All Related Questions of General Investment

Q: The Kelleher brothers, Victor and Darin, could not be more

The Kelleher brothers, Victor and Darin, could not be more different. Victor is assertive and enjoys Taking risks, while Darin is reserved and is exceedingly risk averse. Both have jobs that pay well...

Q: How are the SIPC and FDIC similar? Why are securities laws

How are the SIPC and FDIC similar? Why are securities laws frequently referred to as “full disclosure laws,” and what is the role of the SEC?

Q: Should an investor expect a mutual fund to outperform the market?

Should an investor expect a mutual fund to outperform the market? If not, why should the investor buy the shares?

Q: What are the differences among loading fees, exit fees, and

What are the differences among loading fees, exit fees, and 12b-1 fees?

Q: Why may the annual growth in a fund’s net asset value not

Why may the annual growth in a fund’s net asset value not be comparable to the return earned by an individual investor?

Q: How may beta coefficients be used to standardize returns for risk to

How may beta coefficients be used to standardize returns for risk to permit comparisons of mutual fund performance?

Q: How may realized returns be adjusted for risk so that investment performance

How may realized returns be adjusted for risk so that investment performance may be judged on a risk-adjusted basis?

Q: Are mutual funds subject to federal income taxation? Are distributions from

Are mutual funds subject to federal income taxation? Are distributions from mutual funds taxable?

Q: What is a loading charge? Do all investment companies charge this

What is a loading charge? Do all investment companies charge this fee?

Q: What is a specialized mutual fund? What differentiates large and small

What is a specialized mutual fund? What differentiates large and small cap funds? Value and growth funds?

Q: What advantage do “families” of funds offer?

What advantage do “families” of funds offer?

Q: An investor buys shares in a mutual fund for $20 per

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 w...

Q: In an underwriting, what role does each of the following play

In an underwriting, what role does each of the following play? a) The investment banker b) The syndicate c) The preliminary and final prospectus d) The SEC

Q: What is the net asset value of an investment company with $

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?

Q: If a mutual fund’s net asset value is $23.40

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?

Q: What is the difference between an underwriting and a “best-

What is the difference between an underwriting and a “best-efforts” sale of securities? Who bears the risk associated with each sale? If the investment banker overprices a new issue of securities, who...

Q: The text used Ariba (ARBA) and Ask Jeeves as illustrations

The text used Ariba (ARBA) and Ask Jeeves as illustrations of stocks that soared after the IPO, only to decline dramatically in subsequent trading. Suppose investor A bought 100 shares of Ariba at the...

Q: Groupon (GRPN) went public at $20 a share and

Groupon (GRPN) went public at $20 a share and closed the first day at $26.11. Zynga (ZNGA) went public at $10 a share but closed the first day at $9.50. Facebook (FB) went public in 2012 at $38. While...

Q: 1. What is the difference between each pair of items?

1. What is the difference between each pair of items? a) Listed and unlisted securities b) Brokers and market makers c) Full-service and discount brokerage firms d) Primary and secondary markets e) Ma...

Q: When would you use a stop-loss order?

When would you use a stop-loss order?

Q: Why is it riskier to buy stock on margin?

Why is it riskier to buy stock on margin?

Q: The following questions concern short selling: a) When should

The following questions concern short selling: a) When should an investor sell short? b) How can investors sell stock they do not own? c) How is a short position closed? d) How does the investor profi...

Q: Erin O’Reilly was recently employed by the human resources department of a

Erin O’Reilly was recently employed by the human resources department of a moderate-sized engineering firm. Management is considering the adoption of a defined-benefit pension plan in which the firm w...

Q: Repeat Problem 1 to determine the percentage return on your investment but

Repeat Problem 1 to determine the percentage return on your investment but in this case suppose the price of the stock falls to $7.50 per share. What generalization can be inferred from your answers t...

Q: You want $100,000 after eight years in order to

You want $100,000 after eight years in order to start a business. Currently you have $26,000, which may be invested to earn 7 percent annually. How much additional money must you set aside each year i...

Q: You have accumulated $325,000 in a retirement account and

You have accumulated $325,000 in a retirement account and continue to earn 8 percent on invested funds. a) What amount may you withdraw annually starting today based on a life expectancy of 20 years?...

Q: Your first child is now a 1-year-old.

Your first child is now a 1-year-old. Tuition currently costs $60,000 to attend a public college for four years. If these costs rise 5 percent annually, how much must you invest each year to cover the...

Q: Which is the better choice when purchasing a $30,000

Which is the better choice when purchasing a $30,000 car: a) A four-year loan at 6 percent, b) An immediate rebate of $2,000 and a four-year loan at 8 percent?

Q: You purchase a stock for $50 and sell the stock for

You purchase a stock for $50 and sell the stock for $70 after three years. a) What is the annual return on your investment if you bought the stock in a cash account? b) What is the annual return on yo...

Q: Care facilities are expensive. Your mother wants a single room with

Care facilities are expensive. Your mother wants a single room with her own bathroom. The annual estimated cost is $100,000, but your mother does not anticipate entering the facility for four years. H...

Q: The “Rule of 72” is a shortcut method to answer

The “Rule of 72” is a shortcut method to answer this question, “How long will it take to double my money if i earn a specified percentage such as 10 percent? Divide 72 by the rate, and the rule gives...

Q: The preceding problems can be solved using the interest tables supplied in

The preceding problems can be solved using the interest tables supplied in Appendix A. To test your ability to construct your own interest factors or to use a financial calculator, solve the following...

Q: A 40-year-old individual establishes a retirement account that

A 40-year-old individual establishes a retirement account that is expected to earn 7 percent annually. Contributions will be $2,000 annually at the beginning of each year. Initially, the saver expects...

Q: You are offered $900 five years from now or $150

You are offered $900 five years from now or $150 at the end of each year for the next five years. If you can earn 6 percent on your funds, which offer will you accept? If you can earn 14 percent on yo...

Q: You purchase 100 shares of stock at $100 ($10,

You purchase 100 shares of stock at $100 ($10,000); the margin requirement is 40percent. What are the dollar and percentage returns if a) You sell the stock for $112 and bought the stock for cash? b)...

Q: The following questions illustrate non annual compounding. a) One

The following questions illustrate non annual compounding. a) One hundred dollars is placed in an account that pays 12 percent. How much will be in the account after one year if interest is compounded...

Q: At the end of each year, Tom invests $2,

At the end of each year, Tom invests $2,000 in a retirement account. Joan also invests $2,000 in a retirement account but makes her deposits at the beginning of each year. They both earn 9 percent on...

Q: You purchase a $100,000 life insurance policy for a

You purchase a $100,000 life insurance policy for a single payment of $35,000. If you want to earn 9 percent on invested funds, how soon must you die for the policy to have been the superior alternati...

Q: You are offered an annuity of $12,000 a year

You are offered an annuity of $12,000 a year for 15 years. The annuity payments start after five years have elapsed. If the annuity costs $75,000, is the annuity a good purchase if you can earn 7 perc...

Q: You purchase a $1,000 asset for $800.

You purchase a $1,000 asset for $800. It pays $60 a year for seven years at which time you receive the $1,000 principal. Prove that the annual return on this investment is not 9 percent.

Q: You invest $1,000 a year for ten years at

You invest $1,000 a year for ten years at 6 percent and then invest $2,000 a year for an additional ten years at 6 percent. How much will you have accumulated at the end of the 20 years?

Q: You are promised $10,000 a year for six years

You are promised $10,000 a year for six years after which you will receive $5,000 a year for six years. If you can earn 8 percent annually, what is the present value of this stream of payments?

Q: A township expects its population of 5,000 to grow annually

A township expects its population of 5,000 to grow annually at the rate of 5 percent. The township currently spends $300 per inhabitant, but, as the result of inflation and wage increments, expects th...

Q: Suppose you purchase a home for $350,000. After

Suppose you purchase a home for $350,000. After making a down payment of $50,000, you borrow the balance through a mortgage loan at 8 percent for 20 years. What is the annual payment required by the m...

Q: You have an elderly aunt, Aunt Kitty, who has just

You have an elderly aunt, Aunt Kitty, who has just sold her house for $365,000 and entered a retirement community that charges $100,000 annually. If she can earn 6 percent on her funds, how long will...

Q: Investor A buys 100 shares of SLM Inc. at $35

Investor A buys 100 shares of SLM Inc. at $35 a share and holds the stock for a year. Investor B buys 100 shares on margin. The margin requirement is 60 percent, and the interest rate on borrowed fund...

Q: A widower currently has $107,500 yielding 8 percent annually

A widower currently has $107,500 yielding 8 percent annually. Can he withdraw $18,234 a year for the next 10 years? If he cannot, what return must he earn in order to withdraw $18,234 annually?

Q: A saver places $1,000 in a certificate of deposit

A saver places $1,000 in a certificate of deposit that matures after 20 years and that each year pays 4 percent interest, which is compounded annually until the certificate matures. a) How much intere...

Q: At the end of each year a self-employed person deposits

At the end of each year a self-employed person deposits $1,500 in a retirement account that earns 7 percent annually. a) How much will be in the account when the individual retires at the age of 65 if...

Q: A saver wants $100,000 after ten years and believes

A saver wants $100,000 after ten years and believes that it is possible to earn an annual rate of 8 percent on invested funds. a) What amount must be invested each year to accumulate $100,000 if (1) t...

Q: An investment offers $10,000 per year for 20 years

An investment offers $10,000 per year for 20 years. If an investor can earn 6 percent annually on other investments, what is the current value of this investment? If its current price is $120,000, sho...

Q: Graduating seniors may earn $45,000. If the annual

Graduating seniors may earn $45,000. If the annual rate of inflation is 2 percent, what must these graduates earn after 20 years to maintain their current purchasing power? If the rate of inflation ri...

Q: A person who is retiring at age 65 and who has $

A person who is retiring at age 65 and who has $200,000 wants to leave an estate of at least $30,000. How much can the individual draw annually on the $200,000 (starting at the end of the year) if the...

Q: For a given interest rate, what happens to the following as

For a given interest rate, what happens to the following as time increases? a) Future value of $1 b) Future value of an annuity c) Present value of $1 d) Present value of an annuity

Q: For a given time period, what happens to the following as

For a given time period, what happens to the following as the interest rate increases? a) Future value of $1 b) Future value of an annuity c) Present value of $1 d) Present value of an annuity

Q: What is the difference between a lump-sum payment and an

What is the difference between a lump-sum payment and an annuity? What is the difference between an ordinary annuity and an annuity due? Are all series of payments annuities?

Q: Investor A makes a cash purchase of 100 shares of AB&

Investor A makes a cash purchase of 100 shares of AB&C common stock for $55 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends...

Q: What is the difference between compounding (the determination of future value

What is the difference between compounding (the determination of future value) and discounting (the determination of present value)?

Q: As is explained in subsequent chapters, increases in interest rates cause

As is explained in subsequent chapters, increases in interest rates cause the value of assets to decline. Why would you expect this relationship?

Q: Your financial planning practice services several sophisticated individuals who have accumulated a

Your financial planning practice services several sophisticated individuals who have accumulated a substantial amount of assets but who are naïve concerning potential strategies to reduce taxes To inc...

Q: Your traditional IRA account has stock of GFH, which cost $

Your traditional IRA account has stock of GFH, which cost $2,000 20 years ago when you were 50 years old. You have been very fortunate, and the stock is now worth $23,000. You are in the 35 percent in...

Q: For 20 years through age 66, you contribute $3,

For 20 years through age 66, you contribute $3,000 to your 401(k) plan and earn 6 percent annually. If you are in the 20 percent income tax bracket, what will be your annual tax obligation when you wi...

Q: You are 60 years old. Currently, you have $10

You are 60 years old. Currently, you have $10,000 invested in an IRA and have just received a lump-sum distribution of $50,000 from a pension plan, which you roll over into an IRA. You continue to mak...

Q: Bob places $1,000 a year in his IRA for

Bob places $1,000 a year in his IRA for ten years and then invests $2,000 a year for the next ten years. Mary places $2,000 a year in her IRA for ten years and then invests $1,000 a year for the next...

Q: Bob and Barbara are 55 and 50 years old. Bob annually

Bob and Barbara are 55 and 50 years old. Bob annually contributes $1,500 to Barbara’s IRA. They plan to make contributions until Bob retires at age 65 and then to leave the funds in as long as possibl...

Q: a) An individual in the 28 percent federal income tax bracket

a) An individual in the 28 percent federal income tax bracket and 15 percent long-term capital gains tax bracket bought and sold the following securities during the year: What are the taxes owed on th...

Q: An investor is in the 33 percent tax bracket and pays long

An investor is in the 33 percent tax bracket and pays long-term capital gains taxes of 15 percent. What are the taxes owed (or saved in the case of losses) in the current tax year for each of the foll...

Q: Ms. Tejal Gandhi has decided that the stock of Small Cap

Ms. Tejal Gandhi has decided that the stock of Small Cap Inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms....

Q: You are in the 28 percent income tax bracket and pay long

You are in the 28 percent income tax bracket and pay long-term capital gains taxes of 15 percent. What are the taxes owed or saved in the current year for each of the following sets of transactions? a...

Q: You are in the 25 percent income tax bracket. What are

You are in the 25 percent income tax bracket. What are the taxes owed or saved if you a) Contribute $2,000 to a 401(k) plan b) Contribute $2,000 to a Roth IRA c) Withdraw $2,000 from a traditional IRA...

Q: Which of the following illustrates a tax shelter? a)

Which of the following illustrates a tax shelter? a) Dividend income b) Interest earned on a savings account c) A stock purchased for $10 that is currently worth $25 d) An IRA e) A Roth account f) The...

Q: What are IRA, 401(k), and Keogh plans?

What are IRA, 401(k), and Keogh plans? What are their primary advantages for investors?

Q: What differentiates a deductible IRA from a Roth IRA? What conditions

What differentiates a deductible IRA from a Roth IRA? What conditions favor the Roth IRA?

Q: Taxes affect financial planning. Go to an Internet site such as

Taxes affect financial planning. Go to an Internet site such as the IRS website (www.irs.ustreas.gov) and answer the following questions. Other possible sites include TurboTax (www.turbotax.intuit.co...

Q: Does the efficient market hypothesis suggest that an investor cannot outperform the

Does the efficient market hypothesis suggest that an investor cannot outperform the market? What effect does the dissemination of information (as required by the full disclosure laws) have on the effi...

Q: What are the three forms of the efficient market hypothesis? What

What are the three forms of the efficient market hypothesis? What are possible exceptions (anomalies) to the efficient market hypothesis?

Q: What are the steps for constructing a financial plan? What role

What are the steps for constructing a financial plan? What role do financial statements play in the construction of financial plans?

Q: What is the difference between an individual’s forecasted balance sheet and forecasted

What is the difference between an individual’s forecasted balance sheet and forecasted cash budget? Which of the following should be part of an individual’s balance sheet and which should be part of t...

Q: An investor sells a stock short for $36 a share.

An investor sells a stock short for $36 a share. A year later, the investor covers the position at $30 a share. If the margin requirement is 60 percent, what is the percentage return earned on the inv...

Q: What is a tax shelter? Does a tax shelter imply that

What is a tax shelter? Does a tax shelter imply that the individual avoids paying taxes?

Q: What is a capital gain, and is it subject to taxation

What is a capital gain, and is it subject to taxation? May capital losses be used to offset capital gains and income from other sources?

Q: In Chapter 1, you selected ten stocks and invested $10

In Chapter 1, you selected ten stocks and invested $10,000 in each. This assignment adds to what you have already done. a. What does your portfolio’s beta coefficient tell you about the tendency of th...

Q: Although investing requires the individual to bear risk, the risk can

Although investing requires the individual to bear risk, the risk can be controlled through the construction of diversified portfolios and by excluding any portfolio that offers an inferior return for...

Q: Floria Scarpia believes that many of her clients could benefit from using

Floria Scarpia believes that many of her clients could benefit from using international investments to diversify their portfolios, but many are reluctant to invest abroad—especially...

Q: What is the beta of a portfolio consisting of one share of

What is the beta of a portfolio consisting of one share of each of the following stocks, given their respective prices and beta coefficients? How would the portfolio beta differ if (a) the investor p...

Q: What is the return on a stock according to the security market

What is the return on a stock according to the security market line if the risk-free rate is 6 percent, the return on the market is 10 percent, and the stock’s beta is 1.5? If the beta had been 2.0, w...

Q: You are considering purchasing two stocks with the following possible returns and

You are considering purchasing two stocks with the following possible returns and probabilities of occurrence: Compare the expected returns and risk (as measured by the standard deviations) of each in...

Q: Using the material on the standard deviation and the coefficient of variation

Using the material on the standard deviation and the coefficient of variation presented in the appendix to this chapter, rank the following investments with regard to risk.

Q: This problem illustrates how beta coefficients are estimated and uses material covered

This problem illustrates how beta coefficients are estimated and uses material covered in the appendix to this chapter. It may be answered using any program that performs linear regression analysis su...

Q: A speculator sells a stock short for $50 a share.

A speculator sells a stock short for $50 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $42. What is the percentage return on the...

Q: Given the returns on a domestic stock and a foreign stock,

Given the returns on a domestic stock and a foreign stock, what are the correlation coefficients relating the returns for the 20 years and for each five-year time period:1993–1997, 1...

Q: You are considering three stocks with the following expected dividend yields and

You are considering three stocks with the following expected dividend yields and capital gains: a) What is the expected return on each stock? b) How may transactions costs and capital gains taxes aff...

Q: A portfolio consists of assets with the following expected returns

A portfolio consists of assets with the following expected returns a) What is the expected return on the portfolio? b) What will be the expected return if the individual reduces the holdings of the A...

Q: You are given the following information concerning two stocks:

You are given the following information concerning two stocks: a) What is the expected return on a portfolio consisting of 40 percent in stock A and 60 percent in stock B? b) What is the standard dev...

Q: You are given the following information: / a

You are given the following information: a) What are the expected returns and standard deviations of a portfolio consisting of: 1. 100 percent in stock A? 2. 100 percent in stock B? 3. 50 percent in...

Q: If the expected returns of two stocks are the same but the

If the expected returns of two stocks are the same but the standard deviations of the returns differ, which security is to be preferred?

Q: Indifference curves used in portfolio theory relate risk and return. How

Indifference curves used in portfolio theory relate risk and return. How is the portfolio’s risk measured? If one investor’s indifference curves are steeper than another investor’s, what does that ind...

Q: What is a beta coefficient? What do beta coefficients of 0

What is a beta coefficient? What do beta coefficients of 0.5, 1.0, and 1.5 mean?

Q: If the correlation coefficient for a stock and the market equals 0

If the correlation coefficient for a stock and the market equals 0, what is the market risk associated with the stock?

Q: How are the capital market line and the security market line different

How are the capital market line and the security market line different? What does each represent?

Q: A stock sells for $10 per share. You purchase 100

A stock sells for $10 per share. You purchase 100 shares for $10 a share (i.e., for $1,000), and after a year the price rises to $17.50. What will be the percentage return on your investment if you bo...

Q: What is the difference between non diversifiable (systematic) risk and

What is the difference between non diversifiable (systematic) risk and diversifiable (unsystematic) risk?

Q: What is a diversified portfolio? What type of risk is reduced

What is a diversified portfolio? What type of risk is reduced through diversification? How many securities are necessary to achieve this reduction in risk? What characteristics must these securities p...

Q: What are the sources of return on an investment? What are

What are the sources of return on an investment? What are the differences among the expected return, the required return, and the realized return?

Q: If an investor desires diversification, should he or she seek investments

If an investor desires diversification, should he or she seek investments that have a high positive correlation?

Q: How does arbitrage pricing theory advance our understanding of security returns?

How does arbitrage pricing theory advance our understanding of security returns?

Q: Consider the following four investments. a) You invest $

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...

Q: You are given the following information concerning several mutual funds:

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 percen...

Q: If an investor buys shares in a no-load mutual fund

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...

Q: What differentiates a traditional savings account at a commercial bank from a

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 wi...

Q: What assets do money market mutual funds acquire? Could an individual

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?

Q: Bell Corp. issues a bond with the following features

Bell Corp. issues a bond with the following features The current interest rate on comparable debt is 7 percent, so the bond initially sells for $713. What is the accrued interest on the bond for each...

Q: How do you purchase a publicly traded bond?

How do you purchase a publicly traded bond?

Q: Given the following information concerning four stocks, /

Given the following information concerning four stocks, a) Construct a simple price-weighted average, a value-weighted average, and a geometric average. b) What is the percentage increase in each ave...

Q: You are given the following information concerning four stocks:

You are given the following information concerning four stocks: Using 20X0 as the base year, construct three aggregate measures of the market that simulate the Dow Jones Industrial Average, the S&am...

Q: An investor buys a stock for $35 and sells it for

An investor buys a stock for $35 and sells it for $56.38 after five years. a) What is the holding period return? b) What is the true annual rate of return?

Q: You sold a security for $980 that you purchased five years

You sold a security for $980 that you purchased five years before for $795. What was the holding period return? Prove that this return overstates the annualized, compound return.

Q: You invest $1,000 in a large company stock and

You invest $1,000 in a large company stock and $1,000 in a corporate bond. If you earn 10.0 percent on the stock and 6.0 percent on the bond and hold each security for 10 years, what are the terminal...

Q: In 2000, the Dow Jones Industrial Average’s range was 11,

In 2000, the Dow Jones Industrial Average’s range was 11,72329,796. If the historical returns on stock were 10.4 percent, what should have been the range in the Dow Jones Industrial Average for 2009 i...

Q: Determine the value of the Dow Jones Industrial Average as of your

Determine the value of the Dow Jones Industrial Average as of your date of birth and as of your most recent birthday. What was the annualized return on the average between the two dates? Since this re...

Q: A stock costs $80 and pays a $4 dividend each

A stock costs $80 and pays a $4 dividend each year for three years. a) If an investor buys the stock for $80 and expects to sell it for $100 after three years, what is the anticipated annual rate of r...

Q: You purchase a stock for $100 that pays an annual dividend

You purchase a stock for $100 that pays an annual dividend of $5.50. At the beginning of the second year, you purchase an additional share for $130. At the end of the second year, you sell both shares...

Q: You purchase a stock for $40 and sell it for $

You purchase a stock for $40 and sell it for $50 after holding it for five years. During this period you collected an annual dividend of $2. Did you earn more than 12 percent on your investment? What...

Q: A call penalty protects whom from what? Why may firms choose

A call penalty protects whom from what? Why may firms choose to retire debt prior to maturity? Would you expect a callable bond to have a higher or lower coupon rate of interest than a non-callable bo...

Q: You purchase shares in an investment company such as a mutual fund

You purchase shares in an investment company such as a mutual fund for $35 a share. The fund makes the following cash payments (“distributions”): At the end of the...

Q: You invest $100 in a mutual fund that grows 10 percent

You invest $100 in a mutual fund that grows 10 percent annually for four years. Then the fund experiences an exceptionally bad year and declines by 60 percent. After the bad year, the fund resumes its...

Q: You sold a stock short for $50 and maintained the position

You sold a stock short for $50 and maintained the position for two years during which the stock paid an annual dividend of $2. At the end of two years, you closed your position when the stock was sell...

Q: You read that stock A is trading for $50 and is

You read that stock A is trading for $50 and is down 50 percent for the year. Stock B is also trading for $50 but has risen 100 percent for the year. If the investor had purchased one share of each st...

Q: You believe that QED stock may be a good investment and decide

You believe that QED stock may be a good investment and decide to buy 100 shares at $40. You subsequently buy an additional $4,000 worth of the stock every time the stock’s price declines by an additi...

Q: a) A closed-end investment company is currently selling for

a) A closed-end investment company is currently selling for $10 and its net asset value is $10.63. You decide to purchase 100 shares. During the year, the company distributes $0.75 in dividends. At en...

Q: You purchase a REIT for $50. It distributes $3

You purchase a REIT for $50. It distributes $3 consisting of $1 in income, $0.50 in long-term capital gains, $0.30 in short-term capital gains, and $1.20 in return of capital. After a year, you sell t...

Q: REITs pay dividends in order to retain their favorable tax status.

REITs pay dividends in order to retain their favorable tax status. As the next chapter on stock explains, corporate dividends are made from earnings. REIT dividends often are not made from earnings bu...

Q: The portfolio manager of a hedge fund believes that stock A is

The portfolio manager of a hedge fund believes that stock A is undervalued and stock B is overvalued. Currently their prices are $30 and $30, respectively. The portfolio manager of the fund buys 100 s...

Q: Currently a stock index stands at 100 and the leveraged ETF

Currently a stock index stands at 100 and the leveraged ETF is selling for $100. The ETF should generate a return that is twice the daily return on the index. Over the next 21 days the value of the i...

Q: What are several human traits that tend to affect investment decisions?

What are several human traits that tend to affect investment decisions?

Q: In October 2009, Ares Capital Corporation (ARCC) announced that

In October 2009, Ares Capital Corporation (ARCC) announced that it was acquiring Allied Capital (ALD). The terms of the acquisition specified that one share of ALD would become 0.325 share of ARCC. Pr...

Q: You make an investment and the annual returns are as follows:

You make an investment and the annual returns are as follows: The average annual return is 3 percent. What is the true annualized return?

Q: The following correlation matrix gives the correlation coefficients for several sectors within

The following correlation matrix gives the correlation coefficients for several sectors within the S&P 500. What can you conclude concerning investing in the sectors to diversify a portfolio?

Q: Ken Saffaf’s 22-year-old daughter Bozena has just accepted

Ken Saffaf’s 22-year-old daughter Bozena has just accepted a job with Doctor Medical Systems (DMS), a firm specializing in computer services for doctors. DMS offers employees a 401(k...

Q: Amanda Monaco has just inherited her father’s company. Prior to his

Amanda Monaco has just inherited her father’s company. Prior to his death, Mr. Monaco was the sole stockholder, and he left the entire company to his only daughter. Although Amanda h...

Q: An investor requires a return of 12 percent on risky securities.

An investor requires a return of 12 percent on risky securities. A stock sells for $25, it pays a dividend of $1, and the dividends compound annually at 7 percent. Will this investor find the stock at...

Q: A firm’s stock earns $2 per share, and the firm

A firm’s stock earns $2 per share, and the firm distributes 40 percent of its earnings as cash dividends. Its dividends grow annually at 4 percent. a) What is the stock’s price if the required return...

Q: You are considering two stocks. Both pay a dividend of $

You are considering two stocks. Both pay a dividend of $1, but the beta coefficient of A is 1.5 while the beta coefficient of B is 0.7. Your required return is k = 8% + (15% 2 8%) b. a) What is the re...

Q: You are offered two stocks. The beta of A is 1

You are offered two stocks. The beta of A is 1.4 while the beta of B is 0.8. The growth rates of earnings and dividends are 10 percent and 5 percent, respectively. The dividend yields are 5 percent an...

Q: The required return on an investment is 10 percent. You estimate

The required return on an investment is 10 percent. You estimate that firm X’s dividends will grow as follows: For the subsequent years you expect the dividend to grow but at the mo...

Q: Why do the supporters of behavioral finance suggest that emotions lead to

Why do the supporters of behavioral finance suggest that emotions lead to inferior investment decisions?

Q: Management has recently announced that expected dividends for the next three years

Management has recently announced that expected dividends for the next three years will be as follows For the subsequent years, management expects the dividend to grow at 5 percent annually. If the ri...

Q: Management has recently announced that expected dividends for the next three years

Management has recently announced that expected dividends for the next three years will be as follows The firm’s assets will then be liquidated and the proceeds invested in the prefe...

Q: You are given the following data: / a)

You are given the following data: a) What is the value of the stock? b) If the growth rate increases to 6 percent and the dividend remains $1, what is the value of the stock? c) If the required return...

Q: What is the net asset value of an investment company with $

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?

Q: If a mutual fund’s net asset value is $23.40

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?

Q: An investor buys shares in a mutual fund for $20 per

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 w...

Q: The annual risk-free rate of return is 2 percent and

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, wha...

Q: Your broker suggests that the stock of QED is a good purchase

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...

Q: What are the differences between a closed-end investment company and

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?

Q: Why can a closed-end investment company sell for a discount

Why can a closed-end investment company sell for a discount from net asset value but a mutual fund cannot sell for a discount?

Q: What is the purpose of technical analysis, and why are those

What is the purpose of technical analysis, and why are those who use technical analysis referred to as chartists?

Q: What differentiates a real estate investment trust (REIT) from a

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 advantage...

Q: Using the information on the taxation of REIT distributions, what was

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 Investme...

Q: How do exchange-traded funds (ETFs) differ from mutual

How do exchange-traded funds (ETFs) differ from mutual funds? Why may they be considered alternatives to index mutual funds?

Q: Why does arbitrage virtually assure that an ETF will sell for its

Why does arbitrage virtually assure that an ETF will sell for its net asset value?

Q: How may mutual funds, closed-end investment companies, and

How may mutual funds, closed-end investment companies, and ETFs be used to take positions in foreign securities?

Q: Why are hedge funds and private equity funds of little interest to

Why are hedge funds and private equity funds of little interest to most investors?

Q: Why may investing in an ETF such as the various iShares be

Why may investing in an ETF such as the various iShares be preferable to acquiring shares in a mutual fund that makes foreign investments?

Q: Several closed-end investment companies and iShares invest in the same

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 (...

Q: The efficient market hypothesis suggests that it is difficult to outperform the

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...

Q: What is the difference between the expected return and the required return

What is the difference between the expected return and the required return? When should the two returns be equal?

Q: What changes produce a sell signal in the Dow Theory and Barron’s

What changes produce a sell signal in the Dow Theory and Barron’s confidence index?

Q: What is the difference between the value of a stock and its

What is the difference between the value of a stock and its price? When should they be equal?

Q: What variables affect the value of a stock according to the dividend

What variables affect the value of a stock according to the dividend-growth model? What role do earnings play in this model?

Q: How do interest rates and risk affect a stock’s price in the

How do interest rates and risk affect a stock’s price in the Capital Asset Pricing Model?

Q: Part 3 in the previous chapter requested that you obtain ratios such

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 d...

Q: Are mutual funds subject to federal income taxation? Are distributions from

Are mutual funds subject to federal income taxation? Are distributions from mutual funds taxable?

Q: What is a loading charge? Do all investment companies charge this

What is a loading charge? Do all investment companies charge this fee?

Q: What is a specialized mutual fund? What differentiates large and small

What is a specialized mutual fund? What differentiates large and small cap funds? Value and growth funds?

Q: What advantage do “families” of funds offer?

What advantage do “families” of funds offer?

Q: What differentiates a traditional savings account at a commercial bank from a

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 wi...

Q: What assets do money market mutual funds acquire? Could an individual

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?

Q: What is a moving average? What is the significance when a

What is a moving average? What is the significance when a stock’s price crosses a moving average of the stock’s price?

Q: Should an investor expect a mutual fund to outperform the market?

Should an investor expect a mutual fund to outperform the market? If not, why should the investor buy the shares?

Q: What are the differences among loading fees, exit fees, and

What are the differences among loading fees, exit fees, and 12b-1 fees?

Q: Why may the annual growth in a fund’s net asset value not

Why may the annual growth in a fund’s net asset value not be comparable to the return earned by an individual investor?

Q: How may beta coefficients be used to standardize returns for risk to

How may beta coefficients be used to standardize returns for risk to permit comparisons of mutual fund performance?

Q: How may realized returns be adjusted for risk so that investment performance

How may realized returns be adjusted for risk so that investment performance may be judged on a risk-adjusted basis?

Q: What is a value-weighted average? Why does such an

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?

Q: How does the computation of the Dow Jones Industrial Average differ from

How does the computation of the Dow Jones Industrial Average differ from Standard & Poor’s 500 stock index and the Value Line index?

Q: Why may averaging percentage changes produce an inaccurate measure of the true

Why may averaging percentage changes produce an inaccurate measure of the true rate of return?

Q: Historically, what rates of return have investors earned on investments in

Historically, what rates of return have investors earned on investments in common stocks?

Q: What is the advantage of using a relative rather than an absolute

What is the advantage of using a relative rather than an absolute scale to construct graphs of security prices?

Q: What is the problem with time lags in technical analysis and why

What is the problem with time lags in technical analysis and why may the analysis lead to self-fulfilling predictions?

Q: What is dollar cost averaging? What is averaging down? Why

What is dollar cost averaging? What is averaging down? Why may averaging down result in poor investment decisions?

Q: What is dollar cost averaging? What is averaging down? Why

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 subsequen...

Q: You purchased $1,000 of IBM stock at the end

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...

Q: What is the debt/equity ratio and the debt ratio for

What is the debt/equity ratio and the debt ratio for a firm with total debt of $700,000 and equity of $300,000?

Q: A firm with sales of $500,000 has average inventory

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...

Q: If a firm has sales of $42,791,000

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?

Q: Determine the times-dividend-earned ratio given the following information

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 dividend...

Q: An investor buys 100 shares of a $40 stock that pays

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...

Q: A firm has the following items on its balance sheet:

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...

Q: A company whose stock is selling for $60 has the following

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) Const...

Q: What is the difference between “support” and “resistance”

What is the difference between “support” and “resistance” in technical analysis?

Q: You have taken the following information from a firm’s financial statements.

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 pos...

Q: Two firms have sales of $1 million each. Other financial

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 equit...

Q: A firm with earnings before interest and taxes of $500,

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 i...

Q: This chapter illustrated the calculation of financial ratios using the financial statements

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...

Q: Christina Molitoris is preparing for a meeting of the board of directors

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 combinat...

Q: As a portfolio manager, you are required to provide clients with

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. Du...

Q: What factors, besides the expected rate of inflation, may affect

What factors, besides the expected rate of inflation, may affect the rate of interest a borrower pays?

Q: What is the Federal Reserve? What are its economic goals?

What is the Federal Reserve? What are its economic goals?

Q: How does the Fed pursue its economic goals? How may the

How does the Fed pursue its economic goals? How may the tools of monetary policy affect securities prices?

Q: If an investor buys shares in a no-load mutual fund

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...

Q: Why does technical analysis receive little support from academically oriented students of

Why does technical analysis receive little support from academically oriented students of investments

Q: Consider the following four investments. a) You invest $

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...

Q: You are given the following information concerning several mutual funds:

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 percen...

Q: Your clients, Eva and Walther Sachs, operate a successful catering

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. Mos...

Q: What is the impact on GDP if consumer spending increases? Would

What is the impact on GDP if consumer spending increases? Would the answer be different if the consumer spending was directed toward foreign goods?

Q: Which Dow Jones Industrial Average stocks would be considered “dogs”?

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, compa...

Q: The Sourland Mountain in New Jersey investment club has recently asked you

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...

Q: What are the holding period and the annualized compounded returns if you

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....

Q: What advantages do discounted bonds offer to investors? Why may a

What advantages do discounted bonds offer to investors? Why may a bond be called if it is selling at a premium?

Q: Stephanie Waldron is an aggressive individual whose career as a self-

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 r...

Q: Fiona Corcoran is responsible for meeting distributions for EEM Health and Life

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 y...

Q: Kris Trejo, who recently retired, has come to you for

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 inco...

Q: What differentiates convertible bonds from other bonds?

What differentiates convertible bonds from other bonds?

Q: An investor is in the 28 percent income tax bracket and can

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 taxab...

Q: An investor in the 35 percent tax bracket may purchase a corporate

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 inves...

Q: Molly Matters Inc. issues a split-coupon $1,

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 d...

Q: What is the price of the following zero coupon bonds if interest

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 1...

Q: You are in the 28 percent federal income tax bracket. A

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...

Q: A six-month $10,000 Treasury bill is selling

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.

Q: The federal government issues two four-year notes. The first

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...

Q: (This problem illustrates “riding the yield curve,” which is

(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) Wha...

Q: (This problem illustrates the impact of a call feature. Review

(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, b...

Q: Determine the annual repayment schedule for the first two years (i

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.) Comp...

Q: As a result of lower interest rates, you are considering refinancing

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 year...

Q: You acquire a debt security that is a claim on a mortgage

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...

Q: (This problem is designed to illustrate the potential savings from paying

(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 inte...

Q: You purchase a 6 percent $10,000 bond for $

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 brac...

Q: If a six-month Treasury bill is purchased for $0

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 y...

Q: What distinguishes EE bonds from Treasury bills?

What distinguishes EE bonds from Treasury bills?

Q: When interest rates rise, what happens to the price of federal

When interest rates rise, what happens to the price of federal government bonds? What happens to the price of state and local government bonds?

Q: What is the difference between the following? a) A

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 similari...

Q: What are the sources of risk from investing in the following?

What are the sources of risk from investing in the following? a) Federal government debt b) Municipal debt

Q: What is the difference between a term bond issue and a serial

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?

Q: What is a mortgage pass-through bond? What risks are

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?

Q: If interest rates increase, what should happen to the following?

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 re...

Q: Identify which government securities may be appropriate for the following investors:

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 in...

Q: Why is the debt of the federal government considered to be the

Why is the debt of the federal government considered to be the safest of all possible investments?

Q: You sell a 6 percent $10,000 bond for $

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 bracke...

Q: How is the value of a convertible bond in terms of stock

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?

Q: A $1,000 bond has a coupon rate of 8

A $1,000 bond has a coupon rate of 8 percent and matures after ten years. a) What is the current price of the bond if the comparable rate of interest is 8 percent? b) What is the current price of the...

Q: A $1,000 bond has a coupon rate of 10

A $1,000 bond has a coupon rate of 10 percent and matures after eight years. Interest rates are currently 7 percent. a) What will the price of this bond be if the interest is paid annually? b) What wi...

Q: A company has two bonds outstanding. The first matures after five

A company has two bonds outstanding. The first matures after five years and has a coupon rate of 8.25 percent. The second matures after ten years and has a coupon rate of 8.25 percent. Interest rates...

Q: A $1,000 zero coupon bond sells for $519

A $1,000 zero coupon bond sells for $519 and matures after five years. What is the current yield and the yield to maturity?

Q: Given the following information: XY Inc. 5% bond

Given the following information: XY Inc. 5% bond AB Inc. 14% bond Both bonds are for $1,000, mature in 20 years, and are rated AAA. a) What should be the current market price of each bond if the inter...

Q: a) A stock costs $900 and pays an annual $

a) A stock costs $900 and pays an annual $40 cash dividend. If you expect to sell the stock for $1,000 after five years, what is your anticipated return on the investment? b) A $1,000 bond has a 4 per...

Q: a) If a preferred stock pays an annual dividend of $

a) If a preferred stock pays an annual dividend of $6 and investors can earn 10 percent on alternative and comparable investments, what is the maximum price that should be paid for this stock? b) If t...

Q: What should be the prices of the following preferred stocks if comparable

What should be the prices of the following preferred stocks if comparable securities yield 6 percent, 8 percent, and 10 percent? a) MN Inc., $4 preferred ($100 par). b) CH Inc., $4 preferred ($100 par...

Q: Company X has the following bonds outstanding: /

Company X has the following bonds outstanding: Initially, both bonds sold at $1,000 with yields to maturity of 8 percent. a) After two years, the interest rate on comparable debt is 10 percent. What...

Q: When you purchase a bond, why do you have to pay

When you purchase a bond, why do you have to pay accrued interest?

Q: A high-yield bond has the following features:

A high-yield bond has the following features: a) If comparable yields are 12 percent, what should be the price of this bond? b) Would you expect the firm to call the bond if yields are 12 percent? c...

Q: What is the price of the following split coupon bond if comparable

What is the price of the following split coupon bond if comparable yields are 12 percent? If comparable yields decline to 10 percent, what is the appreciation in the price of the bond?

Q: A bond has the following terms: /

A bond has the following terms: a) Why do you believe that the terms were constructed as specified? b) What is the bond’s price if comparable debt yields 12 percent? c) What is the...

Q: Tinker Spy Corp. has a high-yield junk bond with

Tinker Spy Corp. has a high-yield junk bond with the following features: The current interest rate on comparable debt is 10 percent. If you expect that the interest rate will be 8 percent five years f...

Q: An extendable bond has the following features: /

An extendable bond has the following features: a) If comparable yields are 12 percent, what will be the price of the bond if investors anticipate that it will be retired after eight years? b) What im...

Q: Stella’s Dog Biscuits Inc. has outstanding a high-yield bond

Stella’s Dog Biscuits Inc. has outstanding a high-yield bond with the following features: The current interest rate on comparable debt is 8 percent. a) If you expect that interest r...

Q: You purchase a 7 percent $1,000 bond with a

You purchase a 7 percent $1,000 bond with a term of ten years and reinvest all interest payments. If interest rates rise to 10 percent after you purchase the bond, what is the return on your investmen...

Q: The prices of longer-term bonds are more volatile than the

The prices of longer-term bonds are more volatile than the prices of shorter-term bonds with the same coupon. The prices of bonds with smaller coupons are more volatile than bonds with larger coupons...

Q: Compute the duration for bond C, and rank the bonds on

Compute the duration for bond C, and rank the bonds on the basis of their price volatility. The current rate of interest is 8 percent, so the prices of bonds A and B are $1,000 and $1,268, respectivel...

Q: What is the price of each of the following bonds ($1

What is the price of each of the following bonds ($1,000 principal) if the current interest rate is 9 percent? b) What is the duration of each bond? c) Rank the bonds in terms of price fluctuations w...

Q: What is the difference between the following? a) The

What is the difference between the following? a) The indenture and the trustee b) The coupon rate and the current rate of interest c) Debentures and secured bonds d) A sinking fund and a call feature...

Q: A ten-year bond with a 9 percent coupon will sell

A ten-year bond with a 9 percent coupon will sell for $1,000 when interest rates are 9 percent. What is the duration of this bond? Using duration to forecast the change in the price of the bond, calcu...

Q: You own the following $1,000 bonds: /

You own the following $1,000 bonds: Currently the structure of yields is positive so that each bond sells for its par value. However, you expect that inflation will increase and cause interest rates t...

Q: Portfolio A consists entirely of $1,000 zero coupon bonds

Portfolio A consists entirely of $1,000 zero coupon bonds that mature in 8, 9, and 10 years. Portfolio B consists of $1,000, 8 percent coupons that mature in 10, 15, and 20 years. a) Based on this inf...

Q: In the section on the yield to call, a bond pays

In the section on the yield to call, a bond pays annual interest of $80 and matures after ten years. The bond is valued at $1,147 if the comparable rate is 6 percent and the bond is held to maturity....

Q: (This problem uses the material in Appendix 14B concerning bond valuation

(This problem uses the material in Appendix 14B concerning bond valuation.) Two bonds have the following features: The structure of yields is a) What is the valuation of each security based on the yi...

Q: How do Treasury inflation-indexed securities help the investor manage risk

How do Treasury inflation-indexed securities help the investor manage risk?

Q: What causes bond prices to fluctuate?

What causes bond prices to fluctuate?

Q: Define the current yield and the yield to maturity. How are

Define the current yield and the yield to maturity. How are they different?

Q: Although all bond prices fluctuate, which bond prices tend to fluctuate

Although all bond prices fluctuate, which bond prices tend to fluctuate more?

Q: What is the yield to call? How does it differ from

What is the yield to call? How does it differ from the yield to maturity?

Q: What is the relationship between interest rates and the length of time

What is the relationship between interest rates and the length of time to maturity? Figures 13.1 through 13.3 give various yield curves for U.S. Treasury securities. What is the current yield curve fo...

Q: What differentiates the term of a bond and its duration? If

What differentiates the term of a bond and its duration? If bond A has a 10 percent coupon while bond B has a 5 percent coupon and they both mature after ten years,which bond has the shorter duration?...

Q: Why is a barbell strategy more flexible than a laddered strategy if

Why is a barbell strategy more flexible than a laddered strategy if an investor anticipates a decline in interest rates?

Q: If interest rates rise, bond prices will fall. Given the

If interest rates rise, bond prices will fall. Given the following pairs of bonds, indicate which bond’s price will experience the greater price decline. a) Bond A Coupon: 10% Maturity: 5 years Bond B...

Q: What differentiates inflation and deflation? If both GDP and unemployment were

What differentiates inflation and deflation? If both GDP and unemployment were simultaneously rising, would this period be classified as a recession?

Q: What is the difference between the discount rate and the targeted federal

What is the difference between the discount rate and the targeted federal funds rate?

Q: What are M1 and M2? How does the Fed alter M1

What are M1 and M2? How does the Fed alter M1 and M2?

Q: Do the fundamental economic goals of fiscal policy differ from those of

Do the fundamental economic goals of fiscal policy differ from those of monetary policy? If the Federal Reserve finances the federal government’s deficit, what will happen to the supply of money?

Q: What does the statement of cash flows add to the analyst’s knowledge

What does the statement of cash flows add to the analyst’s knowledge of the firm?

Q: What does it mean for investors who purchase IBM stock to have

What does it mean for investors who purchase IBM stock to have limited liability?

Q: What is the purpose of each of the following? a

What is the purpose of each of the following? a) Preemptive rights b) Cumulative voting c) The board of directors

Q: Even though bonds are debt obligations, investing in them involves risk

Even though bonds are debt obligations, investing in them involves risk. What are the sources of risk? What role do rating services play in managing risk?

Q: Why may a dividend increment lag after an increase in earnings?

Why may a dividend increment lag after an increase in earnings? Why may a firm distribute dividends even though earnings decline?

Q: What are the differences among the ex-dividend date, the

What are the differences among the ex-dividend date, the date of record, and the distribution date?

Q: What are the advantages associated with dividend reinvestment plans?

What are the advantages associated with dividend reinvestment plans?

Q: How do stock dividends differ from cash dividends? How do stock

How do stock dividends differ from cash dividends? How do stock dividends differ from stock splits?

Q: What are the tax implications of the following? a)

What are the tax implications of the following? a) Dividend reinvestment plans b) Stock dividends c) Stock splits d) Corporate stock repurchases

Q: How does preferred stock differ from common stock?

How does preferred stock differ from common stock?

Q: If a preferred stock is in arrearage, what does that imply

If a preferred stock is in arrearage, what does that imply about the dividend payment?

Q: What is the difference between the following? a) Cross

What is the difference between the following? a) Cross-sectional and time-series analysis b) The current ratio and the quick ratio c) Receivables turnover, inventory turnover, and fixed asset turnover...

Q: On January 31, 2001, you bought 100 shares of AVAYA

On January 31, 2001, you bought 100 shares of AVAYA (AV) for $17.50 a share. Subsequent prices of AV were January 1, 2002……..$8.60 January 1, 2003……….2.50 January 1, 2004………17.50 You owned the stock f...

Q: You buy a stock for $20. After a year the

You buy a stock for $20. After a year the price rises to $25 but falls back to $20 at the end of the second year. What was the average percentage return and what was the true annualized return?

Q: What is the Analees’ return objective? a. 6.

What is the Analees’ return objective? a. 6.67 percent b. 6.17 percent c. 3.83 percent

Q: What is the distinction between a real asset and a financial asset

What is the distinction between a real asset and a financial asset? What are the two basic types of financial assets, and what does each represent?

Q: In Problem 2, suppose you sell the stock at a price

In Problem 2, suppose you sell the stock at a price of $62. What is your return? What would your return have been had you purchased the stock without margin? What if the stock price is $46 when you se...

Q: Repeat Problems 2 and 3 assuming the initial margin requirement is 70

Repeat Problems 2 and 3 assuming the initial margin requirement is 70 percent. Does this suggest a relationship between the initial margin and returns Problems 2: You purchase 275 shares of 2nd Chan...

Q: Based on the historical record, if you invest in long-

Based on the historical record, if you invest in long-term U.S. Treasury bonds, what is the approximate probability that your return will be below −6.3 percent in a given year? What range of returns w...

Q: Based on the historical record, what is the approximate probability that

Based on the historical record, what is the approximate probability that an investment in small stocks will double in value in a single year? How about triple in a single year?

Q: In Problem 13, suppose the call money rate is 5 percent

In Problem 13, suppose the call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Calculate your return on investment for each of the following share prices one year la...

Q: Suppose the call money rate is 5.6 percent, and

Suppose the call money rate is 5.6 percent, and you pay a spread of 1.2 percent over that. You buy 1,000 shares at $40 per share with an initial margin of 50 percent. One year later, the stock is sell...

Q: You have found an asset with a 12.60 percent arithmetic

You have found an asset with a 12.60 percent arithmetic average return and a 10.24 percent geometric return. Your observation period is 40 years. What is your best estimate of the return of the asset...

Q: Look back to Figure 1.1 and find the value of

Look back to Figure 1.1 and find the value of $1 invested in each asset class over this 90-year period. Calculate the geometric return for small-company stocks, large-company stocks, long-term governm...

Q: Suppose you purchase 500 shares of stock at $48 per share

Suppose you purchase 500 shares of stock at $48 per share with an initial cash investment of $8,000. If your broker requires a 30 percent maintenance margin, at what share price will you be subject to...

Q: Suppose the call money rate is 4.5 percent, and

Suppose the call money rate is 4.5 percent, and you pay a spread of 2.5 percent over that. You buy 800 shares of stock at $34 per share. You put up $15,000. One year later, the stock is selling for $4...

Q: Given your answer to the last question and the discussion in the

Given your answer to the last question and the discussion in the chapter, why would any rational person do anything other than load up on 100 percent small stocks?

Q: You are given the returns for the following three stocks:

You are given the returns for the following three stocks: Calculate the arithmetic return, geometric return, and standard deviation for each stock. Do you notice anything about the relationship be...

Q: The 1980s were a good decade for investors in S&P

The 1980s were a good decade for investors in S&P 500 stocks. To find out how good, construct a spreadsheet that calculates the arithmetic average return, variance, and standard deviation for the S&P...

Q: Looking back at Problem 12, suppose the call money rate is

Looking back at Problem 12, suppose the call money rate is 5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for six months and sell at a price of $65 p...

Q: If you wanted to purchase the right to sell 2,000

If you wanted to purchase the right to sell 2,000 shares of JC Penney stock in November 2015 at a strike price of $9 per share, how much would this cost you?

Q: Which put contract sells for the lowest price? Which one sells

Which put contract sells for the lowest price? Which one sells for the highest price? Explain why these respective options trade at such extreme prices.

Q: You just sold short 750 shares of Wetscope, Inc., a

You just sold short 750 shares of Wetscope, Inc., a fledgling software firm, at $96 per share. You cover your short when the price hits $86.50 per share one year later. If the company paid $0.75 per s...

Q: You believe the stock in Freeze Frame Co. is going to

You believe the stock in Freeze Frame Co. is going to fall, so you short 600 shares at a price of $72. The initial margin is 50 percent. Construct the equity balance sheet for the original trade. Now...

Q: In Problem 14, suppose JC Penney stock sells for $8

In Problem 14, suppose JC Penney stock sells for $8 per share immediately before your options’ expiration. What is the rate of return on your investment? What is your rate of return if the stock sells...

Q: You’ve located the following option quote for Eric-Cartman, Inc

You’ve located the following option quote for Eric-Cartman, Inc. (ECI): Two of the premiums shown can’t possibly be correct. Which two? Why?

Q: Suppose you have $28,000 to invest. You’re considering

Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price...

Q: How will personal tax rates impact the choice of a traditional versus

How will personal tax rates impact the choice of a traditional versus a Roth IRA?

Q: In Problem 18, suppose a dividend of $0.80

In Problem 18, suppose a dividend of $0.80 per share is paid. Comment on how the returns would be affected. Data from Problem 18: Suppose you have $28,000 to invest. You’re considering Miller-Moore...

Q: In Problem 18, suppose a put option with a $40

In Problem 18, suppose a put option with a $40 strike is also available with a premium of $2.80. Calculate your percentage return for the six-month holding period if the stock price declines to $36 pe...

Q: A sector fund specializing in commercial bank stocks had average daily assets

A sector fund specializing in commercial bank stocks had average daily assets of $3.4 billion during the year. This fund sold $1.25 billion worth of stock during the year, and its turnover ratio was 0...

Q: You purchased 2,000 shares in the New Pacific Growth Fund

You purchased 2,000 shares in the New Pacific Growth Fund on January 2, 2016, at an offering price of $47.10 per share. The front-end load for this fund is 5 percent, and the back-end load for redempt...

Q: You invested $1,250,000 with a market-

You invested $1,250,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water-mark provision. Suppose the first year the fund manager loses 10 percent and...

Q: Suppose the following three defense stocks are to be combined into a

Suppose the following three defense stocks are to be combined into a stock index in January 2016 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performa...

Q: In Problem 14, suppose that Douglas McDonnell shareholders approve a 3

In Problem 14, suppose that Douglas McDonnell shareholders approve a 3-for-1 stock split on January 1, 2017. What is the new divisor for the index? Calculate the rate of return on the index for the ye...

Q: Repeat Problem 14 if a value-weighted index is used.

Repeat Problem 14 if a value-weighted index is used. Assume the index is scaled by a factor of 10 million; that is, if the average firm’s market value is $5 billion, the index would...

Q: In addition to price-weighted and value-weighted indexes,

In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return of the stocks comprising the index. Equa...

Q: Escambia Beach Systems is offering 1,000 shares in a Dutch

Escambia Beach Systems is offering 1,000 shares in a Dutch auction IPO. The following bids have been received: How much will Bidder A have to spend to purchase all of the shares that have been all...

Q: Suppose a share of stock is selling for $100. A

Suppose a share of stock is selling for $100. A put and a call are offered, both with $100 strike prices and nine months to maturity. Intuitively, which do you think is more valuable?

Q: Historically there have been periods where a value-weighted index has

Historically there have been periods where a value-weighted index has a higher return than an equally weighted index and other periods where the opposite has occurred. Why do you suppose this would ha...

Q: Another type of index is the geometric index. The calculation of

Another type of index is the geometric index. The calculation of a geometric index is similar to the calculation of a geometric return: 1 + R G = [(1 + R 1 )(1 + R 2 ) . . . (1 + R N )] 1...

Q: Suppose you want to replicate the performance of several stock indexes,

Suppose you want to replicate the performance of several stock indexes, some of which are price-weighted, others value-weighted, and still others equally weighted. Describe the investment strategy you...

Q: The dividend for Should I, Inc., is currently $1

The dividend for Should I, Inc., is currently $1.25 per share. It is expected to grow at 20 percent next year and then decline linearly to a 5 percent perpetual rate beginning in four years. If you re...

Q: Given the information below for Seger Corporation, compute the expected share

Given the information below for Seger Corporation, compute the expected share price at the end of 2017 using price ratio analysis. Assume that the historical average growth rates will remain the same...

Q: Given the information below for HooYah! Corporation, compute the expected

Given the information below for HooYah! Corporation, compute the expected share price at the end of 2017 using price ratio analysis. Assume that the historical average growth rates will remain the sam...

Q: Given the information below for StartUp.Com, compute the expected

Given the information below for StartUp.Com, compute the expected share price at the end of 2017 using price ratio analysis.

Q: When a stock is going through a period of non constant growth

When a stock is going through a period of non constant growth for T periods, followed by constant growth forever, the residual income model can be modified as follows: where Al’s...

Q: A stock recently increased in price from $32 to $45

A stock recently increased in price from $32 to $45. Using φ, what are the primary and secondary support areas for the stock?

Q: Below you will find the closing stock prices for eBay over a

Below you will find the closing stock prices for eBay over a three-week period. Calculate the simple three-day and five-day moving averages for the stock and graph your results. Are there any technica...

Q: What is the difference between a futures contract and an option contract

What is the difference between a futures contract and an option contract? Do the buyer of a futures contract and the buyer of an option contract have the same rights? What about the seller?

Q: Use the information from Problem 13 to calculate the three-day

Use the information from Problem 13 to calculate the three-day and five-day exponential moving averages for eBay and graph your results. Place two-thirds of the average weight on the most recent stock...

Q: Another technical indicator is the put/call ratio. The put

Another technical indicator is the put/call ratio. The put/call ratio is the number of put options traded divided by the number of call options traded. The put/ call ratio can be constructed on the ma...

Q: Calculate the quoted yield for each of the STRIPS given in the

Calculate the quoted yield for each of the STRIPS given in the table above. Does the market expect interest rates to go up or down in the future? Data for Problem 14: U.S. Treasury STRIPS, close of...

Q: According to the pure expectations theory of interest rates, how much

According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on November 15, 2016? What is the corresponding implied forward rate? How does your ans...

Q: Suppose the (quoted) yield on each of the six STRIPS

Suppose the (quoted) yield on each of the six STRIPS increases by 0.05 percent. Calculate the percentage change in price for the one-year, three-year, and six-year STRIPS. Which one has the largest pr...

Q: Suppose you purchase a $1,000 TIPS on January 1

Suppose you purchase a $1,000 TIPS on January 1, 2016. The bond carries a fixed coupon of 1 percent. Over the first two years, semiannual inflation is 2 percent, 3 percent, 1 percent, and 2 percent, r...

Q: You observe that the current interest rate on short-term U

You observe that the current interest rate on short-term U.S. Treasury bills is 1.64 percent. You also read in the newspaper that the GDP deflator, which is a common macroeconomic indicator used by ma...

Q: A zero coupon bond with a 6 percent YTM has 20 years

A zero coupon bond with a 6 percent YTM has 20 years to maturity. Two years later, the price of the bond remains the same. What’s going on here?

Q: Bond P is a premium bond with an 8 percent coupon,

Bond P is a premium bond with an 8 percent coupon, a YTM of 6 percent, and 15 years to maturity. Bond D is a discount bond with an 8 percent coupon, a YTM of 10 percent, and also 15 years to maturity....

Q: Both bond A and bond B have 6 percent coupons and are

Both bond A and bond B have 6 percent coupons and are priced at par value. Bond A has 5 years to maturity, while bond B has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is...

Q: Refer to Table 1.1 for large-company stock and

Refer to Table 1.1 for large-company stock and T-bill returns for the period 1973–1977: a. Calculate the observed risk premium in each year for the common stocks. b. Calculate the...

Q: Bond J is a 4 percent coupon bond. Bond K is

Bond J is a 4 percent coupon bond. Bond K is an 8 percent coupon bond. Both bonds have 10 years to maturity and have a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what is the perce...

Q: Suppose you buy a 6 percent coupon bond today for $1

Suppose you buy a 6 percent coupon bond today for $1,080. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? Two years from now, the YTM on your bond has...

Q: Fooling Company has a 10 percent callable bond outstanding on the market

Fooling Company has a 10 percent callable bond outstanding on the market with 25 years to maturity, call protection for the next 10 years, and a call premium of $100. What is the yield to call (YTC) f...

Q: A Treasury bond with 8 years to maturity is currently quoted at

A Treasury bond with 8 years to maturity is currently quoted at 106:16. The bond has a coupon rate of 7.5 percent. What is the yield value of a 32nd for this bond?

Q: Suppose the yield to maturity on the bond in Problem 29 increases

Suppose the yield to maturity on the bond in Problem 29 increases by 0.25 percent. What is the new price of the bond using duration? What is the new price of the bond using the bond pricing formula? W...

Q: In Problem 12, what is the standard deviation if the correlation

In Problem 12, what is the standard deviation if the correlation is +1? 0? −1? As the correlation declines from +1 to −1 here, what do you see happening to portfoli...

Q: You are going to invest in asset J and asset S.

You are going to invest in asset J and asset S. Asset J has an expected return of 13 percent and a standard deviation of 54 percent. Asset S has an expected return of 10 percent and a standard deviati...

Q: Asset W has an expected return of 12.0 percent and

Asset W has an expected return of 12.0 percent and a beta of 1.1. If the risk-free rate is 4 percent, complete the following table for portfolios of asset W and a risk-free asset. Illustrate the relat...

Q: Suppose you observe the following situation: /

Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?

Q: Fill in the following table, supplying all the missing information.

Fill in the following table, supplying all the missing information. Use this information to calculate the security’s beta.

Q: Given that no-load funds are widely available, why would

Given that no-load funds are widely available, why would a rational investor pay a front-end load? More generally, why don’t fund investors always seek out funds with the lowest loads, management fees...

Q: Consider the following information on Stocks I and II:

Consider the following information on Stocks I and II: The market risk premium is 8 percent and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most unsy...

Q: Landon Stevens is evaluating the expected performance of two common stocks,

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4 percent, the expected return on the market is 11.5 perc...

Q: For the stock in Problem 13, what is the smallest expected

For the stock in Problem 13, what is the smallest expected gain over the next year with a probability of 1 percent? Does this number make sense? What does this tell you about stock return distribution...

Q: You are constructing a portfolio of two assets, asset A and

You are constructing a portfolio of two assets, asset A and asset B. The expected returns of the assets are 12 percent and 15 percent, respectively. The standard deviations of the assets are 29 percen...

Q: Calculate Jensen’s alpha for the fund, as well as its information

Calculate Jensen’s alpha for the fund, as well as its information ratio. Data for Problem 19: You have been given the following return information for a mutual fund, the market ind...

Q: Margin Call (LO2, CFA2) Suppose the initial margin on

Margin Call (LO2, CFA2) Suppose the initial margin on heating oil futures is $8,400, the maintenance margin is $7,200 per contract, and you establish a long position of 10 contracts today, where each...

Q: You are long 10 gold futures contracts, established at an initial

You are long 10 gold futures contracts, established at an initial settle price of $1,500 per ounce, where each contract represents 100 troy ounces. Your initial margin to establish the position is $12...

Q: You are short 15 gasoline futures contracts, established at an initial

You are short 15 gasoline futures contracts, established at an initial settle price of $2.085 per gallon, where each contract represents 42,000 gallons. Your initial margin to establish the position i...

Q: You have been assigned to implement a three-month hedge for

You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.15 measured relative to the...

Q: A non-dividend-paying stock is currently priced at $

A non-dividend-paying stock is currently priced at $48.15 per share. A futures contract maturing in five months has a price of $48.56 and the risk-free rate is 4 percent. Describe how you could make a...

Q: Is it true that the NAV of a money market mutual fund

Is it true that the NAV of a money market mutual fund never changes? How is this possible?

Q: A stock is currently priced at $53.87 and the

A stock is currently priced at $53.87 and the futures on the stock that expire in six months have a price of $55.94. The risk-free rate is 5 percent and the stock is not expected to pay a dividend. Is...

Q: Ross Co., Westerfield, Inc., and Jordan Company announced a

Ross Co., Westerfield, Inc., and Jordan Company announced a new agreement to market their respective products in China on July 18, February 12, and October 7, respectively. Given the information below...

Q: An investment has an expected return of 11 percent per year with

An investment has an expected return of 11 percent per year with a standard deviation of 24 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequen...

Q: An investment has an expected return of 12 percent per year with

An investment has an expected return of 12 percent per year with a standard deviation of 6 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequent...

Q: In an attempt to talk Ms. Harlan out of investing in

In an attempt to talk Ms. Harlan out of investing in a fund of funds, Mr. Phillips addressed the advantages of investing in individual funds. Which of the following would be his most compelling argume...

Q: What is Ms. Harlan’s tolerance for risk? a.

What is Ms. Harlan’s tolerance for risk? a. Distressed security b. Arbitrage c. Market neutral

Q: What are Barbara’s willingness and ability to assume risk?

What are Barbara’s willingness and ability to assume risk?

Q: If Ms. Harlan is truly concerned about benchmarks, she should

If Ms. Harlan is truly concerned about benchmarks, she should avoid which of her suggested investments? a. None of them b. Kelly Tool and Die c. Hedge funds

Q: Which of Ms. Harlan’s responses is most likely to make Mr

Which of Ms. Harlan’s responses is most likely to make Mr. Phillips consider her a bad candidate for investing in hedge funds? a. I pay a lot of attention to expense and return data from my investment...

Q: Which of the following statements regarding market orders is most accurate?

Which of the following statements regarding market orders is most accurate? Market orders: a. Have price uncertainty, and limit orders have execution uncertainty. b. Have execution uncertainty, and li...

Q: ETFs and index mutual funds hold similar underlying assets. Why might

ETFs and index mutual funds hold similar underlying assets. Why might an investor prefer one over the other?

Q: In the example given by Ms. Plain, what was the

In the example given by Ms. Plain, what was the spread for the GHT stock just prior to execution? a. $0.06 b. $0.02 c. $0.04

Q: Assume that when Mr. White and Ms. Plain entered their

Assume that when Mr. White and Ms. Plain entered their buy order for GHT, the price of the stock increased to $25.45. This is the price at which the trade was executed. Given this impact, the effectiv...

Q: Which of the following best describes Tom Higgins’s behavioral characteristic in investment

Which of the following best describes Tom Higgins’s behavioral characteristic in investment decisions? a. Tom is overconfident. b. Tom uses frame dependence. c. Tom uses anchoring.

Q: Which of the following best describes the potential problem with Mr.

Which of the following best describes the potential problem with Mr. Higgins’s investment strategy? a. He will underestimate the risk of his portfolio and underestimate the impact of an event on stock...

Q: Which of the following best describes Joanne McHale’s behavioral characteristic in investment

Which of the following best describes Joanne McHale’s behavioral characteristic in investment decisions? a. Joanne is loss averse. b. Joanne uses the ceteris paribus heuristic. c. Joanne is experienci...

Q: Which of the following best describes Jack Sims’s behavioral characteristic in investment

Which of the following best describes Jack Sims’s behavioral characteristic in investment decisions? a. Jack is overconfident. b. Jack uses frame dependence. c. Jack uses representativeness.

Q: Which of the following would Mr. Higgins, Ms. McHale

Which of the following would Mr. Higgins, Ms. McHale, and Mr. Sims be least likely to use when making investment decisions? a. Heuristics b. Their personal experiences c. Fundamental analysis

Q: Mr. Wallace asks the trainees which of the following explains an

Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the pure expectations theory. a. The market expects short-term rates to rise through the releva...

Q: Mr. Wallace asks the trainees which of the following explains an

Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the market segmentation theory. a. The market expects short-term rates to rise through the rele...

Q: According to the expectations theory, which of the following is closest

According to the expectations theory, which of the following is closest to the one-year implied forward rate one year from now? a. 6.58 percent b. 5.75 percent c. 6.25 percent

Q: An open-end mutual fund typically keeps a percentage, often

An open-end mutual fund typically keeps a percentage, often around 5 percent, of its assets in cash or liquid money market assets. How does this affect the fund’s return in a year in which the market...

Q: Mr. Wallace is particularly interested in the effects of a steepening

Mr. Wallace is particularly interested in the effects of a steepening yield curve. Which of the following is most accurate for a steepening curve? a. The price of short-term Treasuries increases relat...

Q: Mr. Green and Ms. Hutchinson divided up their research into

Mr. Green and Ms. Hutchinson divided up their research into return enhancement and diversification benefits. Based upon the stated goals of their research, which of the two approaches is more likely t...

Q: What is the difference between a money market deposit account and a

What is the difference between a money market deposit account and a money market mutual fund? Which is riskier?

Q: In your local Chevrolet retailer, both a primary and a secondary

In your local Chevrolet retailer, both a primary and a secondary market are in action. Explain. Is the Chevy retailer a dealer or a broker?

Q: Why would venture capitalists provide financing in stages?

Why would venture capitalists provide financing in stages?

Q: Why would floor brokers be willing to pay $40,000

Why would floor brokers be willing to pay $40,000 per year just for the right to trade on the NYSE?

Q: Suppose Tesla is currently trading at $200. You think that

Suppose Tesla is currently trading at $200. You think that if it reaches $210, it will continue to climb, so you want to buy it if and when it gets there. Should you submit a limit order to buy at $21...

Q: With regard to the NASDAQ, what are inside quotes?

With regard to the NASDAQ, what are inside quotes?

Q: There are basically four factors that differentiate stock market indexes. What

There are basically four factors that differentiate stock market indexes. What are they? Comment on each.

Q: Is it necessarily true that, all else the same, an

Is it necessarily true that, all else the same, an index with more stocks is better? What is the issue here?

Q: What are Vega’s money- (or dollar-) weighted average returns

What are Vega’s money- (or dollar-) weighted average returns over the five-year period for Scenarios 2 and 3?

Q: What are 12b-1 fees? What expenses are 12b-

What are 12b-1 fees? What expenses are 12b-1 fees intended to cover? Many closed-end mutual funds charge a 12b-1 fee. Does this make sense to you? Why or why not?

Q: What is the basic principle behind dividend discount models?

What is the basic principle behind dividend discount models?

Q: If a firm has no dividends and has negative earnings, which

If a firm has no dividends and has negative earnings, which valuation models are appropriate?

Q: Why do growth stocks tend to have higher P/E ratios

Why do growth stocks tend to have higher P/E ratios than value stocks?

Q: What happens in the residual income model when EPS is negative?

What happens in the residual income model when EPS is negative?

Q: Why do we need to convert the typical equity beta to value

Why do we need to convert the typical equity beta to value a firm using FCF?

Q: Why does the value of a share of stock depend on dividends

Why does the value of a share of stock depend on dividends?

Q: A substantial percentage of the companies listed on the NYSE and the

A substantial percentage of the companies listed on the NYSE and the NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to...

Q: Referring to Questions 5 and 6, under what circumstances might a

Referring to Questions 5 and 6, under what circumstances might a company choose not to pay dividends? Data from Questions 5: Why does the value of a share of stock depend on dividends? Data from Qu...

Q: A stock market analyst is able to identify mispriced stocks by comparing

A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the m...

Q: What are the implications of the efficient markets hypothesis for investors who

What are the implications of the efficient markets hypothesis for investors who buy and sell stocks in an attempt to “beat the market”?

Q: If you were concerned about the liquidity of mutual fund shares that

If you were concerned about the liquidity of mutual fund shares that you held, would you rather hold shares in a closed-end fund or an open-end fund? Why?

Q: Your broker commented that well-managed firms are better investments than

Your broker commented that well-managed firms are better investments than poorly managed firms. As evidence, your broker cited a recent study examining 100 small manufacturing firms that eight years e...

Q: A famous economist just announced in The Wall Street Journal his findings

A famous economist just announced in The Wall Street Journal his findings that the recession is over and the economy is again entering an expansion. Assume market efficiency. Can you profit from inves...

Q: Critically evaluate the following statement: “Playing the stock market is

Critically evaluate the following statement: “Playing the stock market is like gambling. Such speculative investing has no social value, other than the pleasure people get from this form of gambling.”...

Q: The efficient markets hypothesis implies that all mutual funds should obtain the

The efficient markets hypothesis implies that all mutual funds should obtain the same expected risk-adjusted returns. Therefore, we can simply pick mutual funds at random. Is this statement true or fa...

Q: Assume that markets are efficient. During a trading day, American

Assume that markets are efficient. During a trading day, American Golf, Inc., announces that it has lost a contract for a large golfing project that, prior to the news, it was widely believed to have...

Q: If a market is semi strong-form efficient, is it

If a market is semi strong-form efficient, is it also weak form efficient? Explain.

Q: In the context of Dow theory, what are the three forces

In the context of Dow theory, what are the three forces at work at all times? Which is the most important?

Q: Suppose you are flipping a fair coin in a coin-flipping

Suppose you are flipping a fair coin in a coin-flipping contest and have flipped eight heads in a row. What is the probability of flipping a head on your next coin flip? Suppose you flipped a head on...

Q: To a technical analyst, what are support and resistance areas?

To a technical analyst, what are support and resistance areas?

Q: Briefly explain mental accounting and identify the potential negative effect of this

Briefly explain mental accounting and identify the potential negative effect of this bias.

Q: Refer to Figure 4.5. Look at the three-

Refer to Figure 4.5. Look at the three-year performance for the funds listed. Why do you suppose there are so few poor performers? Hint: Think about the hit TV show Survivor. Figure 4.5:

Q: Why do 401(k) plans with more bond choices tend

Why do 401(k) plans with more bond choices tend to have participants with portfolios more heavily allocated to fixed income?

Q: In the context of behavioral finance, why do men tend to

In the context of behavioral finance, why do men tend to underperform women with regard to the returns in their portfolios?

Q: What is the “illusion of knowledge” and how does it

What is the “illusion of knowledge” and how does it impact investment performance?

Q: What does it mean to be a contrarian investor? How would

What does it mean to be a contrarian investor? How would a contrarian investor use technical analysis?

Q: What are pure discount securities? Give two examples.

What are pure discount securities? Give two examples.

Q: Compare and contrast commercial paper and Treasury bills. Which would typically

Compare and contrast commercial paper and Treasury bills. Which would typically offer a higher interest rate? Why?

Q: What is LIBOR? Why is it important?

What is LIBOR? Why is it important?

Q: Why do you suppose rates on some money market instruments are quoted

Why do you suppose rates on some money market instruments are quoted on a bank discount basis? (Hint: Why use a 360-day year?)

Q: What are the three different types of Treasury STRIPS that are publicly

What are the three different types of Treasury STRIPS that are publicly traded?

Q: Evaluate the following statement: “Treasury inflation protected securities (TIPS

Evaluate the following statement: “Treasury inflation protected securities (TIPS) pay a fixed coupon.”

Q: What is the difference between a market order and a limit order

What is the difference between a market order and a limit order? What is the potential downside to each type of order?

Q: What are premium, discount, and par bonds?

What are premium, discount, and par bonds?

Q: What are the coupon rate and current yield on a bond?

What are the coupon rate and current yield on a bond? What happens to these if a bond’s price rises?

Q: What is interest rate risk? What are the roles of a

What is interest rate risk? What are the roles of a bond’s coupon and maturity in determining its level of interest rate risk?

Q: Based on market history, what is the average annual standard deviation

Based on market history, what is the average annual standard deviation of return for a single, randomly chosen stock? What is the average annual standard deviation for an equally weighted portfolio of...

Q: Suppose two assets have zero correlation and the same standard deviation.

Suppose two assets have zero correlation and the same standard deviation. What is true about the minimum variance portfolio?

Q: If the returns on two stocks are highly correlated, what does

If the returns on two stocks are highly correlated, what does this mean? If they have no correlation? If they are negatively correlated?

Q: What is an efficient portfolio?

What is an efficient portfolio?

Q: True or false: If two stocks have the same expected return

True or false: If two stocks have the same expected return of 12 percent, then any portfolio of the two stocks will also have an expected return of 12 percent.

Q: True or false: If two stocks have the same standard deviation

True or false: If two stocks have the same standard deviation of 45 percent, then any portfolio of the two stocks will also have a standard deviation of 45 percent.

Q: Assume you are a very risk-averse investor. Why might

Assume you are a very risk-averse investor. Why might you still be willing to add an investment with high volatility to your portfolio?

Q: What is a stop-loss order? Why might it be

What is a stop-loss order? Why might it be used? Is it sure to stop a loss?

Q: True or false: It is impossible for a single asset to

True or false: It is impossible for a single asset to lie on the Markowitz efficient frontier.

Q: Classify the following events as mostly systematic or mostly unsystematic. Is

Classify the following events as mostly systematic or mostly unsystematic. Is the distinction clear in every case? a. Short-term interest rates increase unexpectedly. b. The interest rate a company pa...

Q: True or false: The most important characteristic in determining the expected

True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets in the portfolio. Explain.

Q: Kellogg’s uses large quantities of corn in its breakfast cereal operations.

Kellogg’s uses large quantities of corn in its breakfast cereal operations. Suppose the near-term weather forecast for the corn-producing states is drought like conditions, so corn prices are expected...

Q: Suppose one of Fidelity’s mutual funds closely mimics the S&P

Suppose one of Fidelity’s mutual funds closely mimics the S&P 500 Index. The fund has done very well during the year, and, in November, the fund manager wants to lock in the gains he has made using st...

Q: A mutual fund that predominantly holds long-term Treasury bonds plans

A mutual fund that predominantly holds long-term Treasury bonds plans on liquidating the portfolio in three months. However, the fund manager is concerned that interest rates may rise from current lev...

Q: Jed Clampett just dug another oil well, and, as usual

Jed Clampett just dug another oil well, and, as usual, it’s a gusher. Jed estimates that in two months, he’ll have 2 million barrels of crude oil to bring to market. However, Jed would like to lock in...

Q: The town of South Park is planning a bond issue in six

The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or...

Q: Based on the historical record, rank the following investments in increasing

Based on the historical record, rank the following investments in increasing order of risk. Rank the investments in increasing order of average returns. What do you conclude about the relationship bet...

Q: Suppose your broker tips you on a hot stock. You invest

Suppose your broker tips you on a hot stock. You invest heavily, but, to your considerable dismay, the stock plummets in value. What recourse do you have against your broker?

Q: Suppose Microsoft is currently trading at $50. You want to

Suppose Microsoft is currently trading at $50. You want to sell it if it reaches $55. What type of order should you submit?

Q: The liquidity of an asset directly affects the risk of buying or

The liquidity of an asset directly affects the risk of buying or selling that asset during adverse market conditions. Describe the liquidity risk you face with a short stock position during a market r...

Q: What are the distinguishing features of a money market instrument?

What are the distinguishing features of a money market instrument?

Q: What is the P/E ratio reported for stocks in The

What is the P/E ratio reported for stocks in The Wall Street Journal? In particular, how is it computed?

Q: The current yield on a bond is the coupon rate divided by

The current yield on a bond is the coupon rate divided by the price. Thus, it is very similar to what number reported for common and preferred stocks?

Q: Changes in what price lead to gains and/or losses in

Changes in what price lead to gains and/or losses in futures contracts?

Q: What is the open interest on a futures contract? What do

What is the open interest on a futures contract? What do you think will usually happen to open interest as maturity approaches?

Q: Who actually owns a mutual fund? Who runs it?

Who actually owns a mutual fund? Who runs it?

Q: How does a high-water mark constrain hedge fund managers from

How does a high-water mark constrain hedge fund managers from earning excess performance management fees?

Q: A particular stock had a return last year of 4 percent.

A particular stock had a return last year of 4 percent. However, you look at the stock price and notice that it actually didn’t change at all last year. How is this possible?

Q: What is the probability that the return on small stocks will be

What is the probability that the return on small stocks will be less than −100 percent in a single year (think about it)? What are the implications for the distribution of returns?

Q: Under what two assumptions can we use the constant perpetual growth model

Under what two assumptions can we use the constant perpetual growth model presented in the chapter to determine the value of a share of stock? How reasonable are these assumptions?

Q: What is the difference between asset allocation and security selection?

What is the difference between asset allocation and security selection?

Q: Are market timing and tactical asset allocation similar? Why or why

Are market timing and tactical asset allocation similar? Why or why not?

Q: What is the reason margin requirements exist?

What is the reason margin requirements exist?

Q: The returns we have examined are not adjusted for inflation. What

The returns we have examined are not adjusted for inflation. What do you suppose would happen to our estimated risk premiums if we did account for inflation?

Q: The returns we have examined are not adjusted for taxes. What

The returns we have examined are not adjusted for taxes. What do you suppose would happen to our estimated returns and risk premiums if we did account for taxes? What would happen to our volatility me...

Q: As a practical matter, most of the return you earn from

As a practical matter, most of the return you earn from investing in Treasury bills is taxed right away as ordinary income. Thus, if you are in a 40 percent tax bracket and you earn 5 percent on a Tre...

Q: In Problem 12, what would the risk-free rate have

In Problem 12, what would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? Data from Problem 12: Stock Y has a beta of 1.05 and an expected return of 1...

Q: Using the CAPM, show that the ratio of the risk premiums

Using the CAPM, show that the ratio of the risk premiums on two assets is equal to the ratio of their betas.

Q: You have $100,000 to invest in a portfolio containing

You have $100,000 to invest in a portfolio containing stock X, stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 13 p...

Q: Based on the dividend growth models presented in the chapter, what

Based on the dividend growth models presented in the chapter, what are the two components of the total return of a share of stock? Which do you think is typically larger?

Q: Aero tech, an aerospace technology research firm, announced this morning

Aero tech, an aerospace technology research firm, announced this morning that it hired the world’s most knowledgeable and prolific space researchers. Before today, Aero tech’s stock had been selling f...

Q: When the 56-year-old founder of Gulf & Western

When the 56-year-old founder of Gulf & Western, Inc., died of a heart attack, the stock price immediately jumped from $18.00 a share to $20.25, a 12.5 percent increase. This is evidence of market inef...

Q: What is their tolerance for risk? a. Average

What is their tolerance for risk? a. Average b. Below average c. Above average

Q: Today, the following announcement was made: “Early today the

Today, the following announcement was made: “Early today the Justice Department reached a decision in the Universal Product Care (UPC) case. UPC has been found guilty of discriminatory practices in hi...

Q: New tech Corp. is going to adopt a new chip testing

New tech Corp. is going to adopt a new chip testing device that can greatly improve its production efficiency. Do you think the lead engineer can profit from purchasing the firm’s stock before the new...

Q: Trans Trust Corp. has changed how it accounts for inventory.

Trans Trust Corp. has changed how it accounts for inventory. Taxes are unaffected, although the resulting earnings report released this quarter is 20 percent higher than what it would have been under...

Q: The Durkin Investing Agency has been the best stock picker in the

The Durkin Investing Agency has been the best stock picker in the country for the past two years. Before this rise to fame occurred, the Durkin newsletter had 200 subscribers. Those subscribers beat t...

Q: Suppose the market is semi strong-form efficient. Can you

Suppose the market is semi strong-form efficient. Can you expect to earn abnormal returns if you make trades based on a. Your broker’s information about record earnings for a stock? b. Rumors about a...

Q: Prospectors, Inc., is a publicly traded gold prospecting company in

Prospectors, Inc., is a publicly traded gold prospecting company in Alaska. Although the firm’s searches for gold usually fail, the prospectors occasionally find a rich vein of ore. What pattern would...

Q: Several celebrated investors and stock pickers have recorded huge returns on their

Several celebrated investors and stock pickers have recorded huge returns on their investments over the past two decades. Is the success of these particular investors an invalidation of an efficient s...

Q: For each of the following scenarios, discuss whether profit opportunities exist

For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak-form efficient, (2) the marke...

Q: In the mid- to late-1990s, the performance of

In the mid- to late-1990s, the performance of the pros was unusually poor—on the order of 90 percent of all equity mutual funds underperformed a passively managed index fund. How does this bear on the...

Q: A hundred years ago or so, companies did not compile annual

A hundred years ago or so, companies did not compile annual reports. Even if you owned stock in a particular company, you were unlikely to be allowed to see the balance sheet and income statement for...

Q: Based on the information in the case, which one of the

Based on the information in the case, which one of the following portfolios should the Analees choose? a. Portfolio A b. Portfolio B c. Portfolio C

Q: You invest $10,000 in the market at the beginning

You invest $10,000 in the market at the beginning of the year, and by the end of the year your account is worth $15,000. During the year the market return was 10 percent. Does this mean that the marke...

Q: Which of the following statements are true about the efficient markets hypothesis

Which of the following statements are true about the efficient markets hypothesis? a. It implies perfect forecasting ability. b. It implies that prices reflect all available information. c. It implies...

Q: A frequent argument against the usefulness of technical analysis is that trading

A frequent argument against the usefulness of technical analysis is that trading on a pattern has the effect of destroying the pattern. Explain what this means.

Q: Gaps are another technical analysis tool used in conjunction with open high

Gaps are another technical analysis tool used in conjunction with open high-low-close charts. A gap occurs when either the low price for a particular day is higher than the high price from the previou...

Q: How do prospect theory and the concept of a rational investor differ

How do prospect theory and the concept of a rational investor differ?

Q: How can frame dependence lead to irrational investment decisions?

How can frame dependence lead to irrational investment decisions?

Q: What is noise trader risk? How can noise trader risk lead

What is noise trader risk? How can noise trader risk lead to market inefficiencies?

Q: Why do you think the industrial and transportation averages are the two

Why do you think the industrial and transportation averages are the two that underlie Dow theory?

Q: In the chapter, we discussed the 3Com/Palm and Royal

In the chapter, we discussed the 3Com/Palm and Royal Dutch/ Shell mis pricings. Which of the limits to arbitrage would least likely be the main reason for these mis pricings? Explain.

Q: Based on the history of interest rates, what is the range

Based on the history of interest rates, what is the range of short-term rates that has occurred in the United States? The range of long-term rates? What is a typical value for each?

Q: When combined with Beta Naught in a 50/50 portfolio,

When combined with Beta Naught in a 50/50 portfolio, which of the other three funds will produce a portfolio that has the lowest standard deviation? a. New Horizon only. b. Quality Commodity only. c...

Q: Discuss how each of the following theories for the term structure of

Discuss how each of the following theories for the term structure of interest rates could account for a downward-sloping term structure of interest rates: a. Pure expectations b. Maturity preference c...

Q: Compare and contrast the Fed funds rate and the discount rate.

Compare and contrast the Fed funds rate and the discount rate. Which do you think is more volatile? Which market do you think is more active? Why?

Q: When we observe interest rates in the financial press, do we

When we observe interest rates in the financial press, do we see nominal or real rates? Which are more relevant to investors?

Q: For callable bonds, the financial press generally reports either the yield

For callable bonds, the financial press generally reports either the yield to maturity or the yield to call. Often yield to call is reported for premium bonds, and yield to maturity is reported for di...

Q: In the United States, what is the normal face value for

In the United States, what is the normal face value for corporate and U.S. government bonds? How are coupons calculated? How often are coupons paid?

Q: For a premium bond, which is greater, the coupon rate

For a premium bond, which is greater, the coupon rate or the yield to maturity? Why? For a discount bond? Why?

Q: What is the difference between a bond’s promised yield and its realized

What is the difference between a bond’s promised yield and its realized yield? Which is more relevant? When we calculate a bond’s yield to maturity, which of these are we calculating?

Q: Is the yield to maturity (YTM) on a bond the

Is the yield to maturity (YTM) on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose that today a 10 percent coupon bond sells at par. Two years from now,...

Q: Suppose you buy a 9 percent coupon, 15-year bond

Suppose you buy a 9 percent coupon, 15-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?

Q: (a) What is the relationship between the price of a

(a) What is the relationship between the price of a bond and its YTM? (b) Explain why some bonds sell at a premium to par value, and other bonds sell at a discount. What do you know about the relation...

Q: Look at Table 1.1 and Figures 1.5 and

Look at Table 1.1 and Figures 1.5 and 1.6. When were T-bill rates at their highest? Why do you think they were so high during this period? Table 1.1: Figures 1.5: Figures 1.6:

Q: Why should younger investors be willing to hold a larger amount of

Why should younger investors be willing to hold a larger amount of equity in their portfolios?

Q: Why is the minimum variance portfolio important in regard to the Markowitz

Why is the minimum variance portfolio important in regard to the Markowitz efficient frontier?

Q: In broad terms, why is some risk diversifiable? Why are

In broad terms, why is some risk diversifiable? Why are some risks non diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio but not the level of sys...

Q: Dudley Trudy, CFA, recently met with one of his clients

Dudley Trudy, CFA, recently met with one of his clients. Trudy typically invests in a master list of 30 securities drawn from several industries. After the meeting concluded, the client made the follo...

Q: Suppose the government announces that, based on a just-completed

Suppose the government announces that, based on a just-completed survey, the growth rate in the economy is likely to be 2 percent in the coming year, compared to 5 percent for the year just completed....

Q: Indicate whether the following events might cause stocks in general to change

Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.’s stock to change price. a. The government announces that inflation u...

Q: As indicated by examples in this chapter, earnings announcements by companies

As indicated by examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings...

Q: Is it possible that a risky asset could have a beta of

Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? Wha...

Q: Suppose you identify a situation in which one security is overvalued relative

Suppose you identify a situation in which one security is overvalued relative to another. How would you go about exploiting this opportunity? Does it matter if the two securities are both overvalued r...

Q: Explain what it means for all assets to have the same reward

Explain what it means for all assets to have the same reward-to-risk ratio. How can you increase your return if this holds true? Why would we expect that all assets have the same reward-to-risk ratio...

Q: Which of the following represents the best investment advice? a

Which of the following represents the best investment advice? a. Avoid Texas because its expected return is lower than its required return. b. Buy Montana and Texas because their required returns are...

Q: Suppose that two investments have the same alpha. What things might

Suppose that two investments have the same alpha. What things might you consider to help you determine which investment to choose?

Q: What is the difference between the Sharpe ratio and the Sortino ratio

What is the difference between the Sharpe ratio and the Sortino ratio?

Q: Using Figure 14.1, answer the following questions:

Using Figure 14.1, answer the following questions: a. How many exchanges trade wheat futures contracts? b. If you have a position in 10 gold futures, what quantity of gold underlies your position? c....

Q: What are the similarities and differences in taking the short side of

What are the similarities and differences in taking the short side of a futures contract and short selling a stock? How do the cash flows differ?

Q: An American electronics firm imports its completed circuit boards from Japan.

An American electronics firm imports its completed circuit boards from Japan. The company signed a contract today to pay for the boards in Japanese yen upon delivery in four months; the price per boar...

Q: Is it true that a futures contract represents a zero-sum

Is it true that a futures contract represents a zero-sum game, meaning that the only way for a buyer to win is for a seller to lose, and vice versa?

Q: Program traders closely monitor relative futures and cash market prices, but

Program traders closely monitor relative futures and cash market prices, but program trades are not actually made on a fully mechanical basis. What are some of the complications that might make progra...

Q: What does it mean to purchase a security on margin? Why

What does it mean to purchase a security on margin? Why might you do it?

Q: What does it mean to sell a security short? Why might

What does it mean to sell a security short? Why might you do it?

Q: Why is preferred stock “preferred”?

Why is preferred stock “preferred”?

Q: Explain how volume is quoted for stocks, corporate bonds, futures

Explain how volume is quoted for stocks, corporate bonds, futures, and options.

Q: What is the difference between arithmetic and geometric returns? Suppose you

What is the difference between arithmetic and geometric returns? Suppose you have invested in a stock for the last 10 years. Which number is more important to you, the arithmetic or geometric return?...

Q: What is Blume’s formula? When would you want to use it

What is Blume’s formula? When would you want to use it in practice?

Q: To an investor, what is the difference between using an advisor

To an investor, what is the difference between using an advisor and using a broker?

Q: Calculate the index return for the information in Problem 4 using a

Calculate the index return for the information in Problem 4 using a value-weighted index.

Q: Using the information from Problem 5, calculate the variances and the

Using the information from Problem 5, calculate the variances and the standard deviations for Cherry and Straw.

Q: You purchase 10 call option contracts with a strike price of $

You purchase 10 call option contracts with a strike price of $75 and a premium of $3.85. If the stock price at expiration is $82, what is your dollar profit? What if the stock price is $72?

Q: Suppose you calculated the total market value of the stocks in an

Suppose you calculated the total market value of the stocks in an index over a five-year period: Year 1: 4,387 million Year 2: 4,671 million Year 3: 5,032 million Year 4: 4,820 million Year 5: 5,369 m...

Q: On November 14, Thoro good Enterprises announced that the public and

On November 14, Thoro good Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position i...

Q: The following diagram shows the cumulative abnormal returns (CAR) for

The following diagram shows the cumulative abnormal returns (CAR) for oil exploration companies announcing oil discoveries over a 30-year period. Month 0 in the diagram is the announcement month. Assu...

Q: The following figures present the results of four cumulative abnormal returns (

The following figures present the results of four cumulative abnormal returns (CAR) studies. Indicate whether the results of each study support, reject, or are inconclusive about the semi strong form...

Q: An important difference between a long position in stock and a short

An important difference between a long position in stock and a short position concerns the potential gains and losses. Suppose a stock sells for $18 per share and you buy 500 shares. What are your pot...

Q: A study analyzed the behavior of the stock prices of firms that

A study analyzed the behavior of the stock prices of firms that had lost antitrust cases. Included in the diagram are all firms that lost the initial court decision, even if the decision was later ove...

Q: Calculate the standard deviations for Roll and Ross by filling in the

Calculate the standard deviations for Roll and Ross by filling in the following table (verify your answer using returns expressed in percentages as well as decimals): Data for Question 5:

Q: Calculate the expected return on a portfolio of 55 percent Roll and

Calculate the expected return on a portfolio of 55 percent Roll and 45 percent Ross by filling in the following table: Data for Question 7:

Q: Based on the following information, calculate the expected return and standard

Based on the following information, calculate the expected return and standard deviation for the two stocks.

Q: Consider the following information: /

Consider the following information: a. Your portfolio is invested 25 percent each in A and C and 50 percent in B. What is the expected return of the portfolio? b. What is the variance of this port...

Q: A stock has a beta of 0.9 and an expected

A stock has a beta of 0.9 and an expected return of 9 percent. A risk-free asset currently earns 4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b....

Q: Using Figure 14.1, answer the following questions:

Using Figure 14.1, answer the following questions: a. What was the settle price for March 2016 coffee futures on this date? What is the total dollar value of this contract at the close of trading for...

Q: Referring to Figure 14.1, what is the total open

Referring to Figure 14.1, what is the total open interest on the December 2015 Japanese yen contract? Does it represent long positions, short positions, or both? Based on the settle price on the contr...

Q: Suppose you bought 100 shares of stock at an initial price of

Suppose you bought 100 shares of stock at an initial price of $37 per share. The stock paid a dividend of $0.28 per share during the following year, and the share price at the end of the year was $41....

Q: You found the following stock quote for DRK Enterprises, Inc.,

You found the following stock quote for DRK Enterprises, Inc., at your favorite website. You also found that the stock paid an annual dividend of $0.75, which resulted in a dividend yield of 1.30 perc...

Q: What is the estimate of Country Point’s free cash flow to the

What is the estimate of Country Point’s free cash flow to the firm (FCFF) in 2012? a. 25 b. 16 c. 11

Q: Which of the following is closest to the expected return of a

Which of the following is closest to the expected return of a portfolio that consists of 90 percent of the original portfolio, 5 percent of the Hi Rise (HR) Real Estate Fund, and 5 percent of the Beta...

Q: You find a particular stock has an annual standard deviation of 54

You find a particular stock has an annual standard deviation of 54 percent. What is the standard deviation for a two-month period?

Q: What is the formula for the Sharpe ratio for a stock and

What is the formula for the Sharpe ratio for a stock and bond portfolio with a zero correlation between stock and bond returns?

Q: You find the monthly standard deviation of a stock is 8.

You find the monthly standard deviation of a stock is 8.60 percent. What is the annual standard deviation of the stock?

Q: You are given the following information concerning three portfolios, the market

You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: What are the Sharpe ratio, Treynor ratio, and Jensen’s alpha f...

Q: Assume that the tracking error of portfolio X in Problem 3 is

Assume that the tracking error of portfolio X in Problem 3 is 9.2 percent. What is the information ratio for portfolio X? Data from Problem 3: You are given the following information concerning thre...

Q: In Problem 3, assume that the correlation of returns on portfolio

In Problem 3, assume that the correlation of returns on portfolio Y to returns on the market is .75. What is the percentage of portfolio Y’s return that is driven by the market? Dat...

Q: The Layton Growth Fund has an alpha of 2.1 percent

The Layton Growth Fund has an alpha of 2.1 percent. You have determined that Layton’s information ratio is 0.5. What must Layton’s tracking error be relative to its benchmark?

Q: DW Co. stock has an annual return mean and standard deviation

DW Co. stock has an annual return mean and standard deviation of 12 percent and 30 percent, respectively. What is the smallest expected loss in the coming year with a probability of 5 percent?

Q: Woodpecker, Inc., stock has an annual return mean and standard

Woodpecker, Inc., stock has an annual return mean and standard deviation of 18 percent and 44 percent, respectively. What is the smallest expected loss in the coming month with a probability of 2.5 pe...

Q: Your portfolio allocates equal funds to the DW Co. and Woodpecker

Your portfolio allocates equal funds to the DW Co. and Woodpecker, Inc., stocks referred to in Problems 7 and 8. The return correlation between DW Co. and Woodpecker, Inc., is zero. What is the smalle...

Q: Based on the stock and market data provided above, which of

Based on the stock and market data provided above, which of the following data regarding stock A is most accurate?

Q: A stock futures contract is priced at $27.18.

A stock futures contract is priced at $27.18. The stock has a dividend yield of 1.25 percent and the risk-free rate is 2.5 percent. If the futures contract matures in six months, what is the current s...

Q: You are long 20 November 2015 soybean futures contracts. Calculate your

You are long 20 November 2015 soybean futures contracts. Calculate your dollar profit or loss from this trading day using Figure 14.1. Figure 14.1:

Q: You are short 15 March 2016 corn futures contracts. Calculate your

You are short 15 March 2016 corn futures contracts. Calculate your dollar profit or loss from this trading day using Figure 14.1. Figure 14.1:

Q: You are short 30 March 2016 five-year Treasury note futures

You are short 30 March 2016 five-year Treasury note futures contracts. Calculate your profit or loss from this trading day using Figure 14.1. Figure 14.1:

Q: A non-dividend-paying stock is currently priced at $

A non-dividend-paying stock is currently priced at $16.40. The risk-free rate is 3 percent and a futures contract on the stock matures in six months. What price should the futures be?

Q: A non-dividend-paying stock has a futures contract with

A non-dividend-paying stock has a futures contract with a price of $94.90 and a maturity of two months. If the risk-free rate is 4.5 percent, what is the price of the stock?

Q: A non-dividend-paying stock has a current share price

A non-dividend-paying stock has a current share price of $42.60 and a futures price of $42.95. If the maturity of the futures contract is four months, what is the risk-free rate?

Q: A stock has a current share price of $49.24

A stock has a current share price of $49.24 and a dividend yield of 1.5 percent. If the risk-free rate is 5.4 percent, what is the futures price if the maturity is four months?

Q: Carson Corporation stock sells for $17 per share, and you’ve

Carson Corporation stock sells for $17 per share, and you’ve decided to purchase as many shares as you possibly can. You have $31,000 available to invest. What is the maximum number of shares you can...

Q: You purchased a stock at the end of the prior year at

You purchased a stock at the end of the prior year at a price of $73. At the end of this year, the stock pays a dividend of $1.20 and you sell the stock for $78. What is your return for the year? No...

Q: The beta of stock B is closest to: a.

The beta of stock B is closest to: a. 0.51 b. 1.07 c. 1.46

Q: You purchase 275 shares of 2nd Chance Co. stock on margin

You purchase 275 shares of 2nd Chance Co. stock on margin at a price of $53. Your broker requires you to deposit $8,000. What is your margin loan amount? What is the initial margin requirement?

Q: You have $22,000 and decide to invest on margin

You have $22,000 and decide to invest on margin. If the initial margin requirement is 55 percent, what is the maximum dollar purchase you can make?

Q: You decide to buy 1,200 shares of stock at a

You decide to buy 1,200 shares of stock at a price of $34 and an initial margin of 55 percent. What is the maximum percentage decline in the stock before you will receive a margin call if the maintena...

Q: The stock of Flop Industries is trading at $48. You

The stock of Flop Industries is trading at $48. You feel the stock price will decline, so you short 1,000 shares at an initial margin of 60 percent. If the maintenance margin is 30 percent, at what sh...

Q: You short sold 1,000 shares of stock at a price

You short sold 1,000 shares of stock at a price of $36 and an initial margin of 55 percent. If the maintenance margin is 35 percent, at what share price will you receive a margin call? What is your ac...

Q: If you currently own 15 of the bonds, how much will

If you currently own 15 of the bonds, how much will you receive on the next coupon date? Use the following corn futures quotes for Problems 11–13: Data from Problems 11: How ma...

Q: In Problem 1, assume the company has 100 million shares of

In Problem 1, assume the company has 100 million shares of stock outstanding and a P/E ratio of 15. What was net income for the most recent four quarters? Data from Problem 1: You found the followin...

Q: You find a stock selling for $74.20 that has

You find a stock selling for $74.20 that has a dividend yield of 3.4 percent. What was the last quarterly dividend paid?

Q: In Problem 3, if the company has a P/E

In Problem 3, if the company has a P/E ratio of 21.5, what is the earnings per share (EPS) for the company? Data from Problem 3: You find a stock selling for $74.20 that has a dividend yield of 3.4...

Q: In Problem 1, what is the capital gains yield? The

In Problem 1, what is the capital gains yield? The dividend yield? What is the total rate of return on the investment? Problem 1: Suppose you bought 100 shares of stock at an initial price of $37 pe...

Q: If the market risk premium decreases by 1 percent while the risk

If the market risk premium decreases by 1 percent while the risk-free rate remains the same, the security market line: a. Becomes steeper. b. Becomes flatter. c. Parallel shifts downward.

Q: You purchase 3,000 bonds with a par value of $

You purchase 3,000 bonds with a par value of $1,000 for $980 each. The bonds have a coupon rate of 7.2 percent paid semiannually and mature in 10 years. How much will you receive on the next coupon d...

Q: The contract size for platinum futures is 50 troy ounces. Suppose

The contract size for platinum futures is 50 troy ounces. Suppose you need 300 troy ounces of platinum and the current futures price is $2,025 per ounce. How many contracts do you need to purchase? Ho...

Q: You found the following stock quote for Gigantus Corporation in today’s newspaper

You found the following stock quote for Gigantus Corporation in today’s newspaper. What was the stock selling for on January 1? Use the following bond quote for Problems 9 and 10:...

Q: What is the yield to maturity of the bond? What is

What is the yield to maturity of the bond? What is the current yield of the bond?

Q: The World Income Appreciation Fund has current assets with a market value

The World Income Appreciation Fund has current assets with a market value of $8.5 billion and has 410 million shares outstanding. What is the net asset value (NAV) for this mutual fund?

Q: You invested $10,000 in a mutual fund at the

You invested $10,000 in a mutual fund at the beginning of the year when the NAV was $32.24. At the end of the year, the fund paid $0.24 in short-term distributions and $0.41 in long-term distributions...

Q: Suppose the mutual fund in Problem 1 has a current market price

Suppose the mutual fund in Problem 1 has a current market price quotation of $21.89. Is this a load fund? If so, calculate the front-end load. Data from Problem 1: The World Income Appreciation Fund...

Q: The Emerging Growth and Equity Fund is a “low-load

The Emerging Growth and Equity Fund is a “low-load” fund. The current offer price quotation for this mutual fund is $15.95, and the front-end load is 2.0 percent. What is the NAV? If there are 19.2 mi...

Q: The Aqua Liquid Assets Money Market Mutual Fund has a NAV of

The Aqua Liquid Assets Money Market Mutual Fund has a NAV of $1 per share. During the year, the assets held by this fund appreciated by 1.7 percent. If you had invested $25,000 in this fund at the sta...

Q: An open-end mutual fund has the following stocks:

An open-end mutual fund has the following stocks: If there are 50,000 shares of the mutual fund, what is the NAV?  

Q: What are the Sharpe ratios for the Miranda Fund and the S

What are the Sharpe ratios for the Miranda Fund and the S&P 500?  

Q: Rework Problems 1 and 2 assuming that you buy 500 shares of

Rework Problems 1 and 2 assuming that you buy 500 shares of the stock and the ending share price is $34. Problems 1: Suppose you bought 100 shares of stock at an initial price of $37 per share...

Q: Suppose the fund in Problem 5 has liabilities of $110,

Suppose the fund in Problem 5 has liabilities of $110,000. What is the NAV of the fund now? Data from Problem 5: An open-end mutual fund has the following stocks: If there are 50,000...

Q: In Problem 6, assume the fund is sold with a 6

In Problem 6, assume the fund is sold with a 6.25 percent front-end load. What is the offering price of the fund? Data from Problem 6: Suppose the fund in Problem 5 has liabilities of $110,000...

Q: A mutual fund sold $36 million of assets during the year

A mutual fund sold $36 million of assets during the year and purchased $32 million in assets. If the average daily assets of the fund were $96 million, what was the fund turnover?  

Q: What is the historical rate of return on each of the following

What is the historical rate of return on each of the following investments? What is the historical risk premium on these investments? a. Long-term government bonds b. Treasury bills c. Large stoc...

Q: The rates of return on Cherry Jalopies, Inc., stock over

The rates of return on Cherry Jalopies, Inc., stock over the last five years were 17 percent, 11 percent, −2 percent, 3 percent, and 14 percent. Over the same period, the returns on Straw Cons...

Q: You buy 500 shares of stock at a price of $38

You buy 500 shares of stock at a price of $38 and an initial margin of 60 percent. If the maintenance margin is 30 percent, at what price will you receive a margin call?  

Q: A particular stock has a dividend yield of 1.2 percent

A particular stock has a dividend yield of 1.2 percent. Last year, the stock price fell from $65 to $59. What was the return for the year?  

Q: Using the information from Problem 5, what is the geometric return

Using the information from Problem 5, what is the geometric return for Cherry Jalopies, Inc.?  

Q: A stock has had returns of 21 percent, 12 percent,

A stock has had returns of 21 percent, 12 percent, 7 percent, −13 percent, −4 percent, and 26 percent over the last six years. What are the arithmetic and geometric returns for the stock...

Q: What is the Treynor measure for the Miranda Fund and the S

What is the Treynor measure for the Miranda Fund and the S&P 500?  

Q: On October 28, 2015, the DJIA opened at 17,

On October 28, 2015, the DJIA opened at 17,581.43. The divisor at that time was 0.14967727343. Suppose on this day the prices for 29 of the stocks remained unchanged and one stock increased $5.00. W...

Q: Suppose the 6-month S&P 500 futures price is

Suppose the 6-month S&P 500 futures price is 2,281.55, while the cash price is 2,270.42. What is the implied difference between the risk-free interest rate and the dividend yield on the S&P...

Q: Suppose the 6-month S&P 500 futures price is

Suppose the 6-month S&P 500 futures price is 2,399.25, while the cash price is 2,370.48. What is the implied dividend yield on the S&P 500 if the risk free interest rate is 5 percent?  ...

Q: Suppose you want to hedge a $500 million bond portfolio with

Suppose you want to hedge a $500 million bond portfolio with a duration of 5.1 years using 10-year Treasury note futures with a duration of 6.7 years, a futures price of 102, and 3 months to expirat...

Q: Suppose you want to hedge a $400 million bond portfolio with

Suppose you want to hedge a $400 million bond portfolio with a duration of 8.4 years using 10-year Treasury note futures with a duration of 6.2 years, a futures price of 102, and 85 days to expiration...

Q: Using the information in Problem 1, construct your equity account balance

Using the information in Problem 1, construct your equity account balance sheet at the time of your purchase. What does your balance sheet look like if the share price rises to $24? What if it falls t...

Q: You’ve just opened a margin account with $20,000 at

You’ve just opened a margin account with $20,000 at your local brokerage firm. You instruct your broker to purchase 500 shares of Landon Golf stock, which currently sells for $60 per share. What is yo...

Q: Suppose you buy 15 of the September corn futures contracts at the

Suppose you buy 15 of the September corn futures contracts at the last price of the day. One month from now, the futures price of this contract is 462.125, and you close out your position. Calculate y...

Q: How many of the March contracts are currently open? How many

How many of the March contracts are currently open? How many of these contracts should you sell if you wish to deliver 225,000 bushels of corn in March? If you actually make delivery, how much will yo...

Q: Your grandfather invested $1,000 in a stock 50 years

Your grandfather invested $1,000 in a stock 50 years ago. Currently the value of his account is $324,000. What is his geometric return over this period?

Q: What is the Jensen alpha for the Miranda Fund? a

What is the Jensen alpha for the Miranda Fund? a. 0.2216 b. 0.3515 c. 0.0745

Q: Suppose you sell 25 of the May corn futures at the high

Suppose you sell 25 of the May corn futures at the high price of the day. You close your position later when the price is 465.375. Ignoring commission, what is your dollar profit on this transaction?...

Q: Suppose you take out a margin loan for $50,000

Suppose you take out a margin loan for $50,000. The rate you pay is an 8.4 percent effective rate. If you repay the loan in six months, how much interest will you pay?

Q: A stock has returns of −9 percent, 17 percent,

A stock has returns of −9 percent, 17 percent, 9 percent, 14 percent, and −4 percent. What are the arithmetic and geometric returns?

Q: A stock has had the following year-end prices and dividends

A stock has had the following year-end prices and dividends: What are the arithmetic and geometric returns for the stock?

Q: In Problem 19, suppose your holding period was five months instead

In Problem 19, suppose your holding period was five months instead of seven. What is your annualized return? What do you conclude in general about the length of your holding period and your annualized...

Q: Suppose you buy stock at a price of $57 per share

Suppose you buy stock at a price of $57 per share. Five months later, you sell it for $61. You also received a dividend of $0.60 per share. What is your annualized return on this investment?

Q: Suppose that an investor opens an account by investing $1,

Suppose that an investor opens an account by investing $1,000. At the beginning of each of the next four years, he deposits an additional $1,000 each year, and he then liquidates the account at the en...

Q: You believe that Rose, Inc., stock is going to fall

You believe that Rose, Inc., stock is going to fall and you’ve decided to sell 800 shares short. If the current share price is $47, construct the equity account balance sheet for this trade. Assume th...

Q: Repeat Problem 23 assuming you short the 800 shares on 60 percent

Repeat Problem 23 assuming you short the 800 shares on 60 percent margin. Problem 2: You believe that Rose, Inc., stock is going to fall and you’ve decided to sell 800 shares short. If the current s...

Q: Suppose you take out a margin loan for $75,000

Suppose you take out a margin loan for $75,000. You pay a 6.4 percent effective rate. If you repay the loan in two months, how much interest will you pay?

Q: When hedging its exchange rate risk on the freight car sale,

When hedging its exchange rate risk on the freight car sale, Jackson used a futures contract to: a. Sell €15 million in exchange for $18.75 million. b. Buy €15 million in exchange for $18.75 million....

Q: Suppose you hold a particular investment for seven months. You calculate

Suppose you hold a particular investment for seven months. You calculate that your holding period return is 14 percent. What is your annualized return?

Q: In Problem 11, suppose the annual operating expense ratio for the

In Problem 11, suppose the annual operating expense ratio for the mutual fund is 0.75 percent and the management fee is 0.45 percent. How much money did the fund’s management earn during the year? If...

Q: Suppose you just inherited $25,000 from your Aunt Louise

Suppose you just inherited $25,000 from your Aunt Louise. You have decided to invest in an S&P Index fund, but you haven’t decided yet whether to use an ETF or a mutual fund. Suppose the ETF has an an...

Q: The Bruin Stock Fund sells Class A shares that have a front

The Bruin Stock Fund sells Class A shares that have a front-end load of 5.75 percent, a 12b-1 fee of 0.23 percent, and other fees of 0.73 percent. There are also Class B shares with a 5 percent CDSC t...

Q: You are going to invest in a stock mutual fund with a

You are going to invest in a stock mutual fund with a 6 percent front-end load and a 1.75 percent expense ratio. You also can invest in a money market mutual fund with a 3.30 percent return and an exp...

Q: Suppose you’re evaluating three alternative MMMF investments. The first fund buys

Suppose you’re evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 3.2 percent. The second fund buys o...

Q: In Problem 18, which MMMF offers you the highest yield if

In Problem 18, which MMMF offers you the highest yield if you are a resident of Texas, which has no state income tax? Data from Problem 18: Suppose you’re evaluating three alternative MMMF investmen...

Q: The Argentina Fund has $560 million in assets and sells at

The Argentina Fund has $560 million in assets and sells at a 6.9 percent discount to NAV. If the quoted share price for this closed-end fund is $14.29, how many shares are outstanding? If you purchase...

Q: Suppose you purchase 5,000 shares of a closed-end

Suppose you purchase 5,000 shares of a closed-end mutual fund at its initial public offering; the offer price is $10 per share. The offering prospectus discloses that the fund promoter gets an 8 perce...

Q: In October 2015, Goldman Sachs was the highest priced stock in

In October 2015, Goldman Sachs was the highest priced stock in the DJIA and Cisco was the lowest. The closing price for Goldman Sachs on October 27, 2015, was $186.31, and the closing price for Cisco...

Q: To hedge the foreign exchange risk relative to the Canadian dollar,

To hedge the foreign exchange risk relative to the Canadian dollar, Jackson should: a. Buy a futures contract to exchange $7,083,333 for C$8.5 million. b. Buy a futures contract to exchange $6,390,977...

Q: Looking back at Problems 10 and 11, what would the new

Looking back at Problems 10 and 11, what would the new index level be if all stocks on the DJIA increased by $1.00 per share on the next day? Data from Problems 10: On October 28, 2015, the DJIA ope...

Q: You construct a price-weighted index of 40 stocks. At

You construct a price-weighted index of 40 stocks. At the beginning of the day, the index is 8,465.52. During the day, 39 stock prices remain the same, and one stock price increases $5.00. At the end...

Q: In Problem 16, will your answers change if the Douglas McDonnell

In Problem 16, will your answers change if the Douglas McDonnell stock splits? Why or why not? Data from Problem 16: Repeat Problem 14 if a value-weighted index is used. Assume the index is scaled b...

Q: Could I Industries just paid a dividend of $1.10

Could I Industries just paid a dividend of $1.10 per share. The dividends are expected to grow at a 20 percent rate for the next six years and then level off to a 4 percent growth rate indefinitely. I...

Q: Netscrape Communications does not currently pay a dividend. You expect the

Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4 per share dividend in 15 years, and you expect dividends to grow perpetually at 5.5 percent per...

Q: Jonah’s Fishery has EBITDA of $65 million. Jonah’s has market

Jonah’s Fishery has EBITDA of $65 million. Jonah’s has market value of equity and debt of $420 million and $38 million, respectively. Jonah’s has cash on the balance sheet of $12 million. What is Jona...

Q: Leisure Lodge Corporation is expected to pay the following dividends over the

Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $15.00, $10.00, $5.00, and $2.20. Afterwards, the company pledges to maintain a constant 4 percent growth...

Q: Sea Side, Inc., just paid a dividend of $1

Sea Side, Inc., just paid a dividend of $1.68 per share on its stock. The growth rate in dividends is expected to be a constant 5.5 percent per year indefinitely. Investors require an 18 percent retur...

Q: In Problem 21, suppose the dividends per share over the same

In Problem 21, suppose the dividends per share over the same period were $1.00, $1.08, $1.17, $1.25, $1.35, and $1.40, respectively. Compute the expected share price at the end of 2017 using the perpe...

Q: The current price of Parador Industries stock is $67 per share

The current price of Parador Industries stock is $67 per share. Current earnings per share are $3.40, the earnings growth rate is 6 percent, and Parador does not pay a dividend. The expected return on...

Q: In regard to the table that Dr. Miles constructed, which

In regard to the table that Dr. Miles constructed, which of the following is true? a. The receiving foreign currency position is correct; the action is incorrect. b. The receiving foreign currency pos...

Q: The current price of Parador Industries stock is $67 per share

The current price of Parador Industries stock is $67 per share. Current sales per share are $18.75, the sales growth rate is 8 percent, and Parador does not pay a dividend. The expected return on Para...

Q: What are the sustainable growth rate and required return for Beagle Beauties

What are the sustainable growth rate and required return for Beagle Beauties? Using these values, estimate the current share price of Beagle Beauties stock according to the constant dividend growth mo...

Q: Using the P/E, P/CF, and P

Using the P/E, P/CF, and P/S ratios, estimate the 2016 share price for Beagle Beauties.  Data for Problem 28: Beagle Beauties engages in the development, manufacture, and sale of a line...

Q: Assume the sustainable growth rate and required return you calculated in Problem

Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual inc...

Q: Use the information from Problem 29 and calculate the stock price with

Use the information from Problem 29 and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in Problem 29? Why or why not? Data from Problem 29: Assume the...

Q: Given your answers in Problems 27–30, do you feel

Given your answers in Problems 27–30, do you feel Beagle Beauties is overvalued or undervalued at its current price of around $82? At what price do you feel the stock should sell? D...

Q: A Treasury bill with 64 days to maturity is quoted at 99

A Treasury bill with 64 days to maturity is quoted at 99.012. What are the bank discount yield, the bond equivalent yield, and the effective annual return?

Q: A Treasury bill purchased in December 2016 has 55 days until maturity

A Treasury bill purchased in December 2016 has 55 days until maturity and a bank discount yield of 2.48 percent. What is the price of the bill as a percentage of face value? What is the bond equivalen...

Q: The treasurer of a large corporation wants to invest $20 million

The treasurer of a large corporation wants to invest $20 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.15 percent...

Q: What is the yield of the November ’17 STRIPS expressed as an

What is the yield of the November ’17 STRIPS expressed as an EAR? Data for Problem 15: U.S. Treasury STRIPS, close of business November 15, 2015:

Q: What is the cost of capital that Ms. Nguyen used for

What is the cost of capital that Ms. Nguyen used for her valuation of Country Point? a. 18 percent b. 17 percent c. 15 percent

Q: What is Vega’s geometric average return over the five-year period

What is Vega’s geometric average return over the five-year period? a. 7.85 percent b. 9.00 percent c. 15.14 percent

Q: According to the pure expectations theory of interest rates, how much

According to the pure expectations theory of interest rates, how much do you expect to pay for a five-year STRIPS on November 15, 2016? How much do you expect to pay for a two-year STRIPS on November...

Q: Consider the following spot interest rates for maturities of one, two

Consider the following spot interest rates for maturities of one, two, three, and four years. What are the following forward rates, where f1, k refers to a forward rate for the period beginning in o...

Q: Based on the spot interest rates in the previous question, what

Based on the spot interest rates in the previous question, what are the following forward rates, where fk,1 refers to a forward rate beginning in k years and extending for 1 year?

Q: Based on the spot rates in Problem 21, and assuming a

Based on the spot rates in Problem 21, and assuming a constant real interest rate of 2 percent, what are the expected inflation rates for the next four years?

Q: Ghost Rider Corporation has bonds on the market with 10 years to

Ghost Rider Corporation has bonds on the market with 10 years to maturity, a YTM of 7.5 percent, and a current price of $938. What must the coupon rate be on the company’s bonds?

Q: Great Wall Pizzeria issued 10-year bonds one year ago at

Great Wall Pizzeria issued 10-year bonds one year ago at a coupon rate of 6.20 percent. If the YTM on these bonds is 7.4 percent, what is the current bond price?

Q: Soprano’s Spaghetti Factory issued 25-year bonds two years ago at

Soprano’s Spaghetti Factory issued 25-year bonds two years ago at a coupon rate of 7.5 percent. If these bonds currently sell for 108 percent of par value, what is the YTM?

Q: For the bond referred to in Problem 14, what would be

For the bond referred to in Problem 14, what would be the realized yield if it were held to maturity? Data from Problem 14: A zero coupon bond with a 6 percent YTM has 20 years to maturity. Two year...

Q: LKD Co. has 8 percent coupon bonds with a YTM of

LKD Co. has 8 percent coupon bonds with a YTM of 6.8 percent. The current yield on these bonds is 7.4 percent. How many years do these bonds have left until they mature?

Q: You’ve just found a 10 percent coupon bond on the market that

You’ve just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?

Q: Mr. Spice asks Mr. Myers to quantify the value changes

Mr. Spice asks Mr. Myers to quantify the value changes from changes in interest rates. To illustrate, Mr. Myers computes the value change for the fixed-rate note. He assumes an increase in interest ra...

Q: What is the Macaulay duration of a 7 percent coupon bond with

What is the Macaulay duration of a 7 percent coupon bond with five years to maturity and a current price of $1,025.30? What is the modified duration?

Q: In Problem 23, suppose the yield on the bond suddenly increases

In Problem 23, suppose the yield on the bond suddenly increases by 2 percent. Use duration to estimate the new price of the bond. Compare your answer to the new bond price calculated from the usual bo...

Q: What is the dollar value of an 01 for the bond in

What is the dollar value of an 01 for the bond in Problem 23? Data from Problem 23: What is the Macaulay duration of a 7 percent coupon bond with five years to maturity and a current price of $1,025...

Q: A bond with a coupon rate of 8 percent sells at a

A bond with a coupon rate of 8 percent sells at a yield to maturity of 9 percent. If the bond matures in 10 years, what is the Macaulay duration of the bond? What is the modified duration?

Q: Assume the bond in Problem 27 has a yield to maturity of

Assume the bond in Problem 27 has a yield to maturity of 7 percent. What is the Macaulay duration now? What does this tell you about the relationship between duration and yield to maturity? Data from...

Q: You find a bond with 19 years until maturity that has a

You find a bond with 19 years until maturity that has a coupon rate of 8 percent and a yield to maturity of 7 percent. What is the Macaulay duration? The modified duration?

Q: One method used to obtain an estimate of the term structure of

One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual...

Q: You find that the one-, two-, three-, and four

You find that the one-, two-, three-, and four-year interest rates are 4.2 percent, 4.5 percent, 4.9 percent, and 5.1 percent. What is the yield to maturity of a four year bond with an annual coupon r...

Q: Given the following information, calculate the expected return and standard deviation

Given the following information, calculate the expected return and standard deviation for a portfolio that has 35 percent invested in stock A, 45 percent in stock B, and the balance in stock C.

Q: Use the following information to calculate the expected return and standard deviation

Use the following information to calculate the expected return and standard deviation of a portfolio that is 50 percent invested in 3 Doors, Inc., and 50 percent invested in Down Co.:

Q: Ms. Yamisaka has determined that the average monthly return of another

Ms. Yamisaka has determined that the average monthly return of another Mega client was 1.63 percent during the past year. What is the annualized rate of return? a. 5.13 percent b. 19.56 percent c. 21...

Q: In Problem 12, what are the expected return and standard deviation

In Problem 12, what are the expected return and standard deviation on the minimum variance portfolio? Data from Problem 12: Use the following information to calculate the expected return and standar...

Q: Fill in the missing information assuming a correlation of .30.

Fill in the missing information assuming a correlation of .30.

Q: Consider two stocks, stock D, with an expected return of

Consider two stocks, stock D, with an expected return of 13 percent and a standard deviation of 31 percent, and stock I, an international company, with an expected return of 16 percent and a standard...

Q: What are the expected return and standard deviation of the minimum variance

What are the expected return and standard deviation of the minimum variance portfolio in Problem 16? Data from Problem 16: Consider two stocks, stock D, with an expected return of 13 percent and a s...

Q: Asset K has an expected return of 10 percent and a standard

Asset K has an expected return of 10 percent and a standard deviation of 28 percent. Asset L has an expected return of 7 percent and a standard deviation of 18 percent. The correlation between the ass...

Q: The stock of Bruin, Inc., has an expected return of

The stock of Bruin, Inc., has an expected return of 14 percent and a standard deviation of 42 percent. The stock of Wildcat Co. has an expected return of 12 percent and a standard deviation of 57 perc...

Q: You have a three-stock portfolio. Stock A has an

You have a three-stock portfolio. Stock A has an expected return of 12 percent and a standard deviation of 41 percent, stock B has an expected return of 16 percent and a standard deviation of 58 perce...

Q: Suppose two assets have perfect positive correlation. Show that the standard

Suppose two assets have perfect positive correlation. Show that the standard deviation on a portfolio of the two assets is simply:

Q: Suppose two assets have perfect negative correlation. Show that the standard

Suppose two assets have perfect negative correlation. Show that the standard deviation on a portfolio of the two assets is simply:

Q: Using the result in Problem 23, show that whenever two assets

Using the result in Problem 23, show that whenever two assets have perfect negative correlation, it is possible to find a portfolio with a zero standard deviation. What are the portfolio weights? (Hin...

Q: The return calculation method most appropriate for evaluating the performance of a

The return calculation method most appropriate for evaluating the performance of a portfolio manager is a. Holding period b. Geometric c. Money-weighted (or dollar-weighted)

Q: Derive our expression in the chapter for the portfolio weight in the

Derive our expression in the chapter for the portfolio weight in the minimum variance portfolio. (Danger! Calculus required!)

Q: Stock Y has a beta of 1.05 and an expected

Stock Y has a beta of 1.05 and an expected return of 13 percent. Stock Z has a beta of 0.70 and an expected return of 9 percent. If the risk-free rate is 5 percent and the market risk premium is 7 per...

Q: Show that another way to calculate beta is to take the covariance

Show that another way to calculate beta is to take the covariance between the security and the market and divide by the variance of the market’s return.

Q: The beta for a certain stock is 1.15, the

The beta for a certain stock is 1.15, the risk-free rate is 5 percent, and the expected return on the market is 13 percent. Complete the following table to decompose the stock’s retu...

Q: Look back at Problem 1. Assume that Able undergoes a 1

Look back at Problem 1. Assume that Able undergoes a 1-for-2 reverse stock split. What is the new divisor? Data from Problem 1: Able, Baker, and Charlie are the only three stocks in an index. The st...

Q: What is the formula for the Sharpe ratio for an equally weighted

What is the formula for the Sharpe ratio for an equally weighted portfolio of stocks and bonds?

Q: What is the formula for the Sharpe ratio for a portfolio of

What is the formula for the Sharpe ratio for a portfolio of stocks and bonds with equal expected returns, i.e., E(RS) = E(RB), and a zero return correlation?

Q: A stock has an annual return of 11 percent and a standard

A stock has an annual return of 11 percent and a standard deviation of 54 percent. What is the smallest expected loss over the next year with a probability of 1 percent? Does this number make sense?

Q: Tyler Trucks stock has an annual return mean and standard deviation of

Tyler Trucks stock has an annual return mean and standard deviation of 10 percent and 26 percent, respectively. Michael Moped Manufacturing stock has an annual return mean and standard deviation of 18...

Q: Using the same return means and standard deviations as in Problem 15

Using the same return means and standard deviations as in Problem 15 for Tyler Trucks and Michael Moped Manufacturing stocks, but assuming a return correlation of −.5, what is the smallest expected lo...

Q: Mr. Spice asks Mr. Myers how a fixed-income

Mr. Spice asks Mr. Myers how a fixed-income manager would position his portfolio to capitalize on his expectations of increasing interest rates. Which of the following would be the most appropriate st...

Q: Your portfolio allocates equal amounts to three stocks. All three stocks

Your portfolio allocates equal amounts to three stocks. All three stocks have the same mean annual return of 14 percent. Annual return standard deviations for these three stocks are 30 percent, 40 per...

Q: What are the Sharpe and Treynor ratios for the fund?

What are the Sharpe and Treynor ratios for the fund? Data for Problem 19: You have been given the following return information for a mutual fund, the market index, and the risk-free rate...

Q: You went long 20 June 2016 crude oil futures contracts at a

You went long 20 June 2016 crude oil futures contracts at a price of $42.18. Looking back at Figure 14.1, if you closed your position at the settle price on this day, what was your profit? Figure 14....

Q: You shorted 15 March 2016 British pound futures contracts at the high

You shorted 15 March 2016 British pound futures contracts at the high price for the day. Looking back at Figure 14.1, if you closed your position at the settle price on this day, what was your profit?...

Q: Suppose the CAC-40 Index (a widely followed index of

Suppose the CAC-40 Index (a widely followed index of French stock prices) is currently at 4,920, the expected dividend yield on the index is 2 percent per year, and the risk-free rate in France is 6 p...

Q: You are constructing a portfolio of two assets. Asset A has

You are constructing a portfolio of two assets. Asset A has an expected return of 12 percent and a standard deviation of 24 percent. Asset B has an expected return of 18 percent and a standard deviati...

Q: You are given the following information concerning a stock and the market

You are given the following information concerning a stock and the market: Calculate the average return and standard deviation for the market and the stock. Next, calculate the correlation between th...

Q: You have been given the following return information for two mutual funds

You have been given the following return information for two mutual funds (Papa and Mama), the market index, and the risk-free rate. Calculate the Sharpe ratio, Treynor ratio, Jensenâ€
...

Q: A Treasury bill that settles on May 18, 2016, pays

A Treasury bill that settles on May 18, 2016, pays $100,000 on August 21, 2016. Assuming a discount rate of 0.44 percent, what are the price and bond equivalent yield?

Q: You have a car loan with a nominal rate of 5.

You have a car loan with a nominal rate of 5.99 percent. With interest charged monthly, what is the effective annual rate (EAR) on this loan?

Q: Explain the difference between the Sharpe ratio and the Treynor ratio.

Explain the difference between the Sharpe ratio and the Treynor ratio.

Q: A Treasury bond that settles on August 10, 2016, matures

A Treasury bond that settles on August 10, 2016, matures on April 15, 2021. The coupon rate is 4.5 percent and the quoted price is 106:17. What is the bond’s yield to maturity?

Q: A bond that settles on June 7, 2016, matures on

A bond that settles on June 7, 2016, matures on July 1, 2036, and may be called at any time after July 1, 2026, at a price of 105. The coupon rate on the bond is 6 percent and the price is 115.00. Wh...

Q: A Treasury bond that settles on October 18, 2016, matures

A Treasury bond that settles on October 18, 2016, matures on March 30, 2035. The coupon rate is 5.30 percent and the bond has a 4.45 percent yield to maturity. What are the Macaulay duration and modif...

Q: Most sources report alphas and other metrics relative to a standard benchmark

Most sources report alphas and other metrics relative to a standard benchmark, such as the S&P 500. When might this method be an inappropriate comparison?

Q: What is a common weakness of Jensen’s alpha and the Treynor ratio

What is a common weakness of Jensen’s alpha and the Treynor ratio?

Q: Explain the relationship between Jensen’s alpha and the security market line (

Explain the relationship between Jensen’s alpha and the security market line (SML) of the capital asset pricing model (CAPM).

Q: What are one advantage and one disadvantage of the Sharpe ratio?

What are one advantage and one disadvantage of the Sharpe ratio?

Q: Given Ms. Nguyen’s estimate of Country Point’s terminal value in 2014

Given Ms. Nguyen’s estimate of Country Point’s terminal value in 2014, what is the growth assumption she must have used for free cash flow after 2014? a. 7 percent b. 9 percent c. 3 percent

Q: What is meant by a Sharpe-optimal portfolio?

What is meant by a Sharpe-optimal portfolio?

Q: Explain the meaning of a Value-at-Risk statistic in

Explain the meaning of a Value-at-Risk statistic in terms of a smallest expected loss and the probability of such a loss.

Q: The largest expected loss for a portfolio is −20 percent with

The largest expected loss for a portfolio is −20 percent with a probability of 95 percent. Relate this statement to the Value-at-Risk statistic.

Q: A closed-end fund has total assets of $240 million

A closed-end fund has total assets of $240 million and liabilities of $110,000. Currently, 11 million shares are outstanding. What is the NAV of the fund? If the shares currently sell for $19.25, what...

Q: Able, Baker, and Charlie are the only three stocks in

Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $93, $312, and $78, respectively. If Baker undergoes a 2-for-1 stock split, what is the new divisor for the price-we...

Q: In Problem 1, assume that Baker undergoes a 4-for

In Problem 1, assume that Baker undergoes a 4-for-1 stock split. What is the new divisor now? Data from Problem 1: Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for...

Q: You find the following order book on a particular stock. The

You find the following order book on a particular stock. The last trade on the stock was at $70.54. a. If you place a market buy order for 100 shares, at what price will it be filled? b. If you pl...

Q: You are given the following information concerning two stocks that make up

You are given the following information concerning two stocks that make up an index. What is the price-weighted return for the index?

Q: In Problem 5, assume that you want to re index with

In Problem 5, assume that you want to re index with the index value at the beginning of the year equal to 100. What is the index level at the end of the year? Data from Problem 5: Calculate the inde...

Q: In Problem 5, assume the value-weighted index level was

In Problem 5, assume the value-weighted index level was 408.16 at the beginning of the year. What is the index level at the end of the year? Data from Problem 5: Calculate the index return for the i...

Q: The value of beta for Country Point is: a.

The value of beta for Country Point is: a. 1.09 b. 1.27 c. 1.00

Q: JJ Industries will pay a regular dividend of $2.40

JJ Industries will pay a regular dividend of $2.40 per share for each of the next four years. At the end of the four years, the company will also pay out a $40 per share liquidating dividend, and the...

Q: Johnson Products earned $2.80 per share last year and

Johnson Products earned $2.80 per share last year and paid a $1.25 per share dividend. If ROE was 14 percent, what is the sustainable growth rate?

Q: Joker stock has a sustainable growth rate of 8 percent, ROE

Joker stock has a sustainable growth rate of 8 percent, ROE of 14 percent, and dividends per share of $1.65. If the P/E ratio is 19, what is the value of a share of stock?

Q: A certain stock has a beta of 1.3. If

A certain stock has a beta of 1.3. If the risk-free rate of return is 3.2 percent and the market risk premium is 7.5 percent, what is the expected return of the stock? What is the expected return of a...

Q: Bill’s Bakery expects earnings per share of $2.56 next

Bill’s Bakery expects earnings per share of $2.56 next year. Current book value is $4.70 per share. The appropriate discount rate for Bill’s Bakery is 11 percent. Calculate the share price for Bill’s...

Q: For Bill’s Bakery described in Problem 13, suppose instead that current

For Bill’s Bakery described in Problem 13, suppose instead that current earnings per share are $2.56. Calculate the share price for Bill’s Bakery.

Q: In Problem 1, suppose the current share price is $60

In Problem 1, suppose the current share price is $60. If all other information remains the same, what must the liquidating dividend be? Data from Problem 1: JJ Industries will pay a regular dividend...

Q: You are going to value Lauryn’s Doll Co. using the FCF

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn’s has a reported equity beta of 1.4, a debt-to-equity ratio of 0.3, and a tax rate...

Q: Using your answer to Problem 3, calculate the appropriate discount rate

Using your answer to Problem 3, calculate the appropriate discount rate assuming a risk-free rate of 4 percent and a market risk premium of 7 percent. Data from Problem 3: You are going to value Lau...

Q: Lauryn’s Doll Co. had EBIT last year of $40 million

Lauryn’s Doll Co. had EBIT last year of $40 million, which is net of a depreciation expense of $4 million. In addition, Lauryn’s made $5 million in capital expenditures and increased net working capit...

Q: What is the estimated value of Country Point in a proposed spin

What is the estimated value of Country Point in a proposed spin-off? a. $144.5 million b. $162.6 million c. $178.3 million

Q: Using your answers from Problems 3 through 5, value Lauryn’s Doll

Using your answers from Problems 3 through 5, value Lauryn’s Doll Co. assuming her FCF is expected to grow at a rate of 3 percent into perpetuity. Is this value the value of the equity?

Q: If a firm has an EV of $750 million and EBITDA

If a firm has an EV of $750 million and EBITDA of $165 million, what is its EV ratio?

Q: Xytex Products just paid a dividend of $1.62 per

Xytex Products just paid a dividend of $1.62 per share, and the stock currently sells for $28. If the discount rate is 10 percent, what is the dividend growth rate?

Q: Star Light & Power increases its dividend 3.8 percent per

Star Light & Power increases its dividend 3.8 percent per year every year. This utility is valued using a discount rate of 9 percent, and the stock currently sells for $38 per share. If you buy a shar...

Q: Use the data below to construct the advance/decline line for

Use the data below to construct the advance/decline line for the stock market. Volume figures are in thousands of shares.

Q: Use the data below to construct the advance/decline line and

Use the data below to construct the advance/decline line and Arms ratio for the market. Volume is in thousands of shares.

Q: A stock had the following trades during a particular period. What

A stock had the following trades during a particular period. What was the money flow for the stock? Is the money flow a positive or negative signal in this case?

Q: Using the data in Problem 1, construct the Arms ratio on

Using the data in Problem 1, construct the Arms ratio on each of the five trading days. Data from Problem 1: Use the data below to construct the advance/decline line for the stock market. Volume fig...

Q: The table below shows the closing monthly stock prices for IBM and

The table below shows the closing monthly stock prices for IBM and Amazon. Calculate the simple three-month moving average for each month for both companies. IBM………………………………………………….…..AMZN $169.64 …...

Q: Using the stock prices in Problem 3, calculate the exponential three

Using the stock prices in Problem 3, calculate the exponential three-month moving average for both stocks where two-thirds of the average weight is placed on the most recent price. Data from Problem...

Q: For an increase of 100 basis points in the yield to maturity

For an increase of 100 basis points in the yield to maturity, by what amount would the fixed-rate bond’s price change? a. −$7.49 b. −$5.73 c. −$4.63

Q: Using the stock prices in Problem 3, calculate the exponential three

Using the stock prices in Problem 3, calculate the exponential three-month moving average for IBM and Amazon. Place 50 percent of the average weight on the most recent price. How does this exponential...

Q: A group of investors was polled each week for the last five

A group of investors was polled each week for the last five weeks about whether they were bullish or bearish concerning the market. Construct the market sentiment index for each week based on these po...

Q: You are given the following information concerning the trades made on a

You are given the following information concerning the trades made on a particular stock. Calculate the money flow for the stock based on these trades. Is the money flow a positive or negative signal...

Q: Suppose you are given the following information on the S&P

Suppose you are given the following information on the S&P 500: Date ………………………….…….Close 10/1/2015………………………………..1,923.82 10/2/2015 ………………………………1,951.36 10/5/2015 ……………………………..1,987.05 10/6/2015 ………...

Q: Below you will see a stock price chart for Cisco Systems from

Below you will see a stock price chart for Cisco Systems from finance.yahoo.com. Do you see any resistance or support levels? What do support and resistance levels mean for the stock price?

Q: What is the price of a Treasury STRIPS with a face value

What is the price of a Treasury STRIPS with a face value of $100 that matures in 10 years and has a yield to maturity of 3.5 percent?

Q: In Problem 9, what is the bond equivalent yield?

In Problem 9, what is the bond equivalent yield? Data from Problem 9: How much would you pay for a U.S. Treasury bill with 112 days to maturity quoted at a discount yield of 2.18 percent? Assume a $...

Q: A Treasury STRIPS matures in 7 years and has a yield to

A Treasury STRIPS matures in 7 years and has a yield to maturity of 4.4 percent. If the par value is $100,000, what is the price of the STRIPS? What is the quoted price?

Q: A Treasury STRIPS is quoted at 90.875 and has 5

A Treasury STRIPS is quoted at 90.875 and has 5 years until maturity. What is the yield to maturity?

Q: What is the yield to maturity on a Treasury STRIPS with 4

What is the yield to maturity on a Treasury STRIPS with 4 years to maturity and a quoted price of 70.485?

Q: Mr. Spice wonders how a fixed-income manager could position

Mr. Spice wonders how a fixed-income manager could position his portfolio to capitalize on the expectation of an upward-shifting and twisting term structure. For the twist, interest rates on long-term...

Q: A stock had a return of 8.9 percent last year

A stock had a return of 8.9 percent last year. If the inflation rate was 2.1 percent, what was the approximate real return?

Q: Your investments increased in value by 11.6 percent last year

Your investments increased in value by 11.6 percent last year, but your purchasing power increased by only 7.6 percent. What was the approximate inflation rate?

Q: What is the price of a U.S. Treasury bill

What is the price of a U.S. Treasury bill with 56 days to maturity quoted at a discount yield of 1.15 percent? Assume a $1 million face value.

Q: In Problem 7, what is the bond equivalent yield?

In Problem 7, what is the bond equivalent yield? Data from Problem 7: What is the price of a U.S. Treasury bill with 56 days to maturity quoted at a discount yield of 1.15 percent? Assume a $1 milli...

Q: How much would you pay for a U.S. Treasury

How much would you pay for a U.S. Treasury bill with 112 days to maturity quoted at a discount yield of 2.18 percent? Assume a $1 million face value.

Q: Aloha Inc. has 7 percent coupon bonds on the market that

Aloha Inc. has 7 percent coupon bonds on the market that have 12 years left to maturity. If the YTM on these bonds is 9.1 percent, what is the current bond price?

Q: If, instead, the Atlantis Fisheries zero coupon bonds referred to

If, instead, the Atlantis Fisheries zero coupon bonds referred to in Problems 8 and 9 are callable in 10 years at a call price of $550, what is their yield to call?

Q: Rolling Company bonds have a coupon rate of 4 percent, 14

Rolling Company bonds have a coupon rate of 4 percent, 14 years to maturity, and a current price of $1,086. What is the YTM? The current yield?

Q: A bond has a coupon rate of 8.2 percent and

A bond has a coupon rate of 8.2 percent and 9 years until maturity. If the yield to maturity is 7.4 percent, what is the price of the bond?

Q: A bond with 25 years until maturity has a coupon rate of

A bond with 25 years until maturity has a coupon rate of 7.2  percent and a yield to maturity of 6 percent. What is the price of the bond?

Q: Which of the following is closest to the expected return of the

Which of the following is closest to the expected return of the client’s portfolio if 10 percent of the portfolio is invested in the New Horizon (NH) Emerging Market Fund? a. 11 percent b. 10.2 percen...

Q: A bond sells for $902.30 and has a coupon

A bond sells for $902.30 and has a coupon rate of 6 percent. If the bond has 12 years until maturity, what is the yield to maturity of the bond?

Q: A bond with a maturity of 12 years sells for $1

A bond with a maturity of 12 years sells for $1,047. If the coupon rate is 8.2 percent, what is the yield to maturity of the bond?

Q: May Industries has a bond outstanding that sells for $928.

May Industries has a bond outstanding that sells for $928. The bond has a coupon rate of 7.5 percent and nine years until maturity. What is the yield to maturity of the bond?

Q: Atlantis Fisheries issues zero coupon bonds on the market at a price

Atlantis Fisheries issues zero coupon bonds on the market at a price of $417 per bond. Each bond has a face value of $1,000 payable at maturity in 20 years. What is the yield to maturity for these bon...

Q: Atlantis Fisheries’ zero coupon bonds referred to in Problem 8 are callable

Atlantis Fisheries’ zero coupon bonds referred to in Problem 8 are callable in 10 years at a call price of $500. Using semiannual compounding, what is the yield to call for these bonds?

Q: Use the following information on states of the economy and stock returns

Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone:

Q: Fill in the missing information in the following table. Assume that

Fill in the missing information in the following table. Assume that portfolio AB is 40 percent invested in stock A.

Q: Using the information in Question 1, calculate the standard deviation of

Using the information in Question 1, calculate the standard deviation of returns. Data from Question 1: Use the following information on states of the economy and stock returns to calculate the expe...

Q: Repeat Questions 1 and 2 assuming that all three states are equally

Repeat Questions 1 and 2 assuming that all three states are equally likely. Data from Question 1: Use the following information on states of the economy and stock returns to calculate the expected r...

Q: Calculate the expected returns for Roll and Ross by filling in the

Calculate the expected returns for Roll and Ross by filling in the following table (verify your answer by expressing returns as percentages as well as decimals): Data for Question 4:

Q: Which of the following is closest to the expected standard deviation of

Which of the following is closest to the expected standard deviation of the client’s portfolio if 10 percent of the portfolio is invested in the Quality Commodity (QC) Fund? a. 9.6 percent b. 14.1 pe...

Q: Calculate the volatility of a portfolio of 35 percent Roll and 65

Calculate the volatility of a portfolio of 35 percent Roll and 65 percent Ross by filling in the following table: Data for Question 7:

Q: A stock has an expected return of 13.2 percent,

A stock has an expected return of 13.2 percent, the risk-free rate is 3.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?

Q: A stock has an expected return of 8.0 percent,

A stock has an expected return of 8.0 percent, its beta is 0.60, and the risk-free rate is 3 percent. What must the expected return on the market be?

Q: A stock has an expected return of 12 percent and a beta

A stock has an expected return of 12 percent and a beta of 1.4, and the expected return on the market is 10 percent. What must the risk-free rate be?

Q: A stock has a beta of 0.8 and an expected

A stock has a beta of 0.8 and an expected return of 11 percent. If the risk-free rate is 4.5 percent, what is the market risk premium?

Q: You own a stock portfolio invested 10 percent in stock Q,

You own a stock portfolio invested 10 percent in stock Q, 25 percent in stock R, 50 percent in stock S, and 15 percent in stock T. The betas for these four stocks are 1.4, 0.6, 1.5, and 0.9, respectiv...

Q: You own 400 shares of stock A at a price of $

You own 400 shares of stock A at a price of $60 per share, 500 shares of stock B at $85 per share, and 900 shares of stock C at $25 per share. The betas for the stocks are 0.8, 1.2, and 0.7, respectiv...

Q: You own a portfolio equally invested in a risk-free asset

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.20 and the total portfolio is exactly as risky as the market, what must the beta be for t...

Q: A stock has a beta of 0.85, the expected

A stock has a beta of 0.85, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be?

Q: A share of stock sells for $35 today. The beta

A share of stock sells for $35 today. The beta of the stock is 1.2 and the expected return on the market is 12 percent. The stock is expected to pay a dividend of $0.80 in one year. If the risk-free r...

Q: What is a call option? A put option? Under what

What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?

Q: What is the impact of lengthening the time to expiration on an

What is the impact of lengthening the time to expiration on an option’s value? Explain.

Q: Why is inflation associated with lower values of real GDP and wages

Why is inflation associated with lower values of real GDP and wages?

Q: How does mortgage securitization benefit borrowers?

How does mortgage securitization benefit borrowers?

Q: How does mortgage securitization benefit mortgage originators?

How does mortgage securitization benefit mortgage originators?

Q: All else the same, will the payments be higher on a

All else the same, will the payments be higher on a 15-year mortgage or a 30-year mortgage? Why?

Q: From an investor’s point of view, what is the difference between

From an investor’s point of view, what is the difference between mortgage pools backed by GNMA, FNMA, and FHLMC?

Q: What does it mean for a mortgage pool to be fully modified

What does it mean for a mortgage pool to be fully modified?

Q: Explain why the right to prepay a mortgage is similar to the

Explain why the right to prepay a mortgage is similar to the call feature contained in most corporate bonds.

Q: If the French home currency were to greatly appreciate in value compared

If the French home currency were to greatly appreciate in value compared to the English currency, what is the likely impact on the East Winery? a. Make the firm less competitive in the English market....

Q: Ms. Smith would likely categorize the French wine industry into which

Ms. Smith would likely categorize the French wine industry into which of the following life cycle phases? a. Decline phase b. Pioneer phase c. Mature phase

Q: Mr. Van Eaton tells Ms. Smith that he likes the

Mr. Van Eaton tells Ms. Smith that he likes the fact that the conclusions in her report are backed up with facts, but he tells her that he is concerned about the section concerning the bargaining powe...

Q: Two of the options are clearly mispriced. Which ones? At

Two of the options are clearly mispriced. Which ones? At a minimum, what should the mispriced options sell for? Explain how you could profit from the mispricing in each case.

Q: Regarding Ms. Smith’s and Mr. Van Eaton’s statements made about

Regarding Ms. Smith’s and Mr. Van Eaton’s statements made about the competitive strategy of the South Winery: a. Both are incorrect. b. Both are correct. c. Only one is correct.

Q: How many option contracts on Milson stock were traded with an expiration

How many option contracts on Milson stock were traded with an expiration date of July? How many underlying shares of stock do these option contracts represent?

Q: Are the call options in the money? What is the intrinsic

Are the call options in the money? What is the intrinsic value of a Milson Corp. call option?

Q: Are the put options in the money? What is the intrinsic

Are the put options in the money? What is the intrinsic value of a Milson Corp. put option?

Q: A put and a call option have the same maturity and strike

A put and a call option have the same maturity and strike price. If they also have the same price, which one is in the money?

Q: Recall the option strategies of a protective put and covered call discussed

Recall the option strategies of a protective put and covered call discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how you would impleme...

Q: A put and a call option have the same maturity and strike

A put and a call option have the same maturity and strike price. If both are at the money, which is worth more? Prove your answer and then provide an intuitive explanation.

Q: Why do you think most long-term financial planning begins with

Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales the key input?

Q: Both ROA and ROE measure profitability. Which one is more useful

Both ROA and ROE measure profitability. Which one is more useful for comparing two companies? Why?

Q: What is the difference between gross margin and operating margin? What

What is the difference between gross margin and operating margin? What do they tell us? Generally speaking, are larger or smaller values better?

Q: What is a bond refunding? Is it the same thing as

What is a bond refunding? Is it the same thing as a call?

Q: From an investor’s standpoint, what are the key differences between Treasury

From an investor’s standpoint, what are the key differences between Treasury and agency issues?

Q: From an investor’s standpoint, what are the main differences between Treasury

From an investor’s standpoint, what are the main differences between Treasury and municipal issues?

Q: Complete the following sentence for each of these investors: a

Complete the following sentence for each of these investors: a. A buyer of call options. b. A buyer of put options. c. A seller (writer) of call options. d. A seller (writer) of put options. The (buye...

Q: Treasury and municipal yields are often compared to calculate critical tax rates

Treasury and municipal yields are often compared to calculate critical tax rates. What concerns might you have about such a comparison? What do you think is true about the calculated tax rate?

Q: For a callable Treasury bond selling above par, is it necessarily

For a callable Treasury bond selling above par, is it necessarily true that the yield to call will be less than the yield to maturity? Why or why not?

Q: From the bondholder’s perspective, what are the potential advantages and disadvantages

From the bondholder’s perspective, what are the potential advantages and disadvantages of floating coupons?

Q: What are some examples of embedded options in bonds? How do

What are some examples of embedded options in bonds? How do they affect the price of a bond?

Q: Explain the difference between an original-issue junk bond and a

Explain the difference between an original-issue junk bond and a fallen angel bond.

Q: All else the same, callable bonds have less interest rate sensitivity

All else the same, callable bonds have less interest rate sensitivity than non callable bonds. Why? Is this a good thing?

Q: Two callable bonds are essentially identical, except that one has a

Two callable bonds are essentially identical, except that one has a refunding provision while the other has no refunding provision. Which bond is more likely to be called by the issuer? Why?

Q: Briefly explain why a high level of national debt may be detrimental

Briefly explain why a high level of national debt may be detrimental for economic growth.

Q: If you believed inflation was going to increase over the coming years

If you believed inflation was going to increase over the coming years, would you rather invest in short-term or long-term debt?

Q: What is a collateralized mortgage obligation? Why do they exist?

What is a collateralized mortgage obligation? Why do they exist? What are three popular types?

Q: In general, if you buy a call option, what stock

In general, if you buy a call option, what stock price is needed for you to break even on the transaction ignoring taxes and commissions? If you buy a put option?

Q: What is a collateralized mortgage obligation? Why do they exist?

What is a collateralized mortgage obligation? Why do they exist? What are three popular types?

Q: Which has greater interest rate risk, an IO or a PO

Which has greater interest rate risk, an IO or a PO strip?

Q: Consider a single whole bond sequential CMO. It has two tranches

Consider a single whole bond sequential CMO. It has two tranches, an A-tranche and a Z-tranche. Explain how the payments are allocated to the two tranches. Which tranche is riskier?

Q: Explain in general terms how a protected amortization class (or PAC

Explain in general terms how a protected amortization class (or PAC) CMO works.

Q: Why is Macaulay duration an inadequate measure of interest rate risk for

Why is Macaulay duration an inadequate measure of interest rate risk for an MBS? Why is effective duration a better measure of interest rate risk for an MBS?

Q: What are some of the reasons that mortgages are paid off early

What are some of the reasons that mortgages are paid off early? Under what circumstances are mortgage prepayments likely to rise sharply? Explain.

Q: Evaluate the following argument: “Prepayment is not a risk to

Evaluate the following argument: “Prepayment is not a risk to mortgage investors because prepayment actually means that the investor is paid both in full and ahead of schedule.” Is the statement alway...

Q: Mortgage pools also suffer from defaults. Explain how defaults are handled

Mortgage pools also suffer from defaults. Explain how defaults are handled in a fully modified mortgage pool. In the case of a fully modified mortgage pool, explain why defaults appear as prepayments...

Q: Mr. Wall is a little confused over the relationship between the

Mr. Wall is a little confused over the relationship between the embedded option and the callable bond. How does the value of the embedded call option change when interest rate volatility increases? a....

Q: If VirtualCon had decided to slow its payment of accounts payable by

If VirtualCon had decided to slow its payment of accounts payable by 90 days instead of entering into a financing arrangement with the bank, what would be the impact on its operating cash flow (CFO) a...

Q: What happens to the stock price when the stock pays a dividend

What happens to the stock price when the stock pays a dividend? What impact does a dividend have on the prices of call and put options?

Q: Mr. Wall believes he understands the relationship between interest rates and

Mr. Wall believes he understands the relationship between interest rates and straight bonds but is unclear how callable bonds change as interest rates increase. How do prices of callable bonds react t...

Q: Mr. Blanda instructs Mr. Houston to calculate the weighted average

Mr. Blanda instructs Mr. Houston to calculate the weighted average coupon rate (WAC) for the mortgage pools. Which of the following is closest to the WAC? a. 7.28 percent b. 7.78 percent c. 8.01 perce...

Q: Mr. Johnson asks Mr. Wall to compute the value of

Mr. Johnson asks Mr. Wall to compute the value of the call option. Using the given information, what is the value of the embedded call option? a. $0.00 b. $1.21 c. $2.04

Q: A call option is currently selling for $3. It has

A call option is currently selling for $3. It has a strike price of $65 and six months to maturity. What is the price of a put option with a $65 strike price and six months to maturity? The current st...

Q: A convertible bond has a 5 percent coupon, paid semiannually,

A convertible bond has a 5 percent coupon, paid semiannually, and will mature in 10 years. If the bond were not convertible, it would be priced to yield 4 percent. The conversion ratio on the bond is...

Q: Suppose you have a stock market portfolio with a beta of 1

Suppose you have a stock market portfolio with a beta of 1.15 that is currently worth $300 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and...

Q: The most recent financial statements for Martin, Inc., are shown

The most recent financial statements for Martin, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $850 was paid, and Martin wishes to maintain...

Q: The Federal Reserve announces an offering of Treasury bills with a face

The Federal Reserve announces an offering of Treasury bills with a face value of $60 billion. Noncompetitive bids are made for $8 billion, along with the following competitive bids: In a single-pric...

Q: A stock with a current price of $58 has a put

A stock with a current price of $58 has a put option available with a strike price of $55. The stock will move up by a factor of 1.13 or down by a factor of 0.88 over the next period and the risk-free...

Q: A 30-year, $250,000 mortgage has a

A 30-year, $250,000 mortgage has a rate of 5.4 percent. What are the interest and principal portions in the first payment? In the second?

Q: How do interest rates affect option prices? Explain.

How do interest rates affect option prices? Explain.

Q: Given the following information for Smashville, Inc., construct an income

Given the following information for Smashville, Inc., construct an income statement for the year: Cost of goods sold: ………………………………….$164,000 Investment income: ……………………………………$1,200 Net sales: …………………...

Q: Stock in Cheezy-Poofs Manufacturing is currently priced at $50

Stock in Cheezy-Poofs Manufacturing is currently priced at $50 per share. A call option with a $50 strike and 90 days to maturity is quoted at $1.95. Compare the percentage gains and losses from a $97...

Q: The most recent financial statements for Bradley, Inc., are shown

The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next ye...

Q: Suppose you write 30 of the July 100 put contracts. What

Suppose you write 30 of the July 100 put contracts. What is your net gain or loss if Hendreeks is selling for $90 at expiration? For $110? What is the break-even price, that is, the terminal stock pri...

Q: A stock is currently selling for $60. Over the next

A stock is currently selling for $60. Over the next two periods, the stock will move up by a factor of 1.15 or down by a factor of 0.87 each period. A call option with a strike price of $60 is availab...

Q: A stock is currently priced at $35 and will move up

A stock is currently priced at $35 and will move up by a factor of 1.18 or down by a factor of 0.85 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is...

Q: A stock with a current price of $78 has a call

A stock with a current price of $78 has a call option available with a strike price of $80. The stock will move up by a factor of 0.95 or down by a factor of 0.80 each period for the next two periods...

Q: For the company in Problem 17, suppose fixed assets are $

For the company in Problem 17, suppose fixed assets are $420,000 and sales are projected to grow to $695,000. How much in new fixed assets is required to support this growth in sales? Data from Probl...

Q: The most recent financial statements for Moose Tours, Inc., follow

The most recent financial statements for Moose Tours, Inc., follow. Sales for 2017 are projected to grow by 15 percent. Interest expense will remain constant; the tax rate and the dividend payout rate...

Q: In Problem 19, suppose the firm was operating at only 90

In Problem 19, suppose the firm was operating at only 90 percent capacity in 2017. What is EFN now? Data from Problem 19: The most recent financial statements for Moose Tours, Inc., follow. Sales fo...

Q: What is the time value of a call option? Of a

What is the time value of a call option? Of a put option? What happens to the time value of a call option as the maturity increases? What about a put option?

Q: Determine whether the value of a callable convertible bond will increase,

Determine whether the value of a callable convertible bond will increase, decrease, or remain unchanged if there is an increase in stock price volatility. What if there is an increase in interest rate...

Q: One year has passed and Sands’s common equity price has increased to

One year has passed and Sands’s common equity price has increased to $58 per share. Name the two components of the convertible bond’s value. Indicate whether the value of each component should increas...

Q: Calculate the price-book, price-earnings, and price

Calculate the price-book, price-earnings, and price-cash flow ratios for Kiwi Fruit. Kiwi Fruit Company Balance Sheet Cash and equivalents ……………………………………$  570 Operating assets ………………………………………………..65...

Q: Following the examples in the chapter, prepare a pro forma income

Following the examples in the chapter, prepare a pro forma income statement, balance sheet, and cash flow statement for Kiwi Fruit assuming a 10 percent increase in sales. Kiwi Fruit Company Balance...

Q: Based on Problems 14 and 15, what is the projected stock

Based on Problems 14 and 15, what is the projected stock price assuming a 10 percent increase in sales? Kiwi Fruit Company Balance Sheet Cash and equivalents ……………………………………$  570 Operating assets ………...

Q: In Problem 13, what would the total return be if the

In Problem 13, what would the total return be if the ending exchange rate were 88.65 ¥ / $? What does your answer tell you about the importance of currency fluctuations? Data from Problem 13: Suppos...

Q: Suppose you hold LLL employee stock options representing options to buy 10

Suppose you hold LLL employee stock options representing options to buy 10,000 shares of LLL stock. You wish to hedge your position by buying put options with three-month expirations and a $22.50 stri...

Q: Immediately after establishing your put options hedge, volatility for LLL stock

Immediately after establishing your put options hedge, volatility for LLL stock suddenly jumps to 45 percent. This changes the number of put options required to hedge your employee stock options. How...

Q: Suppose you write 15 put option contracts with a $45 strike

Suppose you write 15 put option contracts with a $45 strike. The premium is $2.40. Evaluate your potential gains and losses at option expiration for stock prices of $35, $45, and $55.

Q: What are the conditional prepayment rates for seasoned 50 PSA, 200

What are the conditional prepayment rates for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages if the 100 PSA benchmark is 3 percent per year? How do you interpret these numbers?

Q: What does an option’s delta tell us? Suppose a call option

What does an option’s delta tell us? Suppose a call option with a delta of 0.60 sells for $5.00. If the stock price rises by $1, what will happen to the call’s value?

Q: In Problem 16, what is the single monthly mortality for seasoned

In Problem 16, what is the single monthly mortality for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages? How do you interpret these numbers? Data from Problem 16: What are the conditional prepayment...

Q: You can also create a butterfly spread using puts by buying a

You can also create a butterfly spread using puts by buying a put at K1, buying a put at K3, and selling two puts at K2. All of the puts are on the same stock and have the same expiration date, and th...

Q: Suppose you write 10 call option contracts with a $50 strike

Suppose you write 10 call option contracts with a $50 strike. The premium is $2.75. Evaluate your potential gains and losses at option expiration for stock prices of $40, $50, and $60.

Q: What are the six factors that determine an option’s price?

What are the six factors that determine an option’s price?

Q: What are the 10K and 10Q reports? By whom are they

What are the 10K and 10Q reports? By whom are they filed? What do they contain? With whom are they filed? What is the easiest way to retrieve one?

Q: What is the impact of an increase in the volatility of the

What is the impact of an increase in the volatility of the underlying stock on an option’s value? Explain.

Q: Buying a put option on a stock you own is sometimes called

Buying a put option on a stock you own is sometimes called “stock price insurance.” Why?

Q: What is the intrinsic value of a call option? How do

What is the intrinsic value of a call option? How do we interpret this value?

Q: What is the intrinsic value of a put option? How do

What is the intrinsic value of a put option? How do we interpret this value?

Q: You notice that shares of stock in the Patel Corporation are going

You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What’s wrong here? Describe how you coul...

Q: What is vesting in regard to employee stock options? Why would

What is vesting in regard to employee stock options? Why would a company use a vesting schedule with employee stock options?

Q: What is the difference between the “retained earnings” number on

What is the difference between the “retained earnings” number on the income statement and that on the balance sheet?

Q: What makes current assets and liabilities “current”? Are operating assets

What makes current assets and liabilities “current”? Are operating assets “current”?

Q: In general, employee stock options cannot be sold to another party

In general, employee stock options cannot be sold to another party. How do you think this affects the value of an employee stock option compared to a market-traded option?

Q: Which is larger, gross margin or operating margin? Can either

Which is larger, gross margin or operating margin? Can either be negative? Can both?

Q: What is the relationship between net income and earnings per share (

What is the relationship between net income and earnings per share (EPS)?

Q: Why do we say depreciation is a “noncash item”?

Why do we say depreciation is a “noncash item”?

Q: In the context of the standard cash flow statement, what is

In the context of the standard cash flow statement, what is operating cash flow?

Q: One thing the put-call parity equation tells us is that

One thing the put-call parity equation tells us is that given any three of a stock, a call, a put, and a T-bill, the fourth can be synthesized or replicated using the other three. For example, how can...

Q: What are the key differences between T-bills and T-

What are the key differences between T-bills and T-bonds?

Q: What is the difference between a revenue bond and a general obligation

What is the difference between a revenue bond and a general obligation bond?

Q: You own stock in a company that has just initiated employee stock

You own stock in a company that has just initiated employee stock options. How do the employee stock options benefit you as a shareholder?

Q: With regard to the call feature, what are call protection and

With regard to the call feature, what are call protection and the call premium? What typically happens to the call premium through time?

Q: What is a put bond? Is the put feature desirable from

What is a put bond? Is the put feature desirable from the investor’s perspective? The issuer’s?

Q: What is the impact on a bond’s coupon rate from,

What is the impact on a bond’s coupon rate from, a. A call feature? b. A put feature?

Q: If the economy was in recession, what monetary policies might the

If the economy was in recession, what monetary policies might the Fed employ?

Q: If you are a U.S. investor who believes the

If you are a U.S. investor who believes the Australian dollar is going to appreciate, would that make you more or less likely to invest in Australian stocks?

Q: Briefly explain the process of top-down analysis.

Briefly explain the process of top-down analysis.

Q: Which sector would be more sensitive to the business cycle: industrials

Which sector would be more sensitive to the business cycle: industrials or health care?

Q: Why do you think that consumer sentiment is considered a leading economic

Why do you think that consumer sentiment is considered a leading economic indicator?

Q: Many health care companies depend on patents to sustain profits. In

Many health care companies depend on patents to sustain profits. In the context of Porter’s five forces, how would a patent expiration impact a health care firm?

Q: Which one of the following propositions would be consistent with a supply

Which one of the following propositions would be consistent with a supply-side view of fiscal policy? a. Higher marginal tax rates will help reduce the size of the budget deficit. b. A tax reduction w...

Q: She would like to compute the value of the corresponding put option

She would like to compute the value of the corresponding put option for Option 1. Which of the following is closest to Ms. Barlow’s answer? a. $3.79 b. $3.94 c. $4.41

Q: Regarding conditional prepayment rates (CPRs) and single monthly mortality (

Regarding conditional prepayment rates (CPRs) and single monthly mortality (SMM) rates, which of the following is most accurate? a. SMM is computed from the CPR to compute monthly prepayments. b. SMM...

Q: You write a put with a strike price of $60 on

You write a put with a strike price of $60 on stock that you have shorted at $60 (this is a “covered put”). What are the expiration date profits to this position for stock prices of $50, $55, $60, $65...

Q: You buy a call with a strike price of $70 on

You buy a call with a strike price of $70 on stock that you have shorted at $70 (this is a “protective call”). What are the expiration date profits to this position for stock prices of $60, $65, $70,...

Q: You simultaneously write a covered put and buy a protective call,

You simultaneously write a covered put and buy a protective call, both with strike prices of $80, on stock that you have shorted at $80. What are the expiration date payoffs to this position for stock...

Q: You simultaneously write a put and buy a call, both with

You simultaneously write a put and buy a call, both with strike prices of $80, naked, i.e., without any position in the underlying stock. What are the expiration date payoffs to this position for stoc...

Q: You buy a straddle, which means you purchase a put and

You buy a straddle, which means you purchase a put and a call with the same strike price. The put price is $2.80 and the call price is $4.20. Assume the strike price is $75. What are the expiration da...

Q: Suppose you buy one SPX call option with a strike of 2125

Suppose you buy one SPX call option with a strike of 2125 and write one SPX call option with a strike of 2150. What are the payoffs at maturity to this position for S&P 500 Index levels of 2050, 2100,...

Q: Suppose you buy one SPX put option with a strike of 2100

Suppose you buy one SPX put option with a strike of 2100 and write one SPX put option with a strike of 2125. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000, 2050, 2...

Q: Suppose you buy one SPX call option with a strike of 2100

Suppose you buy one SPX call option with a strike of 2100 and write one SPX put option with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000, 2050,...

Q: Suppose you buy one each SPX call option with strikes of 2000

Suppose you buy one each SPX call option with strikes of 2000 and 2200 and write two SPX call options with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels...

Q: A strangle is created by buying a put and buying a call

A strangle is created by buying a put and buying a call on the same stock with a higher strike price and the same expiration. A put with a strike price of $100 sells for $6.75 and a call with a strike...

Q: Mr. Houston made a mistake in his research about the nature

Mr. Houston made a mistake in his research about the nature of mortgage loans. Which of the following statements regarding mortgage loans as compared to straight bonds is least accurate? a. Servicing...

Q: You create a bull spread using calls by buying a call and

You create a bull spread using calls by buying a call and simultaneously selling a call on the same stock with the same expiration at a higher strike price. A call option with a strike price of $20 se...

Q: You can also create a bull spread using put options. To

You can also create a bull spread using put options. To do so, you buy a put and simultaneously sell a put at a higher strike price on the same stock with the same expiration. A put with a strike pric...

Q: You create a butterfly spread using calls by buying a call at

You create a butterfly spread using calls by buying a call at K1, buying a call at K3, and selling two calls at K2. All of the calls are on the same stock and have the same expiration date. Additional...

Q: Consider a 30-year, $160,000 mortgage with

Consider a 30-year, $160,000 mortgage with a rate of 6 percent. Five years into the mortgage, rates have fallen to 5 percent. What would be the monthly saving to a homeowner from refinancing the outst...

Q: Consider a 25-year, $350,000 mortgage with

Consider a 25-year, $350,000 mortgage with a rate of 7.25 percent. Ten years into the mortgage, rates have fallen to 5.4 percent. What would be the monthly saving to a homeowner from refinancing the o...

Q: Consider a 30-year, $230,000 mortgage with

Consider a 30-year, $230,000 mortgage with a rate of 6.90 percent. Five years into the mortgage, rates have fallen to 5.70 percent. Suppose the transaction cost of obtaining a new mortgage is $2,500....

Q: Mr. Blanda tells Mr. Houston to recalculate the SMM for

Mr. Blanda tells Mr. Houston to recalculate the SMM for Pool 3 based on 200 PSA rather than the current 100 PSA. The revised SMM is closest to a. 0.36 percent b. 0.55 percent c. 0.97 percent

Q: What is the value of a call option if the underlying stock

What is the value of a call option if the underlying stock price is $84, the strike price is $80, the underlying stock volatility is 42 percent, and the risk-free rate is 4 percent? Assume the option...

Q: What is the value of a call option if the underlying stock

What is the value of a call option if the underlying stock price is $81, the strike price is $90, the underlying stock volatility is 50 percent, and the risk-free rate is 3 percent? Assume the option...

Q: A stock is currently priced at $63 and has an annual

A stock is currently priced at $63 and has an annual standard deviation of 43 percent. The dividend yield of the stock is 2 percent and the risk-free rate is 4 percent. What is the value of a call opt...

Q: The stock of Nugents Nougats currently sells for $44 and has

The stock of Nugents Nougats currently sells for $44 and has an annual standard deviation of 45 percent. The stock has a dividend yield of 2.5 percent and the risk-free rate is 4.1 percent. What is th...

Q: The stock of Lead Zeppelin, a metal manufacturer, currently sells

The stock of Lead Zeppelin, a metal manufacturer, currently sells for $68 and has an annual standard deviation of 41 percent. The risk-free rate is 6 percent. What is the value of a put option with a...

Q: A 30-year mortgage has an annual interest rate of 5

A 30-year mortgage has an annual interest rate of 5.6 percent and a loan amount of $210,000. What are the monthly mortgage payments?

Q: A 20-year mortgage has an annual interest rate of 4

A 20-year mortgage has an annual interest rate of 4.9 percent and a loan amount of $250,000. What are the interest and principal for the 120th payment?

Q: Ms. Barlow notices that the stock in the table above does

Ms. Barlow notices that the stock in the table above does not pay dividends. If the stock begins to pay a dividend, how will the price of the call option be affected? a. It will decrease. b. It will i...

Q: A 30-year mortgage has an annual interest rate of 6

A 30-year mortgage has an annual interest rate of 6.1 percent and a loan amount of $270,000. What is the remaining balance at the 180th payment?

Q: Given the information in Problems 1 and 2, calculate the gross

Given the information in Problems 1 and 2, calculate the gross margin, the operating margin, return on assets, and return on equity for Smashville, Inc. Data from Problems 1: Given the following inf...

Q: During the year, Smashville, Inc., had 17,000

During the year, Smashville, Inc., had 17,000 shares of stock outstanding and depreciation expense of $15,000. Calculate the book value per share, earnings per share, and cash flow per share.

Q: At the end of the year, Smashville stock sold for $

At the end of the year, Smashville stock sold for $48 per share. Calculate the price-book ratio, price-earnings ratio, and price-cash flow ratio.

Q: A STRIPS traded on May 1, 2016, matures in 18

A STRIPS traded on May 1, 2016, matures in 18 years on May 1, 2034. Assuming a 4.1 percent yield to maturity, what is the STRIPS price?

Q: A STRIPS traded on November 1, 2016, matures in 12

A STRIPS traded on November 1, 2016, matures in 12 years on November 1, 2028. The quoted STRIPS price is 62.75. What is its yield to maturity?

Q: Lemon Co. has net income of $520,000 and

Lemon Co. has net income of $520,000 and 75,000 shares of stock. If the company pays a dividend of $1.28 per share, what are the additions to retained earnings?

Q: A convertible bond has a $1,000 face value and

A convertible bond has a $1,000 face value and a conversion ratio of 45. What is the conversion price?

Q: A municipal bond with a coupon rate of 2.7 percent

A municipal bond with a coupon rate of 2.7 percent has a yield to maturity of 3.9 percent. If the bond has 10 years to maturity, what is the price of the bond?

Q: A municipal bond with a coupon rate of 6.2 percent

A municipal bond with a coupon rate of 6.2 percent sells for $4,920 and has seven years until maturity. What is the yield to maturity of the bond?

Q: She would like to compute the value of the corresponding put option

She would like to compute the value of the corresponding put option for Option 2. Which of the following is closest to Ms. Barlow’s answer? a. $0.98 b. $1.41 c. $4.84

Q: Assume a municipal bond has 18 years until maturity and sells for

Assume a municipal bond has 18 years until maturity and sells for $5,640. It has a coupon rate of 5.70 percent and it can be called in 10 years. What is the yield to call if the call price is 110 perc...

Q: A taxable corporate issue yields 6.5 percent. For an

A taxable corporate issue yields 6.5 percent. For an investor in a 35 percent tax bracket, what is the equivalent after tax yield?

Q: A taxable issue yields 6.4 percent, and a similar

A taxable issue yields 6.4 percent, and a similar municipal issue yields 4.7 percent. What is the critical marginal tax rate?

Q: A company just sold a convertible bond at a par value of

A company just sold a convertible bond at a par value of $1,000. If the conversion price is $58, what is the conversion ratio?

Q: A convertible bond has a $1,000 face value and

A convertible bond has a $1,000 face value and a conversion ratio of 36. If the stock price is $42, what is the conversion value?

Q: A bond matures in 25 years but is callable in 10 years

A bond matures in 25 years but is callable in 10 years at 120. The call premium decreases by 2 percent of par per year. If the bond is called in 14 years, how much will you receive?

Q: You own a bond with a 6 percent coupon rate and a

You own a bond with a 6 percent coupon rate and a yield to call of 6.90 percent. The bond currently sells for $1,070. If the bond is callable in five years, what is the call premium of the bond?

Q: You own a convertible bond with a conversion ratio of 20.

You own a convertible bond with a conversion ratio of 20. The stock is currently selling for $72 per share. The issuer of the bond has announced a call; the call price is 108. What are your options he...

Q: What is the price of a STRIPS with a maturity of 12

What is the price of a STRIPS with a maturity of 12 years, a face value of $10,000, and a yield to maturity of 5.2 percent?

Q: A STRIPS with nine years until maturity and a face value of

A STRIPS with nine years until maturity and a face value of $10,000 is trading for $7,693. What is the yield to maturity?

Q: Mr. Franklin wants to know how the put option in Exhibit

Mr. Franklin wants to know how the put option in Exhibit 1 behaves when all the parameters are held constant except delta. Which of the following is the best estimate of the change in the put option’s...

Q: Assume that the Federal Reserve injects $2 billion into the financial

Assume that the Federal Reserve injects $2 billion into the financial system. If the reserve requirement is 18 percent, what is the maximum increase in money supply? Why might the maximum increase not...

Q: Assume that the Federal Reserve injects $60 billion into the financial

Assume that the Federal Reserve injects $60 billion into the financial system. If the money supply increases by a maximum of $300 billion, what must the reserve requirement be?

Q: Assume the CPI increases from 123.9 to 125.6

Assume the CPI increases from 123.9 to 125.6 over the period. What is the inflation rate implied by this CPI change over this period? What does this value indicate?

Q: The CPI for this year was reported at 154.65.

The CPI for this year was reported at 154.65. If inflation was 2.2 percent, what must the CPI have been last year?

Q: If wages grew 3.2 percent, but inflation was 2

If wages grew 3.2 percent, but inflation was 2.8 percent, what was the approximate real increase in wages?

Q: If nominal GDP was reported at $124.9 billion and

If nominal GDP was reported at $124.9 billion and real GDP was reported at $122.8 billion, what was the inflation rate for the period?

Q: If nominal GDP was reported at $1,425.68

If nominal GDP was reported at $1,425.68 billion and inflation was 4.3 percent, what is the level of real GDP for the period?

Q: Assume there are 300 million people in the United States, 155

Assume there are 300 million people in the United States, 155 million of whom make up the labor force. If 10 million people are unemployed, what is the unemployment rate?

Q: What is the monthly payment on a 30-year fixed-

What is the monthly payment on a 30-year fixed-rate mortgage if the original balance is $315,000 and the rate is 4.9 percent?

Q: Consider a 30-year, $145,000 mortgage with

Consider a 30-year, $145,000 mortgage with a 6.1 percent interest rate. After eight years, the borrower (the mortgage issuer) pays it off. How much will the lender receive?

Q: Mr. Franklin wants to compute the value of the call option

Mr. Franklin wants to compute the value of the call option using the information in Exhibit 1. Which of the following is closest to his answer? a. $4.78 b. $5.55 c. $11.54

Q: If a mortgage has monthly payments of $1,240,

If a mortgage has monthly payments of $1,240, a life of 30 years, and a rate of 4.5 percent per year, what is the mortgage amount?

Q: A homeowner takes out a $417,000, 30-

A homeowner takes out a $417,000, 30-year fixed-rate mortgage at a rate of 5.2 percent. What are the monthly mortgage payments?

Q: You have decided to buy a house. You can get a

You have decided to buy a house. You can get a mortgage rate of 5.25 percent, and you want your payments to be $1,500 or less. How much can you borrow on a 30-year fixed-rate mortgage?

Q: What is the single monthly mortality assuming the conditional prepayment rate is

What is the single monthly mortality assuming the conditional prepayment rate is 7 percent?

Q: What is the conditional prepayment rate if the single monthly mortality is

What is the conditional prepayment rate if the single monthly mortality is 0.426 percent?

Q: A $100,000 GNMA pass through bond issue has a

A $100,000 GNMA pass through bond issue has a value of $107,680. The value of the interest-only payments is $52,973. What is the value of the principal only payment?

Q: A homeowner takes a 15-year fixed-rate mortgage for

A homeowner takes a 15-year fixed-rate mortgage for $140,000 at 7.6 percent. After seven years, the homeowner sells the house and pays off the remaining principal. How much is the principal payment?

Q: Suppose you purchase eight call contracts on Macron Technology stock. The

Suppose you purchase eight call contracts on Macron Technology stock. The strike price is $60 and the premium is $3. If, at expiration, the stock is selling for $64 per share, what are your call optio...

Q: A put option with a strike price of $50 sells for

A put option with a strike price of $50 sells for $3.20. The option expires in two months and the current stock price is $51. If the risk-free interest rate is 5 percent, what is the price of a call o...

Q: A stock is currently selling for $45. In one period

A stock is currently selling for $45. In one period, the stock will move up by a factor of 1.15 or down by a factor of 0.87. A call option with a strike price of $50 is available. If the risk-free rat...

Q: Mr. Franklin wants to compute the value of the put option

Mr. Franklin wants to compute the value of the put option that corresponds to the call value calculated in the previous question. Which of the following is the closest to his answer? a. $4.78 b. $5.55...

Q: A stock is currently priced at $74 and will move up

A stock is currently priced at $74 and will move up by a factor of 1.20 or down by a factor of 0.80 over the next period. The risk-free rate of interest is 4.2 percent. What is the value of a call op...

Q: You are managing a pension fund with a value of $300

You are managing a pension fund with a value of $300 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many c...

Q: Given the following information for Hetrich, Inc., calculate the operating

Given the following information for Hetrich, Inc., calculate the operating cash flow, investment cash flow, financing cash flow, and net cash flow: Net income: ………………………………………$175 Depreciation: ……………...

Q: Suppose you purchase five put contracts on Testaburger Co. The strike

Suppose you purchase five put contracts on Testaburger Co. The strike price is $45 and the premium is $3. If, at expiration, the stock is selling for $39 per share, what are your put options worth? Wh...

Q: Given the following information for Smashville, Inc., construct a balance

Given the following information for Smashville, Inc., construct a balance sheet: Current liabilities: ……………………………………………….$42,000 Cash: ………………………………………………………………….$21,000 Long-term debt: ……………………………………...

Q: Weston Corporation had earnings per share of $1.64,

Weston Corporation had earnings per share of $1.64, depreciation expense of $310,000, and 140,000 shares outstanding. What was the operating cash flow per share? If the share price was $43, what was t...

Q: Alphonse Inc. has a return on equity of 12 percent,

Alphonse Inc. has a return on equity of 12 percent, 28,000 shares of stock outstanding, and a net income of $98,000. What are earnings per share?

Q: What is the value of a call option if the underlying stock

What is the value of a call option if the underlying stock price is $73, the strike price is $75, the underlying stock volatility is 37 percent, and the risk-free rate is 5 percent? Assume the option...

Q: Suppose you buy 50 April 100 call option contracts. How much

Suppose you buy 50 April 100 call option contracts. How much will you pay, ignoring commissions?

Q: In Problem 4, suppose that Hendreeks stock is selling for $

In Problem 4, suppose that Hendreeks stock is selling for $105.70 per share on the expiration date. How much is your options investment worth? What if the stock price is $101.60 on the expiration date...

Q: Mr. Franklin is interested in the sensitivity of the put option

Mr. Franklin is interested in the sensitivity of the put option to changes in the volatility of the underlying equity’s returns. If the volatility of the underlying equity’s returns increases, the val...

Q: Suppose you buy 30 March 100 put option contracts. What is

Suppose you buy 30 March 100 put option contracts. What is your maximum gain? On the expiration date, Hendreeks is selling for $84.60 per share. How much is your options investment worth? What is your...

Q: What is the value of a put option if the underlying stock

What is the value of a put option if the underlying stock price is $42, the strike price is $35, the underlying stock volatility is 47 percent, and the risk-free rate is 5 percent? Assume the option h...

Q: A stock with an annual standard deviation of 30 percent currently sells

A stock with an annual standard deviation of 30 percent currently sells for $67. The risk-free rate is 3 percent. What is the value of a put option with a strike price of $80 and 60 days to expiration...

Q: A call option currently sells for $8. It has a

A call option currently sells for $8. It has a strike price of $80 and five months to maturity. A put with the same strike and expiration date sells for $6. If the risk-free interest rate is 4 percent...

Q: Consider the following information on GDP and CPI for an economy over

Consider the following information on GDP and CPI for an economy over the last three years: Calculate nominal GDP growth for 2014 and 2015.

Q: Real vs. Nominal (LO2, CFA3) Using the information

Real vs. Nominal (LO2, CFA3) Using the information from Problem 10, calculate the inflation rates and approximate real GDP growth rates for 2014 and 2015. Data from Problem 10: Consider the followin...

Q: Calculate the gross and operating margins for Kiwi Fruit.

Calculate the gross and operating margins for Kiwi Fruit. Data for Problem 12: Kiwi Fruit Company Balance Sheet Cash and equivalents ……………………………………$  570 Operating assets ………………………………………………..650 Pro...

Q: Calculate ROA and ROE for Kiwi Fruit and interpret these ratios.

Calculate ROA and ROE for Kiwi Fruit and interpret these ratios. Kiwi Fruit Company Balance Sheet Cash and equivalents ……………………………………$  570 Operating assets ………………………………………………..650 Property, plant, a...

Q: A call option matures in six months. The underlying stock price

A call option matures in six months. The underlying stock price is $70 and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded cont...

Q: A call option has an exercise price of $60 and matures

A call option has an exercise price of $60 and matures in six months. The current stock price is $68 and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the cal...

Q: Ignoring interest, what is the effect on VirtualCon’s total cash flow

Ignoring interest, what is the effect on VirtualCon’s total cash flow and cash flow from financing (CFF) from its financing arrangement for its accounts payable at the time of pa...

Q: A stock is currently priced at $55. A call option

A stock is currently priced at $55. A call option with an expiration of one year has an exercise price of $60. The risk-free rate is 12 percent per year, compounded continuously, and the standard devi...

Q: In its 10Q dated February 4, 2016, LLL, Inc

In its 10Q dated February 4, 2016, LLL, Inc., had outstanding employee stock options representing over 272 million shares of its stock. LLL accountants estimated the value of these options using the B...

Q: Thorpe Mfg., Inc., is currently operating at only 75 percent

Thorpe Mfg., Inc., is currently operating at only 75 percent of fixed asset capacity. Current sales are $480,000. How fast can sales grow before any new fixed assets are needed?

Q: A Treasury bond with the longest maturity (30 years) has

A Treasury bond with the longest maturity (30 years) has an ask price quoted at 99.4375. The coupon rate is 4.6 percent, paid semiannually. What is the yield to maturity of this bond?

Q: Steven Long, a bond analyst, is analyzing a convertible bond

Steven Long, a bond analyst, is analyzing a convertible bond. The characteristics of the bond are given below. Convertible Bond Characteristics Par value…………………………………………………….$1,000 Annual coupon rate...

Q: A Treasury bill has a bid yield of 2.75 and

A Treasury bill has a bid yield of 2.75 and an ask yield of 2.73. The bill matures in 152 days. What is the least you could pay to acquire a bill? (Note: You may need to review material from an earlie...

Q: Calculate the following: a. The current market conversion price

Calculate the following: a. The current market conversion price for the Sands convertible bond. b. The expected one-year rate of return for the Sands convertible bond. c. The expected one-year rate of...

Q: A stock has a price of $32 and an annual return

A stock has a price of $32 and an annual return volatility of 45 percent. The risk-free rate is 3.0 percent. Using a computer spreadsheet program, calculate the call and put option prices with a strik...

Q: At what price could you sell the Treasury bill referred to in

At what price could you sell the Treasury bill referred to in Problem 16? What is the dollar spread for this bill? (Note: You may need to review material from an earlier chapter for the relevant formu...

Q: A Treasury issue is quoted at 102.28125 bid and 102

A Treasury issue is quoted at 102.28125 bid and 102.375 ask. What is the least you could pay to acquire a bond?

Q: Which of the following statements about VirtualCon’s securitization of receivables is least

Which of the following statements about VirtualCon’s securitization of receivables is least accurate? a. Accelerates operating cash flow into the current period. b. Enables the firm to reclassify fina...

Q: Suppose you want to convert U.S. dollars into Indian

Suppose you want to convert U.S. dollars into Indian rupees. If you have $1,500,000 and the exchange rate is $0.0245 per rupee, how many rupees will you receive in the conversion?

Q: Suppose you are a U.S. investor who is planning

Suppose you are a U.S. investor who is planning to invest $125,000 in Japan. You do so at a starting exchange rate of 84.28¥/$. Your Japanese investment gains 7 percent, and the ending exchange rate i...

Q: Suppose you are a U.S. investor who is planning

Suppose you are a U.S. investor who is planning to invest $785,000 in Mexico. Your Mexican investment gains 10 percent. If the exchange rate moves from 12.2 pesos per dollar to 12.5 pesos per dollar o...

Q: An analyst gathered the following year-end price level data for

An analyst gathered the following year-end price level data for an economy: 2010 ………………………………174.0 2014 ………………………………190.3 2015 ………………………………196.8 What is the economy’s annual inflation rate for 2015?...

Q: A call option is currently selling for $3.90.

A call option is currently selling for $3.90. It has a strike price of $45 and five months to maturity. The current stock price is $47 and the risk-free rate is 4 percent. The stock will pay a dividen...

Q: A call option is currently selling for $4.60.

A call option is currently selling for $4.60. It has a strike price of $60 and three months to maturity. A put option with the same strike price sells for $7.20. The risk-free rate is 6 percent and th...

Q: A put option is currently selling for $8.30.

A put option is currently selling for $8.30. It has a strike price of $80 and seven months to maturity. The current stock price is $83. The risk-free rate is 5 percent and the stock will pay a $1.40 d...

Q: A homeowner took out a 30-year fixed-rate mortgage

A homeowner took out a 30-year fixed-rate mortgage of $220,000. The mortgage was taken out 10 years ago at a rate of 7.20 percent. If the homeowner refinances, the charges will be $3,500. What is the...

Q: A homeowner took out a 30-year fixed-rate mortgage

A homeowner took out a 30-year fixed-rate mortgage of $120,000. The mortgage was taken out 15 years ago at a rate of 7.95 percent. If the homeowner refinances, the charges will be $2,000. What is the...

Q: Suppose you buy one SPX call option contract with a strike of

Suppose you buy one SPX call option contract with a strike of 2200. At maturity, the S&P 500 Index is at 2218. What is your net gain or loss if the premium you paid was $14?

Q: Judd Read and Judi Todd, senior accounting majors at a large

Judd Read and Judi Todd, senior accounting majors at a large midwestern university, have been good friends since high school. Each has already found a job that will begin after graduation. Judd has ac...

Q: What is active portfolio management? Will it result in superior returns

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

Q: Describe the key advantages and disadvantages of short selling. How are

Describe the key advantages and disadvantages of short selling. How are short sales used to earn speculative profits?

Q: What is intrinsic value? How does it fit into the security

What is intrinsic value? How does it fit into the security analysis process?

Q: Hector Francisco is a successful businessman in Atlanta. The box-

Hector Francisco is a successful businessman in Atlanta. The box-manufacturing firm he and his wife, Judy, founded several years ago has prospered. Because he is self-employed, Hector is building his...

Q: Briefly describe the IPO process and the role of the investment banker

Briefly describe the IPO process and the role of the investment banker in underwriting a public offering. Differentiate among the terms public offering, rights offering, and private placement.

Q: For each of the items in the left-hand column,

For each of the items in the left-hand column, select the most appropriate item in the right-hand column.

Q: Explain how the dealer market works. Be sure to mention market

Explain how the dealer market works. Be sure to mention market makers, bid and ask prices, the Nasdaq market, and the OTC market. What role does the dealer market play in initial public offerings (IPO...

Q: Why is globalization of securities markets an important issue today? How

Why is globalization of securities markets an important issue today? How have international investments performed in recent years?

Q: Describe how foreign security investments can be made, both indirectly and

Describe how foreign security investments can be made, both indirectly and directly.

Q: Describe the risks of investing internationally, particularly currency exchange risk.

Describe the risks of investing internationally, particularly currency exchange risk.

Q: Discuss the impact of the Internet on the individual investor and summarize

Discuss the impact of the Internet on the individual investor and summarize the types of resources it provides.

Q: Describe the steps involved in measuring portfolio return. Explain the role

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.

Q: Define the term investment, and explain why individuals invest.

Define the term investment, and explain why individuals invest.

Q: Differentiate among the following types of investments, and cite an example

Differentiate among the following types of investments, and cite an example of each: (a) securities and property investments; (b) direct and indirect investments; (c) debt, equity, and derivative secu...

Q: Susan Lussier is 35 years old and employed as a tax accountant

Susan Lussier is 35 years old and employed as a tax accountant for a major oil and gas exploration company. She earns nearly $135,000 a year from her salary and from participation in the companyâ...

Q: How would you describe a satisfactory investment? How does security analysis

How would you describe a satisfactory investment? How does security analysis help in identifying investment candidates?

Q: Will this regulation be able to eliminate conflict of interest? Discuss

Will this regulation be able to eliminate conflict of interest? Discuss.

Q: A little more than 10 months ago, Luke Weaver, a

A little more than 10 months ago, Luke Weaver, a mortgage banker in Phoenix, bought 300 shares of stock at $40 per share. Since then, the price of the stock has risen to $75 per share. It is now near...

Q: Suppose you are on an airplane and you overhear two executives of

Suppose you are on an airplane and you overhear two executives of a company talking about a merger that is about to take place. If you buy stock based on what you overheard, are you committing insider...

Q: Look at the record of stock returns in Table 6.1

Look at the record of stock returns in Table 6.1. a. How would you compare the average annual returns for the various decades? b. Considering the average annual returns that have been generated over h...

Q: Assume that a wealthy woman comes to you looking for some investment

Assume that a wealthy woman comes to you looking for some investment advice. She is in her early forties and has $250,000 to put into stocks. She wants to build up as much capital as she can over a 15...

Q: Identify and briefly describe the three sources of return to U.

Identify and briefly describe the three sources of return to U.S. investors in foreign stocks. How important are currency exchange rates? With regard to currency exchange rates, when is the best time...

Q: Why is comparing a portfolio’s return to the return on a broad

Why is comparing a portfolio’s return to the return on a broad market index generally inadequate? Explain.

Q: Briefly define each of the following types of investment programs and note

Briefly define each of the following types of investment programs and note the kinds of stock (blue chips, speculative stocks, etc.) that would best fit with each. a. A buy-and-hold strategy b. A curr...

Q: Economic analysis is generally viewed as an integral part of the top

Economic analysis is generally viewed as an integral part of the top-down approach to security analysis. In this context, identify each of the following and note how each would probably behave in a st...

Q: As an investor, what kind(s) of economic information

As an investor, what kind(s) of economic information would you look for if you were thinking about investing in the following? a. An airline stock b. A cyclical stock c. An electrical utility stock d....

Q: In this chapter, we examined nine stock valuation procedures:

In this chapter, we examined nine stock valuation procedures: • Zero-growth DVM • Constant-growth DVM • Variable-growth DVM • Free cash flow to equity approach • Expected return (IRR) approach • P/E a...

Q: Would there be any need for security analysis if we operated in

Would there be any need for security analysis if we operated in an efficient market environment? Explain.

Q: Explain the role that the future plays in the stock valuation process

Explain the role that the future plays in the stock valuation process. Why not just base the valuation on historical information? Explain how the intrinsic value of a stock is related to its required...

Q: Assume an investor uses the constant-growth DVM to value a

Assume an investor uses the constant-growth DVM to value a stock. Listed below are various situations that could affect the computed value of a stock. Look at each one of these individually and indica...

Q: T. J. Patrick is a young, successful industrial designer

T. J. Patrick is a young, successful industrial designer in Portland, Oregon, who enjoys the excitement of commodities speculation. T. J. has been dabbling in commodities since he was a teenager—he wa...

Q: Much has been written about the concept of an efficient market.

Much has been written about the concept of an efficient market. It’s probably safe to say that some of your classmates believe the markets are efficient and others believe they are not. Have a debate...

Q: Each year financial periodicals like the Wall Street Journal and Money Magazine

Each year financial periodicals like the Wall Street Journal and Money Magazine publish a list of the top performing mutual fund managers. And every year there are some fund managers who earn much hig...

Q: What is an odd-lot differential? How can you avoid

What is an odd-lot differential? How can you avoid odd-lot differentials? Which of the following transactions would involve an odd-lot differential? a. Buy 90 shares of stock b. Sell 200 shares of sto...

Q: Briefly define each of the following terms and describe how it can

Briefly define each of the following terms and describe how it can affect investors’ decisions. a. Loss aversion b. Representativeness c. Narrow framing d. Overconfidence e. Biased self-attribution

Q: Describe how representativeness may lead to biases in stock valuation.

Describe how representativeness may lead to biases in stock valuation.

Q: Briefly describe how technical analysis is used as part of the stock

Briefly describe how technical analysis is used as part of the stock valuation process. What role does it play in an investor’s decision to buy or sell a stock?

Q: Describe each of the following approaches to technical analysis and note how

Describe each of the following approaches to technical analysis and note how it would be used by investors. a. Confidence index b. Arms index c. Trading action d. Odd-lot trading e. Charting f. Moving...

Q: Briefly define each of the following and note the conditions that would

Briefly define each of the following and note the conditions that would suggest the market is technically strong. a. Breadth of the market b. Short interest c. Relative strength index d. Theory of con...

Q: Describe the general concept of economic analysis. Is this type of

Describe the general concept of economic analysis. Is this type of analysis necessary, and can it really help the individual investor make a decision about a stock? Explain.

Q: Using the bond returns in Table 10.1 as a basis

Using the bond returns in Table 10.1 as a basis of discussion: Table 10.1: a. Compare the total returns on Treasury bonds during the 1970s to those produced in the 1980s. How do you explain the dif...

Q: Identify and briefly describe each of the following types of bonds.

Identify and briefly describe each of the following types of bonds. a. Agency bonds b. Municipal bonds c. Zero-coupon bonds d. Junk bonds e. Foreign bonds f. Collateralized mortgage obligations (CMOs)...

Q: Treasury securities are guaranteed by the U.S. government.

Treasury securities are guaranteed by the U.S. government. Therefore, there is no risk in the ownership of such bonds.” Briefly discuss the wisdom (or folly) of this statement.

Q: Dara Simmons, a 40-year-old financial analyst and

Dara Simmons, a 40-year-old financial analyst and divorced mother of two teenage children, considers herself a savvy investor. She has increased her investment portfolio considerably over the past fiv...

Q: Briefly describe each of the following measures for assessing portfolio performance and

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)

Q: Jim Pernelli and his wife, Polly, live in Augusta,

Jim Pernelli and his wife, Polly, live in Augusta, Georgia. Like many young couples, the Pernellis are a two-income family. Jim and Polly are both college graduates and hold high-paying jobs. Jim has...

Q: Why do companies like to issue convertible securities? What’s in it

Why do companies like to issue convertible securities? What’s in it for them?

Q: Describe LYONs, and note how they differ from conventional convertible securities

Describe LYONs, and note how they differ from conventional convertible securities. Are there any similarities between LYONs and conventional convertibles? Explain.

Q: Using the resources at your campus or public library or on the

Using the resources at your campus or public library or on the Internet, find the information requested below. a. Select any two convertible debentures (notes or bonds) and determine the conversion ra...

Q: Briefly describe each of the following theories of the term structure of

Briefly describe each of the following theories of the term structure of interest rates. a. Expectations hypothesis b. Liquidity preference theory c. Market segmentation theory According to these theo...

Q: Briefly explain what will happen to a bond’s duration measure if each

Briefly explain what will happen to a bond’s duration measure if each of the following events occur. a. The yield to maturity on the bond falls from 8.5% to 8%. b. The bond gets 1 year closer to its m...

Q: Why is the business cycle so important to economic analysis? Does

Why is the business cycle so important to economic analysis? Does the business cycle have any bearing on the stock market?

Q: Assume that an investor comes to you looking for advice. She

Assume that an investor comes to you looking for advice. She has $200,000 to invest and wants to put it all into bonds. a. If she considers herself a fairly aggressive investor who is willing to take...

Q: Contrast mutual fund ownership with direct investment in stocks and bonds.

Contrast mutual fund ownership with direct investment in stocks and bonds. Assume your class is going to debate the merits of investing through mutual funds versus investing directly in stocks and bon...

Q: Describe the process of creating an ETF. How does it differ

Describe the process of creating an ETF. How does it differ from the process by which an open-end fund is created?

Q: Why is Jensen’s measure (alpha) generally preferred over the measures

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

Q: For each pair of funds listed below, select the one that

For each pair of funds listed below, select the one that is likely to be less risky. Briefly explain your answer. a. Growth versus growth-and-income funds b. Equity-income versus high-grade corporate...

Q: Describe an ETF and explain how these funds combine the characteristics of

Describe an ETF and explain how these funds combine the characteristics of both open end and closed-end funds. Consider the Vanguard family of funds. Which of its funds most closely resembles a “spide...

Q: Following is a sample of 10 Level-I CFA exam questions

Following is a sample of 10 Level-I CFA exam questions that deal with many of the topics covered in Chapters 10 and 11 of this text, including bond prices and yields, interest rates and risks, bond pr...

Q: In the absence of any load charges, open-end mutual

In the absence of any load charges, open-end mutual funds are priced at (or very close to) their net asset values, whereas closed-end funds rarely trade at their NAVs. Explain why one type of fund wou...

Q: Using the Facebook stock option quotations in Figure 14.1,

Using the Facebook stock option quotations in Figure 14.1, find the option premium, the time value, and the stock index breakeven point for the following puts and calls. Figure 14.1: a. The August...

Q: Alcan stock recently closed at $52.51. Assume that

Alcan stock recently closed at $52.51. Assume that you write a covered call on Alcan by writing one September call with a strike price of $55 and buying 100 shares of stock at the market price. The op...

Q: Assume you hold a well-balanced portfolio of common stocks.

Assume you hold a well-balanced portfolio of common stocks. Under what conditions might you want to use a stock-index (or ETF) option to hedge the portfolio? a. Briefly explain how such options could...

Q: Wally Wilson is a commercial artist who makes a good living by

Wally Wilson is a commercial artist who makes a good living by doing freelance work—mostly layouts and illustrations—for local ad agencies and major institutional c...

Q: Three of the biggest U.S. commodities exchanges—the

Three of the biggest U.S. commodities exchanges—the CME, CBOT, and NYMEX—were identified in this chapter. Other U.S. exchanges and several foreign commodities exchanges are also closely followed in th...

Q: On the basis of the information provided, indicate how much profit

On the basis of the information provided, indicate how much profit or loss you would make in each of the futures transactions listed below. (Hint: You might want to visit http:// www.cmegroup.com for...

Q: Carolyn Bowen, who just turned 55, is employed as an

Carolyn Bowen, who just turned 55, is employed as an administrative assistant for the Xcon Corporation, where she has worked for the past 20 years. She is in good health, lives alone, and has two grow...

Q: Assume that you are 35 years old, are married with two

Assume that you are 35 years old, are married with two young children, are renting a condo, and have an annual income of $90,000. Use the following questions to guide your preparation of a rough inves...

Q: What role, if any, will short-term investments play

What role, if any, will short-term investments play in your portfolio? Why? Complete the following table for the short-term investments listed. Find their current yields online, and explain which, if...

Q: On the basis of the current structure of the world’s financial markets

On the basis of the current structure of the world’s financial markets and your knowledge of the NYSE and Nasdaq OMX markets, describe the key features, functions, and problems that would be faced by...

Q: Critics of longer trading hours believe that expanded trading sessions turn the

Critics of longer trading hours believe that expanded trading sessions turn the stock market into a casino and place the emphasis more on short-term gains than on long-term investment. Do you agree? W...

Q: Following is a sample of 12 Level-I CFA exam questions

Following is a sample of 12 Level-I CFA exam questions that deal with many of the topics covered in Chapters 14 and 15 of this text, including basic properties of options and futures, pricing characte...

Q: From 1999 to 2014, the average IPO rose by 19%

From 1999 to 2014, the average IPO rose by 19% in its first day of trading. In 1999, 117 deals doubled in price on the first day. What factors might contribute to the huge first-day returns on IPOs? S...

Q: Why do you think some large, well-known companies such

Why do you think some large, well-known companies such as Cisco Systems, Intel, and Microsoft prefer to trade on the Nasdaq OMX markets rather than on an organized securities exchange such as the NYSE...

Q: Describe how, if at all, a conservative and an aggressive

Describe how, if at all, a conservative and an aggressive investor might use each of the following types of orders as part of their investment programs. Contrast these two types of investors in view o...

Q: Briefly describe each of the following: a. Gross domestic

Briefly describe each of the following: a. Gross domestic product b. Leading indicators c. Money supply d. Producer prices

Q: Prepare a checklist of questions and issues you would use when shopping

Prepare a checklist of questions and issues you would use when shopping for a stockbroker. Describe both the ideal broker and the ideal brokerage firm, given your investment goals and disposition. Dis...

Q: It’s probably safe to say that there’s nothing more important in determining

It’s probably safe to say that there’s nothing more important in determining a bond’s rating than the underlying financial condition and operating...

Q: Differentiate between the financial advice you would receive from a traditional investment

Differentiate between the financial advice you would receive from a traditional investment advisor and one of the new online planning and advice sites. Which would you prefer to use, and why? How coul...

Q: Two investments offer a series of cash payments over the next four

Two investments offer a series of cash payments over the next four years, as shown in the following table. a. What is the total amount of money paid by each investment over the four years? b. From a...

Q: Why do you think sell ratings tend to cause stock prices to

Why do you think sell ratings tend to cause stock prices to fall, while buy ratings do not lead to stock price increases?

Q: What Is the Mystery in Futures Markets?

What Is the Mystery in Futures Markets?

Q: Erin McQueen purchased 50 shares of BMW, a German stock traded

Erin McQueen purchased 50 shares of BMW, a German stock traded on the Frankfurt Exchange, for €64.5 (euros) per share exactly one year ago when the exchange rate was €0.67>US$1. Today the stock is tra...

Q: Elmo Inc.’s stock is currently selling at $60 per

Elmo Inc.’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a...

Q: Following is a sample of 11 Level-I CFA exam questions

Following is a sample of 11 Level-I CFA exam questions that deal with many topics covered in Chapters 6, 7, 8, and 9 of this text, including the use of financial ratios, various stock valuation models...

Q: You sell 200 shares of a stock short for $60 per

You sell 200 shares of a stock short for $60 per share. You want to limit your loss on this transaction to no more than $1,400. What order should you place?

Q: Chris LeBlanc estimates that if he does five hours of research using

Chris LeBlanc estimates that if he does five hours of research using data that will cost $75, there is a good chance that he can improve his expected return on a $10,000, 1-year investment from 8% to...

Q: What effect, if any, does inflation have on common stocks

What effect, if any, does inflation have on common stocks?

Q: Explain the role of portfolio revision in the process of managing a

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

Q: Assume that an investor buys 100 shares of stock at $35

Assume that an investor buys 100 shares of stock at $35 per share, putting up a 75% margin. a. What is the debit balance in this transaction? b. How much equity funds must the investor provide to make...

Q: Miguel Torres purchased 100 shares of CantWin.com.com for

Miguel Torres purchased 100 shares of CantWin.com.com for $50 per share, using as little of his own money as he could. His broker has a 50% initial margin requirement and a 30% maintenance margin requ...

Q: Jerri Kingston bought 100 shares of stock at $80 per share

Jerri Kingston bought 100 shares of stock at $80 per share using an initial margin of 50%. Given a maintenance margin of 25%, how far does the stock have to drop before Jerri faces a margin call? (Ass...

Q: An investor buys 200 shares of stock selling at $80 per

An investor buys 200 shares of stock selling at $80 per share using a margin of 60%. The stock pays annual dividends of $1 per share. A margin loan can be obtained at an annual interest cost of 8%. De...

Q: Marlene Bellamy purchased 300 shares of Writeline Communications stock at $55

Marlene Bellamy purchased 300 shares of Writeline Communications stock at $55 per share using the prevailing minimum initial margin requirement of 50%. She held the stock for exactly four months and s...

Q: Not long ago, Jack Edwards bought 200 shares of Almost Anything

Not long ago, Jack Edwards bought 200 shares of Almost Anything Inc. at $45 per share; he bought the stock on margin of 60%. The stock is now trading at $60 per share, and the Federal Reserve has rece...

Q: You own 500 shares of Ups & Downs, Inc., stock

You own 500 shares of Ups & Downs, Inc., stock. It is currently priced at $50. You are going on vacation, and you realize that the company will be reporting earnings while you are away. To protect you...

Q: You have $5,000 in a 50% margin account

You have $5,000 in a 50% margin account. You have been following a stock that you think you want to buy. The stock is priced at $52. You decide that if the stock falls to $50, you would like to buy it...

Q: The table below shows the annual change in the average U.

The table below shows the annual change in the average U.S. home price from 2005 to 2014 according to the S&P/Case-Shiller Index. Calculate the average annual return and its standard deviation. Co...

Q: An investor short sells 100 shares of a stock for $20

An investor short sells 100 shares of a stock for $20 per share. The initial margin is 50%, and the maintenance margin is 30%. The price of the stock falls to $12 per share. What is the margin, and wi...

Q: What role do an investor’s portfolio objectives play in constructing a portfolio

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

Q: What is industry analysis, and why is it important?

What is industry analysis, and why is it important?

Q: An investor short sells 100 shares of a stock for $20

An investor short sells 100 shares of a stock for $20 per share. The initial margin is 50%, and the maintenance margin is 30%. The price of the stock rises to $28 per share. What is the margin, and wi...

Q: Calculate the profit or loss per share realized on each of the

Calculate the profit or loss per share realized on each of the following short-sale transactions.

Q: Charlene Hickman expected the price of Bio International shares to drop in

Charlene Hickman expected the price of Bio International shares to drop in the near future in response to the expected failure of its new drug to pass FDA tests. As a result, she sold short 200 shares...

Q: The SP-6 Index (a fictitious index) is used

The SP-6 Index (a fictitious index) is used by many investors to monitor the general behavior of the stock market. It has a base value set equal to 100 at January 1, 1978. In the accompanying table, t...

Q: Deepa Chungi wishes to develop an average, or index, that

Deepa Chungi wishes to develop an average, or index, that can be used to measure the general behavior of stock prices over time. She has decided to include six closely followed, high-quality stocks in...

Q: Al Cromwell places a market order to buy a round lot of

Al Cromwell places a market order to buy a round lot of Thomas, Inc., common stock, which is traded on the NYSE and is currently quoted at $50 per share. Ignoring brokerage commissions, determine how...

Q: Imagine that you have placed a limit order to buy 100 shares

Imagine that you have placed a limit order to buy 100 shares of Sallisaw Tool at a price of $38, although the stock is currently selling for $41. Discuss the consequences, if any, of each of the follo...

Q: If you place a stop-loss order to sell at $

If you place a stop-loss order to sell at $23 on a stock currently selling for $26.50 per share, what is likely to be the minimum loss you will experience on 50 shares if the stock price rapidly decli...

Q: You are considering two investment alternatives. The first is a stock

You are considering two investment alternatives. The first is a stock that pays quarterly dividends of $0.25 per share and is trading at $20 per share; you expect to sell the stock in six months for $...

Q: Define and differentiate between the following pairs of terms. a

Define and differentiate between the following pairs of terms. a. Treasury stock versus classified stock b. Round lot versus odd lot c. Par value versus market value d. Book value versus investment va...

Q: Explain the role that formula plans can play in the timing of

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

Q: In this problem we will visit United Rentals Inc. (URI

In this problem we will visit United Rentals Inc. (URI), which was introduced at the beginning of the chapter. The following table shows the monthly return on URI stock and on the S&P 500 stock in...

Q: Briefly describe the price-to-sales ratio and explain how

Briefly describe the price-to-sales ratio and explain how it is used to value stocks. Why not just use the P/E multiple? How does the P/S ratio differ from the P/BV measure?

Q: Assume you invest $4,000 today in an investment that

Assume you invest $4,000 today in an investment that promises to return $9,000 in exactly 10 years. a. Use the present value technique to estimate the IRR on this investment. b. If a minimum annual re...

Q: You invest $7,000 in stock and receive dividends of

You invest $7,000 in stock and receive dividends of $65, $70, $70, and $65 over the following four years. At the end of the four years, you sell the stock for $7,900. What was the IRR on this investme...

Q: Your friend asks you to invest $10,000 in a

Your friend asks you to invest $10,000 in a business venture. Based on your estimates, you would receive nothing for three years, at the end of year four you would receive $4,900, and at the end of ye...

Q: Use a financial calculator or an Excel spreadsheet to estimate the IRR

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

Q: Elliott Dumack must earn a minimum rate of return of 11%

Elliott Dumack must earn a minimum rate of return of 11% to be adequately compensated for the risk of the following investment. Initial Investment …………………………………………………….. $14,000 End of Year Income 1...

Q: Assume that an investment generates the following income stream and can be

Assume that an investment generates the following income stream and can be purchased at the beginning of 2017 for $1,000 and sold at the end of 2020 for $1,200. Estimate the IRR for this investment. I...

Q: For each of the following streams of dividends, estimate the compound

For each of the following streams of dividends, estimate the compound annual rate of growth between the earliest year for which a value is given and 2017.

Q: The historical returns for two investments—A and B—are

The historical returns for two investments—A and B—are summarized in the following table for the period 2013 to 2017. Use the data to answer the questions that foll...

Q: Briefly describe each of the following plans and differentiate among them.

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

Q: Consider the historical data for an investment given in the accompanying table

Consider the historical data for an investment given in the accompanying table. a. Calculate the total return (in dollars) for each year. b. Indicate the level of return you would expect in 2018 and i...

Q: Refer to the table in Problem 4.5. What is

Refer to the table in Problem 4.5. What is the total return in dollars and as a percentage of your original investment if you purchased 100 shares of the investment at the beginning of 2013 and sold i...

Q: Are the expected future earnings of the firm important in determining a

Are the expected future earnings of the firm important in determining a stock’s investment suitability? Discuss how these and other future estimates fit into the stock valuation framework.

Q: At the beginning of this chapter you read about a 2015 earnings

At the beginning of this chapter you read about a 2015 earnings announcement from HP in which earnings per share were reported as $1.85 for the quarter. Let’s make a simple assumption and say that ear...

Q: Given a real rate of interest of 2%, an expected inflation

Given a real rate of interest of 2%, an expected inflation premium of 3%, and risk premiums for investments A and B of 4% and 6%, respectively, find the following. a. The risk-free rate of return, rf...

Q: The accompanying table shows a series of transactions in a savings account

The accompanying table shows a series of transactions in a savings account. The account pays 6% simple interest, and the account owner withdraws interest as soon as it is paid. Create a new table that...

Q: Find the present value of each of the following streams of income

Find the present value of each of the following streams of income, assuming a 12% discount rate.

Q: Consider the streams of income given in the following table.

Consider the streams of income given in the following table. a. Find the present value of each income stream, using a 1% discount rate, then repeat those calculations using an 8% discount rate. b. Com...

Q: For each of the investments below, calculate the present value of

For each of the investments below, calculate the present value of the annual end-of-year payments at the specified discount rate over the given period.

Q: Using a financial calculator or an Excel spreadsheet, calculate the following

Using a financial calculator or an Excel spreadsheet, calculate the following. a. The present value of $500 to be received four years from now, using an 11% discount rate. b. The present value of the...

Q: Describe how a limit order can be used when securities are bought

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?

Q: Terri Allessandro has an opportunity to make any of the following investments

Terri Allessandro has an opportunity to make any of the following investments. The purchase price, the lump-sum future value, and the year of receipt are given below for each investment. Terri can ear...

Q: Kent Weitz wishes to assess whether the following investments are satisfactory.

Kent Weitz wishes to assess whether the following investments are satisfactory. Use his required return (discount rate) of 17% to evaluate each investment. Make an investment recommendation to Kent....

Q: Using a financial calculator or spreadsheet, calculate the following.

Using a financial calculator or spreadsheet, calculate the following. a. The future value of a $350 deposit left in an account paying 6% annual interest for 10 years. b. The future value at the end of...

Q: Which investment approach (or approaches) do you feel would be

Which investment approach (or approaches) do you feel would be most appropriate for a quality-conscious investor? What kind of investment approach do you think you’d be most comfortable with? Explain....

Q: Can the growth prospects of a company affect its price-to

Can the growth prospects of a company affect its price-to-earnings multiple? Explain. How about the amount of debt a firm uses? Are there any other variables that affect the level of a firm’s P/E rati...

Q: For each of the following initial investment amounts, calculate the future

For each of the following initial investment amounts, calculate the future value at the end of the investment period if interest compounds annually.

Q: The chart shows the number of global corporate bond issues for which

The chart shows the number of global corporate bond issues for which Standard & Poor’s issued ratings upgrades or downgrades every year from 1981 to 2014. a. What is the trend in...

Q: The following table describes the characteristics of five annuities. Calculate the

The following table describes the characteristics of five annuities. Calculate the future value of each annuity given its characteristics.

Q: If you deposit $1,000 into an account at the

If you deposit $1,000 into an account at the end of each of the next 10 years and the account pays an annual interest rate of 2%, how much will be in the account after 10 years?

Q: Assume you can earn 9% on the investments described below.

Assume you can earn 9% on the investments described below. How much money would each investment provide for you after six years? a. Invest $5,000 as a lump sum today. b. Invest $2,000 at the end of ea...

Q: Give two reasons why an investor might want to maintain funds in

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

Q: The following table lists the lump sum payout, the timing of

The following table lists the lump sum payout, the timing of that payout, and the discount rate associated with five different investments. Calculate the present value of each investment.

Q: Use the table of annual returns in Problem 5.9 for

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 the standard deviation of annual returns for HD, LO...

Q: Use the table of annual returns in Problem 5.9 for

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 the correlation coefficient for HD and LOW annual r...

Q: Imagine you wish to estimate the betas for two investments, A

Imagine you wish to estimate the betas for two investments, A and B. You have gathered the following return data for the market and for each of the investments over the past 10 years, 2008â€...

Q: A security has a beta of 1.2. Is this

A security has a beta of 1.2. Is this security more or less risky than the market? Explain. Assess the impact on the required return of this security in each of the following cases. a. The market retu...

Q: What is the market multiple and how can it help in evaluating

What is the market multiple and how can it help in evaluating a stock’s P/E ratio? Is a stock’s relative P/E the same thing as the market multiple? Explain.

Q: Assume the betas for securities A, B, and C are

Assume the betas for securities A, B, and C are as shown here. Security ……………………………………………………………………………………. Beta A ……………………………………………………………………………………………….. 1.4 B ……………………………………………………………………………………………….. 0....

Q: Using your data from Problem 5.1, calculate the portfolio

Using your data from Problem 5.1, calculate the portfolio standard deviation. Problem 5.1: Your portfolio had the values in the following table for the four years listed. There were no withdrawals o...

Q: List each of the major averages or indexes prepared by (a

List each of the major averages or indexes prepared by (a) Dow Jones & Company and (b) Standard & Poor’s Corporation. Indicate the number and source of the securities used in calculating each average...

Q: Referring to Problem 5.20, using the portfolio beta,

Referring to Problem 5.20, using the portfolio beta, what would you expect the value of your portfolio to be if the market rallied 20%? Declined 20%? Problem 5.20: Referring to Problem 5.19, assume...

Q: Identify and briefly discuss several aspects of an industry that are important

Identify and briefly discuss several aspects of an industry that are important to its behavior and operating characteristics. Note especially how economic issues fit into industry analysis.

Q: Use the capital asset pricing model to find the required return for

Use the capital asset pricing model to find the required return for each of the following securities in light of the data given.

Q: Jay is reviewing his portfolio of investments, which include certain stocks

Jay is reviewing his portfolio of investments, which include certain stocks and bonds. He has a large amount tied up in U.S. Treasury bills paying 3%. He is considering moving some of his funds from t...

Q: The risk-free rate is currently 3%, and the market

The risk-free rate is currently 3%, and the market return is 10%. Assume you are considering the following investments. Investment ……………………………………………………………………………. Beta A ………………………………………………………………………………...

Q: Portfolios A through J, which are listed in the following table

Portfolios A through J, which are listed in the following table along with their returns (rp) and risk (measured by the standard deviation, sp), represent all currently available portfolios in the fea...

Q: For his portfolio, Jack Cashman randomly selected securities from all those

For his portfolio, Jack Cashman randomly selected securities from all those listed on the New York Stock Exchange. He began with one security and added securities one by one until a total of 20 securi...

Q: If portfolio A has a beta of 1.5 and portfolio

If portfolio A has a beta of 1.5 and portfolio Z has a beta of -1.5, what do the two values indicate? If the return on the market rises by 20%, what impact, if any, would this have on the returns from...

Q: In the stock valuation framework, how can you tell whether a

In the stock valuation framework, how can you tell whether a particular security is a worthwhile investment candidate? What roles does the required rate of return play in this process? Would you inves...

Q: Stock A has a beta of 0.8, stock B

Stock A has a beta of 0.8, stock B has a beta of 1.4, and stock C has a beta of -0.3. a. Rank these stocks from the most risky to the least risky. b. If the return on the market portfolio increases by...

Q: Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the

Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of...

Q: Assume you are considering a portfolio containing two assets, L and

Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The projected return...

Q: Describe the two items an investor should consider before reaching a decision

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

Q: Briefly describe the composition and general thrust of each of the following

Briefly describe the composition and general thrust of each of the following indexes. a. NYSE Composite Index b. NYSE MKT Composite Index c. Nasdaq Stock Market indexes d. Value Line Composite Index...

Q: Referring to Problem 5.30, assume that you believe that

Referring to Problem 5.30, assume that you believe that each of the five assets will earn the return shown in the table below. Based on these figures and the weights in Problem 5.29, what returns do y...

Q: Refer to Problem 5.3. Assume that asset L represents

Refer to Problem 5.3. Assume that asset L represents 60% of the portfolio and asset M is 40%. Calculate the average return and standard deviation of this portfolio’s returns over the...

Q: You have been given the following return data on three assets—

You have been given the following return data on three assets—F, G, and H—over the period 2018–2021. Using these assets, you have isolated three...

Q: You have been asked for your advice in selecting a portfolio of

You have been asked for your advice in selecting a portfolio of assets and have been supplied with the following data. You have been told that you can create two portfolios—one con...

Q: Assume you wish to evaluate the risk and return behaviors associated with

Assume you wish to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfect positive, uncorrelated, and perfect...

Q: An investor owns some stock in Harry’s Pottery Inc. The stock

An investor owns some stock in Harry’s Pottery Inc. The stock recently underwent a 5-for-3 stock split. If the stock was trading at $40 per share just before the split, how much is each share most lik...

Q: Briefly describe the dividend valuation model and the three versions of this

Briefly describe the dividend valuation model and the three versions of this model. Explain how CAPM fits into the DVM.

Q: Wilfred Nadeau owns 200 shares of Consolidated Glue. The company’s board

Wilfred Nadeau owns 200 shares of Consolidated Glue. The company’s board of directors recently declared a cash dividend of 50 cents a share payable April 18 (a Wednesday) to shareholders of record on...

Q: Southern Cities Trucking Company has the following five-year record of

Southern Cities Trucking Company has the following five-year record of earnings per share. Year ……………………………………………………..………………………………… EPS 2012 ……………………………………………………………………………………… $1.40 2013 …………………………………...

Q: What is asset allocation? How does it differ from diversification?

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

Q: Using the resources at your campus or public library or on the

Using the resources at your campus or public library or on the Internet, select any three common stocks you like and determine the latest book value per share, earnings per share, dividend payout rati...

Q: In January 2012 an investor purchased 800 shares of Engulf & Devour

In January 2012 an investor purchased 800 shares of Engulf & Devour, a rapidly growing high-tech conglomerate. From 2012 through 2016, the stock turned in the following dividend and share price pe...

Q: Ravi Dumar is a stockbroker who lives with his wife, Sasha

Ravi Dumar is a stockbroker who lives with his wife, Sasha, and their five children in Milwaukee, Wisconsin. Ravi firmly believes that the only way to make money in the market is to follow an aggressi...

Q: Discuss each of the following as they are related to assessing bond

Discuss each of the following as they are related to assessing bond market behavior. a. Bond yields b. Bond indexes

Q: George Robbins considers himself an aggressive investor. He’s thinking about investing

George Robbins considers himself an aggressive investor. He’s thinking about investing in some foreign securities and is looking at stocks in (1) Bayer AG, the big German chemical and health-care firm...

Q: On January 1, 2013, an investor bought 200 shares of

On January 1, 2013, an investor bought 200 shares of Gottahavit, Inc., for $50 per share. On January 3, 2014, the investor sold the stock for $55 per share. The stock paid a quarterly dividend of $0.2...

Q: Consider the following information about Truly Good Coffee, Inc.

Consider the following information about Truly Good Coffee, Inc. Total assets …………………………………………………………………… $240 million Total debt ……………………………………………………………………….. $115 million Preferred stock ……………………………...

Q: Assume you are given the following abbreviated financial statement.

Assume you are given the following abbreviated financial statement. ($ in millions) Current assets …………………………………………………………………………………. $150.0 Fixed and other assets ……………………………………….…………………………… $200.0 To...

Q: What is the difference between the variable-growth dividend valuation model

What is the difference between the variable-growth dividend valuation model and the free cash flow to equity approach to stock valuation? Which procedure would work better if you were trying to value...

Q: The Buffalo Manufacturing Company has total assets of $12 million,

The Buffalo Manufacturing Company has total assets of $12 million, an asset turnover of 2.2 times, and a net profit margin of 14%. a. What is Buffalo’s return on assets? b. Find Buffalo’s ROE, given t...

Q: Briefly describe the basic approaches to asset allocation: (a)

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

Q: Find the EPS, P/E ratio, and dividend yield

Find the EPS, P/E ratio, and dividend yield of a company that has five million shares of common stock outstanding (the shares trade in the market at $25), earns 10% after taxes on annual sales of $150...

Q: Stroud Sporting Gear Inc. has a net profit margin of 9

Stroud Sporting Gear Inc. has a net profit margin of 9%, a total asset turnover of 2.4, total assets of $225 million, and total equity of $120 million. What is the company’s return on equity?

Q: Using the resources available at your campus or public library (or

Using the resources available at your campus or public library (or on the Internet), select any common stock you like and determine as many of the profitability, activity, liquidity, leverage, and mar...

Q: Listed below are six pairs of stocks. Pick one of these

Listed below are six pairs of stocks. Pick one of these pairs and then, using the resources available at your campus or public library (or on the Internet), comparatively analyze the two stocks. Which...

Q: The following table lists the 2015 and 2016 financial statements for Otago

The following table lists the 2015 and 2016 financial statements for Otago Bay Marine Motors, a major manufacturer of top-of-the-line outboard motors. a. On the basis of the information provided,...

Q: Describe the types of services offered by brokerage firms, and discuss

Describe the types of services offered by brokerage firms, and discuss the criteria for selecting a suitable stockbroker.

Q: The following summary financial statistics were obtained from the 2015 Otago Bay

The following summary financial statistics were obtained from the 2015 Otago Bay Marine Motors (OBMM) annual report. 2015 ($ in millions) Sales revenue ………………………………………………………………………………… $179.3 Total as...

Q: The Amherst Company has net profits of $10 million, sales

The Amherst Company has net profits of $10 million, sales of $150 million, and 2.5 million shares of common stock outstanding. The company has total assets of $75 million and total stockholders’ equit...

Q: PEGCOR has a P/E ratio of 15. Earnings per

PEGCOR has a P/E ratio of 15. Earnings per share are $2.00, and the expected EPS five years from today is $3.22. Calculate the PEG ratio.

Q: Jack Arnold is a resident of Lubbock, Texas, where he

Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman. He has also built up a sizable portfolio of common stock, which, he believes, is due to the fact that he...

Q: What role could an asset allocation fund play? What makes an

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

Q: Highgate Computer Company produces $1.8 million in profits from

Highgate Computer Company produces $1.8 million in profits from $27 million in sales. It has total assets of $15 million. a. Calculate Highgate’s total asset turnover and its net profit margin. b. Fin...

Q: Financial Learning Systems has 2.5 million shares of common stock

Financial Learning Systems has 2.5 million shares of common stock outstanding and 100,000 shares of preferred stock. (The preferred pays annual cash dividends of $5 a share, and the common pays annual...

Q: An investor estimates that next year’s sales for Dursley’s Hotels, Inc

An investor estimates that next year’s sales for Dursley’s Hotels, Inc., should amount to about $100 million. The company has five million shares outstanding, generates a net profit margin of about 10...

Q: Assume you’ve generated the following information about the stock of Bufford’s Burger

Assume you’ve generated the following information about the stock of Bufford’s Burger Barns: The company’s latest dividends of $4 a share are expected to grow to $4.32 next year, to $4.67 the year aft...

Q: Let’s assume that you’re thinking about buying stock in West Coast Electronics

Let’s assume that you’re thinking about buying stock in West Coast Electronics. So far in your analysis, you’ve uncovered the following information: The stock pays annual dividends of $5.00 a share in...

Q: The price of Myrtle’s Plumbing Supply Co. is now $80

The price of Myrtle’s Plumbing Supply Co. is now $80. The company pays no dividends. Ms. Bossard expects the price three years from now to be $110 per share. Should she buy Myrtle’s Plumbing stock if...

Q: This year, Shoreline Light and Gas (SL&G)

This year, Shoreline Light and Gas (SL&G) paid its stockholders an annual dividend of $3 a share. A major brokerage firm recently put out a report on SL&G predicting that the company’s annual dividend...

Q: Briefly differentiate among the following types of brokerage accounts: a

Briefly differentiate among the following types of brokerage accounts: a. Single or joint b. Custodial c. Cash d. Margin e. Wrap

Q: Assume there are three companies that in the past year paid exactly

Assume there are three companies that in the past year paid exactly the same annual dividend of $2.25 a share. In addition, the future annual rate of growth in dividends for each of the three companie...

Q: New Millennium Company earned $2.5 million in net income

New Millennium Company earned $2.5 million in net income last year. It took depreciation deductions of $300,000 and made new investments in working capital and fixed assets of $100,000 and $350,000, r...

Q: Dave and Marlene Carter live in the Boston area, where Dave

Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of...

Q: How would you go about finding the expected return on a stock

How would you go about finding the expected return on a stock? Note how such information would be used in the stock selection process.

Q: A particular company currently has sales of $250 million; sales

A particular company currently has sales of $250 million; sales are expected to grow by 20% next year (year 1). For the year after next (year 2), the growth rate in sales is expected to equal 10%. Ove...

Q: Assume a major investment service has just given Oasis Electronics its highest

Assume a major investment service has just given Oasis Electronics its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for yourself and to pla...

Q: Assume you obtain the following information about a certain company:

Assume you obtain the following information about a certain company: Total assets ……………………………………………………………………. $50,000,000 Total equity ……………………………………………………………………. $25,000,000 Net income …………………………………...

Q: Newco is a young company that has yet to make a profit

Newco is a young company that has yet to make a profit. You are trying to place a value on the stock, but it pays no dividends and you obviously cannot calculate a P/E ratio. As a result, you decide t...

Q: World Wide Web Wares (4W, for short) is an

World Wide Web Wares (4W, for short) is an online retailer of small kitchen appliances and utensils. The firm has been around for a few years and has created a nice market niche for itself. In fact, i...

Q: Last year, InDebt Company paid $75 million of interest expense

Last year, InDebt Company paid $75 million of interest expense, and its average rate of interest for the year was 10%. The company’s ROE is 15%, and it pays no dividends. Estimate next year’s interest...

Q: Melissa Popp is thinking about buying some shares of R. H

Melissa Popp is thinking about buying some shares of R. H. Lawncare Equipment, at $48 per share. She expects the price of the stock to rise to $60 over the next three years. During that time she also...

Q: Compute the Arms index for the S&P 500 over the

Compute the Arms index for the S&P 500 over the following three days: Which of the three days would be considered the most bullish? Explain why.

Q: Differentiate among market orders, limit orders, and stop-loss

Differentiate among market orders, limit orders, and stop-loss orders. What is the rationale for using a stop-loss order rather than a limit order?

Q: If growth, income, and capital preservation are the primary objectives

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 selectio...

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

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

Q: You find the closing prices for a stock you own. You

You find the closing prices for a stock you own. You want to use a 10-day moving average to monitor the stock. Calculate the 10-day moving average for days 11 through 20. Based on the data in the tabl...

Q: Briefly describe the P/E approach to stock valuation and note

Briefly describe the P/E approach to stock valuation and note how this approach differs from the variable-growth DVM. Describe the P/CF approach and note how it is used in the stock valuation process....

Q: Data on a stock’s closing price and its price change for the

Data on a stock’s closing price and its price change for the last 14 trading days appears below. a. Over this 14-day period what is the average gain on up days? (Note: to calculate...

Q: Listed below are data that pertain to the corporate bond market.

Listed below are data that pertain to the corporate bond market. (Note: Each “period” below covers a span of six months.) a. Compute the confidence index for each...

Q: Compute the level of on-balance volume (OBV) for

Compute the level of on-balance volume (OBV) for the following three-day period for a stock, if the beginning level of OBV is 50,000 and the stock closed yesterday at $25. Does the movement in OBV a...

Q: Below are figures representing the number of stocks making new highs and

Below are figures representing the number of stocks making new highs and new lows for each month over a six-month period: Would a technical analyst consider the trend to be bullish or bearish over t...

Q: You are given the following information for the number of stocks making

You are given the following information for the number of stocks making new highs and new lows for each day: a. Calculate the 10-day moving-average NH-NL indicator. b. If there are 120 new highs and...

Q: You are presented with the following data: /

You are presented with the following data: Calculate the MFCR for each week. Based on the result, are you bullish or bearish?

Q: In early January 2010, you purchased $30,000 worth

In early January 2010, you purchased $30,000 worth of some high-grade corporate bonds. The bonds carried a coupon of 8â…›% and mature in 2024. You paid a price of 94.125 when you bough...

Q: Letticia Garcia, an aggressive bond investor, is currently thinking about

Letticia Garcia, an aggressive bond investor, is currently thinking about investing in a foreign (non-dollar-denominated) government bond. In particular, she’s looking at a Swiss government bond that...

Q: What role does current market information play in analyzing investment returns?

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

Q: Red Electrica España SA (E.REE) is refinancing its

Red Electrica España SA (E.REE) is refinancing its bank loans by issuing Eurobonds to investors. You are considering buying $10,000 of these bonds, which will yield 6%. You are also looking at a U.S....

Q: Differentiate between the services and costs associated with full-service,

Differentiate between the services and costs associated with full-service, premium discount, and basic discount brokers. Be sure to discuss online transactions.

Q: What is the random walk hypothesis, and how does it apply

What is the random walk hypothesis, and how does it apply to stocks? What is an efficient market? How can a market be efficient if its prices behave in a random fashion?

Q: A certain convertible bond has a conversion ratio of 21 and a

A certain convertible bond has a conversion ratio of 21 and a conversion premium of 20%. The current market price of the underlying common stock is $40. What is the bond’s conversion equivalent?

Q: You are considering investing $800 in Higgs B. Technology Inc

You are considering investing $800 in Higgs B. Technology Inc. You can buy common stock at $25 per share; this stock pays no dividends. You can also buy a convertible bond ($1,000 par value) that is c...

Q: A certain 6% annual coupon rate convertible bond (maturing in

A certain 6% annual coupon rate convertible bond (maturing in 20 years) is convertible at the holder’s option into 20 shares of common stock. The bond is currently trading at $800. The stock (which pa...

Q: An 8% convertible bond carries a par value of $1

An 8% convertible bond carries a par value of $1,000 and a conversion ratio of 20. Assume that an investor has $5,000 to invest and that the convertible sells at a price of $1,000 (which includes a 25...

Q: Assume you just paid $1,200 for a convertible bond

Assume you just paid $1,200 for a convertible bond that carries a 7½% coupon and has 15 years to maturity. The bond can be converted into 24 shares of stock, which are now trading at $50 a share. Find...

Q: Find the conversion value of a convertible preferred stock that carries a

Find the conversion value of a convertible preferred stock that carries a conversion ratio of 1.8, given that the market price of the underlying common stock is $40 a share. Would there be any convers...

Q: An investor is in the 28% tax bracket and lives in

An investor is in the 28% tax bracket and lives in a state with no income tax. He is trying to decide which of two bonds to purchase. One is a 7.5% corporate bond that is selling at par. The other is...

Q: Which indexes can you use to compare your investment performance to general

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

Q: An investor lives in a state with a 3% income tax

An investor lives in a state with a 3% income tax rate. Her federal income tax bracket is 35%. She wants to invest in one of two bonds that are similar in terms of risk (and both bonds currently sell...

Q: Maria Lopez is a wealthy investor who’s looking for a tax shelter

Maria Lopez is a wealthy investor who’s looking for a tax shelter. Maria is in the maximum (35%) federal tax bracket and lives in a state with a very high state income tax. (She pays the maximum of 11...

Q: Sara Nixon is looking for a fixed-income investment. She

Sara Nixon is looking for a fixed-income investment. She is considering two bond issues: a. A Treasury with a yield of 5% b. An in-state municipal bond with a yield of 4% Sara is in the 33% federal ta...

Q: Briefly describe each of the following and note how it is computed

Briefly describe each of the following and note how it is computed and how it is used by technicians: a. Advance-decline lines b. Arms index c. On-balance volume d. Relative strength index e. Moving a...

Q: What is day trading, and why is it risky? How

What is day trading, and why is it risky? How can you avoid problems as an online trader?

Q: Which of the following bonds offers the highest current yield?

Which of the following bonds offers the highest current yield? a. A 9½%, 20-year bond quoted at 97¾ b. A 16%, 15-year bond quoted at 164⅝ c. A 5¼%, 18-year bond quoted at 54

Q: Assume that you pay $850 for a long-term bond

Assume that you pay $850 for a long-term bond that carries a 7½% coupon. Over the course of the next 12 months, interest rates drop sharply. As a result, you sell the bond at a price of $962.50. a. Fi...

Q: What is the current yield for a $1,000 par

What is the current yield for a $1,000 par value bond that pays interest semiannually, has nine years to maturity, and is currently selling for $937 with a bond equivalent yield of 12%?

Q: An investor is considering the purchase of an 8%, 18-

An investor is considering the purchase of an 8%, 18-year corporate bond that’s being priced to yield 10%. She thinks that in a year, this bond will be priced in the market to yield 9%. Using annual c...

Q: Compute the current yield of a 10%, 25-year bond

Compute the current yield of a 10%, 25-year bond that is currently priced in the market at $1,200. Use annual compounding to find the promised yield on this bond. Repeat the promised yield calculation...

Q: What are indicators of bond market behavior, and how are they

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

Q: A 10%, 25-year bond has a par value of

A 10%, 25-year bond has a par value of $1,000 and a call price of $1,075. (The bond’s first call date is in five years.) Coupon payments are made semiannually (so use semiannual compounding where appr...

Q: Assume that an investor is looking at two bonds: Bond A

Assume that an investor is looking at two bonds: Bond A is a 20-year, 9% (semiannual pay) bond that is priced to yield 10.5%. Bond B is a 20-year, 8% (annual pay) bond that is priced to yield 7.5%. Bo...

Q: Two bonds have par values of $1,000. One

Two bonds have par values of $1,000. One is a 5%, 15-year bond priced to yield 8%. The other is a 7.5%, 20-year bond priced to yield 6%. Which of these has the lower price? (Assume annual compounding...

Q: A 25-year, zero-coupon bond was recently being

A 25-year, zero-coupon bond was recently being quoted at 11.625% of par. Find the current yield and the promised yield of this issue, given that the bond has a par value of $1,000. Using semiannual co...

Q: What are two or three of the major investment attributes of common

What are two or three of the major investment attributes of common stocks?

Q: What is a stock chart? What kind of information can be

What is a stock chart? What kind of information can be put on charts, and what is the purpose of charting?

Q: Using annual compounding, find the yield to maturity for each of

Using annual compounding, find the yield to maturity for each of the following bonds. a. A 9.5%, 20-year bond priced at $957.43 b. A 16%, 15-year bond priced at $1,684.76 c. A 5.5%, 18-year bond price...

Q: In what two ways, based on the number of shares transacted

In what two ways, based on the number of shares transacted, do brokers typically charge for executing transactions? How are online transaction fees structured relative to the degree of broker involvem...

Q: A bond has a Macaulay duration of 8.62 and is

A bond has a Macaulay duration of 8.62 and is priced to yield 8%. If interest rates go up so that the yield goes to 8.5%, what will be the percentage change in the price of the bond? Now, if the yield...

Q: Find the Macaulay duration and the modified duration of a 20-

Find the Macaulay duration and the modified duration of a 20-year, 10% corporate bond priced to yield 8%. According to the modified duration of this bond, how much of a price change would this bond in...

Q: Describe call and put options. Are they issued like other corporate

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

Q: Which one of the following bonds would you select if you thought

Which one of the following bonds would you select if you thought market interest rates were going to fall by 50 basis points over the next six months? a. A bond with a Macaulay duration of 8.46 years...

Q: Stacy Picone is an aggressive bond trader who likes to speculate on

Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 9%, but she expects them to fall to 7% within a year. As a result, Stac...

Q: Elliot Karlin is a 35-year-old bank executive who

Elliot Karlin is a 35-year-old bank executive who has just inherited a large sum of money. Having spent several years in the bank’s investments department, he’s well aware of the concept of duration a...

Q: Using semiannual compounding, find the prices of the following bonds.

Using semiannual compounding, find the prices of the following bonds. a. A 10.5%, 15-year bond priced to yield 8% b. A 7%, 10-year bond priced to yield 8% c. A 12%, 20-year bond priced at 10% Repeat t...

Q: A $1,000 par value bond has a current price

A $1,000 par value bond has a current price of $800 and a maturity value of $1,000 and matures in five years. If interest is paid semiannually and the bond is priced to yield 8%, what is the bond’s an...

Q: A year ago, an investor bought 200 shares of a mutual

A year ago, an investor bought 200 shares of a mutual fund at $8.50 per share. Over the past year, the fund has paid dividends of $0.90 per share and had a capital gains distribution of $0.75 per shar...

Q: Explain why it is difficult, if not impossible, to consistently

Explain why it is difficult, if not impossible, to consistently outperform an efficient market. a. Does this mean that high rates of return are not available in the stock market? b. How can an investo...

Q: A year ago, the Really Big Growth Fund was being quoted

A year ago, the Really Big Growth Fund was being quoted at an NAV of $21.50 and an offer price of $23.35. Today, it’s being quoted at $23.04 (NAV) and $25.04 (offer). What is the holding period return...

Q: The All-State Mutual Fund has the following five-year

The All-State Mutual Fund has the following five-year record of performance: Find this no-load fund’s five-year (2012–2016) average annual compound rate of return...

Q: What protection does the Securities Investor Protection Corporation (SIPC) provide

What protection does the Securities Investor Protection Corporation (SIPC) provide for securities investors? How are mediation and arbitration procedures used to settle disputes between investors and...

Q: Sara Thomas is a child psychologist who has built a thriving practice

Sara Thomas is a child psychologist who has built a thriving practice in her hometown of Boise, Idaho. Over the past several years she has been able to accumulate a substantial sum of money. She has w...

Q: You’ve uncovered the following per-share information about a certain mutual

You’ve uncovered the following per-share information about a certain mutual fund: On the basis of this information, find the fund’s holding period return for 2014...

Q: Listed below is the 10-year, per-share performance

Listed below is the 10-year, per-share performance record of Larry, Moe, & Curley’s Growth Fund, as obtained from the fund’s May 30, 2016, prospectus. Use thi...

Q: Using the resources at your campus or public library (or on

Using the resources at your campus or public library (or on the Internet), select five mutual funds—a growth fund, an equity-income fund, an international (stock) fund, an index fund, and a high-yield...

Q: One year ago, Super Star Closed-End Fund had an

One year ago, Super Star Closed-End Fund had an NAV of $10.40 and was selling at an 18% discount. Today, its NAV is $11.69 and it is priced at a 4% premium. During the year, Super Star paid dividends...

Q: Niki Malone’s portfolio earned a return of 11.8% during

Niki Malone’s portfolio earned a return of 11.8% during the year just ended. The portfolio’s standard deviation of return was 14.1%. The risk-free rate is currently 6.2%. During the year, the return o...

Q: Chee Chew’s portfolio has a beta of 1.3 and earned

Chee Chew’s portfolio has a beta of 1.3 and earned a return of 12.9% during the year just ended. The risk-free rate is currently 4.2%. The return on the market portfolio during the year just ended was...

Q: The risk-free rate is currently 8.1%. Use

The risk-free rate is currently 8.1%. Use the data in the accompanying table for the Fio family’s portfolio and the market portfolio during the year just ended to answer the question...

Q: What are market anomalies and how do they come about? Do

What are market anomalies and how do they come about? Do they support or refute the EMH? Briefly describe each of the following: a. The January effect b. The size effect c. The value effect

Q: Over the past two years, Jonas Cone has used a dollar

Over the past two years, Jonas Cone has used a dollar-cost averaging formula to purchase $300 worth of FCI common stock each month. The price per share paid each month over the two years is given in t...

Q: Using the data in the following table, assume you are using

Using the data in the following table, assume you are using a constant-dollar plan with a rebalancing trigger of $1,500. The stock price represents your speculative portfolio, and the MM mutual fund r...

Q: Describe three ways in which investors can use stock options.

Describe three ways in which investors can use stock options.

Q: Portfolio A and Portfolio B had the same holding period return last

Portfolio A and Portfolio B had the same holding period return last year. Most of the returns from Portfolio A came from dividends, while most of the returns from Portfolio B came from capital gains....

Q: Identify the four main types of online investment tools. How can

Identify the four main types of online investment tools. How can they help you become a better investor?

Q: Using the data in the following table, assume you are using

Using the data in the following table, assume you are using a variable-ratio plan. You have decided that when the speculative portfolio reaches 60% of the total, you will reduce its proportion to 45%....

Q: Charlotte Smidt bought 2,000 shares of the balanced no-

Charlotte Smidt bought 2,000 shares of the balanced no-load LaJolla Fund exactly one year and two days ago for an NAV of $8.60 per share. During the year, the fund distributed investment income divide...

Q: Dorothy Santosuosso does a lot of investing in the stock market and

Dorothy Santosuosso does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to b...

Q: Myles Houck holds 600 shares of Lubbock Gas and Light. He

Myles Houck holds 600 shares of Lubbock Gas and Light. He bought the stock several years ago at $48.50, and the shares are now trading at $75. Myles is concerned that the market is beginning to soften...

Q: Nick Fitzgerald holds a well-diversified portfolio of high-quality

Nick Fitzgerald holds a well-diversified portfolio of high-quality, large-cap stocks. The current value of Fitzgerald’s portfolio is $735,000, but he is concerned that the market is heading for a big...

Q: Angelo Martino just purchased 500 shares of AT&E at $

Angelo Martino just purchased 500 shares of AT&E at $61.50, and he has decided to write covered calls against these stocks. Accordingly, he sells five AT&E calls at their current market price of $5.75...

Q: How can behavioral finance have any bearing on investor returns? Do

How can behavioral finance have any bearing on investor returns? Do supporters of behavioral finance believe in efficient markets? Explain.

Q: Suppose the DJIA stands at 11,200. You want to

Suppose the DJIA stands at 11,200. You want to set up a long straddle by purchasing 100 calls and an equal number of puts on the index, both of which expire in three months and have a strike of 112. T...

Q: What’s the most that can be made from writing calls? Why

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.

Q: A stock trades for $45 per share. A call option

A stock trades for $45 per share. A call option on that stock has a strike price of $50 and an expiration date one year in the future. The volatility of the stock’s return is 30%, and the risk-free ra...

Q: Repeat the analysis of problem 14.17 assuming that the volatility

Repeat the analysis of problem 14.17 assuming that the volatility of the stock’s return is 40%. Intuitively, would you expect this to cause the call price to rise or fall? By how much does the call pr...

Q: Look at the Facebook option quotes in Figure 14.1,

Look at the Facebook option quotes in Figure 14.1, and focus on the call and put options with a strike price of $80. Can you use put-call parity to infer what the market price of Facebook stock must h...

Q: Describe the services that professional investment advisors perform, how they are

Describe the services that professional investment advisors perform, how they are regulated, online investment advisors, and the cost of investment advice.

Q: Repeat the analysis of problem 14.7, but this time

Repeat the analysis of problem 14.7, but this time focus on the Facebook call and put options in Figure 14.1 that have a strike price of $87.50. If you use put-call parity to find the price of Faceboo...

Q: Not long ago, Vanessa Woods sold her company for several million

Not long ago, Vanessa Woods sold her company for several million dollars. She took some of that money and put it into the stock market. Today Vanessa’s portfolio of bluechip stocks is worth $3.8 milli...

Q: An American currency speculator feels strongly that the value of the Canadian

An American currency speculator feels strongly that the value of the Canadian dollar is going to fall relative to the U.S. dollar over the short run. If he wants to profit from these expectations, wha...

Q: With regard to futures options, how much profit would an investor

With regard to futures options, how much profit would an investor make if she bought a call option on gold at 7.20 when gold was trading at $482 an ounce, given that the price of gold went up to $525...

Q: Taryn Arsenault is a regular commodities speculator. She is currently considering

Taryn Arsenault is a regular commodities speculator. She is currently considering a short position in July oats, which are now trading at 248. Her analysis suggests that July oats should be trading at...

Q: Briefly explain how behavioral finance can affect each of the following:

Briefly explain how behavioral finance can affect each of the following: a. The trading activity of investors b. The tendency of value stocks to outperform growth stocks c. The tendency of stock price...

Q: Briefly describe the differences and similarities between stock-index options and

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

Q: You were just notified that you will receive $100,000

You were just notified that you will receive $100,000 in two months from the estate of a deceased relative. You want to invest this money in safe, interest-bearing instruments, so you decide to purcha...

Q: Tori Reynolds has been an avid stock market investor for years.

Tori Reynolds has been an avid stock market investor for years. She manages her portfolio fairly aggressively and likes to short sell whenever the opportunity presents itself. Recently, she has become...

Q: A wealthy investor holds $500,000 worth of U.

A wealthy investor holds $500,000 worth of U.S. Treasury bonds. These bonds are currently being quoted at 105% of par. The investor is concerned, however, that rates are headed up over the next six mo...

Q: Stefani German, a 40-year-old woman, plans

Stefani German, a 40-year-old woman, plans to retire at age 65, and she wants to accumulate $500,000 over the next 25 years to supplement the retirement programs that are being funded by the federal g...

Q: During 2015, the Smiths and the Joneses both filed joint tax

During 2015, the Smiths and the Joneses both filed joint tax returns. For the tax year ended December 31, 2015, the Smiths’ taxable income was $130,000, and the Joneses had total taxable income of $65...

Q: Angel and Marie Perez own a small pool hall located in southern

Angel and Marie Perez own a small pool hall located in southern New Jersey. They enjoy running the business, which they have owned for nearly three years. Angel, a retired professional pool shooter, s...

Q: What benefits does an investment club offer the small investor? Would

What benefits does an investment club offer the small investor? Would you prefer to join a regular or an online club, and why?

Q: Jason and Kerri Consalvo, both in their 50s, have $

Jason and Kerri Consalvo, both in their 50s, have $50,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs $50 per...

Q: Mike and Julie Bedard are a working couple. They will file

Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from salary and wages (ordinary income) 2. $1,000 i...

Q: Kim and Kanye have been dating for years and are now thinking

Kim and Kanye have been dating for years and are now thinking about getting married. As a financially sophisticated couple, they want to think through the tax implications of their potential union. a....

Q: Identify and briefly discuss two ways to use stock-index options

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

Q: What is the purpose of technical analysis? Explain how and why

What is the purpose of technical analysis? Explain how and why it is used by technicians; note how it can be helpful in timing investment decisions.

Q: Identify the three major parts of security analysis and explain why security

Identify the three major parts of security analysis and explain why security analysis is important to the stock selection process.

Q: What is the purpose of stock valuation? What role does intrinsic

What is the purpose of stock valuation? What role does intrinsic value play in the stock valuation process?

Q: Imagine that the Mini-Dow Average (MDA) is based

Imagine that the Mini-Dow Average (MDA) is based on the closing prices of five stocks. The divisor used in the calculation of the MDA is currently 0.765. The closing prices for each of the five stocks...

Q: What are the third and fourth markets?

What are the third and fourth markets?

Q: Differentiate between a bull market and a bear market.

Differentiate between a bull market and a bear market.

Q: You have been researching a stock that you like, which is

You have been researching a stock that you like, which is currently trading at $50 per share. You would like to buy the stock if it were a little less expensive—say, $47 per share. You believe that th...

Q: Is the CAPM a predictive model? Why do beta and the

Is the CAPM a predictive model? Why do beta and the CAPM remain important to investors?

Q: What are the pros and cons of using the Internet to choose

What are the pros and cons of using the Internet to choose and manage your investments?

Q: Differentiate between descriptive information and analytical information. How might one logically

Differentiate between descriptive information and analytical information. How might one logically assess whether the acquisition of investment information or advice is economically justified?

Q: Max and Veronica Shuman, along with their teenage sons, Terry

Max and Veronica Shuman, along with their teenage sons, Terry and Thomas, live in Portland, Oregon. Max is a sales rep for a major medical firm, and Veronica is a personnel officer at a local bank. To...

Q: Why would an investor want to use index options to hedge a

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, wh...

Q: What popular financial business periodicals would you use to follow the financial

What popular financial business periodicals would you use to follow the financial news? General news? Business news? Would you prefer to get your news from print sources or online, and why?

Q: Doris Wise is a young career woman. She lives in Phoenix

Doris Wise is a young career woman. She lives in Phoenix, Arizona, where she owns and operates a highly successful modeling agency. Doris manages her modest but rapidly growing investment portfolio, m...

Q: Briefly describe the types of information that the following resources provide.

Briefly describe the types of information that the following resources provide. a. Stockholders’ report b. Comparative data sources c. Standard & Poor’s Corporation d. Mergent e. Value Line Investme...

Q: How would you access each of the following types of information,

How would you access each of the following types of information, and how would the content help you make investment decisions? a. Prospectuses b. Back-office research reports c. Investment letters d...

Q: Briefly describe several types of information that are especially well suited to

Briefly describe several types of information that are especially well suited to publication on the Internet. What are the differences between the online and print versions, and when would you use eac...

Q: Describe the basic philosophy and use of stock market averages and indexes

Describe the basic philosophy and use of stock market averages and indexes. Explain how the behavior of an average or index can be used to classify general market conditions as bull or bear.

Q: Explain what is meant by the return on an investment. Differentiate

Explain what is meant by the return on an investment. Differentiate between the two components of return—income and capital gains (or losses).

Q: Define and briefly discuss each of the following sources of risk.

Define and briefly discuss each of the following sources of risk. a. Business risk b. Financial risk c. Purchasing power risk d. Interest rate risk e. Liquidity risky f. Tax risk g. Event risk h....

Q: Paul Chang and Deborah Barry, friends who work for a large

Paul Chang and Deborah Barry, friends who work for a large software company, decided to leave the relative security of their employer and join the staff of Online Speed, Inc., a 2-year-old company wor...

Q: Briefly describe standard deviation as a measure of risk or variability.

Briefly describe standard deviation as a measure of risk or variability.

Q: Grace Hesketh is the owner of an extremely successful dress boutique in

Grace Hesketh is the owner of an extremely successful dress boutique in downtown Chicago. Although high fashion is Grace’s first love, she’s also interested in investments, particularly bonds and othe...

Q: Differentiate among the three basic risk preferences: risk-indifferent,

Differentiate among the three basic risk preferences: risk-indifferent, risk-averse, and risk-seeking. Which of these attitudes toward risk best describes most investors?

Q: Describe the steps involved in the investment decision process. Be sure

Describe the steps involved in the investment decision process. Be sure to mention how returns and risks can be evaluated together to determine acceptable investments.

Q: Can the market really have a measurable effect on the price behavior

Can the market really have a measurable effect on the price behavior of individual securities? Explain.

Q: What role do historical performance data play in estimating an investment’s expected

What role do historical performance data play in estimating an investment’s expected return? Discuss the key factors affecting investment returns—internal characteristics and external forces.

Q: What is a satisfactory investment? When the present value of benefits

What is a satisfactory investment? When the present value of benefits exceeds the cost of an investment, what can you conclude about the rate of return earned by the investor relative to the discount...

Q: Define the following terms and explain how they are used to find

Define the following terms and explain how they are used to find the risk-free rate of return and the required rate of return for a given investment. a. Real rate of return b. Expected inflation premi...

Q: What is meant by the holding period, and why is it

What is meant by the holding period, and why is it advisable to use holding periods of equal length when comparing alternative investments? Define the holding period return, and explain for what lengt...

Q: Define internal rate of return. When is it appropriate to use

Define internal rate of return. When is it appropriate to use IRR rather than the HPR to measure the return on an investment?

Q: Explain why you must earn 10% on all income received from

Explain why you must earn 10% on all income received from an investment during its holding period in order for its IRR actually to equal the 10% value you’ve calculated.

Q: Explain how either the present value (of benefits versus cost)

Explain how either the present value (of benefits versus cost) or the IRR measure can be used to find a satisfactory investment. Given the following data, indicate which, if any, of these investments...

Q: What are LEAPS? Why would an investor want to use a

What are LEAPS? Why would an investor want to use a LEAPS option rather than a regular listed option?

Q: On January 1, 2017, Dave Coates, a 23-

On January 1, 2017, Dave Coates, a 23-year-old mathematics teacher at Xavier High School, received a tax refund of $1,100. Because Dave didn’t need this money for his current living...

Q: Define risk. Explain what we mean by the risk-return

Define risk. Explain what we mean by the risk-return tradeoff. What happens to the required return as risk increases? Explain.

Q: What is the time value of money? Explain why an investor

What is the time value of money? Explain why an investor should be able to earn a positive return.

Q: Describe the confidence index, and note the feature that makes it

Describe the confidence index, and note the feature that makes it unique.

Q: Define, discuss, and contrast the following terms. a

Define, discuss, and contrast the following terms. a. Interest b. Simple interest c. Compound interest d. True rate of interest (or return)

Q: Describe, compare, and contrast the concepts of future value and

Describe, compare, and contrast the concepts of future value and present value. Explain the role of the discount rate in calculating present value.

Q: What is an annuity? How can calculation of the future value

What is an annuity? How can calculation of the future value of an annuity be simplified? What about the present value of an annuity?

Q: What is a mixed stream of returns? Describe the procedure used

What is a mixed stream of returns? Describe the procedure used to find the present value of such a stream.

Q: What is an efficient portfolio, and what role should such a

What is an efficient portfolio, and what role should such a portfolio play in investing?

Q: What is the capital asset pricing model (CAPM)? What role

What is the capital asset pricing model (CAPM)? What role does beta play in the model? What is the risk premium? How is the security market line (SML) related to the CAPM?

Q: What are listed options, and how do they differ from conventional

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

Q: Describe traditional portfolio management. Give three reasons why traditional portfolio managers

Describe traditional portfolio management. Give three reasons why traditional portfolio managers like to invest in well-established companies.

Q: What is modern portfolio theory (MPT)? What is the feasible

What is modern portfolio theory (MPT)? What is the feasible or attainable set of all possible portfolios? How is it derived for a given group of investments?

Q: Over the past 10 years, Molly O’Rourke has slowly built a

Over the past 10 years, Molly O’Rourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a total mar...

Q: What is the efficient frontier? How is it related to the

What is the efficient frontier? How is it related to the attainable set of all possible portfolios? How can it be used with an investor’s utility function to find the optimal portfolio?

Q: Briefly describe each of the following and explain how it is used

Briefly describe each of the following and explain how it is used in technical analysis: a. Breadth of the market b. Short interest c. Odd-lot trading

Q: Define and differentiate among the diversifiable, undiversifiable, and total risk

Define and differentiate among the diversifiable, undiversifiable, and total risk of a portfolio. Which is considered the relevant risk? How is it measured?

Q: Define beta. How can you find the beta of a portfolio

Define beta. How can you find the beta of a portfolio when you know the beta for each of the assets included within it?

Q: Explain how you can reconcile the traditional and modern portfolio approaches.

Explain how you can reconcile the traditional and modern portfolio approaches.

Q: How do you calculate the return and standard deviation of a portfolio

How do you calculate the return and standard deviation of a portfolio? Compare the calculation of a portfolio’s standard deviation to that for a single asset.

Q: What is correlation, and why is it important with respect to

What is correlation, and why is it important with respect to portfolio returns? Describe the characteristics of returns that are (a) positively correlated, (b) negatively correlated, and (c) uncorrela...

Q: What are the main investment attractions of call and put options?

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

Q: What is diversification? How does the diversification of risk affect the

What is diversification? How does the diversification of risk affect the risk of the portfolio compared to the risk of the individual assets it contains?

Q: Discuss how the correlation between asset returns affects the risk and return

Discuss how the correlation between asset returns affects the risk and return behavior of the resulting portfolio. Describe the potential range of risk and return when the correlation between two asse...

Q: What benefit, if any, does international diversification offer the individual

What benefit, if any, does international diversification offer the individual investor? Compare and contrast the methods of achieving international diversification by investing abroad versus investing...

Q: Briefly define and give examples of each of the following components of

Briefly define and give examples of each of the following components of total risk. Which type of risk matters, and why? a. Diversifiable risk b. Undiversifiable risk

Q: Walt Davies and Shane O’Brien are district managers for Lee, Inc

Walt Davies and Shane O’Brien are district managers for Lee, Inc. Over the years, as they moved through the firm’s sales organization, they became (and still remain) close friends. Walt, who is 33 yea...

Q: Briefly describe the behavior of the U.S. stock market

Briefly describe the behavior of the U.S. stock market over the last half of the 20th century and the early part of the 21st century.

Q: What appeal do bonds hold for investors? Give several reasons why

What appeal do bonds hold for investors? Give several reasons why bonds make attractive investment outlets.

Q: Explain what is meant by beta. What type of risk does

Explain what is meant by beta. What type of risk does beta measure? What is the market return? How is the interpretation of beta related to the market return?

Q: What range of values does beta typically exhibit? Are positive or

What range of values does beta typically exhibit? Are positive or negative betas more common? Explain.

Q: What is a common stock? What is meant by the statement

What is a common stock? What is meant by the statement that holders of common stock are the residual owners of the firm?

Q: What is a stock option? What is the difference between a

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.

Q: Briefly explain how the dividend decision is made. What corporate and

Briefly explain how the dividend decision is made. What corporate and market factors are important in deciding whether, and in what amount, to pay dividends?

Q: Why is the ex-dividend date important to stockholders? If

Why is the ex-dividend date important to stockholders? If a stock is sold on the ex-dividend date, who receives the dividend—the buyer or the seller? Explain.

Q: What is the difference between a cash dividend and a stock dividend

What is the difference between a cash dividend and a stock dividend? Which would be more valuable to you? How does a stock dividend compare to a stock split? Is a 200% stock dividend the same as a two...

Q: What are dividend reinvestment plans, and what benefits do they offer

What are dividend reinvestment plans, and what benefits do they offer to investors? Are there any disadvantages?

Q: Define and briefly discuss the investment merits of each of the following

Define and briefly discuss the investment merits of each of the following. a. Blue chips b. Income stocks c. Mid-cap stocks d. American depositary receipts e. IPOs f. Tech stocks

Q: Why do most income stocks offer only limited capital gains potential?

Why do most income stocks offer only limited capital gains potential? Does this mean the outlook for continued profitability is also limited? Explain.

Q: With all the securities available in the United States, why would

With all the securities available in the United States, why would a U.S. investor want to buy foreign stocks? Describe the two ways in which a U.S. investor can buy stocks in a foreign company. As a U...

Q: Briefly describe each of the following types of bonds: (a

Briefly describe each of the following types of bonds: (a) Treasury bonds, (b) agency issues, (c) municipal securities, and (d) corporate bonds. Note some of the major advantages and disadvantages of...

Q: Briefly define each of the following and note how they might be

Briefly define each of the following and note how they might be used by fixed-income investors: (a) zero-coupon bonds, (b) CMOs, (c) junk bonds, and (d) Yankee bonds.

Q: What are the special tax features of (a) Treasury securities

What are the special tax features of (a) Treasury securities, (b) agency issues, and (c) municipal bonds?

Q: What are the four stages of an industry’s growth cycle? Which

What are the four stages of an industry’s growth cycle? Which of these stages offers the biggest payoff to investors? Which stage is most influenced by forces in the economy?

Q: Describe an asset-backed security (ABS) and identify some

Describe an asset-backed security (ABS) and identify some forms of collateral used with these issues. Briefly note how an ABS differs from an MBS. What is the central idea behind securitization?

Q: What’s the difference between dollar-denominated and non-dollar-

What’s the difference between dollar-denominated and non-dollar-denominated (foreign-pay) bonds? Briefly describe the two major types of U.S.-pay bonds. Can currency exchange rates affect the total re...

Q: What is a convertible debenture? How does a convertible bond differ

What is a convertible debenture? How does a convertible bond differ from a convertible preferred?

Q: Chris Norton is a young Hollywood writer who is well on his

Chris Norton is a young Hollywood writer who is well on his way to television superstardom. After writing several successful television specials, he was recently named the head writer for one of TV’s...

Q: Identify the equity kicker of a convertible security and explain how it

Identify the equity kicker of a convertible security and explain how it affects the value and price behavior of convertibles.

Q: Explain why it is necessary to examine both the bond and stock

Explain why it is necessary to examine both the bond and stock properties of a convertible debenture when determining its investment appeal.

Q: How important are dividends as a source of return to common stock

How important are dividends as a source of return to common stock? What about capital gains? Which is more important to total return? Which causes wider swings in total return?

Q: What is the difference between conversion parity and conversion value? How

What is the difference between conversion parity and conversion value? How would you describe the payback period on a convertible? What is the investment value of a convertible, and what does it revea...

Q: How would you describe the behavior of market interest rates and bond

How would you describe the behavior of market interest rates and bond returns over the last 50 years? Do swings in market interest rates have any bearing on bond returns? Explain.

Q: Identify and briefly describe the five types of risk to which bonds

Identify and briefly describe the five types of risk to which bonds are exposed. What is the most important source of risk for bonds in general? Explain.

Q: What is a strike price? How does it differ from the

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

Q: Can issue characteristics (such as coupon and call features) affect

Can issue characteristics (such as coupon and call features) affect the yield and price behavior of bonds? Explain.

Q: What is the difference between a call feature and a sinking-

What is the difference between a call feature and a sinking-fund provision? Briefly describe the three types of call features. Can a bond be freely callable but nonrefundable?

Q: What is the difference between a premium bond and a discount bond

What is the difference between a premium bond and a discount bond? What three attributes are most important in determining an issue’s price volatility?

Q: Bonds are said to be quoted “as a percent of par

Bonds are said to be quoted “as a percent of par.” What does that mean? What is one point worth in the bond market?

Q: What are bond ratings, and how can they affect investor returns

What are bond ratings, and how can they affect investor returns? What are split ratings?

Q: Marc Dodier is a recent university graduate and a security analyst with

Marc Dodier is a recent university graduate and a security analyst with the Kansas City brokerage firm of Lippman, Brickbats, and Shaft. Marc has been following one of the hottest issues on Wall Stree...

Q: From the perspective of an individual investor, what good are bond

From the perspective of an individual investor, what good are bond ratings? Do bond ratings indicate the amount of market risk embedded in a bond? Explain.

Q: What are some of the advantages and disadvantages of owning common stock

What are some of the advantages and disadvantages of owning common stock? What are the major types of risks to which stockholders are exposed?

Q: Is there a single market rate of interest applicable to all segments

Is there a single market rate of interest applicable to all segments of the bond market, or is there a series of market yields? Explain and note the investment implications of such a market environmen...

Q: What does the term duration mean to bond investors and how does

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...

Q: Why do call and put options have expiration dates? Is there

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

Q: Describe the process of bond portfolio immunization, and explain why an

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...

Q: Briefly describe a bond ladder and note how and why an investor

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?

Q: What strategy would you expect an aggressive bond investor (someone who’s

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

Q: Why is interest sensitivity important to bond speculators? Does the need

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.

Q: Explain why interest rates are important to both conservative and aggressive bond

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?

Q: What is the term structure of interest rates and how is it

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 ha...

Q: How might you, as a bond investor, use information about

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

Q: Brett Daly is an active stock trader and an avid market technician

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 e...

Q: What is a stock split? How does a stock split affect

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 o...

Q: Explain how market yield affects the price of a bond. Could

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

Q: Briefly explain how you would make money on (a) a

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?

Q: Why are bonds generally priced using semiannual compounding? Does it make

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

Q: What’s the difference between current yield and yield to maturity? Between

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

Q: Briefly describe the term bond equivalent yield. Is there any difference

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

Q: Why is the reinvestment of interest income so important to bond investors

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

Q: What is a mutual fund? Discuss the mutual fund concept,

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

Q: What are fund families? What advantages do fund families offer investors

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

Q: Briefly describe some of the investor services provided by mutual funds.

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?

Q: How important is the general behavior of the market in affecting the

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.

Q: What is the major/dominant type of closed-end fund

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

Q: What is a stock spin-off? In very general terms

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.

Q: What role, if any, do an investor’s personal characteristics play

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

Q: How do you find the intrinsic value of a call? Of

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

Q: Several months ago, Deb Forrester received a substantial sum of money

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....

Q: Identify three potential sources of return to mutual fund investors and briefly

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...

Q: Discuss the various types of risk to which mutual fund shareholders are

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.

Q: What are the advantages and disadvantages of mutual fund ownership?

What are the advantages and disadvantages of mutual fund ownership?

Q: Briefly describe how a mutual fund is organized. Who are the

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

Q: Define each of the following: a. Open-end

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

Q: What is the difference between a load fund and a no-

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?

Q: Describe a back-end load, a low load, and

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?

Q: Briefly describe each of the following types of mutual funds:

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 fund...

Q: What is an asset allocation fund and how does it differ from

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

Q: Name five variables that can affect the price of options, and

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 opt...

Q: What is a futures contract? Briefly explain how it is used

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

Q: The Reverend Mark Thomas is the minister of a church in the

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...

Q: What is the difference between physical commodities and financial futures? What

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

Q: Describe a currency future and contrast it with an interest rate future

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?

Q: Discuss how stock index futures can be used for speculation and for

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?

Q: What is fundamental analysis? Does the performance of a company have

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

Q: What are futures options? Explain how they can be used by

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?

Q: Discuss the difference between a cash market and a futures market.

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

Q: Briefly discuss holding period return (HPR) and yield as measures

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

Q: What is the major source of return to commodities speculators? How

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

Q: Why are both hedgers and speculators important to the efficient operation of

Why are both hedgers and speculators important to the efficient operation of a futures market?

Q: Explain how margin trading is conducted in the futures market.

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?...

Q: List and briefly define the five essential parts of a commodities contract

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?

Q: Briefly define each of the following: a. Settlement price

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

Q: Calvin Jacobs is a widower who recently retired after a long career

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...

Q: What is the source of return on futures contracts? What measure

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

Q: Note several approaches to investing in commodities and explain the investment objectives

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

Q: Why do investors bother to look at the historical performance of a

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

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

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

Q: Distinguish between the types of dividend distributions that mutual funds make.

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.

Q: Define the term risk, and explain how risk is used to

Define the term risk, and explain how risk is used to differentiate among investments.

Q: What are foreign investments, and what role do they play for

What are foreign investments, and what role do they play for the individual investor?

Q: Describe the structure of the overall investment process. Explain the role

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

Q: Classify the roles of (a) government, (b)

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

Q: Differentiate between individual investors and institutional investors.

Differentiate between individual investors and institutional investors.

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

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

Q: What is common stock, and what are its two sources of

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

Q: Mary and Nick Stalcheck have an investment portfolio containing four investments.

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 m...

Q: Briefly define and differentiate among the following investments. Which offer fixed

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 se...

Q: What is ratio analysis? Describe the contribution of ratio analysis to

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

Q: Under what three conditions would an investment holding be a candidate for

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 investme...

Q: What should an investor establish before developing and executing an investment program

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

Q: Define and differentiate among the following. Explain how each is related

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. T...

Q: Describe the differing investment philosophies typically applied during each of the following

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 y...

Q: Discuss the relation between stock prices and the business cycle.

Discuss the relation between stock prices and the business cycle.

Q: What makes an asset liquid? Why hold liquid assets? Would

What makes an asset liquid? Why hold liquid assets? Would 100 shares of IBM stock be considered a liquid investment? Explain.

Q: Explain the characteristics of short-term investments with respect to purchasing

Explain the characteristics of short-term investments with respect to purchasing power and default risk.

Q: Briefly describe the key features and differences among the following deposit accounts

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

Q: Define, compare, and contrast the following short-term investments

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 fund...

Q: Why is an understanding of investment principles important to a senior manager

Why is an understanding of investment principles important to a senior manager working in corporate finance?

Q: Charles Spurge, a mathematician with Ansco Petroleum Company, wishes to

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 n...

Q: What is a problem investment? What questions should one consider when

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

Q: Contrast historical standards of performance with industry standards. Briefly note the

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.

Q: Why do insurance companies need employees with advanced training in investments?

Why do insurance companies need employees with advanced training in investments?

Q: Differentiate between each of the following pairs of terms. a

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

Q: How are after-hours trades typically handled? What is the

How are after-hours trades typically handled? What is the outlook for after-hours trading?

Q: Briefly describe the key requirements of the following federal securities laws:

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 Fr...

Q: What is a long purchase? What expectation underlies such a purchase

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?

Q: How does margin trading magnify profits and losses? What are the

How does margin trading magnify profits and losses? What are the key advantages and disadvantages of margin trading?

Q: Describe the procedures and regulations associated with margin trading. Be sure

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...

Q: What is the primary motive for short selling? Describe the basic

What is the primary motive for short selling? Describe the basic short-sale procedure. Why must the short seller make an initial equity deposit?

Q: What relevance do margin requirements have in the short-selling process

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 suc...

Q: Following is a sample of eight Level-1 CFA exam questions

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 diversifi...

Q: Select the security in the left-hand column that best fits

Select the security in the left-hand column that best fits the investor’s desire described in the right-hand column.

Q: Jill Clark invested $25,000 in the bonds of Industrial

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 in...

Q: Linda Babeu, who is in a 33% ordinary tax bracket

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...

Q: Mom and Pop had a portfolio of long-term bonds that

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...

Q: On January 1, 2017, Simon Love’s portfolio of 15 common

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, fo...

Q: Apple stock is selling for $120 per share. Call options

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?

Q: Refer to Problem 14.9. What happens if you are

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 tha...

Q: Rick owns stock in a retailer that he believes is highly undervalued

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 ind...

Q: Twitter is trading at $34.50. Call options with

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?

Q: Verizon is trading at $36. Put options with a strike

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?

Q: Abercrombie & Fitch is trading at $21.50. Put

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?

Q: You are considering purchasing a bond that pays annual interest of $

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....

Q: A six-month call option contract on 100 shares of Home

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 shar...

Q: Suppose that a call option with a strike price of $45

Suppose that a call option with a strike price of $45 expires in one year and has a current market price of $5.16. The market price of the underlying stock is $46.21, and the risk-free rate is 1%. Use...

Q: You believe that oil prices will be rising more than expected and

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 operat...

Q: Josh Rink considers himself a shrewd commodities investor. Not long ago

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...

Q: A quote for a futures contract for British pounds is 1.

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?

Q: You have purchased a futures contract for euros. The contract is

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...

Q: You just heard a news story about mad cow disease in a

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. su...

Q: You decide to act on your hunches about feeder cattle, so

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 tr...

Q: As it turns out, you were correct when you purchased four

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 di...

Q: George Seby is thinking about doing some speculating in interest rates.

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...

Q: Assuming you purchased a share of stock for $50 one year

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...

Q: The current exchange rate between the U.S. dollar and

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?

Q: An investor buys a bond for $10,000. The

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.

Q: An investor recently sold some stock in a European company that was

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 wi...

Q: In each of the following cases, calculate the price of one

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....

Q: Assume you purchased a bond for $9,500. The

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 r...

Q: Harold Perto purchased 100 shares of Barclays, a U.K

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...

Q: An investor believes that the U.S. dollar will rise

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 Jap...

Q: How much would an investor earn on a stock purchased one year

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 g...

Q: Assume that an investor buys 100 shares of stock at $50

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 ma...

Q: Assume that an investor buys 100 shares of stock at $50

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?

Q: The risk-free rate is 3%, and expected inflation is

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?