What is the difference between “support” and “resistance” in technical analysis?
> How is the value of a convertible bond in terms of stock determined? What effect does this conversion value have on the price of the bond?
> You sell a 6 percent $10,000 bond for $9,180 plus $156 in accrued interest for a total of $9,336. Soon thereafter the company makes a $300 interest payment. You are in the 20 percent income tax bracket. a) How much tax do you owe on the interest? b) Comp
> Why is the debt of the federal government considered to be the safest of all possible investments?
> Identify which government securities may be appropriate for the following investors: a) A retired couple seeking income b) An individual in the highest tax bracket seeking a liquid investment c) An individual seeking a government bond for inclusion in an
> If interest rates increase, what should happen to the following? a) The price of a Ginnie Mae bond and the price of a municipal bond b) The payments received from a Ginnie Mae bond and the payments received from a municipal bond Contrast your answers to
> What is a mortgage pass-through bond? What risks are associated with investing in Ginnie Mae bonds? What is the composition of the payment received from a mortgage pass-through bond?
> What is the difference between a term bond issue and a serial bond issue? Why are many capital improvements made by state and local governments financed through serial bonds?
> What are the sources of risk from investing in the following? a) Federal government debt b) Municipal debt
> What is the difference between the following? a) A bond secured by a moral obligation and a bond secured by full faith and credit b) A revenue bond and a general obligation bond Are there any similarities between a bond secured by a moral obligation and
> When interest rates rise, what happens to the price of federal government bonds? What happens to the price of state and local government bonds?
> What distinguishes EE bonds from Treasury bills?
> If a six-month Treasury bill is purchased for $0.9675 on a dollar (i.e., $96,750 for a $100,000 bill), what is the discount yield, the annual rate of interest, and the compound rate? What will these yields be if the discount price falls to $0.94 on a dol
> You purchase a 6 percent $10,000 bond for $9,180 plus $156 in accrued interest for a total outlay of $9,336. Subsequently you receive a $300 interest payment. You are in the 20 percent income tax bracket. How much tax do you owe on the interest payment?
> (This problem is designed to illustrate the potential savings from paying a mortgage off faster. It may be viewed as an illustration of an assured, risk-free return, except that the return is the interest you save instead of interest you earn.)You have a
> You acquire a debt security that is a claim on a mortgage pool (e.g., a Ginnie Mae pass through security). The mortgages pay 9 percent and have an expected life of 20 years. Currently, interest rates are 9 percent, so the cost of the investment is its pa
> As a result of lower interest rates, you are considering refinancing your mortgage. The existing mortgage has a 12 percent interest rate. The balance owed is $50,000, and the remaining term is 18 years, and your annual payment (i.e., interest plus princi
> Determine the annual repayment schedule for the first two years (i.e., interest, principal repayment, and balance owed) for each of the following. (Assume that only one payment is made annually.) Compare the payments required by each mortgage. What concl
> (This problem illustrates the impact of a call feature. Review the material in the previous chapter, if necessary.) In 2005, a brokerage firm offered a tax-exempt 4.5 percent Ocean City, New Jersey, bond that was due in 11 years for a price of $105.30 wi
> (This problem illustrates “riding the yield curve,” which is covered in the appendix to this chapter.) The U.S. Treasury issues a ten-year, zero coupon bond. a) What will be the original issue price if comparable yield
> The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note). The second pays a real yield of 3 percent with the amount of interest being adjusted with changes in
> A six-month $10,000 Treasury bill is selling for $9,844. What is the annual yield according to the discount method? Does this yield understate or overstate the true annual compound yield? Explain.
> You are in the 28 percent federal income tax bracket. A corporate bond offers you 6.8 percent while a tax-exempt bond with the same credit rating and term to maturity offers 4.1 percent. On the basis of taxation, which bond should be preferred? Explain.
> What is the price of the following zero coupon bonds if interest rates are (a) 4 percent, (b) 7 percent, and (c) 10 percent? • Bond A: zero coupon; maturity 5 years • Bond B: zero coupon; maturity 10 years • Bond C: zero coupon; maturity 20 years What
> Molly Matters Inc. issues a split-coupon $1,000 bond that matures in seven years. Interest payments are $80 a year (8 percent) and start after three years have lapsed. The bond initially sells for a discounted price of $794. a) You are in the 30 percent
> An investor in the 35 percent tax bracket may purchase a corporate bond that is rated double B and is traded on the New York Stock Exchange (the bond division). This bond yields 9.0 percent. The investor may also buy a double-B-rated municipal bond with
> An investor is in the 28 percent income tax bracket and can earn 3.3 percent on a nontaxable bond. What is the comparable yield on a taxable bond? If this same investor can earn 5.9 percent on a taxable bond, what must be the yield on a nontaxable bond s
> What differentiates convertible bonds from other bonds?
> Kris Trejo, who recently retired, has come to you for financial help. At the initial consultation, you realized that he is an investor with a very low risk tolerance who wants to increase current income. Trejo has $300,000 invested in certificates of dep
> Fiona Corcoran is responsible for meeting distributions for EEM Health and Life Insurance Company. An actuary, Robert Bjornsund, has forecasted that a specific policy will require $210,000 after ten years. Current interest rates are 8 percent, and RPM Re
> Stephanie Waldron is an aggressive individual whose career as a self-employed management consultant has blossomed. Waldron is both willing and able to bear substantial risk in order to earn a higher return. She is also very independent, preferring to mak
> What advantages do discounted bonds offer to investors? Why may a bond be called if it is selling at a premium?
> What are the holding period and the annualized compounded returns if you buy a zero coupon bond for $519 and it is redeemed after five years for $1,000? Compare the answer to the answer for Problem 5. Data from Problem 5: A $1,000 zero coupon bond sell
> The Sourland Mountain in New Jersey investment club has recently asked you to give a presentation on investing in corporate bonds. Club members have previously invested solely in corporate stocks, but several members have expressed an interest in diversi
> Which Dow Jones Industrial Average stocks would be considered “dogs”? Determine the Dow dogs as of January 1; invest $1,000 in each dog. At the end of a time period such as the semester or year, compare the dogs’ performance with the performance of the D
> What is the impact on GDP if consumer spending increases? Would the answer be different if the consumer spending was directed toward foreign goods?
> Your clients, Eva and Walther Sachs, operate a successful catering business specializing in Germanic and eastern European foods. It is a family business with part-time workers during peak periods. Most of the part-time employees have regular full-time jo
> You are given the following information concerning several mutual funds: During the time period, the Standard & Poor’s stock index exceeded the Treasury bill rate by 10.5 percent (i.e., rm 2 rf 5 10.5%). a) Rank the performance of
> Consider the following four investments. a) You invest $3,000 annually in a mutual fund that earns 10 percent annually, and you reinvest all distributions. How much will you have in the account at the end of 20 years? b) You invest $3,000 annually in a m
> Why does technical analysis receive little support from academically oriented students of investments
> If an investor buys shares in a no-load mutual fund for $31.40 and the share appreciate to $44.60 in a year, what would be the percentage return on the investment? If the fund charges an exit fee of 1 percent, what would be the return on the investment?
> How does the Fed pursue its economic goals? How may the tools of monetary policy affect securities prices?
> What is the Federal Reserve? What are its economic goals?
> What factors, besides the expected rate of inflation, may affect the rate of interest a borrower pays?
> As a portfolio manager, you are required to provide clients with a measure of your performance, a comparison with the market, and a measure of risk. Initially, your portfolio was worth $10 a share. During the last five years, the ending values of the por
> Christina Molitoris is preparing for a meeting of the board of directors of Chesapeake Bay Corporation, a developer of moderate-priced homes and vacation homes in the Chesapeake Bay area. The combination of the location near major metropolitan areas with
> This chapter illustrated the calculation of financial ratios using the financial statements of Chloe’s CoatS, a manufacturer and marketer of clothing. Tinker’s TrouserS also manufactures clothing. Given selected financial data for Tinker&rs
> A firm with earnings before interest and taxes of $500,000 needs $1 million of additional funds. If it issues debt, the bonds will mature after 20 years and pay interest of 8 percent. The firm could issue preferred stock with a dividend rate of 8 percent
> Two firms have sales of $1 million each. Other financial information is as follows: What are the operating profit margins and the net profit margins for these two firms? What is their return on equity? Why are they different? If total assets are the sam
> You have taken the following information from a firm’s financial statements. As an investor in the firm’s debt instruments, you are concerned with its liquidity position and its use of financial leverage. What conclusi
> A company whose stock is selling for $60 has the following balance sheet: / a) Construct a new balance sheet showing the effects of a 3-for-1 stock split. What is the new price of the stock? b) Construct a new balance sheet showing the effects of a 10 p
> A firm has the following items on its balance sheet: Describe how each of these accounts would appear after the following: a) A cash dividend of $1 per share b) 10 percent stock dividend (fair market value of stock is $13 per share) c) A 3-for-1 stock s
> An investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the dividend reinvestment plan. a) If neither the dividend nor the price changes, how many shares will the investor h
> Determine the times-dividend-earned ratio given the following information: 30% corporate income tax rate $10,000 earnings before interest and taxes $2,000 interest owed $2,000 preferred stock dividends
> If a firm has sales of $42,791,000 a year, and the average collection period for the industry is 40 days, what should be this firm’s accounts receivable if the firm is comparable to the industry?
> A firm with sales of $500,000 has average inventory of $200,000. The industry average for inventory turnover is four times a year. What would be the reduction in inventory if this firm were to achieve a turnover comparable to the industry average?
> What is the debt/equity ratio and the debt ratio for a firm with total debt of $700,000 and equity of $300,000?
> You purchased $1,000 of IBM stock at the end of each quarter from 2000 through 2006. Excluding commissions, how many shares have you accumulated? As of January 2010, IBM was selling for $130. What was the position worth in January 2010? (For questions 7
> What is dollar cost averaging? What is averaging down? Why may averaging down result in poor investment decisions? What were the percentage changes for these measures of the stock market in subsequent years? Dow Jones Industrial Average (ADJI) 11,4
> What is dollar cost averaging? What is averaging down? Why may averaging down result in poor investment decisions?
> What is the problem with time lags in technical analysis and why may the analysis lead to self-fulfilling predictions?
> What is the advantage of using a relative rather than an absolute scale to construct graphs of security prices?
> Historically, what rates of return have investors earned on investments in common stocks?
> Why may averaging percentage changes produce an inaccurate measure of the true rate of return?
> How does the computation of the Dow Jones Industrial Average differ from Standard & Poor’s 500 stock index and the Value Line index?
> What is a value-weighted average? Why does such an average place more emphasis on such firms as Microsoft and ExxonMobil than on other companies?
> How may realized returns be adjusted for risk so that investment performance may be judged on a risk-adjusted basis?
> How may beta coefficients be used to standardize returns for risk to permit comparisons of mutual fund performance?
> Why may the annual growth in a fund’s net asset value not be comparable to the return earned by an individual investor?
> What are the differences among loading fees, exit fees, and 12b-1 fees?
> Should an investor expect a mutual fund to outperform the market? If not, why should the investor buy the shares?
> What is a moving average? What is the significance when a stock’s price crosses a moving average of the stock’s price?
> What assets do money market mutual funds acquire? Could an individual investor with $12,345 to invest in a safe, short-term security acquire these assets?
> What differentiates a traditional savings account at a commercial bank from a money market mutual fund? Are investments in money market funds as safe as savings accounts and certificates of deposit with a commercial bank?
> What advantage do “families” of funds offer?
> What is a specialized mutual fund? What differentiates large and small cap funds? Value and growth funds?
> What is a loading charge? Do all investment companies charge this fee?
> Are mutual funds subject to federal income taxation? Are distributions from mutual funds taxable?
> Part 3 in the previous chapter requested that you obtain ratios such as the return on equity and the profit margin. A high profit margin and a high return on equity are desirable, but those data are derived from the firm’s balance sheet
> How do interest rates and risk affect a stock’s price in the Capital Asset Pricing Model?
> What variables affect the value of a stock according to the dividend-growth model? What role do earnings play in this model?
> What is the difference between the value of a stock and its price? When should they be equal?
> What changes produce a sell signal in the Dow Theory and Barron’s confidence index?
> What is the difference between the expected return and the required return? When should the two returns be equal?
> The efficient market hypothesis suggests that it is difficult to outperform the market on a consistent basis. Are there possible exceptions to the hypothesis that concern the valuation of common stock?
> Several closed-end investment companies and iShares invest in the same country, such as the Japan Equity Fund (JEQ) and the iShares Japan Index Series (EWJ). Compare their monthly percentage changes (i.e., monthly returns) for three years and compute the
> Why may investing in an ETF such as the various iShares be preferable to acquiring shares in a mutual fund that makes foreign investments?
> Why are hedge funds and private equity funds of little interest to most investors?
> How may mutual funds, closed-end investment companies, and ETFs be used to take positions in foreign securities?
> Why does arbitrage virtually assure that an ETF will sell for its net asset value?
> How do exchange-traded funds (ETFs) differ from mutual funds? Why may they be considered alternatives to index mutual funds?
> Using the information on the taxation of REIT distributions, what was the tax status of recent annual distributions made by Plum Creek Timber (PCU), UDR Inc. (UDR), and Washington Real Estate Investment Trust (WRE)?
> What differentiates a real estate investment trust (REIT) from a firm involved in building, developing, and owning properties? What differentiates a mortgage trust from an equity trust? What advantages do REITs offer investors over direct investments in
> What is the purpose of technical analysis, and why are those who use technical analysis referred to as chartists?
> Why can a closed-end investment company sell for a discount from net asset value but a mutual fund cannot sell for a discount?
> What are the differences between a closed-end investment company and a mutual fund? What are the sources of return from an investment in a closed-end investment company?
> Your broker suggests that the stock of QED is a good purchase at $25. You do an analysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 5 percent annually. The firm’s beta coefficient is 1.34, and th
> The annual risk-free rate of return is 2 percent and the investor believes that the market will rise annually at 7 percent. If a stock has a beta coefficient of 1.5 and its current dividend is $1, what should be the value of the stock if its earnings and
> An investor buys shares in a mutual fund for $20 per share. At the end of the year the fund distributes a dividend of $0.58, and after the distribution the net asset value of a share is $23.41. What would be the investor’s percentage return on the invest
> If a mutual fund’s net asset value is $23.40 and the fund sells its shares for $25, what is the load fee as a percentage of the net asset value?
> What is the net asset value of an investment company with $10,000,000 in assets, $790,000 in current liabilities, and 1,200,000 shares outstanding?
