Question: What are LEAPS? Why would an investor

> Identify the equity kicker of a convertible security and explain how it affects the value and price behavior of convertibles.

> 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 top-rated sitcoms. Chris fully realizes that his busin

> What is a convertible debenture? How does a convertible bond differ from a convertible preferred?

> 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 return of U.S.-pay bonds? Of foreign-pay bonds? Explain.

> 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?

> 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?

> What are the special tax features of (a) Treasury securities, (b) agency issues, and (c) municipal bonds?

> 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.

> 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 each.

> 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.S. investor, which approach would you prefer? Explain

> Why do most income stocks offer only limited capital gains potential? Does this mean the outlook for continued profitability is also limited? Explain.

> 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

> What are dividend reinvestment plans, and what benefits do they offer to investors? Are there any disadvantages?

> 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-for-one stock split? Explain.

> 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.

> 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?

> 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.

> What is a common stock? What is meant by the statement that holders of common stock are the residual owners of the firm?

> What range of values does beta typically exhibit? Are positive or negative betas more common? Explain.

> 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?

> What appeal do bonds hold for investors? Give several reasons why bonds make attractive investment outlets.

> 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.

> 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 years old, currently lives in Princeton, New Jersey. Shan

> 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

> 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 domestically.

> 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 assets is (a) perfectly positive, (b) uncorrelated, and (c

> 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?

> What are the main investment attractions of call and put options? What are the risks?

> 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) uncorrelated. Differentiate between perfect positive correlatio

> 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.

> Explain how you can reconcile the traditional and modern portfolio approaches.

> Define beta. How can you find the beta of a portfolio when you know the beta for each of the assets included within it?

> Define and differentiate among the diversifiable, undiversifiable, and total risk of a portfolio. Which is considered the relevant risk? How is it measured?

> 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

> 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?

> 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 market value of $82,500. Molly is at present considering

> 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?

> Describe traditional portfolio management. Give three reasons why traditional portfolio managers like to invest in well-established companies.

> What are listed options, and how do they differ from conventional options?

> 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?

> What is an efficient portfolio, and what role should such a portfolio play in investing?

> 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

> 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.

> 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 ave

> 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