Final Exam Study Guide

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Final Exam Study Guide

• What do you need to know for the FINAL exam?

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OLD NEW STUFF!

• OLD
• Chapters 3,4,5, 6.
• NEW
• Chapters 9,11,12,21.
• How to select a Mutual Fund

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Some preparatory hints

• For all the Chapters make sure you understand the
  relevant key terms provided at the beginning of
  the chapter.
• Make use of the study guide to the text (required
  material as stated on the syllabus).
• 60-70 multiple choice and 30-40 open ended.
• Open ended questions

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OLD STUFFThe Marketplace Chapter 3

• Explain the role of capital markets the
  economic, continuous pricing and fair pricing
  functions.
• Distinguish between primary and secondary
  markets. Examples of exchanges, both national and
  regional.
• Understand trading systems - What is a
  specialist? Super DOT and NYSE Direct, market
  makers. Explain the importance of Circuit
  Breakers and Trading Curbs.

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The MarketplaceContd

• Understand the Over-the Counter Market and how
  different NASDAQ is today. NASDAQ National Market
  and Small-Cap Market. Over-the Counter Bulletin
  Board (OTCBB), Pink sheet Stocks, Third and
  Fourth markets.
• The Securities and Exchange Commission (SEC) as
  the primary securities markets watchdog. Also,
  the dilemma between what is illegal and what is
  unethical.

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Chapter 4

• Bonds are identified by three features issuer,
  coupon rate, and maturity. Bond cash flows
  annuities and zero coupon bonds only.
  Distinguish between Convertible and exchangeable
  bonds.
• Understand par value (face value), coupon rate,
  yield to maturity and present value valuation of
  annuity bonds. Who are the typical issuers of
  bonds?

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Chapter 4 contd

• Distinguish between unsecured and secured debt.
  Compute current yield and accrued interest (refer
  to examples performed in class).
• Understand all different types of bond risks
  price risks (default and interest rate risk) and
  convenience risks (call risk and re-investment
  risk only)

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Chapter 5

• Distinguish common stock from preferred stock,
  Explain the three different rights that a common
  stock holder has an owner is a company.
• Dividends specifically stock and cash dividends.
  Special distributions i.e. Spin-offs and
  split-offs. Understand the dividend payment
  procedure really well (refer to Fig 5.6 on page
  98).

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Chapter 5 contd

• Understand stock splits (forward and reverse
  splits), their impact on the number of shares
  owned and why they do not matter. How
  different/similar are stock splits and stock
  dividends? (See page 102).
• Understand all the different categories of stocks
  and their key characteristics.

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You do not need to know the following

• In chapter 4 Inflation-Indexed Treasury Bonds,
  Registration of bonds, The financial page
  listing, consol, measuring yield to maturity,
  computing the realized compound yield and
  marketability risk.

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You do not need to know the following

• Do not worry about the material on The
  Financial Page Listing as it appears in chapters
  4 and 5

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Chapter 6

• Trading in stocks - Distinguish between market
  orders, limit orders and stop orders, Remember
  that stock and bond transactions settle three
  business days after the trade date. Understand
  the role of a specialist on an exchange.

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Chapter 6 contd

• Types of Accounts cash and margin accounts.
  Using the T accounts is very helpful, helps you
  figure out the buying power, how much cash
  withdrawal an investor can take out and figuring
  out when margin calls occur.
• Recall Fed regulation T initial margin and
  maintenance margin requirements.

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Chapter 6 contd

• The concept of short selling understand the
  mechanics. What is a short sale against the box?
  Read over trading fees and get a general idea of
  commissions.

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NEW!

• Chapter 9 Technical Analysis
• What is Technical Analysis? The Underlying logic
  and role of the human element, how does the
  analysis work?
• Contrast with fundamental analysis.
• Charting types of charts, basic chart
  presentation, I.e. support and resistance levels,
  congestion, breakout, trends candlestick charts,
  moving averages.

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Technical analysis contd

• Market Indicators and their interpretation
• Short interest
• Margin buying
• Cash held by mutual funds
• Confidence Index
• Advance decline line
• Relative strength ratio
• Super bowl Indicator
• Hemline indicator

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Technical analysis contd

• The Dow Theory
• The primary trend.
• The secondary trend.
• Daily fluctuations in the stock.

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Behavioral Finance Ch. 11

• What is behavioral finance?
• Why is it important to understand the psychology
  of investing? Explain.
• Learn some psychological biases that affect
  decision making
• Understand how these biases affect investment
  decisions
• See how these decisions reduce your wealth
• Learn to recognize them and avoid them in your
  life.
• J. Nofsinger

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Behavioral Finance

• Established Behaviors (Be able to identify a
  behavioral tendency as resulting from )
• Representativeness Heuristic
• Loss Aversion
• Fear of Regret
• Myopic Loss Aversion
• Herding
• Anchoring
• Illusion of Control
• Prospect Theory

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Behavioral Finance

• Established Behaviors continued
• Mental Accounting
• Asset Segregation
• Hindsight Bias
• Overconfidence
• Framing
• Availability Heuristic
• Illusion of Truth
• Biased Expectations
• Reference Dependence

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Investment InformationCh. 12

• What are the different investment needs that
  individuals have?
• Distinguish categories of users of investment
  information.
• Characteristics of good information.
• Justify the need to start investing early.
• Where do you need to start and why?

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Investment Information

• Research Philosophy
• Know Thyself
• Screening
• Resources at the Library
• Standard Poors Publications
• Mergent / Moodys Publications
• Company Information
• Annual Reports
• SEC Filings
• The Prospectus

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Investment Information

• Investment Letters
• Advisory Letters
• The Popular Press
• Computer / Internet Services
• Screening Services
• Investment Seminars
• Brokerage Firms
• Bank Trust Departments
• Employee Relation Programs
• Exchange Seminars

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Investment CompaniesChapter 21

• What is an investment company?
• Distinguish an open-end from a closed-end
  investment company.
• What is the rational for mutual fund company?

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Investment Companies

• Some common options are
• - automatic reinvestment option
• - automatic monthly investment plan
• - limit order option
• - periodic payment option
• - telephone redemption option
• - switching option

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Investment Companies

• Types of fees
• Load brokerage commission/sales charge
• Expense ratio for management compensation and
  general office expenses
• 12b-1 Fee advertising, distribution annual
  reports and prospectus (annual fee)
• Miscellaneous e.g. switching option usage over
  maximum allowable
• Do no-load funds charge higher expense ratios?
  What does the evidence say?

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Investment Companies

• The Effective Rate
• Example Suppose you invest 1,000 but the
  company charges a front load of 5.5. Your net
  investment would be 945 i.e. ((1,000(1-0.055)).
  
• Effective rate 55/945 5.82
• This means the investment has to return 5.82
  before taxes just to break even!
• At a tax rate of 28, the investment must return
  at least 5.82/1-.28 or 8.083 to break even
  after taxes.

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The Investment Company Industry Fees

• The annual 12b-1 fees permit the fund manager to
  pass certain advertising costs on to the
  accountholders.
• Suppose you invest 20,000 for 20 years and pay
  0.75 in annual 12b-1 fees, how much would you
  have paid in dollars if your average annual
  return were 10.
• Ending value
• Without fees 20,000(1.10)20 134,550
• With fees 20,000(1.0925)20 117,343
• Fees 134,550 - 117,343 17,207 (-12.8)

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Selecting A Mutual Fund

• With a mutual fund, return comes from the change
  in net asset value, capital gains distributions,
  and income distributions.

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How to Select a Mutual Fund.

• How important is past performance?
• Elaborate each of the basic steps
• What are your financial needs?
• Examine a fund company
• Consider Funds costs
• Consider its volatility
• Examine Investment returns
• Build a diversified portfolio
• Review Funds policies.

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Investment Concepts

• Indexing Some funds seek to mirror the
  performance of a market index such as the SP 500
  or the Dow Jones Industrial Average.
• Dollar cost averaging The idea is to invest a
  fixed amount on a regular interval into the same
  security, regardless of current market
  conditions.