FINC314 (Investments) - Exam #1 Study Guide
Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ___
Balanced funds
___ represents an ownership share in a corporation
Common stock
Advantages of investment companies to investors include all but which of the following?
Guaranteed rates of return
Suppose that in a wave of pessimism, housing prices fall 10% across the entire economy: a) Has the stock of real assets of the economy changed? b) Are individuals less wealthy?
a) NO b) YES
Look at futures listings for corn in Figure 2.10: a) Suppose you buy one contract for December 2011 delivery. If the contract closes in December at a price of $4.63 per bushel, what will be your profit or loss? b) How many December 2011 maturity contracts are outstanding?
a) Profit of $300 b) # of outstanding contracts = 487,465
A municipal bond carries a coupon rate of 6.75% and is trading at par: a) What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket
10.38%
Three stocks have share prices of $12, $75, and $30 with total market values of $400M, $350M, and $150M, respectively. What would be the value of the price-weighted index of the three stocks?
39 [(12+75+30)/3]
An investor purchases one municipal bond and one corporate bond that pays rates of return of 5% and 6.4%, respectively. If the investor is in a 15% tax bracket, his after-tax rates of return on the municipal bond and the corporate bond would be, respectively, _________
5% and 5.44%
___ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund
A load
Which of the following is NOT a true statement regarding municipal bonds?
A municipal bond is a debt obligation issued by the federal government
Currently, the Dow Jones Industrial Average is computed by ______
Adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends
Which of the following does NOT approximate the performance of a buy-and-hold portfolio strategy?
An equally weighted index
Where would an illiquid security in a developing country most likely trade?
Broker markets
In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs ______
By adjusting the divisor
The interest rate charged by large banks in London to lend money among themselves is called ______
LIBOR
Net asset value is defined as ___
Market value of assets minus market value of liabilities divided by shares outstanding
In a ___ index, changes in the value of the stock with the greatest market value will move the index value the most, all else equal
Market value-weighted index
Which of the following is NOT a characteristic of a money market instrument?
Maturity greater than 1 year
The primary measurement unit used for assessing the value of one's stake in an investment company is ___
Net Asset Value (NAV)
___ funds stand ready to redeem or issue shares at NAV
Open-end
___ are often called mutual funds
Open-end investment companies
A market order has:
Price uncertainty but not execution uncertainty
If you thought prices of a stock would be rising over the next few months, you might want to ___ on the stock
Purchase a call option
Which of the following is NOT a characteristic of common stock ownership?
Unlimited liability
What would happen to the divisor of the Dow Jones Industrial Average if FedEx, with current price around $95 per share, replaced AT&T (with a current value of about $31 per share)?
Value of the divisor will increase by 2.06 points
A stock quote indicates a stock price $60 and a dividend yield of 3%. The largest quarterly dividend received by stock investors must have been ___ per share
$0.45 [($60 x .03)/4]
Revenue sharing with respect to mutual funds refers to ___
Fund companies paying brokers if the broker recommends the fund to investors
The Vangard 500 index fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company ___
In proportion to the market value weight of the firm's equity in the S&P 500
If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at ___
The NAV calculated at the market close at 4pm NY time
The purchase of a futures contact gives the buyer _______
The obligation to buy an item at a specified price
The bid price of a Treasury bill is ______
The price at which the dealer in T-bills is willing to buy the bill
Money market securities are sometimes referred to as "cash equivalents" because _______
They are safe and marketable
Refer to Figure 2.3 and look at the Treasury bond maturing in November 2040: a) How much would you have to pay to purchase one of these bonds? b) What is the coupon rate? c) What is the current yield (coupon income as fraction of bond price) of the bond?
a) $980 b) 4.25% c) 4.34%
Examine the balance sheets given in Table 1.3 and 1.4: a) What is the ratio of real assets to total assets for commercial banks? b) What is the ratio for non financial firms
a) .01 b) .48
What options position is associated with: a) Right to buy an asset at a specified price b) Right to sell an asset at a specified price c) Obligation to buy an asset at a specified price d) Obligation to sell an asset at a specified price
a) Long call b) Long put c) Short put d) Short call
Dee 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 Dee's account when she first purchases the stock? b-1) If the share price falls to $30 a share, what is the remaining margin in her account? b-2) If the maintenance margin requirement is 30%, will she receive a margin call? c) What is the rate of return on her investment?
a) Margin = $8,000 b-1) Remaining margin = 52% b-2) NO c) Rate of return = -41.5%
Suppose you short-sell 100 shares of IBM, now selling at $200 per share: a) What is your maximum possible loss? b) What happens to the maximum loss if you simultaneously place a stop-buy order at $210?
a) Maximum loss = Unlimited b) Maximum loss = $1000
Consider the three stocks in the following table. P(t) represents price at time (t), and Q(t) represents shares outstanding at time (t). Stock C splits two-for-one in the last period a) Calculate the rate of return on a price-weighted index of the three stocks for the first period (t=0 to t=1) b) What will be the divisor of the price-weighted index in year 2? c) Calculate the rate of return on a market value-weighted index of the three stocks for the first period (t=0 to t=1) d) Calculate the rate of return on a equally weighted index of the three stocks for the first period (t=0 to t=1)
a) Rate of return = 4.17% b) Divisor = 2.34 c) Rate of return = 3.85% d) Rate of return = 1.85%
Old Economy traders opened an account to short-sell 1,000 shares of Internet Dreams at $40 a share. Her initial margin requirement was 50% (pays no interest). A year later, the price per share has risen to $50, and the stock has paid a dividend of $2 per share: a) What is the remaining margin on the account? b-1) What is the margin on the short position? b-2) If the maintenance margin requirement is 30%, will they receive a margin call? c) What is the rate of return on the investment?
a) Remaining margin = $8,000 b-1) Short margin = 16% b-2) YES c) Rate of return = -60%
DRK Inc. has just sold 100,000 shares in its IPO. The underwriter's explicit fees were $60,000. The offering price per share was $40, but immediately jumped to $44 upon issue: a) What is the total cost to DRK of the equity issue? b) Is the entire cost of the underwriting a source of profit to the underwriters?
a) Total cost = $460,000 b) NO
Refer to the stock options on Apple in 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 the call? a-2) What is the net profit/loss on your position? a-3) What is the rate of return on your position? b-1) Would you exercise the call if you had bought the August call with an exercise price $360? b-2) What is the net profit/loss on your position? b-3) What is the rate of return on your position? c-1) What if you bought an August put with exercise price $355 instead? Would you exercise that put at a stock price of $355? c-2) What is the rate of return on your position?
a-1) YES a-2) Net loss of $170 a-3) Rate of return = -12.41% b-1) YES b-2) Net loss of $415 b-3) Rate of return = -37.22% c-1) NO c-2) -100%
Find the equivalent taxable yield of a municipal bond for tax brackets of zero, 10%, 20%, and 30%, if it offers a yield of 4%
0%) 4% 10%) 4.44% 20%) 5% 30%) 5.71%
Treasury notes have initial maturities between ___ years
1 and 10
A benchmark market value index is comprised of 3 stocks, priced yesterday 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?
6.16% [($16x600,000)+($18x500,000)+($62x200,000)] / [($12x600,000)+($20x500,000)+($60x200,000)]
You decide to purchase an equal # 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
Ownership of a put option entitles the owner to the ___ to ___ a specific stock on or before a specific date, at a specific price
Right; sell
Which of the following ETF's tracks the S&P 500
Spiders