Econ 104: To prepare for exam 2 Reading about retirement plans: Primary tax differences between Traditional IRA/401-K and Roth IRA, be able to describe. Rollover IRAs, when and why use them? (For the small entrepreneur) What is a solo 401-K? (Bond HW): The questions are in the homework. Aruba HW: What general investment strategy is reflected in the Aruba Model? What does PEY and UOY measure? (Do not need to memorize formula). What currently seem to be reasonable thresholds for PEY and OUY based upon what you did? Purple terms - represented in matching or T/F or MC questions. Definition of put and call (what rights are extended)? Elementary – how to calculate the premium on an OTM call. continued Remember the simple little questions in the easy first options HW. How to hedge a long stock position with options (question would be based upon example – index ETFs like DIA typically used). What is time decay and what impact does it and volatility have upon option prices and premiums? Put/call buying and writing strategies – know how and why you do each of these, including what must happen for you to make money - again question may come from example: Buying DITM index ETF calls Straddles Collars Writing covered calls Fundamental – what effectively determines the value of all yield-bearing financial assets continued Classification of Treasury securities Four fundamental types of risk, which mostly impacts Treasuries and why, which impacts CBNs and why? Economic reason why bond values and yields move inversely. Everything about Dutch Auctions (how they work). Distinction between coupon yield, discount, current yield, and yield-to-maturity (also called ask yield). What is TLT and the role played by TLT in monitoring contemporary policy? Interpreting the data in the Corporate Yield Spread rating slide. What happens to AAA, BBB, CCC and UST spreads in time of trouble? New material in 2012: (From the S&P material) The role of time for evaluating default risk, especially for non-investment grade YBFAs. Explain S&P’s conceptual description of the impact of economic risk upon default rates. continued Formulas: By memory, discount yield (for bills – formulas 1-4, chap 8) and the current yield for notes and bonds (see lecture). For the "final formula" (chap 8 formula 23) .. do not need to memorize the formula but be able to logically explain its structure (including what the final term is used for). Why the yield curve normally has positive slope TOPICAL AND POLICY ISSUES: What FRS is doing with QE3 and Op twist What effect has Op Twist had upon the yield curve? What is flight to quality and how does it affect bond prices, yields, TLT and the relevance of maturity dates to this? Why your teacher warns against being in long-term Treasuries right how. Note: We will return to policy issues in the final. I am not going to ask about the “Four competing influences” slide in this exam but will in the final. This will not be on the exam: No question on TIPS or STRIPs Although relevant, nothing (on this exam) on Greek Debt crisis and European sovereign debt problem (3 final slides in last lecture) [For first time ever] Will not ask about the different tax features of different YBFAs. It is important, but also easy to look up. Nothing about Commercial Paper or REPOs or MMFAs in general except how MMFAs are priced (by discount only). [Please keep in mind that MMFAs are important and an MMFA mutual fund is likely to be in your retirement account – it is just that they are simple – just think of the best of them as collections of short-term US Treasury bills]. Nothing on munis and their tax features.