FIN 330 Notes

The current market price of PNC is $200 per share. You have $5,000 of your own to invest. You borrow an additional $5,000 from your broker and invest $10,000 in the stock. How far does the price of PNC have to fall for you to get a margin call if the maintenance margin is 35%? Ignore interests on the margin loan. Round your answer to two decimal places and enter the number without the dollar sign.

# shares= 10000/200=50 shares Margin= 50*P-5000/50*P=.35 P=153.85

You sell short 200 shares of RCF at $30 per share. If you want to limit your loss to $1,500, you should place a stop-buy order at ____.

$37.50

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.

$62.50 >stop-buy order is placed at a higher price > The most you want to make at least 2,500 >200*50=10,000/2,500=62.50

The current yield curve for treasuries is as follows: Maturity (years) YTM 1 0.5% 2 0.9% 3 0.95% Compute the forward rate for the third year.

(1+yn)^n=(1+y(n-1) )^(n-1) (1+fn) (1+3 year YTM%)^3 / (1+2 year YTM) ^2 -1 (1+0.95%) ^3 / (1+0.9%) ^2 -1 =.1051

The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity on two-year zero-coupon bond is 9.0%. What is the forward rate of interest for the second year?

(1+yn)^n=(1+y(n-1) )^(n-1) (1+fn) rate from last year r2= Two year Zero Coupon Yield =9% r1= One year Zeor Coupon yield = 8% f2= Forward rate for the Second Year= (1+.09)^2/(1+.08)-1= .1001

What is capital market line?

(CML) ch. 6

You are forming a Capital Allocation Line (CAL) using the risk-free asset with a 4% return and the portfolio described in the previous question. What is the slope of the CAL?

(Portfolio Return-risk free rate)/SD of portfolio or square root of variance .37

What with security characteristic line?

(SCL) ch. 9

What is a security market line?

(SML) >shows the expected return against Beta >systematic risk >plot risk-free rate (Rf) >when beta=0 it just slopes positively >your expected return changes as you change beta

You expect a bond to sell at a premium when _________.

-Bonds selling above par value -Coupon rate > YTM

You put half of your money in a stock that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a bond that has an expected return of 6% and a standard deviation of 12%. The stock and bond have a correlation of .55. What is the variance of your portfolio?

.0259

What is the bank discount rate of a T-bill with 170 days to maturity, a par value of $10,000, and is currently trading at $9840?

.0339 >Bank Discount Rate F-P/F * 360/N 10,000-9840/10,000 * 360/170

What is the bond equivalent yield of a bond if it has 150 days to maturity, a par value of $10,000, and is currently trading at $9780?

.0547 >Bond Equivalent Yield F-P/P * 365/N 10,000-9780/9780 * 365/150

You purchased 500 shares of Stock M at $80 per share. You borrowed $12,000 from your broker to help pay for the purchase. What is the initial margin in your account? Enter your answer as a decimal, rounded to two decimal places.

.70

Just Question: You purchased 500 shares of Stock M at $80 per share. You borrowed $12,000 from your broker to help pay for the purchase. What is the initial margin in your account? Enter your answer as a decimal, rounded to two decimal places.zWhat is the bond equivalent yield of a T-bill with 170 days to maturity, a par value of $10,000, and is currently trading at $9780? Enter your answer as a decimal, rounded to 4 decimal places.

0.0483

A coupon bond paying semiannual interest is reported as having an ask price of 106% of its $1,000 par value. If the last interest payment was made 60 days ago and the coupon rate is 3%, what is the invoice price of the bond? Assume there are 182 days between coupon payments. Round your answer to two decimal places, and enter it without a dollar sign.

1. Find accrued interest 2. Find quoted price 3. add the 2 together accrued interest= ((1000*.03)/2*60/182)= 4.9451 quoted price= 1000*1.06=1060 1060+4.9451=1064.95

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. 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?

100*50=5000 5000*.5=2500

Suppose you have $2,000 to invest. If you borrow $500 at a risk-free rate 2% and invest $2,500 ($2,000 of your money and $500 borrowed) in a risky portfolio with an expected return of 11% and a standard deviation of 15%, what would be the expected return of your complete portfolio?

2500*.1=250 500*.02=10 250-10=240 240/2000=.133

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. How high can the price of the stock go before you get a margin call if the maintenance margin is 40% of the value of the short position?

2500+5000=7500 (100P)40%= ((7500P-100P)(100P))/100P 40P=(7500P-100P) 140P=7500P P=53.57

You sell short 300 shares of Stock X that are currently selling at $30 per share. You post the 50% margin required on the short sale. What will be the margin of your account if Stock X is selling at $34? Ignore any interest or dividend

300*30=9000 (9000+x-9000)/9000=.5 x=$4,500 9000+4500=13500=asset margin=(13,500-300*34)/(300*34)= 10,200 3300/10,200=.3235

Dée Trader opens a brokerage account and purchases 200 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. If the share price falls to $32 per share, what is the margin in her account? Enter your answer as a decimal, rounded to two decimal places.

32*200=6400 6400-4000=2400 2400/6400=.375

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. What is the maximum amount you can borrow from the broker if you need a 60% initial margin?

8,000 >Margin= 500*40=20000 x=amount you can borrow 2000-x/(20000) x=.6 *20000 =12000 =20000-12000=8000

Suppose you bought 100 shares of IBM at $150 per share. What is the maximum loss if you place a stop-loss order at $141?

900 > 150-141=9 9*100=900

What is NOT a money market security?

Common Stock

A bond with an annual coupon rate of 6.0% and face value of $1,000 sells for $970. What is the bond's current yield?

Current yield= Annual coupon payment/price 1000*.06/970= .0619

Which of the following is a price-weighted index?

Dow Jones Industrial Average

You paid $9,700 for a $10,000 par value Treasury bill maturing in 3 months. What is the effective annual rate of return of the investment?

EAR=(FV/PV)^1/n -1 (10000/9700)^1/.25 -1= .1296

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 3%. How much should you invest in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%?

E[Rp]=1% SDp=20% Rf=3% y=how much you invest in risky portfolio SDc=y*SDp=.09 y*.2=.09 .09/.2= y=.45 $450

What is a dollar-dominated deposit at a London Bank called?

Eurodollars

You are managing a fund with an expected rate of return of 15% and a standard deviation of 27%. The T-bill rate is 3%. Your client chooses to invest 90% of his portfolio in your fund and the rest in a T-bill money market fund. What is the expected return of your client's portfolio?

Expected Return= Sum of Return*weight

What examples of real assets

Factory Land Consumer Durables

T/F The expected return of your complete portfolio cannot exceed the expected return of the optimal risky portfolio.

False

A semi-annual coupon bond with a 6% coupon rate has a par value of $1,000, matures in 5 years, and is selling today at an $1,041.07. The yield to maturity on this bond is _________.

Financial Calculator: N= 10--- (5*2) I%= ??---*2 PV= 1041.07--The Price PMT=30--- (1000*.06)/2 FV= 1000 YTM= 5.06

You paid $9,700 for a $10,000 par value Treasury bill maturing in 3 months. What is the holding-period return if you hold the treasury bill until maturity?

HPR= (END-INITIAL)/INITIAL HPR=(10000-9700)/9700=.0309

You purchased a 5-year, 6% annual-coupon bond with $1,000 par value. The yield to maturity at the time of purchase was 4%. You sold the bond after one year, right after receiving the first coupon payment. The bond's yield to maturity was 3.4% when you sold it. What is your holding period return on the bond?

HPR= (Selling Price + Coupon Received - Purchase Price) / Purchase Price Bond Price: Fin. Calc: Purchase Time: N=5, I%=4, PV=??, PMT=1000*.06, FV=1000 PV= 1089.04 Sale Time: N=4, I%=3.2, PV=??, PMT=1000*.06, FV=1000 PV= 1103.58 HPR= (1103.58-1089.04)+60/1089.04 =.0684

What are characteristics of a money market instrument

Liquidity Low Risk Marketability

Consider a bond with a 10% coupon and with yield to maturity equal to 8%. If the bond's YTM remains constant, then in one year will the bond price be higher, lower, or unchanged?

Lower Because the value of the bond will decrease in value when yield to maturity is lower than the coupon rate.

Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after-tax yield if your tax bracket is 30%?

Municipal Bonds >municipal interest income is tax exempt so you do these calculations to see which equivalent yield is higher >equation

What is NOT a real assets

Mutual Fund

A 30-year maturity, 8% coupon bond paying coupons semiannually is callable in five years at a call price of $1,100. The bond currently sells at a yield to maturity of 7% and has a par value of 1000. What is its yield to call?

N=60 I%= 7/2=3.5 PV=???=-1124.723 PMT= 40 FV=1000 N=10 I%= ??*2=6.74 PV=-1124.723 PMT= 40 FV=1100

Portfolio A has an expected return of 18% and a standard deviation of return of 20%. Portfolio B has an expected return of 14% and a standard deviation of return of 5%. What can you tell about the two portfolios?

Neither portfolio dominates the other. >This is because the return of A is higher and the risk of B is lower so they cannot dominate each other >SDa: 20% SDb: 5% >Domination: determined by sharpe ratio not risk-free rate A>B if E[Ra]>E[Rb] and SDa<SDb which means higher return and lower risk

Which of the following statements is not correct about the capital allocation line (CAL)?

One can achieve the maximum possible return along the capital allocation line by investing 100% in the risky asset.

Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis?

One could have made large profits after risk adjustment by buying stock after a 10% rise in price and selling after a 10% fall.

What is NOT a money market instrument

Represents an ownership in a company

The MD Fund has an expected return of 15% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility (Sharpe) ratio for the MD Fund?

Reward to Volatility Ratio= (Er- Rf)/SD (.15-.04)/.2= .55

Consider a Treasury bill with a rate of return of 2% and the following risky securities:Security A: E(r) = 14%; SD(r)= 25%Security B: E(r) = 10%; SD(r) = 17%Security C: E(r) = 12%; SD(r) = 28%Security D: E(r) = 13%; SD(r) = 24%The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best Capital Allocation Line would be _________.

Security A Compare the Sharpe ratio of 4 stocks and choose the highest Sharpe ratio

If you form a Capital Allocation Line (CAL) using the risk-free asset with a 2% return and a risky portfolio with an expected return of 12% and a standard deviation of 20%, what is the slope of the CAL? Round your answer to two decimal places

Sharpe Ratio .12-.02/.02= .5

Stock A has a beta of 1.5 and Stock B has a beta of 0.8. Which of the following statements is most accurate?

Stock A has more systematic risk than Stock B.

You short-sell 100 shares of RCF Co. at $60 per share. Which of the following can limit your potential losses from the short position?

Stop-buy order

You are considering a municipal bond with a 5% yield and a taxable bond with a 7% yield. Which gives you the higher after-tax yield if your tax bracket is 25%?

Taxable bond (compare the two which one is higher)

Portfolio A has a higher standard deviation of returns than Portfolio B which means...

The likely range of returns for Portfolio A is wider than the likely range of returns for Portfolio B.

What is true about a optimal risky portfiol?

The optimal risky portfolio is the risky portfolio that has the highest Sharpe ratio.

Which of the following is not true concerning short sales of exchange-listed stocks?

The potential loss from short selling is limited to the proceeds from the short sale.

What is a repurchase agreement?

The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.

BID= 55.25 ASKED=55.50 Suppose you have submitted an order to your broker to sell a market. What will happen?

The trade will be executed at 55.25

BID= 55.25 ASKED=55.50 Suppose you have submitted a limit order to buy at $55.40. What will happen?

The trade will not be executed because the ask price is higher than the price specified in the limit order.

Here is some price information of Stock D, which trades in a dealer market. Bid: 34.20 Asked 34.28 Suppose you have submitted a limit order to sell Stock D at $34.30. What will happen?

The trade will not be executed because the bid price is lower than the price specified in the limit order.

Dée Trader opens a brokerage account and purchases 200 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. What is the initial margin in Dée's account when she first purchases the stock? Enter your answer as a decimal, rounded to two decimal places.

Total Assets: 200*40=8000 Total Liabilities: 4000 Equity: 8000-4000=4000 Margin Ratio: equity in acc./value of stock 4000/8000=.5

What are examples of money market securities?

U.S. Treasury Bill Bankers' Acceptance 6-Month Maturity

Consider a bond that matures in 6 years. The bond has a par value of $1,000, 8% semiannual coupon. What is the bond's price today if the interest rate is 9.0%? Round your answer to two decimal places and enter the number without a dollar sign.

Use Financial Calculator to find PV. N= 12 (number of payments) I%= 4.5 (interest rate per period--semiannual= rate/2) PV= solve (it will be negative, answer is positive) PMT= 40 (coupon rate*par/# number of payments/year) FV= 1,000 (the par value) PV=954.41

A bond with a call feature:

Will usually have a higher yield to maturity (i.e., lower price) than a similar noncallable bond.

What is the YTM and YTC of a 30-year, 8% semi-annual coupon bond with $1,000 par value currently trading at $1,150? It is callable in 10 years at $1,100.

YTM: Find I% in Financial Calculator FV= 1000 PMT= 1000*.08/2=40 N=30 * 2 = 60 PV= -1150 (MAKE PV NEGATIVE) I%=??*2 YTM= 6.82% YTC: Find I% in Financial Calculator FV=1100 I%=??*2 N=10*2=20 PV=-1150 PMT= 1000*.08/2= 40 YTC=6.64% We would pick the YTC because the interest rate is lower.

What is the yield to maturity of a 5-year zero-coupon bond with a par value of $1,000 and a market price of $772? Enter your answer as a decimal, rounded to 4 decimal places.

Yield To Maturity=(Face Value/Current Bond Price)^(1/Years To Maturity)−1

Which of the following is not true concerning short sales of exchange-listed stocks?

You are likely to get a margin call when the stock price falls.

Which of the following statements is not implied by the efficient market hypothesis?

You cannot earn positive returns from investing in stocks.

Proponents of the efficient market hypothesis typically advocate __________

a passive investment strategy >if market is efficient don't waste time looking at other possibilities

When measuring the average return over multiple periods, the __________ ignores compounding.

arithmetic average return >because arithmetic all you do is add up the return and divide by the number of periods >geometric is compounded

According to the capital asset pricing model, an overpriced security will be...

below the security market line >Shows expected return and a function of beta plots the risk free rate >overpriced security means below the line

A __________ bond gives the issuer an option to repurchase the bond before maturity at a specific price after a specific date.

callable

The _________________ refers to the plot of risk-return combinations available by varying allocation between risky and risk-free assets.

capital allocation line >shows the expected return and the risk of return combination, it talks about the risk and SD >You then plot the risk-free asset (Rf) with the portfolio

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 and invest $10,000 in the stock. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 35%? Assume the price fall happens immediately. Round your answer to two decimal places and enter the number without the dollar sign.

check screenshot from homework #2

Sinking Fund

designed to ease the burden of principal repayment by spreading it out over several years

Risk that can be eliminated through diversification is called ______ risk.

diversifiable

Diversification is more effective when security returns _________.

have lower correlations

According to the separation property, portfolio choice can be separated into two tasks consisting of __________ and __________.

identifying the optimal risky portfolio; finding the best mix of the risky portfolio (optimal portfolio) and risk-free asset based on the investor's degree of risk aversion

TIPS (Treasury Inflation Protected Securities) offer investors inflation protection by ______________ by the inflation rate each year.

increasing both the par value and the coupon payment

An investor's degree of risk aversion will determine his or her ______.

optimal mix of the risk-free asset and risky asset

invoice price:

quoted price + accrued interest quoted price= ask price % of par

The risky premium of an asset is define as....?

the difference between the return on a the asset and the risk-free rate >The market risk premium is defined as E[Ri]-Rt The return on the asset - the risk free rate i=asset

Solve for Accrued Interest.

the idea that the seller or buyer needs the payment after they sell, because they only get paid Equation: =annual coupon payment/(payment per year) *days since last coupon payment/days separating coupon payment

The bid price of a Treasury bill is _________.

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

The ask price of a Treasury bill is _________.

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

What is the market risk premium?

the risk premium on market portfolio >The market risk premium is defined as E[Rp]-Rf The return on the asset - the risk free rate i=asset

The term complete portfolio refers to a portfolio consisting of ____________.

the risk-free asset and risky assets

The complete portfolio refers to the investment in _________.

the risk-free asset and the risky portfolio

Liquidity Preference Theory

the theory that investors demand a risk premium on long-term bonds

A stock with a positive CAPM alpha is ____________.

underpriced

Firm-specific risk is also called _______________ and ______________.

unique risk; diversifiable risk

A bond with $1,000 par value pays a semiannual coupon, and the last coupon was paid 83 days ago. If the bond's coupon rate is 5%, what is the accrued interest? Assume 182 days between coupon payments. Round your answer to two decimal places and enter it without a dollar sign.

use accrued interest equation (found in this quizlet) ((1,000*.05)/2)*(83/182)