Question: What is the source of return on

> 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.

> Calvin Jacobs is a widower who recently retired after a long career with a major Midwestern manufacturer. Beginning as a skilled craftsman, he worked his way up to the level of shop supervisor over a period of more than 30 years with the firm. Calvin rec

> 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 the 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 the efficient operation of a futures market?

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

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

> 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?

> What is fundamental analysis? Does the performance of a company have any bearing on the value of its stock? Explain.

> 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 Reverend Mark Thomas is the minister of a church in the San Diego area. He is married, has one young child, and earns a “modest income.” Because religious organizations are not notorious for their generous retirement programs, the reverend has decide

> 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?

> 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

> 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?

> 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?

> 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 various types of risk to which mutual fund shareholders are exposed. What is the major risk exposure of mutual funds? Are all funds subject to the same level of 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.

> Several months ago, Deb Forrester received a substantial sum of money from the estate of her late aunt. Deb initially placed the money in a savings account because she was not sure what to do with it. Since then, however, she has taken a course in invest

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

> What role, if any, do an investor’s personal characteristics play in determining portfolio policy? Explain.

> What is a stock spin-off? In very general terms, explain how a stock spin-off works. Are these spin-offs of any value to investors? Explain.

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

> How important is the general 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.

> Why is the reinvestment of interest income so important to bond investors?

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

> What’s the difference between current yield and yield to maturity? Between promised yield and realized yield? How does YTC differ from YTM?

> Why are bonds generally priced using semiannual compounding? Does it make much difference if you use annual compounding?

> 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?

> Explain how market yield affects the price of a bond. Could you price a bond without knowing its market yield? Explain.

> What is a stock split? How does a stock split affect the market value of a share of stock? Do you think it would make any difference (in price behavior) if the company also changed the dividend rate on the stock? Explain.

> Brett Daly is an active stock trader and an avid market technician. He got into technical analysis about 10 years ago, and although he now uses the Internet for much of his analytical work, he still enjoys running some of the numbers and doing some of th

> How might you, as a bond investor, use information about the term structure of interest rates and yield curves when making investment decisions?

> What is the term structure of interest rates and how is it related to the yield curve? What information is required to plot a yield curve? Describe an upward-sloping yield curve and explain what it has to say about the behavior of interest rates. Do the

> Explain why interest rates are important to both conservative and aggressive bond investors. What causes interest rates to move, and how can you monitor such movements?

> Why is interest sensitivity important to bond speculators? Does the need for interest sensitivity explain why active bond traders tend to use high-grade issues? Explain.

> What strategy would you expect an aggressive bond investor (someone who’s looking for capital gains) to employ?

> Briefly describe a bond ladder and note how and why an investor would use this investment strategy. What is a tax swap and why would it be used?

> Describe the process of bond portfolio immunization, and explain why an investor would want to immunize a portfolio. Would you consider portfolio immunization a passive investment strategy comparable to, say, a buy-and-hold approach? Explain.

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

> What does the term duration mean to bond investors and how does the duration of a bond differ from its maturity? What is modified duration, and how is it used? What is effective duration, and how does it differ from modified duration?