A newly issued 20-year-maturity, zero-coupon bond is issued with a yield to maturity of 8% and face value $1,000. Find the imputed interest income in the first, second, and last years of the bond’s life.
> A supplier of branded kitchen appliances that sells to the domestic market is considering offering its equipment and tools not as products but as ‘a culinary lifestyle’. To help customers experience this lifestyle, it is considering establishing a networ
> Nespresso has been described as ‘Starbucks without the drive’. It supplies coffee machines that brew coffee from capsules, or pods, for home or professional use. The company is an autonomous globally managed business within the Nestlé Group. With corpora
> Consider three services: first, a business servicing heating, ventilation and air-conditioning facilities; second, an emergency plumbing service; and third, a disaster emergency charity. Again, using Figure 1.3, how does each service fit on the IHIP scal
> Why is phase 2 of the development looking more difficult? What could have been done to reduce potential problems?
> What problems does Peter Greenwood face?
> Although cost and revenue estimates of each proposal are not yet available, which one do you favor?
> What are the broad advantages and disadvantages of each proposal?
> In particular, what recommendations would you make about unbundling the complimentary meals service on long-haul economy?
> If you were Peter Greenwood, what would you say to the Board?
> Many services require their front-line staff to adopt very prescriptive dress standards. What factors should be taken into account when deciding on what is considered appropriate clothing and appearance for the following services: (a) Airline cabin crew
> ‘Happy employees mean happy customers’ is at the core of the service–profit chain. How do you think that idea applies to, (a) A performance of an opera at a grand opera house. (b) Heart surgery?
> Re-read the case example ‘Caring for your players’. What do you think are the main pressures on professional sportspeople that someone in a sports-related service, such as Sara at Scarlet’s, has to deal with?
> When services talk about ‘customer training’, what do you think that they see as the main advantages?
> Re-read the case example, ‘It’s not part of the job – Co-op’s “Safer Colleagues, Safer Communities” campaign’. In addition to technological solutions such as Smart Water, what else could such retailers do to protect their front-line staff from abuse?
> How would you position each stakeholder group on Dale’s power–interest grid?
> Beantown Housing Association is a social landlord charity that owns and manages around 6,000 properties in the south of the UK. Employing around 650 people, it is a quasi-government body that provides housing services in areas of social deprivation. A hi
> A problem in large service organizations is that knowledge is often ‘soloed’ in regions, or functional departments. Internal practice benchmarking can be difficult because experience is inaccessible to many employees. This situation can be a real headach
> Re-read the ‘Acuity and House Mark’ case example earlier in the chapter. The example refers to ‘benchmarking clubs’. The benefits of these clubs are mostly obvious, but what might be the ‘dis- benefits’? How would you counter these disbenefits?
> Viola Media, run by Violet Lesseps, had developed a specialization in videography for festivals, arts and outdoor events when it won a contract to provide videography support for the production of online Masters Degrees at a UK university. Violet knew th
> Haven is a charity providing refuge and safe houses for parents and children who have been subject to domestic abuse. The charity is based in the south-west of England. Most of the revenue funding for the charity comes from Haven’s 14 charity shops. One
> Select a process you are involved in, such as ‘being taught’, ‘cooking a meal’, ‘cleaning’, etc. What might be the benefits of benchmarking this process and with whom could you compare your performance? How would this lead to the benefits identified?
> What would be the impact of offering a guarantee on the service that you personally provide?
> Flodden is a leading international retailer selling clothing and accessories, with stores around the world. The countries from which it sources its products include Sri Lanka, Bangladesh, India and Vietnam. It was shocked when a British newspaper reporte
> Viz2XHealth was a business-to-business healthcare IT company based in Dubai, serving major hospitals in the Gulf States. Its system allowed health staff to access and interrogate multiple systems from one, user-friendly interface. But it had a problem. E
> How might public service guarantees (service guarantees issued by public, rather than private, organizations) need to differ from normal commercial ones?
> Who are the main stakeholders in the development of this service, and what is their interest in it?
> Where is the bottleneck (if any) in the process?
> Here is some price information on Marabel, Inc.: a. You have placed a limit order to sell at $68. What are you telling your broker? b. Given market prices, will your order be executed?
> What are some different components of the effective costs of buying or selling shares of stock?
> You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. a. How much in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of the value of the
> You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. a. What will be
> Consider the following limit order book for Fin Trade stock. The last trade in the stock occurred at a price of $50 a. If a market buy order for 100 shares comes in, at what price will it be filled? b. At what price would the next market buy order be fi
> Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams from the previous question. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 t
> Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8% a. What is the margin in Dee’s account when she first
> DRK, Inc., has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44. a. What is your best guess as to t
> Call one full-service broker and one discount broker and find out the transaction costs of implementing the following strategies: a. Buying 100 shares of IBM now and selling them six months from now. b. Investing an equivalent amount in six-month at-th
> Are the following statements true or false? If false, correct them. a. An investor who wishes to sell shares immediately should ask his or her broker to enter a limit order. b. The ask price is less than the bid price. c. An issue of additional shares
> Use the following scenario analysis for stocks X and Y to answer below the CFA Question: Assume that of your $10,000 portfolio, you invest $9,000 in stock X and $1,000 in stock Y. What is the expected return on your portfolio?
> Where would an illiquid security in a developing economy most likely trade? a. Broker markets. b. Electronic crossing networks. c. Electronic limit-order markets.
> Are the following statements true or false? If false, correct them. a. Market orders entail greater price uncertainty than limit orders. b. Market orders entail greater time-of-execution uncertainty than limit orders.
> What is the difference between an IPO (initial public offering) and an SEO (seasoned equity offering)?
> Why are corporations more apt to hold preferred stock than other potential investors?
> How does a municipal revenue bond differ from a general obligation bond? Which would you expect to have a lower yield to maturity?
> What is the LIBOR rate? The federal funds rate?
> Why are high-tax-bracket investors more inclined to invest in municipal bonds than are low-bracket investors?
> Describe alternative ways that an investor may add positions in international equity to his or her portfolio.
> Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years, and have a 7% annual coupon rate paid semiannually. a. Calculate the: Current yield. Yield to maturity. Horizon yield (also called realized compound return) for a
> a. Explain the likely impact on the offering yield of adding a call feature to a proposed bond issue. b. Explain the likely impact on the bond’s expected life of adding a call feature to a proposed bond issue. c. Cite one advantage and one disadvantage
> Use the following scenario analysis for stocks X and Y to answer below the CFA Question: What are the standard deviations of returns on stocks X and Y?
> A convertible bond has the following features. What is its conversion premium?
> A 30-year maturity, 6% coupon bond paying coupons semiannually is callable in five years at a call price of $1,100. The bond currently sells at a yield to maturity of 5% (2.5% per half-year). a. What is the yield to call? b. What is the yield to call i
> On May 30, 2021, Janice Kerr is considering the newly issued 10-year AAA corporate bonds shown in the following exhibit: a. Suppose that market interest rates decline by 100 basis points (i.e., 1%). Contrast the effect of this decline on the price of eac
> Assume that two firms issue bonds with the following characteristics. Both bonds are issued at par. Ignoring credit quality, identify four features of these issues that might account for the lower coupon on the ABC debt. Explain.
> The following multiple-choice problems are based on questions that appeared in past CFA examinations. a. A bond with a call feature: attractive because the immediate receipt of principal plus premium produces a high return. Is more apt to be called whe
> Suppose that today’s date is April 15. A bond with a 10% coupon paid semiannually every January 15 and July 15 is quoted as selling at an ask price of 101.25. If you buy the bond from a dealer today, what price will you pay for it?
> Claire Pierce comments on her life circumstances and investment outlook: I must support my parents who live overseas on Pogo Island. The Pogo Island economy has grown rapidly over the past two years with minimal inflation, and consensus forecasts call fo
> A two-year bond with par value $1,000 making annual coupon payments of $100 is priced at $1,000. What is the yield to maturity of the bond? What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 8
> During an interview with her investment adviser, a retired investor made the following two statements: a. “I have been very pleased with the returns I’ve earned on Petrie stock over the past two years, and I am certain that it will be a superior perform
> Use the following scenario analysis for stocks X and Y to answer below the CFA Question: What are the expected returns for stocks X and Y?
> A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the ori
> Louise and Christopher Maclin live in London, United Kingdom, and currently rent an apartment in the metropolitan area. During an initial discussion of the Marlins’ financial plans, Christopher Maclin makes the following statements to the Maclins’ financ
> Now suppose the bond in the previous question is selling for 102. a. What is the bond’s yield to maturity? b. What would the yield to maturity be at a price of 102 if the bond paid its coupons only once per year?
> Monty Frost’s tax-deferred retirement account is invested entirely in equity securities. Because the international portion of his portfolio has performed poorly in the past, he has reduced his international equity exposure to 2%. Frost’s investment advis
> Consider the following $1,000 par value zero-coupon bonds: According to the expectations hypothesis, what is the market’s expectation of the yield curve one year from now? Specifically, what are the expected values of next yearâ&#
> Don Sampson begins a meeting with his financial adviser by outlining his investment philosophy as shown below: Select the statement from the table above that best illustrates each of the following behavioral finance concepts. Justify your selection. i.
> The following table contains spot rates and forward rates for three years. However, the labels got mixed up. Can you identify which row of the interest rates represents spot rates and which one the forward rates?
> Your investment client asks for information concerning the benefits of active portfolio management. She is particularly interested in the question of whether active managers can be expected to consistently exploit inefficiencies in the capital markets to
> The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity on two-year zero-coupon bonds is 9%. a. What is the forward rate of interest for the second year? b. If you believe in the expectations hypothesis, what is your best guess
> Growth and value can be defined in several ways. Growth usually conveys the idea of a portfolio emphasizing or including only companies believed to possess above-average future rates of per-share earnings growth. Low current yield, high price-to-book rat
> Use the following data in answering below CFA Question; Suppose investor “satisfaction” with a portfolio increases with expected return and decreases with variance according to the following “utility&
> The yield curve for default-free zero-coupon bonds is currently as follows: a. What are the implied one-year forward rates? b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will
> a. Briefly explain the concept of the efficient market hypothesis (EMH) and each of its three forms— weak, semistrong, and strong—and briefly discuss the degree to which existing empirical evidence supports each of the three forms of the EMH. b. Briefly
> Under the liquidity preference theory, if inflation is expected to be falling over the next few years, long-term interest rates will be higher than short-term rates. True/false/uncertain? Why?
> You are a portfolio manager meeting a client. During the conversation that follows your formal review of her account, your client asks the following question: My grandson, who is studying investments, tells me that one of the best ways to make money in t
> Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and
> Some scholars contend that professional managers are incapable of outperforming the market. Others come to an opposite conclusion. Compare and contrast the assumptions about the stock market that support (a) passive portfolio management and (b) active
> The yield curve is upward-sloping. Can you conclude that investors expect short-term interest rates to rise? Why or why not?
> A market anomaly refers to: a. An exogenous shock to the market that is sharp but not persistent. b. A price or volume event that is inconsistent with historical price or volume trends. c. A trading or pricing structure that interferes with efficient
> Under the expectations hypothesis, if the yield curve is upward-sloping, the market must expect an increase in short-term interest rates. True/false/uncertain? Why?
> A “random walk” occurs when: a. Stock price changes are random but predictable. b. Stock prices respond slowly to both new and old information. c. Future price changes are uncorrelated with past price changes. d. Past information is useful in predict
> Use the following data in answering below CFA Question; Suppose investor “satisfaction” with a portfolio increases with expected return and decreases with variance according to the following “utility&
> Fencer issues two bonds with 20-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep discount with a coupon rate of 4% and a price of $580 to yield 8.4%. The second bond is issued at par value with a coupon rate of 8.75%
> Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect: a. An abnormal price change at the announcement. b. An abnormal price increase before the ann
> A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $800. What will be an investor’s taxable income from the bond over the coming year? The bond will not be sold at the end of the year. The bo
> The semistrong form of the efficient market hypothesis asserts that stock prices: a. Fully reflect all historical price information. b. Fully reflect all publicly available information. c. Fully reflect all relevant information including insider info
> Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 50%. Portfolios A and B are both well diversified. What is the expected return&
> Briefly explain whether investors should expect a higher return from holding portfolio A versus portfolio B under capital asset pricing theory (CAPM). Assume that both portfolios are fully diversified.
> Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 4% and IR 6%. A stock with a beta of 1 on IP and 0.4 on IR currently is expected to provide a rate of
> When plotting portfolio R relative to the capital market line, portfolio R lies: a. On the CML. b. Below the CML. c. Above the CML. d. Insufficient data given
> Two bonds were issued five years ago, with terms given in the following table: a. Why is the price range greater for the 9% coupon bond than the floating-rate bond? b. What factors could explain why the floating-rate bond is not always sold at par value
> When plotting portfolio R on the preceding table relative to the SML, portfolio R lies: a. On the SML. b. Below the SML. c. Above the SML. d. Insufficient data given.
> Use the following data in answering below CFA Question; Suppose investor “satisfaction” with a portfolio increases with expected return and decreases with variance according to the following “utility&
> If the APT is to be a useful theory in practice, the number of systematic factors in the economy must be small. Why?
> Suppose you observe the investment performance of 350 portfolio managers for five years and rank them by investment returns during each year. After five years, you find that 11 of the funds have investment returns that place the fund in the top half of t
> According to CAPM, the expected rate of return of a portfolio with a beta of 1 and an alpha of 0 is: a. Between rM and rf. b. The risk-free rate, rf. c. β(rM − rf). d. The expected return on the market, rM.
> Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 30%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3%
> Why would it be challenging to properly compare the performance of an equity fund to a fixed income mutual fund?
> How does investment banking differ from commercial banking?
> What are the differences between real and financial assets?
> The security market line depicts: a. A security’s expected return as a function of its systematic risk. b. The market portfolio as the optimal portfolio of risky securities. c. The relationship between a security’s return and the return on an index.
