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 government and her employer. She expects to earn an average annual return of about 5% by investing in a low-risk portfolio containing about 20% short-term securities, 30% common stock, and 50% bonds. Stefani currently has $44,300 that at a 5% annual rate of return will grow to about $150,000 by her 65th birthday (the $150,000 figure is found using time value of money techniques, Chapter 4 appendix). Stefani consults a financial advisor to determine how much money she should save each year to meet her retirement savings objective. The advisor tells Stefani that if she saves about $20.95 each year, she will accumulate $1,000 by age 65. Saving 5 times that amount each year, $104.75, allows Stefani to accumulate roughly $5,000 by age 65. a. How much additional money does Stefani need to accumulate over time to reach her goal of $500,000? b. How much must Stefani save to accumulate the sum calculated in part a over the next 25 years?
> What is a mixed stream of returns? Describe the procedure used to find the present value of such a stream.
> What is an annuity? How can calculation of the future value of an annuity be simplified? What about the present value of an annuity?
> Describe, compare, and contrast the concepts of future value and present value. Explain the role of the discount rate in calculating present value.
> Define, discuss, and contrast the following terms. a. Interest b. Simple interest c. Compound interest d. True rate of interest (or return)
> Describe the confidence index, and note the feature that makes it unique.
> What is the time value of money? Explain why an investor should be able to earn a positive return.
> Define risk. Explain what we mean by the risk-return tradeoff. What happens to the required return as risk increases? Explain.
> 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 expenses, he decided to make a long-term investment. A
> What are LEAPS? Why would an investor want to use a LEAPS option rather than a regular listed option?
> 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 is acceptable. Explain your findings. Investment
> 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.
> Define internal rate of return. When is it appropriate to use IRR rather than the HPR to measure the return on an investment?
> 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 length holding periods it is typically used.
> 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 premium c. Risk premium for a given investment
> 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 rate?
> 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.
> Can the market really have a measurable effect on the price behavior of individual securities? Explain.
> 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.
> Differentiate among the three basic risk preferences: risk-indifferent, risk-averse, and risk-seeking. Which of these attitudes toward risk best describes most investors?
> 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 other fixed-income securities. She actively manages her ow
> Briefly describe standard deviation as a measure of risk or variability.
> 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 working on new fiber-optic technology for fast Internet a
> 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. Market risk
> Explain what is meant by the return on an investment. Differentiate between the two components of return—income and capital gains (or losses).
> 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.
> 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 each?
> 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. Price quotations
> 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 Investment Survey
> 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, made up mostly of high-grade common stocks. Because she
> 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?
> Why would an investor want to use index options to hedge a portfolio of common stock? Could the same objective be obtained using options on ETFs? If the investor thinks the market is in for a fall, why not just sell the stock?
> 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. Together they earn an annual income of around $100,000.
> Differentiate between descriptive information and analytical information. How might one logically assess whether the acquisition of investment information or advice is economically justified?
> What are the pros and cons of using the Internet to choose and manage your investments?
> Is the CAPM a predictive model? Why do beta and the CAPM remain important to investors?
> 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 the stock price will go to $70 by year-end and then leve
> Differentiate between a bull market and a bear market.
> What are the third and fourth markets?
> 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 in the MDA today and exactly one year ago, when the d
> What is the purpose of stock valuation? What role does intrinsic value play in the stock valuation process?
> Identify the three major parts of security analysis and explain why security analysis is important to the stock selection process.
> 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.
> Identify and briefly discuss two ways to use stock-index options. Do the same for foreign currency options.
> 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. Suppose Kim and Kanye both earn $70,000 (so their com
> 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 in interest income 3. $3,000 in dividend income 4. $2,0
> 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 share and pays dividends of $2 per share per year. No
> What benefits does an investment club offer the small investor? Would you prefer to join a regular or an online club, and why?
> 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, saved for nearly 10 years to buy this business, which h
> 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 $65,000. a. Using the federal tax rates given in Table 1.
> 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 months, and he would like to do something to protect thi
> 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 fascinated with stock index futures, especially the i
> 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 purchase five-year Treasury notes. You believe, however, tha
> Briefly describe the differences and similarities between stock-index options and stock options. Do the same for foreign currency options and stock options.
> 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 prices to drift up (down) after unusually good (bad) earnin
> 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 about 240 in a couple of months. Assuming that her ex
> 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 an ounce by the expiration date on the call? (Note: As
> 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, what kind of position (long or short) should he take in C
> 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 million. Vanessa wants to keep her portfolio intact, but sh
> 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 Facebook stock at the time those call prices were quoted, wou
> Describe the services that professional investment advisors perform, how they are regulated, online investment advisors, and the cost of investment advice.
> 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 have been when these option prices were quoted? To keep
> 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 price change? Problem 14.17: A stock trades for $45 pe
> 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 rate is 2%. What is the Black and Scholes value of this
> 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.
> 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. The put price is listed at $1.65 and the call sells for
> How can behavioral finance have any bearing on investor returns? Do supporters of behavioral finance believe in efficient markets? Explain.
> 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. The calls have three months to expiration and carry
> 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 fall (perhaps as much as 20%) over the next three to s
> 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. He doesn’t want to sell the stock, but he would like
> 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 buy a put option on the S&P 100 Index. The put option h
> 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 dividends of $0.32 per share and capital gains dividends of
> 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%. What action, if any, should you take in time period t
> Identify the four main types of online investment tools. How can they help you become a better investor?
> 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. Which portfolio was likely owned by a single working p
> Describe three ways in which investors can use stock options.
> 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 represents your conservative portfolio. What action, if
> 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 the following table. Assume that Jonas paid no brokerag
> 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
> 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 questions that follow. a. Calculate Sharpe’
> 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 11.0%. a. Calculate Jensen’s measure ( Jensen’s alph
> 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 on the market portfolio was 9.0% and its standard devia
> 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 of $0.40 and had a capital gains distribution of $0.95
> 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 corporate bond fund—that you think would make good in
> 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 this information to find LM&C’s hol
> 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, 2015, and 2016. (In all three cases, assume you buy
> 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 worked long and hard to be successful, but she never im
> 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 their brokers?
> 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. Also find its three-year (2014–201
> 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 on this load fund, given that it was purchased a year
> 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 investor earn a high rate of return in an efficient market?
> 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 share. a. Find the investor’s holding period return, given
> 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 annual coupon rate?
> 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 the problem using annual compounding. Then comment on t
> 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 and decides to apply it to his bond portfolio. In parti
> 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, Stacy is thinking about buying either a 25-year, zero-coup
> 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 that’s currently being priced to yield 7.5% b. A bond
> Describe call and put options. Are they issued like other corporate securities?
> 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 incur if market yields rose to 9%? Using annual compound
> 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 on this bond goes down to 7.5%, what will be the bond
> 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 involvement?
