Investment Tools and Concepts Flashcards

Which type of analysis focuses on a company's financial statements, competitive position, and economic environment to determine intrinsic value?

Answer: Fundamental analysis

Fundamental analysis evaluates intrinsic value using financial data, industry dynamics, and macroeconomic factors.

An investor wants to lock in a borrowing rate for a future loan. The most appropriate derivative instrument is:

Answer: A long forward rate agreement (FRA)

A long FRA fixes the borrowing rate for a future period, protecting against rising interest rates.

Which of the following best describes 'duration matching' as an immunization strategy?

Answer: Matching the portfolio's Macaulay duration to the investment horizon

Duration matching sets the portfolio's Macaulay duration equal to the investment horizon, neutralizing interest rate risk.

If a portfolio's beta is 1.5 and the market rises by 4%, the portfolio's expected return increase (from CAPM) is:

Answer: 6%

Portfolio expected excess return = beta × market excess return = 1.5 × 4% = 6%.

The term 'liquidity premium' in the context of bond yields refers to compensation for:

Answer: The difficulty of selling the bond quickly at fair value

The liquidity premium compensates investors for bonds that may be difficult to sell quickly without price concession.

Which valuation multiple is most useful when comparing companies with different capital structures?

Answer: EV/EBITDA

EV/EBITDA is capital-structure neutral because it uses enterprise value and earnings before interest, making leverage differences irrelevant.

A swap in which one party pays a fixed interest rate and receives a floating rate is called a:

Answer: Plain vanilla interest rate swap

A plain vanilla interest rate swap involves exchanging fixed-rate payments for floating-rate payments on a notional principal.