Question: Why are money market securities often called “

> Use the following data in answering below CFA Question; Suppose investor “satisfaction” with a portfolio increases with expected return and decreases with variance according to the following “utility&

> The yield curve for default-free zero-coupon bonds is currently as follows: a. What are the implied one-year forward rates? b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will

> a. Briefly explain the concept of the efficient market hypothesis (EMH) and each of its three forms— weak, semistrong, and strong—and briefly discuss the degree to which existing empirical evidence supports each of the three forms of the EMH. b. Briefly

> 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?

> You are a portfolio manager meeting a client. During the conversation that follows your formal review of her account, your client asks the following question: My grandson, who is studying investments, tells me that one of the best ways to make money in t

> Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and

> Some scholars contend that professional managers are incapable of outperforming the market. Others come to an opposite conclusion. Compare and contrast the assumptions about the stock market that support (a) passive portfolio management and (b) active

> The yield curve is upward-sloping. Can you conclude that investors expect short-term interest rates to rise? Why or why not?

> A market anomaly refers to: a. An exogenous shock to the market that is sharp but not persistent. b. A price or volume event that is inconsistent with historical price or volume trends. c. A trading or pricing structure that interferes with efficient

> 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?

> A “random walk” occurs when: a. Stock price changes are random but predictable. b. Stock prices respond slowly to both new and old information. c. Future price changes are uncorrelated with past price changes. d. Past information is useful in predict

> Use the following data in answering below CFA Question; Suppose investor “satisfaction” with a portfolio increases with expected return and decreases with variance according to the following “utility&

> Fencer issues two bonds with 20-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep discount with a coupon rate of 4% and a price of $580 to yield 8.4%. The second bond is issued at par value with a coupon rate of 8.75%

> Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect: a. An abnormal price change at the announcement. b. An abnormal price increase before the ann

> A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $800. What will be an investor’s taxable income from the bond over the coming year? The bond will not be sold at the end of the year. The bo

> The semistrong form of the efficient market hypothesis asserts that stock prices: a. Fully reflect all historical price information. b. Fully reflect all publicly available information. c. Fully reflect all relevant information including insider info

> Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 50%. Portfolios A and B are both well diversified. What is the expected return&

> Briefly explain whether investors should expect a higher return from holding portfolio A versus portfolio B under capital asset pricing theory (CAPM). Assume that both portfolios are fully diversified.

> Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 4% and IR 6%. A stock with a beta of 1 on IP and 0.4 on IR currently is expected to provide a rate of

> When plotting portfolio R relative to the capital market line, portfolio R lies: a. On the CML. b. Below the CML. c. Above the CML. d. Insufficient data given

> Two bonds were issued five years ago, with terms given in the following table: a. Why is the price range greater for the 9% coupon bond than the floating-rate bond? b. What factors could explain why the floating-rate bond is not always sold at par value

> When plotting portfolio R on the preceding table relative to the SML, portfolio R lies: a. On the SML. b. Below the SML. c. Above the SML. d. Insufficient data given.

> Use the following data in answering below CFA Question; Suppose investor “satisfaction” with a portfolio increases with expected return and decreases with variance according to the following “utility&

> If the APT is to be a useful theory in practice, the number of systematic factors in the economy must be small. Why?

> Suppose you observe the investment performance of 350 portfolio managers for five years and rank them by investment returns during each year. After five years, you find that 11 of the funds have investment returns that place the fund in the top half of t

> According to CAPM, the expected rate of return of a portfolio with a beta of 1 and an alpha of 0 is: a. Between rM and rf. b. The risk-free rate, rf. c. β(rM − rf). d. The expected return on the market, rM.

> Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 30%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3%

> Why would it be challenging to properly compare the performance of an equity fund to a fixed income mutual fund?

> How does investment banking differ from commercial banking?

> What are the differences between real and financial assets?

> The security market line depicts: a. A security’s expected return as a function of its systematic risk. b. The market portfolio as the optimal portfolio of risky securities. c. The relationship between a security’s return and the return on an index.

> What are agency problems? What are some approaches to solving them?

> What is the difference between asset allocation and security selection?

> What is the difference between a primary asset and a derivative asset?

> What are the differences between equity and fixed-income securities?

> What are the major components of the money market?

> What features of money market securities distinguish them from other fixed-income securities?

> What would happen to the divisor of the Dow Jones Industrial Average if FedEx, with a current price of around $115 per share, replaced Intel (with a current price of about $55 per share)?

> What problems would confront a mutual fund trying to create an index fund tied to an equally weighted index of a broad stock market?

> Using the data in the previous problem, calculate the first-period rates of return on the following indexes of the three stocks: a. A market value–weighted index b. An equally weighted index

> Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average?

> Assume both portfolios A and B are well diversified, that E(rA) = 14% and E(rB) = 14.8%. If the economy has only one factor, and βA = 1 while βB = 1.1, what must be the risk-free rate?

> Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits twofor-one in the last period. a. Calculate the rate of return on a price-weighted index of the three stocks f

> Turn to Figure 2.8 and look at the listing for Home Depot. a. What was the firm’s closing price yesterday? b. How many shares can you buy for $5,000? c. What would be your annual dividend income from those shares? d. What must be Home Depot’s earning

> Turn back to Figure 2.3 and look at the Treasury bond maturing in February 2039. a. How much would you have to pay to purchase one of these bonds? b. What is its coupon rate? c. What is the current yield (i.e., coupon income as a fraction of bond pric

> Find the equivalent taxable yield of the municipal bond in Problem 14 for tax brackets of: a. Zero b. 10% c. 20% d. 30%

> An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?

> Suppose that 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 combined tax bracket is? a. Zero b. 10% c. 20% d. 30%

> A municipal bond carries a coupon rate of 2.25% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% combined tax bracket?

> 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

> What is meant by limited liability?

> You expect a tax-free municipal bond portfolio to provide a rate of return of 4%. Management fees of the fund are 0.6%. a. What fraction of portfolio income is given up to fees? b. If the management fees for an equity fund also are 0.6%, but you expect

> What are the key differences between common stock, preferred stock, and corporate bonds?

> What is the difference between a call option and a long position in a futures contract?

> What is the difference between a put option and a short position in a futures contract?

> Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at yearend at $40, and receives a $4 year-end dividend. The firm is in the 21% tax bracket.

> Examine the stocks listed in Figure 2.8. For what fraction of these stocks is the 52-week high price at least 40% greater than the 52-week low price? What do you conclude about the volatility of prices on individual stocks? Figure 2.8:

> 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?

> Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of six months. a. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in six months? (i) $40

> Why do call options with exercise prices higher than the price of the underlying stock sell for positive prices?

> What options position is associated with: a. The right to buy an asset at a specified price? b. The right to sell an asset at a specified price? c. The obligation to buy an asset at a specified price? d. The obligation to sell an asset at a specified

> Turn back to Figure 2.10 and look at the Microsoft options. Suppose you buy a November expiration call option with exercise price $140.) a. If the stock price at option expiration is $144, will you exercise your call? What is the profit on your position

> Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant made the following arguments: a. Bo

> Look at the futures listings for corn in Figure 2.11. Suppose you buy one contract for December 2020 delivery. If the contract closes in December at a price of $4.00 per bushel, what will be your profit or loss? (Each contract calls for delivery of 5,000

> Which security should sell at a greater price? a. A 10-year Treasury bond with a 5% coupon rate or a 10-year T-bond with a 6% coupon. b. A three-month expiration call option with an exercise price of $40 or a three-month call on the same stock with an

> A T-bill with face value $10,000 and 87 days to maturity is selling at a bank discount ask yield of 3.4%. (LO 2-1) a. What is the price of the bill? b. What is its bond equivalent yield?

> You see an advertisement for a book that claims to show how you can make $1 million with no risk and with no money down. Will you buy the book?

> 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?

> Firms raise capital from investors by issuing shares in the primary markets. Does this imply that corporate financial managers can ignore trading of previously issued shares in the secondary market?

> Give an example of three financial intermediaries, and explain how they act as a bridge between small investors and large capital markets or corporations.

> What would you expect to be the relationship between securitization and the role of financial intermediaries in the economy? For example, what happens to the role of local banks in providing capital for mortgage loans when national markets in mortgage-ba

> Why would you expect securitization to take place only in highly developed capital markets?

> Wall Street firms have traditionally compensated their traders with a share of the trading profits they generated. How might this practice have affected traders’ willingness to assume risk? What agency problem can this practice can engender?

> Consider the following data for a single-index economy. All portfolios are well diversified. Suppose another portfolio E is well diversified with a beta of 2/3 and expected return of 9%. Is there an arbitrage opportunity? If so, what is it?

> Which of the following statements reflects the importance of the asset allocation decision to the investment process? The asset allocation decision: a. Helps the investor decide on realistic investment goals. b. Identifies the specific securities to in

> Oversight by large institutional investors or creditors is one mechanism to reduce agency problems. Why don’t individual investors in the firm have the same incentive to keep an eye on management?

> Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems, that is, potential conflicts of interest between managers and shareholders. a. A fixed salary. b. Stock in the firm that

> 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?

> Examine the balance sheet of commercial banks in Table 1.3. a. What is the ratio of real assets to total assets? b. What is that ratio for nonfinancial firms (Table 1.4)? c. Why should this difference be expected? Table 1.3: Table 1.4:

> What reforms to the financial system might reduce its exposure to systemic risk?

> Reconsider Lanni Products from Problem 9. a. Prepare its balance sheet just after it gets the bank loan. What is the ratio of real assets to total assets? b. Prepare the balance sheet after Lanni spends the $70,000 to develop its software product. What

> Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,000 and has cash on hand of $20,000 contributed by Lanni’s owners. For each of the following transactions, identify the real and/or financial

> Suppose that in a wave of pessimism, housing prices fall by 10% across the entire economy. a. Has the stock of real assets of the economy changed? b. Are individuals less wealthy? c. Can you reconcile your answers to (a) and (b)?

> For each transaction, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction? a. Toyota takes out a bank loan to finance the construction of a new factory. b. Toyota pays off its loa

> A bond with an annual coupon rate of 4.8% sells for $970. What is the bond’s current yield?

> Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 0.4% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by tr

> Consider a bond with a 10% coupon and with 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?

> 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?

> Why do bond prices go down when interest rates go up? Don’t bond investors like to receive high interest rates?

> A zero-coupon bond with face value $1,000 and maturity of five years sells for $746.22. a. What is its yield to maturity? b. What will happen to its yield to maturity if its price falls immediately to $730?

> A newly issued bond pays its coupons once a year. Its coupon rate is 5%, its maturity is 20 years, and its yield to maturity is 8%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7% by

> A coupon bond paying semiannual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 6%, what is the invoice price of the bond?

> What would be the likely effect on a bond’s yield to maturity of: a. An increase in the issuing firm’s times-interest earned ratio? b. An increase in the issuing firm’s debt-equity ratio? c. An increase in the issuing firm’s quick ratio?

> Consider a bond with a settlement date of February 22, 2022, and a maturity date of March 15, 2030. The coupon rate is 5.5%. a. If the yield to maturity of the bond is 5.34% (bond equivalent yield, semiannual compounding), what is the list price of the

> Is the coupon rate of the bond in the previous problem 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.

> Joan McKay is a portfolio manager for a bank trust department. McKay meets with two clients, Kevin Murray and Lisa York, to review their investment objectives. Each client expresses an interest in changing his or her individual investment objectives. Bot

> 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

> A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $800, what will be the percentage capital gain of this bond over the next year if its yield to maturity

> Fill in the table below for the following zero-coupon bonds, all of which have par values of $1,000.