Financial Investment Flashcards

An investor holds a bond with a 5% coupon rate when market interest rates rise to 7%. What happens to the bond's market price?

Answer: It falls below par value

Bond prices move inversely to interest rates; when rates rise above the coupon rate, the bond becomes less attractive and trades at a discount.

Which metric measures the percentage of a company's earnings paid out as dividends?

Answer: Payout ratio

The payout ratio is calculated as dividends per share divided by earnings per share, expressed as a percentage.

A mutual fund with a 12b-1 fee primarily uses that fee to cover:

Answer: Marketing and distribution costs

12b-1 fees are SEC-authorized charges used to pay for a fund's marketing, advertising, and distribution expenses.

What does the Sharpe ratio measure?

Answer: Risk-adjusted return per unit of total risk

The Sharpe ratio divides a portfolio's excess return over the risk-free rate by its standard deviation to measure return per unit of risk.

An investor in the 32% marginal tax bracket compares a municipal bond yielding 3.5% to a taxable bond. What taxable equivalent yield does the muni represent?

Answer: 5.15%

Taxable equivalent yield = muni yield / (1 - tax rate) = 3.5% / (1 - 0.32) = 5.15%.

Which investment strategy involves buying securities in proportion to their market-cap weighting in an index?

Answer: Passive indexing

Passive indexing replicates an index by holding securities in the same proportions as their market-cap weights, minimizing tracking error and costs.

What is the primary purpose of dollar-cost averaging as an investment strategy?

Answer: To reduce the average cost per share by investing fixed amounts regularly

Dollar-cost averaging invests a fixed dollar amount at regular intervals, automatically buying more shares when prices are low and fewer when prices are high.