CFP 513 - Module 1-9 Quiz
A convertible bond's market value will NOT fall below its
A convertible bond's market value will not fall below its investment value. If the conversion premium is worthless, the bond still has value as a straight bond—its market value.
Identify which of these statements regarding revenue bonds is NOT correct. I. They are secured by a specific pledge or property. II. They are a type of full faith and credit bond. III. Their interest is tax-exempt at the federal level. IV. They are analyzed by the project's ability to generate earnings. A) I and II B) III and IV C) I and III D) II and IV
A) I and II
What is the holding period requirement for a stock investor for the dividend to qualify for the preferential tax rates? A) The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. B) The stock must have paid dividends for two consecutive quarters. C) The stock must be held for more than 30 days during the 61-day period beginning 10 days before the ex-dividend date. D) The taxpayer must make an election to reinvest any cash dividends.
A) The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.
Advantages of unit investment trusts include which of these? I. Stable periodic income II. Diversification III. Active management of the portfolio
I and II
Portfolio immunization is designed to protect bondholders from which of the following risks? I. Interest rate risk II. Reinvestment rate risk III. Default risk
I and II
Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? I. Specific identification II. First in, first out (FIFO) III. Average cost method
I, II, and III
Which of these statements regarding bond portfolio immunization is CORRECT? I. Immunization allows an investor to ensure that the value of his or her bond portfolio remains the same, regardless of whether interest rates increase or decrease. II. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon. III. Immunization allows investors to earn a current yield that is equal to the yield to maturity. IV. Immunization allows an investor to earn a specific rate of return, regardless of whether interest rates increase or decrease.
II and IV
Which of the following regarding mutual fund performance is CORRECT? I. Past performance is a reliable predictor of future performance. II. Past performance offers some indication as to the competency of fund managers.
II only
Identify which of these methods may be used to trade exchange-traded funds (ETFs). I. Investors can buy or redeem shares from the fund family in lots of 1,000. II. Investors can trade ETFs in the secondary market by using a broker. III. ETFs can be purchased on margin. IV. ETFs may be sold short.
II, III, and IV
Which of these statements regarding unit investment trusts (UITs) are CORRECT? I. A bond UIT has a yield to maturity. II. UIT sponsors must make a secondary market in the UITs they create. III. UITs have management fees lower than mutual funds. IV. A bond UIT does not replace bonds that are called.
III and IV
Identify the entity that issues guaranteed investment contracts (GICs)
Insurance companies
Immunization offsets which two risks in a bond portfolio?
Interest rate risk and reinvestment rate risk
Choose the form of the efficient market hypothesis that supports technical analysis.
None of these
A client has $12,000 of capital gains and $15,000 of capital losses. How much unused loss is carried forward to the following tax year? A) $15,000 B) $0 C) $12,000 D) $3,000
The answer is $0. After netting capital gain and losses, the client has a net capital loss of $3,000. Because $3,000 of net losses can be deducted during any one tax year, there is no carryforward.
George Jones owns a convertible bond that has a conversion price of $50 per share and an annual coupon rate of 6.0%. Interest is paid semiannually. The current market price of the stock is $51 per share. The investment value of the bond is $890, and the bond currently sells for a market price of $1,080. What is the downside risk of this bond?
The answer is $190. The downside risk of a convertible bond is the dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond: $1,080 - $890 = $190.
John made these investments over a four month period into ABC Growth and Income fund. What is the average cost per share?
The answer is $26.67. The average cost per share equals $2,400 (the total investment) ÷ 90 (the total number of shares purchased), or $26.67 per share, whereas the average price per share is $28.50 ($114 ÷ 4).
Alice Vinton began purchasing a mutual fund several years ago. She has followed a dollar-cost averaging approach by investing $2,400 each year for five years. The following data depict Alice's purchases: What is Alice's average cost per share
The answer is $70.28.
All of the following statements correctly describe a type of money market instrument except A) commercial paper is a short-term, unsecured promissory note issued by large firms and offers a nominally higher yield than T-bills. B) Eurodollars are Eurodollar-denominated deposits maintained at banks within the United States. C) banker's acceptances are short-term drafts drawn on major banks to finance imports and exports. D) negotiable CDs are deposits of $100,000 or more and are traded in the open market.
The answer is Eurodollars are Eurodollar-denominated deposits marinated at banks within the United States. Eurodollars are U.S. dollar-denominated deposits in banks outside the United States. The average deposit is in the millions and has a maturity of less than six months.
Two mutual funds have these performance statistics: Fund E: Three-year total return: 16.5% Standard deviation: 18.1 R-squared: 81% Sharpe ratio: .58 Alpha: 1.1 Fund F: 17.2% 16.4 87% .68 1.6 Which one of the two funds has the better risk-adjusted performance, and why?
The answer is Fund F, because its alpha is higher. In this case, the investor should choose the fund with the higher alpha. With an alpha of 1.6, Fund F exhibits the best risk-adjusted performance.
All of these statements correctly explain warrants except
The answer is issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. Warrants give the bond purchaser a sweetener, which makes the issue more attractive. Issuing a bond with a warrant will typically allow the corporation to lower the coupon rate necessary to entice the investor to make the investment.
Which one of these is a general characteristic of hedge funds?
The answer is may sell short a variety of securities beyond the standard stocks and bonds. Hedge funds charge both a management fee and a carried interest fee. Hedge funds are characterized by a lack of marketability, significant use of leverage, and limited transparency.
If a bond is immunized against interest rate risk, a dollar decline in the bond's price, resulting from rising interest rates, will be approximately offset by a dollar increase in the
income from coupons reinvested over the investment horizon.
An investor would consider converting a convertible bond into common stock if the bond's
market price is less than the conversion value.
Financial leverage affects
return on equity, earnings per share, and risk to stockholders.
According to the unbiased expectations theory of interest rates,
the current long-term rate is the average of today's short-term rate and expected future short-term rates.
The yield curve graphically plots
yield on the y-axis and time on the x-axis.
Choose the CORRECT statement regarding yield curves. A) All of these statements are correct. B) An inverted yield curve occurs when the Federal Reserve has tightened credit in an inflationary economy. C) A flat yield curve occurs when the economy is peaking and, therefore, no near-term change in future interest rates is expected. D) A normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future.
A) All of these statements are correct.
Limited partnerships are distinguished by which of the following? I. The general partner controls the business activities of the partnership. II. The limited partners participate in the business venture with limited liability. III. The general partner determines when distributions are made to the limited partners. IV. The limited partners may have difficulty selling their interests. A) I, II, III, and IV B) I, II, and III C) II and IV D) I and III
A) I, II, III, and IV
Income or dividends produced by which of the following securities is exempt from federal income tax? A) Municipal bonds B) Corporate debt C) Common stock D) U.S. Treasuries
A) Municipal bonds
Grant calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.75 for his shares. Select the type of order that his broker should place to sell the stock. A) Stop limit order B) Market order C) Limit order D) Good-til-canceled order
A) Stop limit order
Identify which of these is NOT a characteristic of a normal yield curve. A) A normal yield curve indicates that long-term market interest rates are higher than short-term rates. B) As the maturity date of bonds lengthens, the corresponding bond yield decreases. C) The curve has a tendency to slope upward and outward. D) A normal yield curve occurs during periods of economic expansion.
B) As the maturity date of bonds lengthens, the corresponding bond yield decreases.
Which of the following accurately describes the certificate of deposit investment strategy known as laddering? A) Purchasing certificates in progressively increasing deposit amounts B) Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity C) Redeeming a certificate of deposit and reinvesting in a new certificate when interest rates increase D) Immediately purchasing another certificate as one certificate matures
B) Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity
Which of the following statements regarding cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is CORRECT? A) They decrease the cost basis of the shares whether or not taxes are paid B) They are fully taxable to the investor C) They are added to the tax basis of the shares once taxes on the distributions are paid D) They decrease the taxable gain or increase the loss on sale of the shares after taxes are paid
B) They are fully taxable to the investor
All of the following statements concerning the types of orders used to buy and sell securities are correct except A) a good-til-canceled (GTC) order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or canceled. B) a market order has the lowest priority and is subject to the fluctuations and timeliness of the market. C) a limit order is an order to buy or sell at a specified (or better) price. D) a stop order is an order specifying a certain price at which a market order takes effect.
B) a market order has the lowest priority and is subject to the fluctuations and timeliness of the marke
Identify which of these statements regarding rights and warrants is CORRECT. I. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. II. Warrants are typically attached to new bond issues to attract investors.
Both I and II
Rhett recently purchased a bond with attached warrants that afford him the opportunity to participate in the appreciation of the underlying stock. Which of the following statements correctly describes warrants? I. Warrants are customized to fit the needs of the issuing corporation. II. Warrants typically have a maturity date of several years.
Both I and II
Which of the following statements is CORRECT? I. If an investor expects a decline in market interest rates, she should attempt to construct a portfolio of long maturity bonds with low coupon rates. II. If the investor expects an increase in market interest rates, he should attempt to construct a portfolio of short maturity bonds with high coupon rates.
Both I and II
Which of the following statements regarding duration is CORRECT? I. Risk-averse investors should consider bonds with low durations. II. Aggressive investors should consider bonds with low durations when they anticipate that interest rates will rise.
Both I and II
Carly purchased $80,000 of JEM stock for $40 per share utilizing her margin account. She used $40,000 in her money market fund plus she borrowed $40,000 from her broker. She acquired a total of 2,000 shares of JEM stock. JEM stock is currently trading at $39.65 per share. Calculate the stock price that Carly would receive a margin call from her broker. Assume a maintenance margin requirement of 35% and an initial margin requirement of 50%. A) $30.50 B) $30.77 C) $30.23 D) $29.68
C) $30.23 The answer is $30.77. Carly would receive a margin call when the stock fell to $30.77 per share. Margin call = [(1 − initial margin percentage) ÷ (1 − maintenance margin)] × purchase price of the stock = [(1 - 0.50) ÷ (1 - 0.35)] × 40 = 30.7692, or $30.77.
Sam holds a considerable amount of both Series EE and Series HH savings bonds. He is nearing retirement and likes the fact that his Series HH bonds pay interest semiannually and would like to exchange most of his Series EE bonds for Series HH bonds to increase his cash flow. Choose which of these statements regarding such an exchange is CORRECT. A) Sam may exchange the bonds but will be subject to a three-month interest penalty. B) Only Sam's Series EE bonds issued prior to 2004 may be exchanged. C) Series EE bonds may no longer be exchanged for Series HH bonds. D) Sam may exchange the bonds but must recognize the Series EE accrued interest at the time of exchange.
C) Series EE bonds may no longer be exchanged for Series HH bonds.
All of the following correctly describe disadvantages of cash and cash equivalents except A) investors choosing to redeem their certificates of deposit (CDs) prior to maturity may be subject to a substantial penalty. B) investments in money market mutual funds are not insured or guaranteed by the U.S. government. C) an investor may quickly convert a money market deposit account to cash to meet short-term needs. D) the rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds.
C) an investor may quickly convert a money market deposit account to cash to meet short-term needs.
To be eligible for preferential dividend tax rates A) the taxpayer must make an election to waive tax deferral on the dividend. B) the stock must be held for more than 60 days during the 121-day period beginning 60 days AFTER the ex- dividend date. C) the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date. D) the stock must have paid dividends for four consecutive quarters.
C) the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date.
Equity investments made for the launch, early development, or expansion of a business are known as A) distressed debt investing. B) mezzanine financing. C) venture capital. D) leveraged buyouts.
C) venture capital.
Which of these is NOT correct when defining an accredited investor under Rule 501 of Regulation D? A) A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year B) A director, executive officer, or general partner of the company selling the securities C) A charitable organization, corporation, or partnership with assets exceeding $5 million D) A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence.
D) A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence.
Which of the following statements regarding certificates of deposit (CDs) is CORRECT? I. CDs are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. II. Negotiable CDs are deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year. A) II only B) I only C) Neither I nor II D) Both I and II
D) Both I and II
Which of the following statements regarding wash sales is CORRECT? A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company. A) Neither I nor II B) II only C) I only D) Both I and II
D) Both I and II
A risk-averse client, living in Iowa, holds a high proportion of his investment portfolio in cash and cash equivalents in U.S. financial institutions in dollars. The advisor should point out to the client that the portfolio is most subject to which of the following risks? A) Reinvestment rate risk B) Market risk C) Exchange rate risk D) Purchasing power risk
D) Purchasing power risk
All of these statements correctly describe yield curves except A) a normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future. B) a flat yield curve occurs when the economy is peaking and, therefore, no change in future interest rates is expected. C) an inverted yield curve occurs when the Federal Reserve has tightened credit in an overheating economy. D) a positive yield curve can signal an upcoming economic recession.
D) a positive yield curve can signal an upcoming economic recession.
All of the following are features of limited partnerships except A) the limited partners have limited liability. B) the general partner controls the business activities of the partnership. C) the general partner determines when distributions are made to the limited partners. D) the limited partners may participate in the management of the partnership.
D) the limited partners may participate in the management of the partnership.
Select which of these is NOT a primary risk associated with a coupon-paying bond.
Debenture risk
Which of these statements correctly describes differences between preferred stock and long-term bonds? I. Interest paid by firms is a tax-deductible expense; dividends paid on preferred stock are not tax deductible. II. Bonds usually have a finite maturity; preferred stock is usually perpetual. III. Bonds pay a fixed amount of interest; preferred stock pays a fluctuating dividend based on earnings. IV. Interest on bonds and preferred stock dividends are legal obligations of a firm that must be paid.
I and II
Which of these statements are CORRECT of mutual fund dividend distributions? I. The fund pays dividends from net investment income. II. A single taxpayer may exclude $100 worth of dividend income from taxes annually. III. An investor is liable for taxes on distributions whether a dividend is a cash distribution or is reinvested in the fund. IV. An investor is not liable for taxes if he or she automatically reinvests distributions.
I and III
Identify the CORRECT statements regarding warrants. I. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. II. Warrants are typically written with a maturity date of nine months. III. Warrants must include standardized terms required by the Options Clearing Corporation. IV. Warrants are issued by a corporation rather than written by an individual.
I and IV
Identify which of these statements regarding unit investment trusts (UITs) is CORRECT. I. Units are sold at net asset value plus a commission for the broker executing the transaction. II. Like stocks, UITs are traded on the major exchanges. III. During the term of the trust, unit holders are taxed in the same manner as owners of variable annuities. IV. Upon maturity, the securities are generally liquidated and the proceeds distributed to the investor or trust beneficiaries.
I and IV
Which of the following are considered bond classifications for multisector bond funds? I. Foreign bonds II. High-dividend-paying common stocks III. Commodities
I only
Which of these is a correct justification for use of an investment in a client's portfolio? I. Blue chip common stocks because they provide a hedge against inflation II. FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government III. Aggressive growth stocks because they perform better during economic contractions
I only
Equity income funds may hold which of these types of securities? I. Income-producing common stocks II. Convertible bonds III. Convertible preferred stocks
I, II, and III
Identify which of these statements regarding bonds is CORRECT. I. If a bond is issued in registered form, payments will be made to the owner of record. II. If a bond is issued in bearer form, payments will be made to whoever holds or possesses the bond. III. A bond acquired in the secondary market at a discount is called a market discount bond. IV. The amount attributable to a market discount is always includable in income in the year of acquisition.
I, II, and III
Identify which of these statements regarding zero-coupon bonds is NOT correct. I. Zero-coupon bonds are purchased at par and defer interest payments until maturity. II. Because there are no coupon payments for zero-coupon bonds, no current income is recognized. III. A zero-coupon bond is issued at a discount and pays semiannual interest payments. IV. Corporations may favor zero-coupon bonds because they have an extended period to use the money that has been raised by the offering.
I, II, and III
Exchange-traded funds (ETFs) generally offer which of these? I. Tax efficiency II. Low expense ratios III. Active professional management IV. Marketability
I, II, and IV
Which of these describe similarities between preferred stock and long-term bonds? I. Both dividends and interest are tax-deductible expenses for the issuing corporations. II. Both generally pay a fixed periodic payment. III. Both preferred dividends and interest must be paid before common stock cash dividends are paid.
II and III
Which of these describe differences between preferred stock and long-term bonds? I. Preferred stock usually has a shorter maturity than long-term bonds. II. Corporations receive more favorable tax treatment when investing in preferred stock than when investing in long-term bonds. III. Preferred stock dividends are a stronger legal obligation to the firm than interest payments on long-term bonds. IV. The market price of preferred stock tends to fluctuate more than the market price of long-term bonds.
II and IV
FER stock has a current dividend of $0.75 per share that has been growing at a rate of 1.25% per year. If an investor's required rate of return is 15% and the stock is currently selling for $6.34 per share, determine whether the investor should purchase the stock.
No, the stock is overvalued based on the constant growth dividend discount model. Based on the constant growth dividend discount model, the intrinsic value of the stock is $5.52, calculated as follows: [0.75 × (1 + 0.0125)] ÷ (0.15 - 0.0125) = 0.7594 ÷ 0.1375 = 5.5227, or $5.52. Because FER is currently trading at a price of $6.34 per share, it is overvalued, and the investor should not buy the stock.
Calculate the present value of a five-year bond with a coupon rate of 5.50% (paid semiannually) if similar quality bonds are currently yielding 4.35%.
The answer is $1,051.18. The present value of the bond is $1,051.18, calculated as follows: END Mode, 2 P/YR, 5, DOWNSHIFT, N = 10; I/YR = 4.35; PMT = 27.50 (5.50% × 1,000 ÷ 2); FV = 1,000; solve for PV = -1,051.18, or $1,051.18.
LAC Corporation stock is currently trading for $180 per share. If the company institutes a 3-for-2 stock split, calculate the company's stock price following the stock split.
The answer is $120. The company's new stock price will be $120, calculated as follows: $180 ÷ 3 × 2 = $120.
A client is considering the purchase of a $25 par preferred stock to add income to his portfolio. The stock has an 8% stated annual dividend rate and will never change. The investor's discount rate is 12%. What is the most the investor should pay for this stock?
The answer is $16.67. The zero growth or dividend in perpetuity formula would apply: 8% of $25 par is $2.00, so $2.00 ÷ 0.12 = $16.67
Your client, Ralph, has $15,000 of capital gains and $20,000 of capital losses in the current tax year. How much unused loss may Ralph carry forward to the following tax year? A) $3,000 B) $0 C) $12,000 D) $2,000
The answer is $2,000. After netting capital gain and losses, the client has a net capital loss of $5,000. Because $3,000 of net losses can be deducted during any one tax year, the client will carry over the remaining $2,000 capital loss.
John Hawkins began purchasing VNB stock two years ago. He has followed a dollar cost averaging approach by investing $1,500 every six months for the last two years. The following data depicts John's purchases: What is John's average cost per share of VNB?
The answer is $23.44. John purchased 256 shares (60 + 68 + 72 + 56) and invested $6,000 over this period. Divide the total dollars invested by the number of shares purchased to obtain the correct answer.
Nellie has accumulated $500,000 in a money market deposit account at ABC Bank and Trust. She is worried about the number of bank failures in the recent years and transfers $250,000 into a money market mutual fund paying a slightly higher return offered by her friend's investment firm. Determine the amount she has insured by the Federal Deposit Insurance Corporation (FDIC). A) $250,000 B) $200,000 C) $0 D) $500,000
The answer is $250,000. Nellie's FDIC insured funds remain at $250,000. The money market deposit account is insured up to $250,000, but the money market mutual fund is not FDIC insured.
On December 27, 20X0, Jackie sells ABC stock for a loss at $12 a share that she originally purchased for $28 per share. On January 9, 20X1, she repurchases the shares for $15 per share. What is her cost basis on the repurchased shares? A) $40 B) $31 C) $16 D) $27
The answer is $31. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $28 - $12 = $16 disallowed loss, so $16 + $15 = $31 new basis.
Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Assuming the maintenance margin is 40%, what would the price of Aardvark be before Cosmo would receive a margin call? A) $16.00 B) $33.33 C) $24.00 D) $37.50
The answer is $33.33. Margin call = (50% × $40) ÷ (1 - 0.40) = $33.33.
Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call. A) $41.54 B) $50.76 C) $31.43 D) $27.00
The answer is $41.54. The client will receive a margin call when the price of the stock drops below $41.54, calculated as follows: Margin call = ($60 × 0.45) ÷ (1 - 0.35) Margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54
On December 18, 20X1, John sells some stock for a loss at $15 a share that he originally purchased for $40 per share. On January 9, 20X2, John repurchases the shares for $22 per share. What is his cost basis on the repurchased shares? A) $15 B) $47 C) $22 D) $40
The answer is $47. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $40 - $15 = $25 disallowed loss, so $25 + 22 = $47 new basis.
Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55%, and the maintenance margin is 40%. Calculate the market price at which Amanda will receive a margin call. A) $33.00 B) $21.54 C) $56.95 D) $50.25
The answer is $50.25. Margin call = debit balance ÷ (1 − maintenance margin): ($67 × (1 − 0.55)) ÷ (1 − 0.40) = $30.15 ÷ 0.60 = $50.25
Patrice Patterson began investing last year in the Apex Fund. She is investing $500 every quarter and wants to know what her average cost per share (basis) has been. These are the prices of the Apex fund at the end of each quarter when she made her purchases: $35.50, $38.90, $65.70, $72.50, and $89.00. What is her average cost per share?
The answer is $53.12 $2,500 ÷ 47.063 shares = $53.12 $ Amount / Share Price = # of Shares Purchased. Sum the total # of Shares Purchased (47.063).
LFM Corporation has an estimated free cash flow to equity (FCFE) of $2.50 per share in the current year. Moreover, its FCFE is expected to grow at a constant rate of 2% per year. Assuming an institutional investor has a required rate of return of 6.5%, calculate the intrinsic value of LFM stock.
The answer is $56.67. The formula for the discounted free cash-flow model: V = FCFE1 ÷ (r - g) = ($2.50 × 1.02) ÷ (0.065 - 0.02) = 2.55 ÷ 0.045 = 56.6667, or $56.67
An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. Assuming the stock quickly falls to $40 per share, calculate the additional capital that the investor must provide to cover a margin call. A) $600 B) $400 C) $800 D) $200
The answer is $600. The current market value of the 100 shares is $4,000. The maintenance margin requires an equity of $4,000 × 0.40, or $1,600. The investor's equity in the account ($1,000) is the market value ($4,000) minus the loan amount ($3,000). A margin call for $600 ($1,600 - $1,000) will be ordered.
Norma owns ABC Corporation bonds of AA rated quality that mature in seven years, pay semiannual interest, and have a coupon of 8%. Similar bonds (AA rated, seven years to maturity) yield 9%. The ABC Corporation bonds are convertible into common stock at $26 per share, and the current market price of ABC common stock is $23. What is the conversion value of an ABC Corporation bond?
The answer is $884.61. The conversion value = conversion ratio × market price of common stock. Therefore, the conversion value equals ($1,000 ÷ $26) × $23 = $884.61.
Henry owns a 10-year bond with a coupon rate of 4.85% (paid semiannually). Assuming the comparable yield for this quality bond is currently 5.5%, calculate the intrinsic value of his bond.
The answer is $950.51. The intrinsic value of his bond is $950.51, calculated as follows: END Mode, 2 P/YR, 10, DOWNSHIFT, N = 20; I/YR = 5.5; PMT = 24.25 (4.85% × 1,000 ÷ 2); FV = 1,000; solve for PV = -950.51, or $950.51.
ABC Corporation has a P/E ratio of 5.00 and an expected growth rate in earnings for the next year of 9.5%. Assuming an investor's required rate of return is 12%, calculate the firm's PEG ratio.
The answer is 0.5263. Calculate the firm's PEG ratio as follows: 5.00 ÷ (0.095 × 100) = 0.5263. After calculating this ratio, it then would be compared to ABC Corporation's peers to determine whether a purchase is warranted.
Brett bought 500 shares of WCA stock at $27 per share on margin (50% initial margin percentage) with an annual margin interest rate of 5.25%. After one year, he sold the shares for $44 per share. The stock did not pay dividends during his holding period. Calculate Brett's holding period rate of return using margin. A) 120.68% B) 125.93% C) 60.00% D) 57.42%
The answer is 120.68%. Brett's holding period rate of return using margin is 120.68% [($22,000 - $13,500 - $354.38) ÷ $6,750]. With a margin account, Brett's initial investment will be 50% of the total purchase price of $13,500. Margin interest for the year is $354.38 ($6,750 × 0.0525).
Assume a 3-year, $1,000 par value corporate bond is currently trading for $959.53. The bond has a coupon rate of 4% (paid once per year) and a yield to maturity of 5.50%. Calculate the duration for this bond.
The answer is 2.8835 years. To solve for the PV of a given CF (example Year 1): FV = 40, N = 1, PMT = 0, 5.5 = I/YR, solve for PV. Divide the sum in the last column (2,766.83) by the total PV/market price of the bond (959.53) to derive the duration of 2.8835 years.
JEM Technologies, Inc. has assets of $500 million and $50 million in liabilities. For the past year the company earned $125 million, and paid out $50 million in dividends. Calculate the company's return on equity (ROE).
The answer is 28%. $500,000,000 - $50,000,000 = $450,000,000 in equity. $125,000,000 profit ÷ $450,000,000 equity = 0.2778, or 28% ROE.
XYZ Corporation issues a 20-year callable bond paying a 6% coupon (semiannual payments) selling at par ($1,000). XYZ Corporation has the option to call the bonds in five years for 105% of par value. Calculate the bond's nominal yield.
The answer is 6.00%. The nominal yield (coupon rate) is 6%. The nominal yield is stated as a percentage of the par value of the bond.
Terri has been an active investor for many years, and her present portfolio consists of listed stocks, penny stocks, and options. She earns approximately $175,000 annually, has $35,000 in cash to invest, and is in the 32% marginal income tax bracket. Terri is interested in accumulating wealth for the future and does NOT need current income. Which one of these fixed-income securities best suits Terri's needs at this time?
The answer is A rated, discount, long-term, tax-free, municipal revenue bond. Because Terri is in a high income tax bracket, an investment-grade municipal bond would be the best choice. The long-term nature of this bond may afford Terri a higher net interest payment than the other bonds.
Acme Electric Company announces a cash dividend of $0.50 per share on August 5, to be paid on September 20, the payable date. The company also announces that the record date will be August 25. Bob Johnson purchases 100 shares of Acme on August 24. Based on this information, choose the CORRECT statement regarding the dividend payment.
The answer is Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. In order to receive the dividend, Bob must purchase the shares before the ex-dividend date. The ex-dividend date is one business day before the record date. To receive the dividend, Bob must have purchased the shares by August 23.
Identify which of the following statements regarding money market deposit accounts (MMDAs) are NOT correct. I. They are FDIC insured. II. They offer unlimited check writing privileges. III. They are primarily offered by open-end investment companies. IV. They require a minimum balance. A) I and IV B) II and III C) I and II D) III and IV
The answer is II and III. MMDAs provide limited check writing privileges and are offered by banks and savings and loans. MMDAs require a minimum balance. Unlike money market mutual funds, MMDAs are FDIC insured.
Barbara, a Louisiana resident, is in the 35% marginal federal income tax bracket and the 6% marginal state income tax bracket. Select the bond that would provide Barbara with the highest after-tax rate of return.
The answer is Louisiana municipal bond with a coupon rate of 5.5%. U.S. Treasury bond (exempt from state income tax): 6% × (1 - 0.35) = 3.90% Corporate bond: 8% × [1 - (0.35 + 0.06)] = 4.72% Texas municipal bond (exempt from federal income tax): 5.8% × (1 - 0.06) = 5.45% Louisiana municipal bond (exempt from both federal and state income tax): 5.5%
LFM Corporation declared a record date of Wednesday, May 16, for its next quarterly cash dividend. Determine the last day an investor can purchase LFM stock and receive the current dividend.
The answer is Monday, May 14. To receive a cash dividend, an investor must be owner of record as of the close of business on the record date. The record date is the first business day after the ex-dividend date. To be listed as an owner, the investor must purchase the stock before the ex-dividend date, or May 15. Hence, the investor must purchase the stock no later than Monday, May 14, to be entitled to receive the dividend.
Dividend reinvestment plans offer which of these advantages?
The answer is a convenient means to accumulate shares. The advantage to an investor is the saving of commissions by using a dividend reinvestment plan (DRIP). The advantage is to an investor, not to the company. The use of a DRIP has no effect on the stock's par value. A dividend reinvestment program has no effect on the company's ability to retain more earnings.
When a company issues an option to buy its stock at a specified price within a specified time period, it is known as a
The answer is a warrant. A warrant can only be created by corporations and is an option to buy its stock at a specified price within a specified time period.
To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock
The answer is before the ex-dividend date. Ex-dividend means "without dividend." Therefore, all purchases made on or after the ex-dividend date are not entitled to the next dividend to be paid. The ex-dividend date is one trading day before the record date.
When considering the purchase of a limited partnership interest, an investor should be most concerned with A) short-term trading opportunities. B) potential tax shelter. C) loss pass-through. D) economic viability.
The answer is economic viability. Economic viability is the number one reason for the purchase of an interest in a limited partnership. Tax sheltering and loss pass-through are also considerations but should not be the primary motive to invest. Short-term trading opportunities do not exist. The investor should expect to hold the interest until the partnership is dissolved or liquidated.
Which one of these is NOT a typical key element that separates hedge funds from mutual funds?
The answer is many hedge funds are broadly diversified. Hedge funds are private investment vehicles that tend to be more heavily concentrated than mutual funds. They often use leverage, derivatives, employ narrow investment strategies, and invest in nonpublic and illiquid securities.
Identify the yield-curve theory that relies on the laws of supply and demand for various maturities of borrowing and lending
The answer is market segmentation theory. Market segmentation theory relies on the laws of supply and demand for various maturities of borrowing and lending. Unbiased expectations theory states that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates. The liquidity premium theory is based on the unbiased expectations theory but incorporates a liquidity premium into the model.
What is one disadvantage of investing in convertible bonds?
The answer is the yield to maturity tends to be lower than that of similar nonconvertible bonds. A disadvantage of investing in a convertible bond is that its yield to maturity tends to be lower than a similar nonconvertible bond due to the conversion feature.
Which one of these statements is CORRECT regarding exchange-traded funds (ETFs)?
The answer is they also have lower turnover of assets than mutual funds and are, as a result, more tax efficient. In-kind exchanges are done in blocks of 50,000 shares or more. An ETF that buys all the securities in an index is called a replicate index-based ETF. Futures contracts are taxed at year-end on appreciation at rates of 60% for long-term gains and 40% for short-term gains. ETFs can and do offer currency ETFs.
Identify the incorrect statement regarding savings accounts. A) They offer a relatively low interest rate B) Depositors are permitted to withdraw their savings at any time without penalty C) They require a minimum balance of $500 D) Accounts are established with a commercial bank or savings and loan
The answer is they require a minimum balance of $500. Money market deposit accounts (MMDAs) would require a minimum balance.
The interest rate theory that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates is known as
The answer is unbiased expectations theory. The unbiased expectations theory states that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates.
Marcy may add 100 shares of LKM corporation stock to her investment portfolio. The stock recently paid a dividend of $1.85 per share. The dividend is expected to grow at a constant rate of 2.25% per year. Her required rate of return is 7%. The stock is currently trading for $35.75 per share. Determine whether she should purchase the stock and why.
The answer is yes, the stock is undervalued based on an intrinsic value of $39.82. Using the constant growth dividend discount model, the intrinsic value of the stock is $39.82. V = ($1.85 × 1.0225) ÷ (0.07 - 0.0225) V = 1.8916 ÷ 0.04750 V = 39.8232, or $39.82 Based on this value, the stock is undervalued relative to its price in the secondary market.
