Investment Fundamentals Exam 1

You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.

($32-$25)/$25*65% = 43%

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

($50*200)*50% = 5000 200P - 5000 / 200P = 30% 5000 / 200(1-0.3) = $35.71

A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share.

($60*.03)/4= $0.45

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?

$10000 -- gain

You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)

($25*200)*50 = 2500*2 = 5000 + 2500 = 7500 7500 - 200P / 200P = 30% 7500 / 200(1+0.3) = 28.85%

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up

($30*300)*50% = 4500

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is

($40*500)*4% = 8000

A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket?

.0234/(1-0.28)= 3.25%

A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?

.032/(1-0.35)= 4.92%

A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of

.0625/(1-.28)= 8.68%

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

.09*(1-.3)= 6.3%

What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?

0.09*(1-0.28)= 6.48%

Stock Shares Price A 200,000 $35 B 300,000 40 C 400,000 20 D 600,000 25 If during the year the portfolio manager sells all of the holdings of stock D and replaces it with 200,000 shares of stock E at $50 per share and 200,000 shares of stock F at $25 per share, what is the portfolio turnover rate? (Round your answer to 2 decimal places.)

200000*35=7000000 300000*40=12000000 400000*20=8000000 600000*25=15000000 7+12+8+15=42000000 200000*50=10000000 200000*25=5000000 15000000/42000000=35.71%

You sell short 300 shares of Microsoft that are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any dividends.)

300*30=9000*50%=4500 (30-27)*300=900/4500=.2 4500*1.2=5400 5400-4500/4500=20%

A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?

350000*23= 8050000 405000*43= 17415000 553000*56= 30968000 Old = 56433000 350000*23= 8050000 405000*41= 16605000 553000*58=32074000 New = 56729000 (970*56729000)/56433000= 975

A municipal bond carries a coupon rate of 6.75% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket?

6.75/(1-.035)= 10.38%

Mutual funds account for roughly ______ of investment company assets.

90%

Advantages of ECNs over traditional markets include all but which one of the following?

Ability to handle very large orders

The New York Stock Exchange

Auction Market

In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.

By adjusting the divisor

An individual who goes short in a futures position _____.

Commits to delivering the underlying commodity at contract maturity

Corporate Bond

Coupon Rate*(1-Tax Rate)

Municipal Bond

Coupon Rate/ (1-Tax Rate)

Advantages of ETFs over mutual funds include all but which one of the following?

ETF values can diverge from NAV.

The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make

I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make

Higher portfolio turnover:

I. Results in greater tax liability for investors II. Results in greater trading costs for the fund, which investors have to pay for III. Is a characteristic of asset allocation funds

What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

Increase, as the spread usually increases in response to a crisis

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks.

Right to buy

Long Call

Right to sell

Long Put

Net/Profit Loss

Payoff = Stock price - Exercise Price Profit/Loss = Payoff - Premium

Price Weighted Rate of Return

Price's at t=0 / Quantity at t=0 Price's at t=1 / Quantity at t=1 (Sum t=0 / Sum t=1) - 1 = Price Weighted Rate of Return

If you thought prices of stock would be rising over the next few months, you might want to __________________ on the stock.

Purchase a call option

Ownership of a put option entitles the owner to the __________ to ___________ a specific stock

Right ; Sell

Ask Bid

Sell -- Lowest price someone will sell Buy -- Highest price someone will pay

Obligation to sell

Short Call

Obligation to buy

Short Put

__________ often accompany short sales and are used to limit potential losses from the short position.

Short-buy orders

What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

The effective spread decreased in both cases

TIPS are ______.

Treasury bonds that protect investors from inflation

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

Unlimited -- loss

Find the equivalent taxable yield of the municipal bond for tax brackets of zero, 10%, 20%, and 30%, if it offers a yield of 4%. (Round your answers to 2 decimal places.) Tax Brackets a. Zero b. 10% c. 20% d. 30%

a) .04/(1-0.0)= 4% b) .04/(1-0.1)= 4.4% c) .04/(1-0.2)= 5% d) .04/(1-0.3)= 5.7%

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

a. Long call b. Long put c. Short put d. Short call

Investors who want to liquidate their holdings in a closed-end fund may ___________________.

sell their shares on the open market

The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index?

(10+20+80+50+20)/X= 40 X=4.5

On a given day a bond broker maintains a bid of $1,011.00 for a bond and an ask price of $1,015.00. The broker made 28 trades that totaled 1,400 bonds traded that day. What was the broker's gross trading profit for this security?

(1015-1011)*1400 = $5600

Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

(12+75+30)/3= 39

Corporate Fund started the year with a net asset value of $12.50. By year-end, its NAV equaled $12.10. The fund paid year-end distributions of income and capital gains of $1.50. What was the rate of return to an investor in the fund?

(12.1+1.5)/12.5=1.088-1=8.8%

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

(22-25)*100 = -300 (25%*25)*100 = 625 -300/625 = -48% return

Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?

(225-30)/10=19.5

The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?

(25-4)/700=30 3/30=.1

The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

(300-5)/9=32.78 32.78-30=2.78 2.78/32.78=8.47 Discount

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?

(500-50)/50=9

An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was

10000/25=400 (28-25)*400-(0.07*5000)/5000= 17%

An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return?

16000/20=800 shares of stock (.4*16000)*.08=(512) (23-20)*800=2400+16000=18400 Value of stock 1-year 800*$.5=$400 in dividends .4*16000=(6400) 18400+400-512-6400=11888 .6*16000=9600 (11888/9600)-1=23.83%

A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was

17.25/69=25%

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively,

5% -- municipal bond (tax exempt) .064*(1-0.15)= 5.44%

A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?

600000*12= 7200000 500000*20= 10000000 200000*60= 12000000 Old = 29200000 600000*16= 9600000 500000*18= 9000000 200000*62= 12400000 New = 31000000 (31000000-29200000)/29200000= 6.16%

Explicit costs of an IPO tend to be around ______ of the funds raised.

7%

An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been

8000/40=200 8000*50%=4000 6%*8000/2=240 200P-4000-240/200P=30% 4240/200(1-0.3)= 30.29%

Equally Weighted Index

A - P1/P0-1= SumA B - P1/P0-1= SumB C - P1/P0-1= SumC (SumA+SumB+SumC)/3=%

You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______.

A price-weighted index

Which of the following funds are usually most tax-efficient?

ETF's

The purchase of a futures contract gives the buyer

The obligation to buy an item at a specified price

The purchase of a futures contract gives the seller

The obligation to sell an item at a specified price

The bid price of a Treasury bill is _________.

The price at which the dealer in Treasury bills is willing to buy the bill

You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____.

a seasoned equity offering

Refer to the stock options on Apple in the Figure 2.9. Suppose you buy an August expiration call option with exercise price $355. a-1. If the stock price in August is $367, will you exercise your call? a-2. What is the net profit/loss on your position? (Input the amount as a positive value.) a-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) b-1. Would you exercise the call if you had bought the August call with the exercise price $360? b-2. What is the net profit/loss on your position? (Input the amount as a positive value.) b-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) c-1. What if you had bought an August put with exercise price $355 instead? Would you exercise the put at a stock price of $355? c-2. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

a-1. Yes a-2. (367-355)= $12 $12-$13.7= -$1.7 x 100= -$170 (Loss) a-3. -1.7/13.7= -12.41% b-1. Yes b-2. (367-360)= $7 $7-$11.15= -$4.15 x 100= -$415 (Loss) b-3. -4.15/11.15= -37.22% c-1. No ( A put option holder exercises his contract only when the market price of the underlying share is lower than the contract price. It is so b/c the put option holder always wants to sell the shares at a higher price.) c-2. 0-$11.10= -$11.10 (Loss) -$11.10/$11.10= -1% or -100%

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round your answers to 2 decimal places.) a. A market value-weighted index. Rate of return % b. An equally weighted index. Rate of return %

a. @ t=0 [ (90 x 100) + (50 x 200) + (100 x 200) ]/3= [9000+10000+20000]/3= 13000 @ t=1 [ (95 x 100)+(45 x 200)+(110 x 200) ]/3= [9500+9000+22000]/3= 13500 Rate of return= (13500/13000)-1= 3.85% b. (95/90)-1= .056 (45/50)-1= -0.1 (110/100)-1= .1 (.055+(-0.1)+0.1)/3= 1.85%

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a. @ t=0 (90+50+100)/3= 80 @ t=1 (95+45+110)/3= 83.33 Rate of return= (83.33/80)-1= 4.17% b. 83.33=(95+45+55)/d d=2.34

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Input the amount as a positive value. Round your answer to 2 decimal places.)

a. $50 x 100 shares = $5000 5000 x 50% = 2500 Initial Margin $5000 + $2500 = $7500 7500 - 100P / 100P = 30% > 7500 / 100(1+0.3) P = $57.69 Margin call when price rises above

You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.) b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

a. $5000 + $5000 = $10000 / $50 = 200 shares $10000 x 10% = $1000 Increase in value $5000 x 8% = $400 Interest owed from borrowing $1000 - $400 / $5000 = 12% Rate of return b. 200P - $5000 / 200P = 30% > 5000 / 200(1-0.3) P = $35.71 Margin call when price falls below

Here is some price information on Fincorp stock. Suppose first that Fincorp trades in a dealer market. Bid Asked 55.25 55.50 a. Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed? (Round your answer to 2 decimal places.) b. Suppose you have submitted an order to sell at market. At what price will your trade be executed? (Round your answer to 2 decimal places.) c. What will happen suppose you have submitted a limit order to sell at $55.62. d. What will happen suppose you have submitted a limit order to buy at $55.37.

a. $55.50 b. $55.25 c. Trade will not be executed d. Trade will not be executed

Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. a. What is the margin in Dée's account when she first purchases the stock? b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30%, will she receive a margin call? c. What is the rate of return on her investment?

a. ($40 x 300 shares)= 12000 12000-4000= $8000 margin b. ($30 x 300 shares)= $9000 margin $4000(1.08)= $4320 $9000-$4320/9000= 52% -- No margin call c. 52% x 9000= 4680 - 8000 / 8000 = -41.5%

On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $21 per share. On March 1, a dividend of $3 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $15 per share. You paid 50 cents per share in commissions for each transaction. a. What is the proceeds from the short sale (net of commission)? b. What is the dividend payment? c. What is the total cost, including commission, if you have to cover the short sale by buying the stock at a price of $15 per share? d. What is the value of your account on April 1?

a. (21*100) - $50<(.5*100) = $2050 Short Sale proceeds b. $3*100 = $300 Dividend Payment c. $15*100 = $1500 +50 = $1550 Total cost d. (2050-300-1550) = $200 Value on account

You've borrowed $20,000 on margin to buy shares in Disney, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share. a. What is the percentage margin on the above transaction? (Round your answer to 2 decimal places.) b. How low can the price of Disney shares fall before you receive a margin call? (Round your answer to 2 decimal places.)

a. 20000*(100/50)= $40000 Total Investment 40000/$40= 1000 Shares $35*1000= $35000 Value of shares in market $35000-$20000= $15000 Value of equity 15000/35000= 42.9% No margin call b. 1000P-20000 / 1000P = 35% > 20000 / 1000(1-.35) P = $30.77

City Street Fund has a portfolio of $450 million and liabilities of $10 million. a. If there are 44 million shares outstanding, what is net asset value? b-1. If a large investor redeems 1 million shares, what happens to the portfolio value? (Enter your answer in millions.) b-2. If a large investor redeems 1 million shares, what happens to shares outstanding? (Enter your answer in millions.) b-3. If a large investor redeems 1 million shares, what is net asset value?

a. 450-10/44=10 b-1. 450-(10*1mil)=440 b-2. 44-1=43 b-3. 440-10/43=10 NAV = "Market value of assets － Market value of liabilities" /"Shares outstanding"

Which security should sell at a greater price? A. three-month expiration call option with an exercise price of $40 or a three-month call on the same stock with an exercise price of $35. B. A put option on a stock selling at $50 or a put option on another stock selling at $60. (All other relevant features of the stocks and options are assumed to be identical.)

a. A three-month call on the same stock with an exercise price of $35. b. A put option on a stock selling at $50.

A contingent deferred sales charge is commonly called a ____.

back-end load

The difference between balanced funds and asset allocation funds is that _____.

balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds

The greatest percentage of mutual fund assets are invested in ________.

equity funds

In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

firm-commitment

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.

front-end load; 12b-1 fee

Net asset value is defined as ________________________.

market value of assets minus liabilities divided by shares outstanding

You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.

stop-loss order

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

underpriced