Question: Assume you have a one-year investment

> 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 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 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

> 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.

> What are agency problems? What are some approaches to solving them?

> What is the difference between asset allocation and security selection?

> What is the difference between a primary asset and a derivative asset?

> What are the differences between equity and fixed-income securities?

> What are the major components of the money market?

> What features of money market securities distinguish them from other fixed-income securities?

> What would happen to the divisor of the Dow Jones Industrial Average if FedEx, with a current price of around $115 per share, replaced Intel (with a current price of about $55 per share)?

> What problems would confront a mutual fund trying to create an index fund tied to an equally weighted index of a broad stock market?

> Using the data in the previous problem, calculate the first-period rates of return on the following indexes of the three stocks: a. A market value–weighted index b. An equally weighted index

> Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average?

> Assume both portfolios A and B are well diversified, that E(rA) = 14% and E(rB) = 14.8%. If the economy has only one factor, and βA = 1 while βB = 1.1, what must be the risk-free rate?

> Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits twofor-one in the last period. a. Calculate the rate of return on a price-weighted index of the three stocks f

> Turn to Figure 2.8 and look at the listing for Home Depot. a. What was the firm’s closing price yesterday? b. How many shares can you buy for $5,000? c. What would be your annual dividend income from those shares? d. What must be Home Depot’s earning

> Turn back to Figure 2.3 and look at the Treasury bond maturing in February 2039. a. How much would you have to pay to purchase one of these bonds? b. What is its coupon rate? c. What is the current yield (i.e., coupon income as a fraction of bond pric

> Find the equivalent taxable yield of the municipal bond in Problem 14 for tax brackets of: a. Zero b. 10% c. 20% d. 30%

> An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?

> Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after-tax yield if your combined tax bracket is? a. Zero b. 10% c. 20% d. 30%

> A municipal bond carries a coupon rate of 2.25% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% combined tax bracket?

> Why are money market securities often called “cash equivalents”?

> Which of the following correctly describes a repurchase agreement? a. The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price. b. The sale of a security with a commitment to repurchase

> What is meant by limited liability?

> You expect a tax-free municipal bond portfolio to provide a rate of return of 4%. Management fees of the fund are 0.6%. a. What fraction of portfolio income is given up to fees? b. If the management fees for an equity fund also are 0.6%, but you expect

> What are the key differences between common stock, preferred stock, and corporate bonds?

> What is the difference between a call option and a long position in a futures contract?

> What is the difference between a put option and a short position in a futures contract?

> Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at yearend at $40, and receives a $4 year-end dividend. The firm is in the 21% tax bracket.