Question: What are LEAPS? Why would an investor

> What is tax-favored income? Briefly describe the following forms of income excluded from taxation. a. Tax-free municipal bond interest b. Treasury and government agency issues c. Sale of a personal residence

> What is a tax shelter? What is the tax advantage of organizing certain business activities as a sole proprietorship or a partnership rather than as a corporation?

> How does tax avoidance differ from tax deferral? Explain whether either of these is a form of tax evasion.

> Describe the steps involved in calculating a person’s taxable income. How do tax credits differ from tax deductions?

> What is a capital asset? Explain how capital asset transactions are taxed, and compare their treatment with that of ordinary income.

> The historical returns for two investments—A and B—are summarized in the following table for the period 2016 to 2020. Use the data to answer the questions that follow. a. On the basis of a review of the return data, wh

> In each of the following cases, calculate the price of one share of the foreign stock measured in U.S. dollars (US$). a. A Belgian stock priced at 103.2 euros (€) when the exchange rate is 1.0753$/€ (i.e., each euro is worth $1.0753). b. A Swiss stock pr

> What is a limited liability company (LLC) and why has it become a popular business entity?

> How does a limited partnership (LP) differ from a corporation and a general partnership? How did the Tax Reform Act of 1986 affect the popularity of LPs as tax shelters?

> Discuss the investment suitability of a deferred annuity, particularly its positive and negative features. Briefly describe the procedures for buying annuities.

> Explain how a deferred annuity works as a tax shelter. How does a tax-sheltered annuity work, and who is eligible to purchase one? Discuss whether a deferred annuity is a better tax shelter than an IRA.

> Define the following terms as they are related to deferred annuities. a. Current interest rate b. Minimum guaranteed interest rate c. Payout

> Define an annuity, explain the role it might play in an investment portfolio, and differentiate between a. single-premium and installment annuities. b. immediate and deferred annuities. c. fixed and variable annuities.

> Describe how a tax swap can be used to reduce or eliminate a tax liability without significantly altering the composition of one’s portfolio.

> Briefly describe each of the following strategies that trade current income for capital gains income. a. Growth stocks b. Deep-discount bonds c. Income property depreciation

> What are guaranteed investment contracts (GICs), and what role do they play in 401(k) plans? What investment vehicles might be suitable for funding a Keogh or IRA?

> Describe and compare the key features of the following types of educational savings plans. a. Coverdell Education Savings Account (ESA) b. Section 529 College Plan

> In 2007, Amazon reported total revenue of $14.8 billion. Ten years later it generated $177.9 billion in revenue. What was the compound annual growth rate in revenue from 2007 to 2017?

> What is tax planning? Describe the current tax rate structure, and explain why it is considered progressive.

> Identify several investment uses of preferred stocks. Would preferreds be suitable for both conservative and aggressive investors? Explain.

> Discuss why the dividend yield is critical in evaluating the investment merits of high grade preferred stocks during periods when market yields are expected to decline.

> Describe how the market prices high-grade preferred stocks. What role does dividend yield play in the valuation of preferred stocks? Could you use the zero-growth dividend valuation model to value a preferred stock? Explain.

> Distinguish a cumulative preferred share from a callable preferred share. Do cumulative dividend provisions and call features affect the investment merits of preferred issues? Explain.

> What are the advantages and the disadvantages of investing in preferreds?

> In what ways is a preferred stock like equity? In what ways is it like a bond?

> Define a preferred stock. What types of prior claims do preferred shareholders enjoy? How do trust preferreds differ from traditional preferreds?

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

> What measure is used to calculate the return on a commodities contract?

> The Minnesota-based industrial conglomerate 3M has been paying dividends and increasing them for a long time. In 1970 3M shareholders received dividends per share of $1.10, and 47 years later in 2017 they received $5.07. What is the compound annual divid

> Briefly define each of the following: a. Settlement price b. Daily price limit c. Volume d. Maximum daily price range e. Delivery month

> List and briefly define five essential parts of a commodities contract. Which parts have a direct bearing on the price behavior of the contract?

> Explain how margin trading is conducted in the futures market. a. What is the difference between an initial margin and a maintenance margin? b. Are investors ever required to put up additional margin? If so, when?

> Why are both hedgers and speculators important to a futures market?

> What is the major source of return to commodities speculators? How important is current income from dividends and interest?

> Discuss the difference between a cash market and a futures market.

> What are futures options? Explain how they can be used by speculators. Why would an investor want to use an option on an interest rate futures contract rather than the futures contract itself?

> Discuss how stock index futures can be used for speculation and for hedging. What advantages are there to speculating with stock index futures rather than specific issues of common stock?

> Describe a currency future and contrast it with an interest rate future. What is a stock index future, and how can it be used by investors?

> What is the difference between physical commodities and financial futures? What are their similarities?

> The table below shows the dividend per share paid in 2007 and 2017 for three companies. For each company, estimate the compound annual dividend growth rate over this decade.

> What is a futures contract? Briefly explain how it is used as an investment vehicle.

> Name five variables that can affect the price of options, and briefly explain how each affects prices. How important are intrinsic value and time value to in-the money options? To out-of-the-money options?

> How do you find the intrinsic value of a call? Of a put? Does an out-of-the-money option have intrinsic value?

> Briefly explain how you would make money on (a) a call option and (b) a put option. Do you have to exercise the option to capture the profit?

> Why do call and put options have expiration dates? Is there a market for options that have passed their expiration dates?

> What is a strike price? How does it differ from the market price of the stock?

> What is a stock option? What is the difference between a stock option and a derivative security? Describe a derivative security and give several examples.

> What are the main investment attractions of call and put options? What are the risks?

> What are listed options, and how do they differ from conventional options?

> Assume that an investment generates the following income stream and can be purchased at the beginning of 2020 for $2,000 and sold at the end of 2026 for $2,200. Estimate the IRR for this investment. If a minimum return of 5% is required, would you recomm

> Why would an investor want to use index options to hedge a portfolio of common stock? Could the same objective be obtained using options on ETFs? If the investor thinks the market is in for a fall, why not just sell the stock?

> Identify and briefly discuss two ways to use stock-index options. Do the same for foreign currency options.

> Briefly describe the differences and similarities between stock-index options and stock options. Do the same for foreign currency options and stock options.

> What’s the most that can be made from writing calls? Why would an investor want to write covered calls? Explain how you can reduce the risk on an underlying common stock by writing covered calls.

> Describe three ways in which investors can use stock options.

> Describe call and put options. Are they issued like other corporate securities?

> What are indicators of bond market behavior, and how are they different from stock market indicators? Name three sources of bond yield data.

> Which indexes can you use to compare your investment performance with general market returns? Briefly explain each of these indexes.

> What role does current market information play in analyzing investment returns? How do changes in economic and market activity affect investment returns? Explain.

> Why is it important to continuously manage and control your portfolio?

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

> What role could an asset allocation fund play? What makes an asset allocation scheme effective?

> Briefly describe the basic approaches to asset allocation: (a) fixed weightings, (b) flexible weightings, and (c) tactical asset allocation.

> What is asset allocation? How does it differ from diversification? What role does asset allocation play in constructing an investment portfolio?

> Describe the two items an investor should consider before reaching a decision to sell an investment.

> Give two reasons why an investor might want to maintain funds in a low-risk, highly liquid investment.

> Describe how a limit order can be used when securities are bought or sold. How can a stop-loss order be used to reduce losses? To protect profit?

> Briefly describe each of the following plans and differentiate among them. a. Dollar-cost averaging b. Constant-dollar plan c. Constant-ratio plan d. Variable-ratio plan

> Explain the role that formula plans can play in the timing of security transactions. Describe the logic underlying the use of these plans.

> What role do an investor’s portfolio objectives play in constructing a portfolio?

> Explain the role of portfolio revision in the process of managing a portfolio.

> Justin Lieberman must earn a minimum rate of return of 9.25% as compensation for the risk of the following investment. a. Use present value techniques to estimate the IRR on this investment. b. On the basis of your finding in part a, should Justin make t

> Why is Jensen’s measure (Jensen’s alpha) generally preferred over the measures of Sharpe and Treynor for assessing portfolio performance? Explain.

> Briefly describe each of the following measures for assessing portfolio performance and explain how they are used. a. Sharpe’s measure b. Treynor’s measure c. Jensen’s measure (Jensen’s alpha)

> Why is comparing a portfolio’s return to the return on a market index inadequate?

> Describe the steps involved in measuring portfolio return. Explain the role of the portfolio’s HPR in this process, and explain why one must differentiate between realized and unrealized gains.

> What is active portfolio management? Will it result in superior returns? Explain.

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

> 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

> 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.

> Briefly discuss holding period return (HPR) and yield as measures of investment return. Are they equivalent? Explain.

> What role do an investor’s personal characteristics play in determining portfolio policy?

> Use a financial calculator or an Excel spreadsheet to estimate the IRR for each of the following investments.

> If growth, income, and capital preservation are the primary objectives of mutual funds, why do we bother to categorize funds by type? Do you think such classifications are helpful in the fund selection process? Explain.

> What is an asset allocation fund, and how does it differ from other types of mutual funds? How does a target date fund work?

> Briefly describe each of the following types of mutual funds: a. Aggressive-growth funds b. Equity-income funds c. Growth-and-income funds d. Bond funds e. Sector funds f. Socially responsible funds

> What is the difference between a load fund and a no-load fund? What are the advantages of each type? What is a 12(b)-1 fund? Can such a fund operate as a no-load fund?

> Describe a back-end load, a low load, and a hidden load. How can you tell what kinds of fees and charges a fund has?

> Define each of the following: a. Open-end investment companies b. Closed-end investment companies c. Exchange-traded funds d. Real estate investment trusts e. Hedge funds

> Briefly describe how a mutual fund is organized. Who are the key players in a typical mutual fund organization?

> What are the advantages and disadvantages of mutual fund ownership?

> Discuss the types of risk that mutual fund shareholders face. What is the major risk exposure of mutual funds? Are all funds subject to equal risk? Explain.

> Identify three potential sources of return to mutual fund investors, and briefly discuss how each could affect total return to shareholders. Explain how the discount or premium of a closed-end fund can also be treated as a return to investors.

> Kate Berry will not invest unless she can earn at least an 8% return. She is evaluating an investment opportunity that requires an initial outlay of $2,500 and promises to return $5,000 in eight years. a. Use present value techniques to estimate the IRR

> What is the dominant type of closed-end fund? How do CEFs differ from open-end funds?

> How important is the behavior of the market in affecting the price performance of mutual funds? Explain. Does the future behavior of the market matter in the selection process? Explain.

> Briefly describe some of the investor services provided by mutual funds. What are automatic reinvestment plans, and how do they differ from automatic investment plans?

> What are fund families? What advantages do fund families offer investors? Are there any disadvantages?

> What is a mutual fund? Discuss the mutual fund concept, including the importance of diversification and professional management.

> Briefly describe the term bond equivalent yield. Is there any difference between promised yield and bond equivalent yield? Explain.