Briefly explain the process of top-down analysis.
> A bond matures in 25 years but is callable in 10 years at 120. The call premium decreases by 2 percent of par per year. If the bond is called in 14 years, how much will you receive?
> A convertible bond has a $1,000 face value and a conversion ratio of 36. If the stock price is $42, what is the conversion value?
> A company just sold a convertible bond at a par value of $1,000. If the conversion price is $58, what is the conversion ratio?
> A taxable issue yields 6.4 percent, and a similar municipal issue yields 4.7 percent. What is the critical marginal tax rate?
> A taxable corporate issue yields 6.5 percent. For an investor in a 35 percent tax bracket, what is the equivalent after tax yield?
> Assume a municipal bond has 18 years until maturity and sells for $5,640. It has a coupon rate of 5.70 percent and it can be called in 10 years. What is the yield to call if the call price is 110 percent of par?
> She would like to compute the value of the corresponding put option for Option 2. Which of the following is closest to Ms. Barlow’s answer? a. $0.98 b. $1.41 c. $4.84
> A municipal bond with a coupon rate of 6.2 percent sells for $4,920 and has seven years until maturity. What is the yield to maturity of the bond?
> A municipal bond with a coupon rate of 2.7 percent has a yield to maturity of 3.9 percent. If the bond has 10 years to maturity, what is the price of the bond?
> A convertible bond has a $1,000 face value and a conversion ratio of 45. What is the conversion price?
> Lemon Co. has net income of $520,000 and 75,000 shares of stock. If the company pays a dividend of $1.28 per share, what are the additions to retained earnings?
> A STRIPS traded on November 1, 2016, matures in 12 years on November 1, 2028. The quoted STRIPS price is 62.75. What is its yield to maturity?
> A STRIPS traded on May 1, 2016, matures in 18 years on May 1, 2034. Assuming a 4.1 percent yield to maturity, what is the STRIPS price?
> At the end of the year, Smashville stock sold for $48 per share. Calculate the price-book ratio, price-earnings ratio, and price-cash flow ratio.
> During the year, Smashville, Inc., had 17,000 shares of stock outstanding and depreciation expense of $15,000. Calculate the book value per share, earnings per share, and cash flow per share.
> Given the information in Problems 1 and 2, calculate the gross margin, the operating margin, return on assets, and return on equity for Smashville, Inc. Data from Problems 1: Given the following information for Smashville, Inc., construct an income sta
> A 30-year mortgage has an annual interest rate of 6.1 percent and a loan amount of $270,000. What is the remaining balance at the 180th payment?
> Ms. Barlow notices that the stock in the table above does not pay dividends. If the stock begins to pay a dividend, how will the price of the call option be affected? a. It will decrease. b. It will increase. c. It will not change.
> A 20-year mortgage has an annual interest rate of 4.9 percent and a loan amount of $250,000. What are the interest and principal for the 120th payment?
> A 30-year mortgage has an annual interest rate of 5.6 percent and a loan amount of $210,000. What are the monthly mortgage payments?
> The stock of Lead Zeppelin, a metal manufacturer, currently sells for $68 and has an annual standard deviation of 41 percent. The risk-free rate is 6 percent. What is the value of a put option with a strike price of $70 and 45 days to expiration?
> The stock of Nugents Nougats currently sells for $44 and has an annual standard deviation of 45 percent. The stock has a dividend yield of 2.5 percent and the risk-free rate is 4.1 percent. What is the value of a call option on the stock with a strike pr
> A stock is currently priced at $63 and has an annual standard deviation of 43 percent. The dividend yield of the stock is 2 percent and the risk-free rate is 4 percent. What is the value of a call option on the stock with a strike price of $60 and 45 day
> What is the value of a call option if the underlying stock price is $81, the strike price is $90, the underlying stock volatility is 50 percent, and the risk-free rate is 3 percent? Assume the option has 60 days to expiration.
> What is the value of a call option if the underlying stock price is $84, the strike price is $80, the underlying stock volatility is 42 percent, and the risk-free rate is 4 percent? Assume the option has 135 days to expiration.
> Mr. Blanda tells Mr. Houston to recalculate the SMM for Pool 3 based on 200 PSA rather than the current 100 PSA. The revised SMM is closest to a. 0.36 percent b. 0.55 percent c. 0.97 percent
> Consider a 30-year, $230,000 mortgage with a rate of 6.90 percent. Five years into the mortgage, rates have fallen to 5.70 percent. Suppose the transaction cost of obtaining a new mortgage is $2,500. Should the homeowner refinance at the lower rate?
> Consider a 25-year, $350,000 mortgage with a rate of 7.25 percent. Ten years into the mortgage, rates have fallen to 5.4 percent. What would be the monthly saving to a homeowner from refinancing the outstanding mortgage balance at the lower rate?
> Consider a 30-year, $160,000 mortgage with a rate of 6 percent. Five years into the mortgage, rates have fallen to 5 percent. What would be the monthly saving to a homeowner from refinancing the outstanding mortgage balance at the lower rate?
> You create a butterfly spread using calls by buying a call at K1, buying a call at K3, and selling two calls at K2. All of the calls are on the same stock and have the same expiration date. Additionally, butterfly spreads assume that K2 = ½(K1 + K3). Cal
> You can also create a bull spread using put options. To do so, you buy a put and simultaneously sell a put at a higher strike price on the same stock with the same expiration. A put with a strike price of $20 is available for $0.45 and a put with a strik
> You create a bull spread using calls by buying a call and simultaneously selling a call on the same stock with the same expiration at a higher strike price. A call option with a strike price of $20 sells for $4.55 and a call with a strike price of $25 se
> Mr. Houston made a mistake in his research about the nature of mortgage loans. Which of the following statements regarding mortgage loans as compared to straight bonds is least accurate? a. Servicing fees on mortgage pools decline as the loan matures. b.
> A strangle is created by buying a put and buying a call on the same stock with a higher strike price and the same expiration. A put with a strike price of $100 sells for $6.75 and a call with a strike price of $110 sells for $8.60. Draw a graph showing t
> Suppose you buy one each SPX call option with strikes of 2000 and 2200 and write two SPX call options with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels of 1900, 1950, 2000, 2050, 2100, 2150, and 2200?
> Suppose you buy one SPX call option with a strike of 2100 and write one SPX put option with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000, 2050, 2100, 2150, and 2200?
> Suppose you buy one SPX put option with a strike of 2100 and write one SPX put option with a strike of 2125. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000, 2050, 2100, 2150, and 2200?
> Suppose you buy one SPX call option with a strike of 2125 and write one SPX call option with a strike of 2150. What are the payoffs at maturity to this position for S&P 500 Index levels of 2050, 2100, 2150, 2200, and 2250?
> You buy a straddle, which means you purchase a put and a call with the same strike price. The put price is $2.80 and the call price is $4.20. Assume the strike price is $75. What are the expiration date profits to this position for stock prices of $65, $
> You simultaneously write a put and buy a call, both with strike prices of $80, naked, i.e., without any position in the underlying stock. What are the expiration date payoffs to this position for stock prices of $70, $75, $80, $85, and $90?
> You simultaneously write a covered put and buy a protective call, both with strike prices of $80, on stock that you have shorted at $80. What are the expiration date payoffs to this position for stock prices of $70, $75, $80, $85, and $90?
> You buy a call with a strike price of $70 on stock that you have shorted at $70 (this is a “protective call”). What are the expiration date profits to this position for stock prices of $60, $65, $70, $75, and $80 if the call premium is $3.40?
> You write a put with a strike price of $60 on stock that you have shorted at $60 (this is a “covered put”). What are the expiration date profits to this position for stock prices of $50, $55, $60, $65, and $70 if the put premium is $1.80?
> Regarding conditional prepayment rates (CPRs) and single monthly mortality (SMM) rates, which of the following is most accurate? a. SMM is computed from the CPR to compute monthly prepayments. b. SMM is computed from the CPR to compute changes in loan ma
> She would like to compute the value of the corresponding put option for Option 1. Which of the following is closest to Ms. Barlow’s answer? a. $3.79 b. $3.94 c. $4.41
> Which one of the following propositions would be consistent with a supply-side view of fiscal policy? a. Higher marginal tax rates will help reduce the size of the budget deficit. b. A tax reduction will increase disposable income and spur economic growt
> Many health care companies depend on patents to sustain profits. In the context of Porter’s five forces, how would a patent expiration impact a health care firm?
> Why do you think that consumer sentiment is considered a leading economic indicator?
> Which sector would be more sensitive to the business cycle: industrials or health care?
> If you are a U.S. investor who believes the Australian dollar is going to appreciate, would that make you more or less likely to invest in Australian stocks?
> If the economy was in recession, what monetary policies might the Fed employ?
> What is the impact on a bond’s coupon rate from, a. A call feature? b. A put feature?
> What is a put bond? Is the put feature desirable from the investor’s perspective? The issuer’s?
> With regard to the call feature, what are call protection and the call premium? What typically happens to the call premium through time?
> You own stock in a company that has just initiated employee stock options. How do the employee stock options benefit you as a shareholder?
> What is the difference between a revenue bond and a general obligation bond?
> What are the key differences between T-bills and T-bonds?
> One thing the put-call parity equation tells us is that given any three of a stock, a call, a put, and a T-bill, the fourth can be synthesized or replicated using the other three. For example, how can we replicate a share of stock using a put, a call, an
> In the context of the standard cash flow statement, what is operating cash flow?
> Why do we say depreciation is a “noncash item”?
> What is the relationship between net income and earnings per share (EPS)?
> Which is larger, gross margin or operating margin? Can either be negative? Can both?
> In general, employee stock options cannot be sold to another party. How do you think this affects the value of an employee stock option compared to a market-traded option?
> What makes current assets and liabilities “current”? Are operating assets “current”?
> What is the difference between the “retained earnings” number on the income statement and that on the balance sheet?
> What is vesting in regard to employee stock options? Why would a company use a vesting schedule with employee stock options?
> You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What’s wrong here? Describe how you could take advantage of this mispricing if the option expi
> What is the intrinsic value of a put option? How do we interpret this value?
> What is the intrinsic value of a call option? How do we interpret this value?
> Buying a put option on a stock you own is sometimes called “stock price insurance.” Why?
> What is the impact of an increase in the volatility of the underlying stock on an option’s value? Explain.
> What are the 10K and 10Q reports? By whom are they filed? What do they contain? With whom are they filed? What is the easiest way to retrieve one?
> What are the six factors that determine an option’s price?
> Suppose you write 10 call option contracts with a $50 strike. The premium is $2.75. Evaluate your potential gains and losses at option expiration for stock prices of $40, $50, and $60.
> You can also create a butterfly spread using puts by buying a put at K1, buying a put at K3, and selling two puts at K2. All of the puts are on the same stock and have the same expiration date, and the assumption that K2 = ½(K1 + K3) still holds. Puts on
> In Problem 16, what is the single monthly mortality for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages? How do you interpret these numbers? Data from Problem 16: What are the conditional prepayment rates for seasoned 50 PSA, 200 PSA, and 400 PSA mortg
> What does an option’s delta tell us? Suppose a call option with a delta of 0.60 sells for $5.00. If the stock price rises by $1, what will happen to the call’s value?
> What are the conditional prepayment rates for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages if the 100 PSA benchmark is 3 percent per year? How do you interpret these numbers?
> Suppose you write 15 put option contracts with a $45 strike. The premium is $2.40. Evaluate your potential gains and losses at option expiration for stock prices of $35, $45, and $55.
> Immediately after establishing your put options hedge, volatility for LLL stock suddenly jumps to 45 percent. This changes the number of put options required to hedge your employee stock options. How many put option contracts are now required?
> Suppose you hold LLL employee stock options representing options to buy 10,000 shares of LLL stock. You wish to hedge your position by buying put options with three-month expirations and a $22.50 strike price. How many put option contracts are required?
> In Problem 13, what would the total return be if the ending exchange rate were 88.65 ¥ / $? What does your answer tell you about the importance of currency fluctuations? Data from Problem 13: Suppose you are a U.S. investor who is planning to invest $1
> Based on Problems 14 and 15, what is the projected stock price assuming a 10 percent increase in sales? Kiwi Fruit Company Balance Sheet Cash and equivalents ……………………………………$ 570 Operating assets ………………………………………………..650 Property, plant, and equipment. …
> Following the examples in the chapter, prepare a pro forma income statement, balance sheet, and cash flow statement for Kiwi Fruit assuming a 10 percent increase in sales. Kiwi Fruit Company Balance Sheet Cash and equivalents ……………………………………$ 570 Operat
> Calculate the price-book, price-earnings, and price-cash flow ratios for Kiwi Fruit. Kiwi Fruit Company Balance Sheet Cash and equivalents ……………………………………$ 570 Operating assets ………………………………………………..650 Property, plant, and equipment. …………………….2,700 Othe
> One year has passed and Sands’s common equity price has increased to $58 per share. Name the two components of the convertible bond’s value. Indicate whether the value of each component should increase, stay the same, or decrease in response to the incre
> Determine whether the value of a callable convertible bond will increase, decrease, or remain unchanged if there is an increase in stock price volatility. What if there is an increase in interest rate volatility? Justify each of your responses.
> What is the time value of a call option? Of a put option? What happens to the time value of a call option as the maturity increases? What about a put option?
> In Problem 19, suppose the firm was operating at only 90 percent capacity in 2017. What is EFN now? Data from Problem 19: The most recent financial statements for Moose Tours, Inc., follow. Sales for 2017 are projected to grow by 15 percent. Interest e
> The most recent financial statements for Moose Tours, Inc., follow. Sales for 2017 are projected to grow by 15 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, cur
> For the company in Problem 17, suppose fixed assets are $420,000 and sales are projected to grow to $695,000. How much in new fixed assets is required to support this growth in sales? Data from Problem 17: Thorpe Mfg., Inc., is currently operating at o
> A stock with a current price of $78 has a call option available with a strike price of $80. The stock will move up by a factor of 0.95 or down by a factor of 0.80 each period for the next two periods and the risk-free rate is 3.5 percent. What is the pri
> A stock is currently priced at $35 and will move up by a factor of 1.18 or down by a factor of 0.85 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is the value of a put option with a strike price of $40?
> A stock is currently selling for $60. Over the next two periods, the stock will move up by a factor of 1.15 or down by a factor of 0.87 each period. A call option with a strike price of $60 is available. If the risk-free rate of interest is 3.2 percent p
> Suppose you write 30 of the July 100 put contracts. What is your net gain or loss if Hendreeks is selling for $90 at expiration? For $110? What is the break-even price, that is, the terminal stock price that results in a zero profit? Calls Puts Stri
> The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $6,24
> Stock in Cheezy-Poofs Manufacturing is currently priced at $50 per share. A call option with a $50 strike and 90 days to maturity is quoted at $1.95. Compare the percentage gains and losses from a $97,500 investment in the stock versus the option in 90 d
> Given the following information for Smashville, Inc., construct an income statement for the year: Cost of goods sold: ………………………………….$164,000 Investment income: ……………………………………$1,200 Net sales: ………………………………………………..$318,000 Operating expense: …………………………………
> How do interest rates affect option prices? Explain.
> A 30-year, $250,000 mortgage has a rate of 5.4 percent. What are the interest and principal portions in the first payment? In the second?
