Investments - CH2

Which security should sell at a greater price? A T-bill with a coupon rate of 9.25% or a T-bill with a coupon rate of 8.25%?

9.25%, the higher the coupon rate the more it is worth.

What is an Index Divisor?

An index divisor is a number chosen at the inception of a price-weighted stock market index The divisor is used to ensure that events like stock splits, special dividends, and buybacks do not significantly alter the index Some divisors, such as the one used to normalize the Dow Jones Industrial Average, are updated regularly. *Divisor= Sum of stock price after split/old price weighted index*

How do you calculate the *divisor* for a price weighted index at a time where a stock split occurs?

Calculate the avg. before the split (i.e. 91.3), then set that equal to the average with the split/d, solve for d. 91.3 = avg w split (101 + 51 + 61)/d 91.3d= 213 d=213/91.3 d=2.33

Equivalent Taxable Yield

ETY= Rate of return/(1-tax rate) 5%/(1-15%)

How do you calculate an *equally weighted index* rate of return?

Find the return for each stock from P0 to P1, add the return for each stock and divide it by the number of stocks. P1/P0= x A: 87/82= .061 B: 37/42= -.119 C: 94/84= .119 Sum: (.061) +(-.119) + (.119) = .061/3 = 2.03%

How do you calculate *Price Weighted Index* 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 Q 294 100 99 100 99 100 54 200 49 200 49 200 108 200 118 200 59 400 Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1) - index value

IVo = (94 + 54 + 108) / 3 = 85.33 IV1 = (99 + 49 + 118) / 3 = 88.6788.67 / 85.33 - 1 = 3.91%

How do you calculate a *market value-weighted index*? find rate of return.

Multiply the price by the shares outstanding and add it up to get total market for a period. Once you have total market for two periods, divide period 1 by period 0 and subtract 1 to get the rate of return. Do for period 0 and period 1: P0: (82 x 100) + (42 x 200) + (84 x 200) = 33,400 P1: (87 x 100) + (37 x 200) + (94 x 200) = 34,900 P1/P0 -1 34,900/33,400 -1 = 4.49%

What are the three types of indexes we calculated in this chapter?

Price weighted Market Value weighted Equally weighted

How do you find the return for each index?

Price: V1(A+B+C)/3 divided by V0(A+B+C)/3 minus 1 Market: V1(AxQ)+(BxQ)+(CxQ)/V0(AxQ)+(BxQ)+(CxQ) - 1 Equally: (V1A/V0A)+(V1B/V0B)+(V1C/V0C)= sum/3

What is a Price Weighted Index

stock market index in which stocks are held in proportion to their share price. Example: Dow Jones

What is the formula for rate of return?

(Later period avg/Earlier period avg) -1 Ex: (91.33/88)-1= 3.79%

How do you find the *after tax rate of return* from a corporations purchased stock?

1. How much income did company make? P1-P0, 41-41= 0 Dividend = 5 income = $5 2. What is the amount of income that can be taxed? "Company may exclude 70% of dividends earned from taxable income" 100-70 = 30% of Dividend income can be taxed 5 X .3 = $1.15 3. Using tax rate, find the amount of taxable income that is taxed. Tax rate = 30% *note: this is the tax bracket rate, diff than above* $1.15 x .3 = .45 4. Subtract the amount that is taxed from your original income 5-.45= $4.55 5. Find the After tax rate of return After tax income/stock price 4.55/41 = .1110 or 11.10%