If New Fund’s expense ratio (see the previous problem) was 1.1% and the management fee was .7%, what were the total fees paid to the fund’s investment managers during the year? What were other administrative expenses?
> The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is 8%. Both bonds sell at par. At what tax bracket (marginal tax rate) would an investor be indifferent between the two bonds?
> If you place a limit order to sell 100 shares of stock at $55 when the current price is $62, how much will you receive for each share if the price drops to $50? a. $50. b. $55. c. $54.87. d. Cannot tell from the information given.
> Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed? a. Write a call option. b. Write a put option. c. Buy a call option. d. Buy a
> A municipal bond carries a coupon of 6.75% and is trading at par. What is the equivalent taxable yield to a taxpayer in a combined federal plus state 34% tax bracket?
> A firm’s preferred stock often sells at yields below its bonds because a. Preferred stock generally carries a higher agency rating. b. Owners of preferred stock have a prior claim on the firm’s earnings. c. Owners of preferred stock have a prior claim on
> Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 21% tax bracket.
> Suppose investors can earn a return of 2% per 6 months on a Treasury note with 6 months remaining until maturity. What price would you expect a 6-month-maturity Treasury bill to sell for?
> Hennessy & Associates manages a $30 million equity portfolio for the multimanager Wilstead Pension Fund. Jason Jones, financial vice president of Wilstead, noted that Hennessy had rather consistently achieved the best record among Wilstead’s six equity m
> An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6%. What is the offering price?
> Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The
> Why are high-tax-bracket investors more inclined to invest in municipal bonds than low-bracket investors?
> Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The
> Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The
> Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The
> Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The
> Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The
> The correlation coefficients between several pairs of stocks are as follows: Corr(A, B) = .85; Corr(A, C) = .60; Corr(A, D) = .45. Each stock has an expected return of 8% and a standard deviation of 20%. Suppose that in addition to investing in one more
> The correlation coefficients between several pairs of stocks are as follows: Corr(A, B) = .85; Corr(A, C) = .60; Corr(A, D) = .45. Each stock has an expected return of 8% and a standard deviation of 20%. Would the answer to Problem 17 change for more ris
> FBN Inc. has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $70,000. The offering price for the shares was $50, but immediately upon issue, the share price jumped to $53. a. What is your best estimate of the
> Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: a. Risk-free asset earning 12% per year. b. Risky asset with expected return of 30% per year and standard deviation of 40%. If you construct a port
> Suppose you have a project that has a .7 chance of doubling your investment in a year and a .3 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment?
> True or false: Assume that expected returns and standard deviations for all securities (including the risk-free rate for borrowing and lending) are known. In this case, all investors will have the same optimal risky portfolio.
> What are the key differences between common stock, preferred stock, and corporate bonds?
> Which of the following factors reflect pure market risk for a given corporation? a. Increased short-term interest rates. b. Fire in the corporate warehouse. c. Increased insurance costs. d. Death of the CEO. e. Increased labor costs.
> What must be true about the sign of the risk aversion coefficient, A, for a risk lover? Draw the indifference curve for a utility level of .05 for a risk lover
> Draw an indifference curve for a risk-neutral investor providing utility level .05.
> What do you think would happen to the equilibrium expected return on stocks if investors perceived higher volatility in the equity market? Relate your answer to Equation 6.7.
> You estimate that a passive portfolio, for example, one invested in a risky portfolio that mimics the S&P 500 stock index, offers an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18%
> Suppose that the borrowing rate that your client faces is 9%. Assume that the equity market index has an expected return of 13% and standard deviation of 25%, that rf = 5%, and that your fund has the parameters given in Problem 21. Solve Problems 23 and
> U.S. Treasuries represent a significant holding in many pension portfolios. You decide to analyze the yield curve for U.S. Treasury notes. a. Using the data in the table below, calculate the 5-year spot and forward rates assuming annual compounding. Show
> 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 tax bracket is: a. Zero b. 10% c. 20% d. 30%
> Suppose that the borrowing rate that your client faces is 9%. Assume that the equity market index has an expected return of 13% and standard deviation of 25%, that rf = 5%, and that your fund has the parameters given in Problem 21. Draw a diagram of you
> Investment Management Inc. (IMI) uses the capital market line to make asset allocation recommendations. IMI derives the following forecasts: ∙ Expected return on the market portfolio: 12% ∙ Standard deviation on the market portfolio: 20% ∙ Risk-free rate
> Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rP) = 11%, σP = 15%, rf = 5%. a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of
> You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. Your client’s degree of risk aversion is A = 3.5. a. What proportion, y, of the total investment should be invested in your fund?
> What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?
> You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the complete portfoli
> You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. Draw the CAL of your portfolio on an expected return–standard deviation diagram. What is the slope of the CAL? Show the position o
> You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. What is the reward-to-volatility (Sharpe) ratio (S) of your risky portfolio? Your client’s?
> You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. Suppose that your risky portfolio includes the following investments in the given proportions: Stock A………………………………….. 25% Stock B
> You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. Your client chooses to invest 70% of a portfolio in your fund and 30% in an essentially risk-free money market fund. What are the
> The shape of the U.S. Treasury yield curve appears to reflect two expected Federal Reserve reductions in the federal funds rate. The current short-term interest rate is 5%. The first reduction of approximately 50 basis points (bp) is expected six months
> Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 90 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume
> Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 90 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume
> The composition of the Fingroup Fund portfolio is as follows: The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30,000. There are 4 million shares outstanding. What is the net asset value of
> If the offering price of an open-end fund is $12.30 per share and the fund is sold with a frontend load of 5%, what is its net asset value?
> Why can closed-end funds sell at prices that differ from net asset value while open-end funds do not?
> 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 th
> Loaded-Up Fund charges a 12b-1 fee of 1.0% and maintains an expense ratio of .75%. Economy Fund charges a front-end load of 2% but has no 12b-1 fee and an expense ratio of .25%. Assume the rate of return on both funds’ portfolios (before any fees) is 6%
> The New Fund had average daily assets of $2.2 billion last year. The fund sold $400 million worth of stock and purchased $500 million during the year. What was its turnover ratio?
> Consider a mutual fund with $200 million in assets at the start of the year and 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $2 million. The stocks included in the fund’s
> A portfolio manager at Superior Trust Company is structuring a fixed-income portfolio to meet the objectives of a client. The portfolio manager compares coupon U.S. Treasuries with zero coupon stripped U.S. Treasuries and observes a significant yield adv
> The Closed Fund is a closed-end investment company with a portfolio currently worth $200 million. It has liabilities of $3 million and 5 million shares outstanding. a. What is the NAV of the fund? b. If the fund sells for $36 per share, what is its premi
> Reconsider the Fingroup Fund in the previous problem. If during the year the portfolio manager sells all of the holdings of stock D and replaces it with 200,000 shares of stock E at $50 per share and 200,000 shares of stock F at $25 per share, what is th
> Why do call options with exercise prices greater than the price of the underlying stock sell for positive prices?
> Explain the difference between a call option and a long position in a futures contract.
> Explain the difference between a put option and a short position in a futures contract.
> Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? What will be the
> Why have average trade sizes declined in recent years?
> What reforms to the financial system might reduce its exposure to systemic risk?
> Look at the futures listings for the corn contract in Table 2.7. Suppose you buy one contract for March 2019 delivery. If the contract closes in March at a level of 4.06, what will your profit be?
> Why do financial assets show up as a component of household wealth, but not of national wealth? Why do financial assets still matter for the material well-being of an economy?
> Sandra Kapple is a fixed-income portfolio manager who works with large institutional clients. Kapple is meeting with Maria VanHusen, consultant to the Star Hospital Pension Plan, to discuss management of the fund’s approximately $100 mi
> Here is some price information on FinCorp stock. Suppose that FinCorp trades in a dealer market. a. Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed? b. Suppose you have submitted an order to
> Find the equivalent taxable yield of a short-term municipal bond with a yield of 4% for tax brackets of (a) zero, (b) 10%, (c) 20%, and (d) 30%.
> The average rate of return on investments in large stocks has outpaced that on investments in Treasury bills by about 8% since 1926. Why, then, does anyone invest in Treasury bills?
> An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 6% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?
> Corporate Fund started the year with a net asset value of $12.50. By year-end, its NAV equaled $12.10. The fund paid year-end distributions of income and capital gains of $1.50. What was the (pretax) rate of return to an investor in the fund?
> 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 y
> 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
> Which of the following choices best completes the following statement? Explain. An investor with a higher degree of risk aversion, compared to one with a lower degree, will most prefer investment portfolios a. with higher risk premiums. b. that are riski
> 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&#
> a. Assuming that the expectations hypothesis is valid, compute the expected price of the 4-year bond in Problem 7 at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. b. What is the rate of return of the bon
> The tables below show, respectively, the characteristics of two annual-coupon bonds from the same issuer with the same priority in the event of default, as well as spot interest rates on zero coupon bonds. Neither coupon bond’s price is
> The following is a list of prices for zero-coupon bonds of various maturities. Maturity (years) Price of Bond 1……………………………… $943.40 2……………………………….. 898.47 3…………………………………847.62 4………………………………….792.16 a. Calculate the yield to maturity for a bond with a
> Assuming the pure expectations theory is correct, an upward-sloping yield curve implies: a. Interest rates are expected to increase in the future. b. Longer-term bonds are riskier than short-term bonds. c. Interest rates are expected to decline in the fu
> If the liquidity preference hypothesis is true, what shape should the term structure curve have in a period where interest rates are expected to be constant? a. Upward-sloping. b. Downward-sloping. c. Flat
> 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?
> 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?
> Consider a bond with a 10% coupon and yield to maturity = 8%. If the bond’s yield to maturity remains constant, then in one year, will the bond price be higher, lower, or unchanged? Why?
> Treasury bonds paying an 8% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually? (Hint: What is the effective annual yield on the bond?)
> Which security has a higher effective annual interest rate? a. A 3-month T-bill selling at $97,645 with par value $100,000. b. A coupon bond selling at par and paying a 10% coupon semiannually.
> A bond with an annual coupon rate of 4.8% sells for $970. What is the bond’s current yield?
> The stated yield to maturity and realized compound yield to maturity of a (default-free) zerocoupon bond are always equal. Why?
> The 6-month Treasury bill spot rate is 4%, and the 1-year Treasury bill spot rate is 5%. What is the implied 6-month forward rate for six months from now?
> Which of the following most accurately describes the behavior of credit default swaps? a. When credit risk increases, swap premiums increase. b. When credit and interest rate risk increase, swap premiums increase. c. When credit risk increases, swap prem
> 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?
> 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
> Two bonds have identical times to maturity and coupon rates. One is callable at 105, the other at 110. Which should have the higher yield to maturity? Why?
> 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 (a) the first year; (b) the second year; and (c) the last year of the bond’s life.
> Return to Table 14.1, showing the cash flows for TIPS bonds. a. What is the nominal rate of return on the bond in year 2? b. What is the real rate of return in year 2? c. What is the nominal rate of return on the bond in year 3? d. What is the real rate
> Is the coupon rate of the bond in Problem 16 more or less than 9%?
> A bond has a current yield of 9% and a yield to maturity of 10%. Is the bond selling above or below par value? Explain.
> A bond with a coupon rate of 7% makes semiannual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100.125. What is the invoice price of the bond? The coupon period has 182
> Fill in the table below for the following zero-coupon bonds, all of which have par values of $1,000.
> The following table shows yields to maturity of zero-coupon Treasury securities. Term to Maturity (years) Yield to Maturity (%) 1……………………………………………3.50% 2………………………………………….4.50 3………………………………………….5.00 4………………………………………….5.50 5………………………………………….6.00 10………………
> Suppose that, in addition to the market factor that has been considered in Problems 1–7, a second factor is considered. The values of this factor for years 1 to 12 were as follows: / Perform the first-pass regressions as in the Chen, Roll, and Ross st
> Plot the capital market line (CML), the nine stocks, and the three portfolios on a graph of average returns versus standard deviation. Compare the mean-variance efficiency of the three portfolios and the market index. Does the comparison support the CAPM
> Perform the second-pass SML regression by regressing the average excess return of each portfolio on its beta.
> Specify the hypotheses for the second-pass regression used to test the SML of the CAPM.
