Question: Suppose that a call option with a

> When interest is compounded more frequently than annually, what happens to the true rate of interest? Under what condition would the stated and true rates of interest be equal? What is continuous compounding?

> An investor deposits $20,000 into a new brokerage account. The investor buys 1,000 shares of Tipco stock for $19 per share. Two weeks later, the investor sells the Tipco stock for $20 per share. When the investor receives his brokerage account statement,

> Bruce buys $25,000 of UH-OH Corporation stock. Unfortunately, a major newspaper reveals the very next day that the company is being investigated for accounting fraud, and the stock price falls by 50%. What is the percentage increase now required for Bruc

> The following table contains annual returns for the stocks of Home Depot (HD) and Lowe’s (LOW). The returns are calculated using end-of-year prices (adjusted for dividends and stock splits) retrieved from http://www.finance.yahoo.com/.

> Referring to Problem 5.6, what would happen if you constructed a portfolio consisting of assets A, B, and C, equally weighted? Would this reduce risk or enhance return? Problem 5.6: You have been asked for your advice in selecting a portfolio of assets

> Referring to Problem 5.19, assume you have a portfolio with $20,000 invested in each of investments A, B, and C. What is your portfolio beta? Problem 5.19: Assume the betas for securities A, B, and C are as shown here. Security ……………………………………………………………

> Referring to Problem 5.16, if you expected a significant market rally, would your decision be altered? Explain. Problem 5.16: You are evaluating two possible stock investments, Buyme Co. and Getit Corp. Buyme Co. has an expected return of 14% and a bet

> You are evaluating two possible stock investments, Buyme Co. and Getit Corp. Buyme Co. has an expected return of 14% and a beta of 1.0. Getit Corp. has an expected return of 14% and a beta of 1.2. Based only on this data, which stock should you buy and w

> The following table contains annual returns for the stocks of M and N. Use Excel to create a spreadsheet that calculates the average, standard deviation, and correlation coefficient for the two annual return series. Next, use the averages, standard devia

> Create an Excel spreadsheet that graphs the portfolio return and standard deviation combinations found in Problem 5.12 for Home Depot and Lowe’s. Problem 5.12: Use the table of annual returns in Problem 5.9 for Home Depot (HD) and Low

> Referring to Problem 5.29, if the risk-free rate is 2% and the market return is 7%, calculate the required return for each portfolio using the CAPM. Problem 5.29: Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same fiv

> At the beginning of the chapter you read about an analyst’s report on Advanced Micro Devices. Use an online source such as Yahoo! Finance or AMD’s own website to look up the company’s income statement for the fiscal year ending in early 2016. What was AM

> Use the table of annual returns in Problem 5.9 for Home Depot (HD) and Lowe’s (LOW) to create an Excel spreadsheet that calculates returns for portfolios that comprise HD and LOW using the following, respective, weightings: (1.0, 0.0),

> Your portfolio had the values in the following table for the four years listed. There were no withdrawals or contributions of new funds to the portfolio. Calculate your average return over the four-year period. Year Beginning Value Ending Value 2013

> A Florida state savings bond pays $1,000 when it matures seven years from now. If the state bonds are to be competitive with U.S. savings bonds, which pay 2% interest compounded annually, at what price will the state’s bonds sell?

> Using a financial calculator or spreadsheet, calculate the future value in seven years of $10,000 invested today in an account that pays a stated annual interest rate of 6%, compounded monthly.

> Congratulations! You have won the lottery! Would you rather have $1 million at the end of each of the next 20 years or $15 million today? (Assume an 8% discount rate.)

> How much should you be willing to pay for a lump sum of $10,000 five years from now if you can earn 3% every six months on other similar investments?

> Referring to Problem 4A.9, at what price would the bond sell if U.S. savings bonds were paying 4% interest compounded annually? Compare your answer to your answer to the preceding problem. Problem 4A.9: A Florida state savings bond pays $1,000 when it

> A company reported net income in 2012 of $350 million. In 2016 the company expects net income to be $446.9 million. Estimate the annual compound growth rate of net income.

> A company paid dividends of $1.00 per share in 2009 and just announced that it will pay $2.21 in 2016. Estimate the compound annual growth rate of the dividends.

> Referring to Problem 4A.19, assume you have made 10 payments. What is the balance (present value) of your loan?

> In the beginning of this chapter you read about Neil Dana, who exercised his option to buy six million shares. In that transaction, Mr. Dana spent $3.6 million to acquire stock valued at $229 million. What was the strike price of the options, and what wa

> You purchased a car using some cash and borrowing $15,000 (the present value) for 50 months at 12% per year. Calculate the monthly payment (annuity).

> Sara Holliday must earn a return of 10% on an investment that requires an initial outlay of $2,500 and promises to return $6,000 in eight years. a. Use present value techniques to estimate the IRR on this investment. b. On the basis of your finding in pa

> An investor short sells 100 shares of a stock for $20 per share. The initial margin is 50%. Ignoring transaction costs, how much will be in the investor’s account after this transaction if this is the only transaction the investor has undertaken and the

> An investor short sells 100 shares of a stock for $20 per share. The initial margin is 50%. How much equity will be required in the account to complete this transaction?

> Use a financial calculator or an Excel spreadsheet to estimate the IRR each of the following investments. Initial Future End of Investment Investment Value Year A $ 1,000 $ 1,200 В $10,000 $20,000 7 $ 2,000 $ 4,000 $ 400 20 D $ 3,000 6 $ 5,500 $25,0

> Calculate a one-year holding period return for the following two investment alternatives. Which investment would you prefer, assuming they are of equal risk? Explain. Investment X Y Cash received 1st quarter $ 1.00 $ 0.00 2nd quarter $ 1.20 $ 0.00 3

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

> Assume that an investor buys 100 shares of stock at $50 per share, putting up a 60% margin. If the stock rises to $60 per share, what is the investor’s new margin position?

> Assume that an investor buys 100 shares of stock at $50 per share, putting up a 60% margin. a. What is the debit balance in this transaction? b. How much equity capital must the investor provide to make this margin transaction?

> How much would an investor earn on a stock purchased one year ago for $45 if it paid an annual cash dividend of $2.25 and had just been sold for $52.50? Would the investor have experienced a capital gain? Explain.

> An investor believes that the U.S. dollar will rise in value relative to the Japanese yen. The same investor is considering two investments with identical risk and return characteristics: One is a Japanese yen investment and the other is a U.S. dollar in

> Harold Perto purchased 100 shares of Barclays, a U.K. financial services firm, when they were trading for £260 (pounds sterling) and the exchange rate between British pounds and U.S. dollars was $1.50 per pound. A few months later, Harold sold his Barcla

> Assume you purchased a bond for $9,500. The bond pays $300 interest every 6 months. You sell the bond after 18 months for $10,000. Calculate the following. a. Income b. Capital gain or loss c. Total return in dollars and as a percentage of the original i

> In each of the following cases, calculate the price of one share of the foreign stock measured in United States dollars (US$). a. A Belgian stock priced at 103.2 euros (€) when the exchange rate is 0.93€>US$. b. A Swiss stock priced at 93.3 Swiss francs

> An investor recently sold some stock in a European company that was worth 20,000 euros. The U.S. $>euro exchange rate is currently 1.300, meaning that 1 euro buys 1.3 dollars. How many U.S. dollars will the investor receive?

> An investor buys a bond for $10,000. The bond pays $200 interest every 6 months. After 18 months, the investor sells the bond for $9,500. Describe the types of income and/or loss the investor had.

> The current exchange rate between the U.S. dollar and the Japanese yen is 120 (yen >$). That is, 1 dollar can buy 120 yen. How many dollars would you get for 1,000 Japanese yen?

> Assuming you purchased a share of stock for $50 one year ago, sold it today for $60, and during the year received three dividend payments totaling $2.70, calculate the following. a. Income b. Capital gain (or loss) c. Total return (1) In dollars (2) As a

> George Seby is thinking about doing some speculating in interest rates. He thinks rates will fall and, in response, the price of Treasury bond futures should move from 92’15, their present quote, to a level of about 98. Given a required margin deposit of

> As it turns out, you were correct when you purchased four contracts for feeder cattle at 88.8, as the spot price on cattle rose to 101.2 on the delivery date given in your contracts. How much money did you make? What was your return on invested capital?

> You decide to act on your hunches about feeder cattle, so you purchase four contracts for April delivery at 88.8. You are required to put down 10%. How much equity/capital did you need to make this transaction?

> You just heard a news story about mad cow disease in a neighboring country, and you believe that feeder cattle prices will rise dramatically in the next few months as buyers of cattle shift to U.S. suppliers. Someone else believes that prices will fall i

> You have purchased a futures contract for euros. The contract is for 125,000 euros and the quote was 1.1636. On the delivery date, the exchange quote is 1.1050. Assuming you took delivery of the euros, how many dollars would you have after converting bac

> A quote for a futures contract for British pounds is 1.6683. The contract size for British pounds is 62,500. What is the dollar equivalent of this contract?

> Josh Rink considers himself a shrewd commodities investor. Not long ago he bought one July cotton contract at $0.54 a pound and he recently sold it at $0.58 a pound. How much profit did he make? What was his return on invested capital if he had to put up

> You believe that oil prices will be rising more than expected and that rising prices will result in lower earnings for industrial companies that use a lot of petroleum-related products in their operations. You also believe that the effects on this sector

> A six-month call option contract on 100 shares of Home Depot common stock with a strike price of $60 can be purchased for $600. Assuming that the market price of Home Depot stock rises to $75 per share by the expiration date of the option, what is the ca

> You are considering purchasing a bond that pays annual interest of $50 per $1,000 of par value. The bond matures in one year, and at that time you will collect the par value and the interest payment. If you can purchase this bond for $950, what is the ho

> Abercrombie & Fitch is trading at $21.50. Put options with a strike price of $20.50 are priced at $0.85. What is the intrinsic value of the option, and what is the time value?

> Verizon is trading at $36. Put options with a strike price of $45 are priced at $10.50. What is the intrinsic value of the option, and what is the time value?

> Twitter is trading at $34.50. Call options with a strike price of $35 are priced at $2.30. What is the intrinsic value of the option, and what is the time value?

> Rick owns stock in a retailer that he believes is highly undervalued. Rick expects that the stock will increase in value nicely over the long term. He is concerned, however, that the entire retail industry may fall out of favor with investors as some lar

> Refer to Problem 14.9. What happens if you are wrong and the price of XLB increases to $25 on the expiration date? Problem 14.9: You believe that oil prices will be rising more than expected and that rising prices will result in lower earnings for indu

> Apple stock is selling for $120 per share. Call options with a $117 exercise price are priced at $12. What is the intrinsic value of the option, and what is the time value?

> On January 1, 2017, Simon Love’s portfolio of 15 common stocks had a market value of $264,000. At the end of May 2017, Simon sold one of the stocks, which had a beginning of- year value of $26,300, for $31,500. He did not reinvest those or any other fund

> Mom and Pop had a portfolio of long-term bonds that they purchased many years ago. The bonds pay 12% interest annually, and the face value is $100,000. If Mom and Pop are in the 25% tax bracket, what is their annual after-tax HPR on this investment? (Ass

> Linda Babeu, who is in a 33% ordinary tax bracket (federal and state combined) and pays a 15% capital gains rate on dividends and capital gains for holding periods longer than 12 months, purchased 10 options contracts for a total cost of $4,000 just over

> Jill Clark invested $25,000 in the bonds of Industrial Aromatics, Inc. She held them for 13 months, at the end of which she sold them for $26,746. During the period of ownership she received $2,000 interest. Calculate the pretax and after-tax HPR on Jill

> Select the security in the left-hand column that best fits the investor’s desire described in the right-hand column. a. 5-year Treasury note b. A bond with a low coupon and a long maturity 1. Lock in a high-coupon yield 2. Accumula

> Following is a sample of eight Level-1 CFA exam questions that deal with many of the topics covered in Chapters 11, 12 and 13 of this text, including the structure of mutual funds, portfolio diversification, portfolio returns, and the administration of p

> 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?

> 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?

> Contrast historical standards of performance with industry standards. Briefly note the role of each in analyzing the financial condition and operating results of a company.

> What is a problem investment? What questions should one consider when analyzing each investment in a portfolio?

> Charles Spurge, a mathematician with Ansco Petroleum Company, wishes to develop a rational basis for timing his portfolio transactions. He currently holds a security portfolio with a market value of nearly $100,000, divided equally between a very conserv

> 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

> 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

> What should an investor establish before developing and executing an investment program? Briefly describe the elements of an investment policy statement.

> Under what three conditions would an investment holding be a candidate for sale? What must be true about the expected return on a risky investment, when compared with the return on a low-risk investment, to cause a rational investor to acquire the risky

> What is ratio analysis? Describe the contribution of ratio analysis to the study of a company’s financial condition and operating results.

> Briefly define and differentiate among the following investments. Which offer fixed returns? Which are derivative securities? Which offer professional investment management? a. Bonds b. Convertible securities c. Preferred stock d. Mutual funds e. Hedge f

> Mary and Nick Stalcheck have an investment portfolio containing four investments. It was developed to provide them with a balance between current income and capital appreciation. Rather than acquire mutual fund shares or diversify within a given class of

> What is common stock, and what are its two sources of potential return?

> What are short-term investments? How do they provide liquidity?

> Differentiate between individual investors and institutional investors.

> Classify the roles of (a) government, (b) business, and (c) individuals as net suppliers or net demanders of funds.

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

> 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.

> Distinguish between the types of dividend distributions that mutual funds make. Are these dividends the only source of return for a mutual fund investor? Explain.

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

> Why do investors bother to look at the historical performance of a company when future behavior is what really counts? Explain.

> Note several approaches to investing in commodities and explain the investment objectives of each.

> What is the source of return on futures contracts? What measure is used to calculate the return on a commodities contract?