivatives, bogus strategies, and substitution swap
51.
yield to call: What the investor will earn if the bond is called as soon as the issuer is legally able to. Actual decision is made by issuer
