Question: Describe how, if at all, a conservative

> Alcan stock recently closed at $52.51. Assume that you write a covered call on Alcan by writing one September call with a strike price of $55 and buying 100 shares of stock at the market price. The option premium that you obtain from writing the call is

> Notice that among the options expiring in one month, the option with the highest time value is the one with a strike price of $70. Likewise, among the options expiring in three months, the option with a $70 strike has more time value than the options wit

> Using the Facebook stock option quotations in Figure 14.1, find the option premium, the time value, and the stock index breakeven point for the following puts and calls. a. The August put with a strike price of $82.50 b. The August call with a strike pri

> In the absence of any load charges, open-end mutual funds are priced at (or very close to) their net asset values, whereas closed-end funds rarely trade at their NAVs. Explain why one type of fund would normally trade at its NAV while the other type (CEF

> Describe an ETF, and explain how these funds combine the characteristics of both open-end and closed-end funds. Consider the Vanguard family of funds. Which of its funds most closely resembles a “spider” (SPDR)? In what respects are the Vanguard fund (th

> For each pair of funds listed, select the one that is likely to be less risky. Briefly explain your answer. a. Growth versus growth-and-income funds b. Equity-income versus high-grade corporate bond funds c. Balanced versus sector funds d. Global versus

> For each of the following initial investment amounts, calculate the future value at the end of the investment period if interest compounds annually.

> Describe the process of creating an ETF. How does it differ from the process by which an open-end fund is created?

> Contrast mutual fund ownership with direct investment in stocks and bonds. Assume your class is going to debate the merits of investing through mutual funds versus investing directly in stocks and bonds. Develop some arguments on each side of this debate

> Assume that an investor comes to you looking for advice. She has $200,000 to invest and wants to put it all into bonds. a. If she considers herself a fairly aggressive investor who is willing to take the risks necessary to generate the big returns, what

> Briefly explain what will happen to a bond’s duration in each of the following situations. a. The yield to maturity on the bond falls from 8.5% to 8%. b. The bond gets one year closer to its maturity. c. Market interest rates go from 8% to 9%. d. The bon

> Using the Wall Street Journal, Barron’s, or an online source, find the bond yields for Treasury securities with the following maturities: 3 months, 6 months, 1 year, 3 years, 5 years, 10 years, 15 years, and 20 years. Construct a yield curve based on the

> Briefly describe each of the following theories of the term structure of interest rates. a. Expectations hypothesis b. Liquidity preference theory c. Market segmentation theory According to these theories, what conditions would result in a downward-slopi

> Using the resources at your campus or public library or on the Internet, find the information requested below. a. Select any two convertible debentures (notes or bonds) and determine the conversion ratio, conversion parity, conversion value, conversion p

> Describe LYONs, and note how they differ from conventional convertible securities. Are there any similarities between LYONs and conventional convertibles? Explain.

> Why do companies like to issue convertible securities? What’s in it for them?

> Select the security in the left-hand column that best fits the investor’s desire described in the right-hand column. a. Five-year Treasury note b. A bond with a low coupon and a long maturity c. Yankee bond d. Insured revenue bond e. Long-term Treasury s

> Terri Allessandro has an opportunity to make any of the following investments. The purchase price, the lump-sum future value, and the year of receipt are given below for each investment. Terri can earn a 10% rate of return on investments similar to those

> “Treasury securities are guaranteed by the U.S. government. Therefore, there is no risk in the ownership of such bonds.” Briefly discuss the wisdom (or folly) of this statement.

> Identify and briefly describe each of the following types of bonds. a. Agency bonds b. Municipal bonds c. Zero-coupon bonds d. Junk bonds e. Foreign bonds f. Collateralized mortgage obligations (CMOs) What type of investor do you think would be most attr

> Using the bond returns in Table 10.1 as a basis of discussion: a. Compare the total returns on Treasury bonds during the 1970s with those produced in the 1980s. How do you explain the differences? b. How did the bond market do in the 1990s? How does the

> Describe each of the following approaches to technical analysis, and note how it would be used by investors. a. Confidence index b. Arms index c. Odd-lot trading d. Charting e. Moving averages f. On-balance volume Which of these approaches is likely to i

> Briefly describe how technical analysis is used as part of the stock valuation process. What role does it play in an investor’s decision to buy or sell a stock?

> Describe how representativeness may lead to biases in stock valuation.

> Briefly define each of the following terms, and describe how it can affect investors’ decisions. a. Loss aversion b. Representativeness c. Narrow framing d. Overconfidence e. Biased self-attribution

> You look at a large number of firms that announced higher-than-expected sales growth and notice that the stocks of these firms were rising quickly prior to these public announcements. Does that violate market efficiency?

> Suppose you look back over the past 10 years and identify firms that have increased dividends every year. You notice that these stocks outperformed the broader market over the decade too. Does this violate efficient markets? Do you think buying stocks ba

> If small stocks outperform large stocks, does that violate market efficiency? If yes, why? If not, what else would have to be true to conclude that the pattern did violate market efficiency?

> Calculate the following. a. The present value of $500 to be received four years from now, using an 11% discount rate. b. The present value of the following end-of-year income streams, using a 9% discount rate and assuming it is now the beginning of 2020

> Erin McQueen purchased 50 shares of BMW, a German stock traded on the Frankfurt Exchange, for €85.5 (euros) per share exactly one year ago when the exchange rate was 1.10$/€ (i.e, €1 was worth $1.10). Today the stock is trading at €87.10 per share, and t

> Each year the financial media publishes lists of the top-performing mutual fund managers. And every year there are some fund managers who earn much higher returns than the market average, and in some cases they do so without taking above-average risk. Is

> Briefly define each of the following, and note the conditions that would suggest the market is technically strong. a. Breadth of the market b. Short interest c. Relative strength index d. Theory of contrary opinion e. Head and shoulders

> Much has been written about the concept of an efficient market. It’s probably safe to say that some of your classmates believe the markets are efficient and others believe they are not. Have a debate to see whether you can resolve this issue (at least am

> Assume an investor uses the constant-growth DVM to value a stock. Listed are various situations that could affect the computed value of a stock. Look at each one of these individually and indicate whether it would cause the computed value of a stock to g

> Explain the role that the future plays in stock valuation. Why not base the valuation solely on historical information? Explain how a stock’s intrinsic value relates to its required return. Illustrate what happens to a stock’s value when the required ret

> In this chapter, we examined nine stock valuation procedures: • Zero-growth DVM • Constant-growth DVM • Variable-growth DVM • Free cash flow to equity approach • Expected return (IRR) approach • P/E approach • Price-to-cash-flow ratio • Price-to-sales ra

> Select a company from Yahoo! Finance or another online source. (Hint: Pick a company that’s been publicly traded for at least 10 years, and avoid public utilities, banks, and other financial institutions.) Using the historical and forecasted data reporte

> Match the specific ratios in the left-hand column with the category in the right-hand column to which it belongs. a. Inventory turnover b. Debt-equity ratio c. Current ratio d. Net profit margin e. Return on assets f. Total asset turnover g. Price-to-ear

> As an investor, what kind(s) of economic information would you look for if you were thinking about investing in the following? a. An airline stock b. A cyclical stock c. An electrical utility stock d. A building materials stock e. An aerospace firm, with

> Economic analysis is generally viewed as an integral part of the top-down approach to security analysis. In this context, identify each of the following and note how each would probably behave in a strong economy. a. Fiscal policy b. Interest rates c. In

> The accompanying table shows a series of transactions in a savings account. The account pays 6% simple interest, and the account owner withdraws interest as soon as it is paid. Create a new table that shows (a) the account balance at the end of each year

> Briefly define each of the following types of investment programs and note the kinds of stock (blue chips, speculative stocks, etc.) that would best fit with each. a. A buy-and-hold strategy b. A current-income portfolio c. Long-term total return d. Aggr

> Identify and briefly describe the three sources of return to U.S. investors in foreign stocks. How important are currency exchange rates? With regard to currency exchange rates, when is the best time to be in foreign securities? a. Listed are exchange ra

> Assume that a wealthy woman comes to you looking for some investment advice. She is in her early forties and has $250,000 to put into stocks. She wants to build up as much capital as she can over a 15-year period and is willing to tolerate a “fair amount

> Given the information in Figure 6.4, answer the following questions for Netflix. a. On what day did the trading activity occur? b. At what price did the stock sell when the market closed? c. What is the firm’s price-to-earnings ratio? What does that indi

> Look at the record of stock returns in Table 6.1. a. How would you compare the average annual returns for the various decades? b. Considering the average annual returns that have been generated over holding periods of 10 years or more, what rate of retur

> Search online to find forecasts of the U.S. inflation rate for next year. Also find the current interest rate paid by one-year Treasury bills (this will be the nominal rate of interest for that type of security). Use the data to estimate the current real

> Two investments offer a series of cash payments over the next four years, as shown in the following table. a. What is the total amount of money paid by each investment over the four years? b. From a time value of money perspective, which of these investm

> Choose a publicly traded company that has been listed on a major exchange or in the over-the-counter market for at least five years. Use any data source of your choice to find the annual cash dividend, if any, paid by the company in each of the past five

> Differentiate between the financial advice you would receive from a traditional investment advisor and one of the new robo-advisors. Which would you prefer to use, and why? How could membership in an investment club serve as an alternative to a paid inve

> Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar Barrel, but she is also thinking of investing her money. a.

> Thomas Weisel, chief executive of a securities firm that bears his name, believes that individual investors already have too much information. “Many lose money by trading excessively on stray data,” he says. Other industry professionals oppose the SEC’s

> Why do you think some large, well-known companies such as Cisco Systems, Intel, and Microsoft prefer to trade on the Nasdaq OMX markets rather than on an organized securities exchange such as the NYSE (for which they easily meet the listing requirements)

> From 1999 to 2017, the average IPO rose by 18.4% in its first day of trading. In 1999, 117 deals doubled in price on the first day. What factors might contribute to the huge first-day returns on IPOs? Some critics of the current IPO system claim that und

> In most developed countries, prices of goods and services tend to rise over time, an economic phenomenon known as inflation. Of course, prices of some goods, such as consumer electronics, tend to fall as time passes, but from one year to the next, the ov

> In March 2018 a federal jury convicted San Diego stockbroker Paul Rampoldi of insider trading because he used information he obtained from a director at Ardea Biosciences about that firm’s upcoming (and unannounced) acquisition by AstraZeneca. Rampoldi m

> In recent years, business headlines were full of allegations of massive financial fraud committed by prominent business leaders. These allegations shocked the investment community and resulted in spectacular bankruptcies of large corporations. Civil and

> Before it was known for its financial problems, Enron, a utility firm operating pipelines and shipping natural gas, was a business pioneer, blazing new trails in the market for trading risk. In the 1980s the price of natural gas was deregulated, which me

> Buy, sell, or hold? Should investors trust and act on the investment recommendations of professional securities analysts? The evidence is somewhat mixed. Consider that from 1993 to 2015, about 55% of all analyst recommendations were to buy a stock rather

> Scandals involving fraudulent accounting practices resulted in public outrage, not only in the United States but around the world as well. In December 2013, the SEC charged Fifth Third Bank of Cincinnati and its former chief financial officer, Daniel Po

> Describe the structure of the overall investment process. Explain the role played by financial institutions and financial markets.

> The risk-free rate is 3%, and expected inflation is 2.5%. If inflation expectations change such that future expected inflation falls to 1.5%, what will the new risk-free rate be?

> What are foreign investments, and what role do they play for the individual investor?

> Define the term risk, and explain how risk is used to differentiate among investments.

> What is the relation between an investment’s risk and its return?

> Differentiate among the following types of investments, and cite an example of each: (a) securities and property investments; (b) direct and indirect investments; (c) debt, equity, and derivative securities; and (d) short-term and long-term investments.

> Define the term investment, and explain why individuals invest.

> Discuss each of the following as they are related to assessing bond market behavior. a. Bond yields b. Bond indexes

> Briefly describe the composition and general thrust of each of the following indexes. a. NYSE Composite Index b. NYSE MKT Composite Index c. Nasdaq Stock Market indexes d. Value Line Composite Index

> List each of the major averages or indexes prepared by (a) Dow Jones & Company and (b) Standard & Poor’s Corporation. Indicate the number and type of securities used in calculating each average or index.

> Discuss the impact of the Internet on the individual investor and summarize the types of resources it provides.

> Describe the risks of investing internationally, particularly currency exchange risk.

> Given a real rate of interest of 2%, an expected inflation premium of 3%, and risk premiums for investments A and B of 4% and 6%, respectively, find the following. a. The risk-free rate of return, rf b. The required returns for investments A and B

> Describe how foreign security investments can be made, both indirectly and directly.

> Why is globalization of securities markets an important issue today? How have international investments performed in recent years?

> Differentiate between a bull market and a bear market.

> What are electronic communication networks?

> Explain how the dealer market works. Be sure to mention market makers, bid and ask prices, the Nasdaq market, and the OTC market. What role does the dealer market play in initial public offerings (IPOs) and secondary distributions?

> For each of the items in the left-hand column, select the most appropriate item in the right-hand column. a. Prospectus b. Underwriting c. NYSE d. Nasdaq BX e. Listing requirements f. OTC 1. Trades unlisted securities 2. Buying securities from firms and

> Briefly describe the IPO process and the role of the investment bank in underwriting a public offering. Differentiate among the terms public offering, rights offering, and private placement.

> Describe the key advantages and disadvantages of short selling. How are short sales used to earn speculative profits?

> What relevance do margin requirements have in the short-selling process? What would have to happen to experience a margin call on a short-sale transaction? What two actions could be used to remedy such a call?

> What is the primary motive for short selling? Describe the basic short-sale procedure. Why must the short seller make an initial equity deposit?

> Below are the prices on the first and last day of the year for Netflix common stock for several recent years. Netflix paid no dividends over this period. Calculate the return that an investor would have earned in each calendar year. What is the average o

> Describe the procedures and regulations associated with margin trading. Be sure to explain restricted accounts, the maintenance margin, and the margin call. Define the term debit balance, and describe the common uses of margin trading.

> How does margin trading magnify profits and losses? What are the key advantages and disadvantages of margin trading?

> What is a long purchase? What expectation underlies such a purchase? What is margin trading, and what is the key reason why investors sometimes use it as part of a long purchase?

> Briefly describe the key requirements of the following federal securities laws: a. Securities Act of 1933 b. Investment Company Act of 1940 c. Investment Advisors Act of 1940 d. Insider Trading and Fraud Act of 1988 e. Regulation Fair Disclosure (2000) f

> How are after-hours trades typically handled? What is the outlook for after-hours trading?

> Differentiate between each of the following pairs of terms. a. Money market and capital market b. Primary market and secondary market c. Broker market and dealer market

> Why do insurance companies need employees with advanced training in investments?

> Why is an understanding of investment principles important to a senior manager working in corporate finance?

> Define, compare, and contrast the following short-term investments. a. I bonds b. U.S. Treasury bills c. Certificates of deposit d. Commercial paper e. Banker’s acceptances f. Money market mutual funds (money funds)

> Briefly describe the key features and differences among the following deposit accounts. a. Passbook savings account b. NOW account c. Money market deposit account d. Asset management account

> For each of the investments shown in the following table, calculate the rate of return earned over the period.

> Explain the characteristics of short-term investments with respect to purchasing power and default risk.

> What makes an asset liquid? Why hold liquid assets? Would 100 shares of IBM stock be considered a liquid investment? Explain.

> Discuss the relation between stock prices and the business cycle.

> Describe the differing investment philosophies typically applied during each of the following stages of an investor’s life cycle. a. Youth (ages 20 to 45) b. Middle age (ages 46 to 60) c. Retirement years (age 61 and older)

> Define and differentiate among the following. Explain how each is related to federal income taxes. a. Active income b. Portfolio and passive income c. Capital gain d. Capital loss e. Tax planning f. Tax-advantaged retirement investments