Wealth Management
What is the relationship between the price of a bond and a change in the market interest rates?
Inverse
Contrarians use certain technical indicators as reference points for their own buying and selling of securities. This includes which of the following?
Investment advisory opinions; Short selling; Put-call ratios
The compound rate of return that will be earned on a bond if the bond is held to the end of its stated life is referred to as its
yield to maturity
What is the definition of a money market security in the financial services industry?
A debt issued with a maturity date of 1 year or less
Which of the following statements regarding rights and warrants are correct?
A long-term investor would prefer a warrant because the time frame for exercise is typically much longer that it is for a shareholder who is issued a right; A right is usually issued to existing shareholders, and a warrant is usually offered to prospective shareholders
Which of the following accurately describes a bond barbell?
Acquiring a portfolio of bonds consisting of both very long-term and very short-term maturities
The investor's investment time horizon and risk tolerance are linked in the asset allocation decision. Which of the following statements correctly illustrate(s) why this distinction is important in determining the proper asset allocation?
An investor with a short-term investment horizon will be most likely concerned with safety of principal. Therefore, he will be less likely to take on significant risk and will tend toward fixed-income investments; An investor with a long-term investment horizon will be most concerned with the safety of his long-term investments, and he will tend toward fixed-income investments
In what step of the wealth management process is it necessary to consider an individual's current position in the financial life cycle?
Analyzing and evaluating the client's current financial status
Of the 4 pairs of assets below, which pair provides the highest level of diversification?
Assets 7 & 8: with a correlation coefficient of −0.78
If $1,000 is placed in an account that pays 5% interest compounded monthly, how much will be in the account after 2 years?
$1105 1000 +/- PV 5/12 I/YR 12(2) N FV
Gilbert has determined that he will need a lump sum of $600,000 in today's dollars to retire at his desired standard of living in 20 years. He currently has saved $150,000 (in current dollars) toward this goal. Gilbert assumes the annual inflation rate over the 20-year period until he retires will be 3% and that he can earn an after-tax rate of return of 6% on any invested funds. How much does Gilbert need to save on an annual basis if he makes the deposits at the beginning of each year?
$12,173 BEG mode 600,000 FV 20 N [(1.06/1.03)-1](100) I/YR 150,000 +/- PV PMT
Jerome Jacobson wants to withdraw $15,000 annually from an investment at the end of each year for the next 15 years. He can earn 9% on the funds over this period. How much does Jacobson need in his investment before he begins withdrawals?
$129,910.33 END mode 15000 +/- PMT 9 I/YR 15 N PV
Jerome Jacobson wants to withdraw $15,000 annually from an investment at the beginning of each year for the next 15 years. He can earn 9% on the funds over this period. How much does Jacobson need in his investment before he begins withdrawals?
$131,792.26 BEG mode 15000 +/- PMT 9 I/YR 15 N PV
Consider an investment in which Deborah Klaussen deposits $1200 annually for 35 years at a 7% growth rate. If the deposits are made at the end of the year, what is the balance at the end of 35 years?
$165,884.25 END mode 0 PV 1200 +/- PMT 35 N 7 I/YR FV
Consider an investment in which Deborah Klaussen deposits $1200 annually for 35 years at a 7% growth rate. The deposits are made at the beginning of the year. What is the balance at the end of 35 years?
$177496.15 BEG mode 0 PV 1200 +/- PMT 35 N 7 I/YR FV
Adam and Elise have recently financed the purchase of a new home with a $180,000 mortgage at a 3.75% annual interest rate over 15 years. How much will they have repaid on their original mortgage balance after making their 24th monthly payment?
$18,574.87 END mode 180000 PV 15 × 12 = N 3.75 ÷ 12 = I/YR PMT (Do not clear calculator) 1 INPUT 24 Shift AMORT Press =
Geoff invests $12,000 annually for 12 years at an after-tax rate of return of 4.25%. Assume he makes these deposits at the beginning of the year. What is the balance in the account at the end of 12 years?
$190,691 BEG mode 0 PV 12,000 +/- PMT 12 N 4.25 I/YR FV
Patricia and Ken would like to save $15,000 for a down payment on a motor coach they would like to buy in 5 years. They believe they can earn 8% on their savings. How much will they need to save at the end of each year?
$2,556.85 END mode 15000 FV 5 N 8 I/YR PMT
Jessica has $25,000 that she has saved for the purchase of a new home. She believes that she can afford a monthly payment of $1,000. Interest rates are currently 3.9% for a 30-year mortgage. What is the maximum purchase price of the home that Jessica can afford? (Assume she has other funds for closing costs, property taxes, and insurance.)
$237,013.44 END mode 1000 +/- PMT 12 × 30 = N 3.9 ÷ 12 = I/YR PV = $212,013.44 + $25,000 down payment = $237,013.44
Christy wishes to lease an automobile valued at $25,000 over a 3-year period. The lease provides for an option to buy the auto at the end of 3 years for $20,000. If the dealer needs to yield a return of 8% on this lease, what is Christy's monthly lease payment?
$288.09 BEG mode 8 ÷ 12 = I/YR 25000 +/- PV 20000 FV 12 × 3 = N PMT
Jesse wants to save over the next 25 years by depositing $3,000 at the beginning of each year in an investment earning 8% per year. He expects an annual inflation rate of 3% per year and will be increasing his annual contributions by that rate. How much will he accumulate over the period?
$308,104.38 BEG mode 3000 +/- PMT 25 N 1.08 ÷ 1.03 - 1 × 100 = I/YR PV = 44,988.7565 8 I/YR 0 PMT FV
Alex and Rachel want to add $100 at the beginning of each month to their current $5,000 education fund for their 5-year-old daughter. If they can earn 7% per year, how much will the fund be worth when she is ready to go to college at age 18?
$37,869.67 BEG mode 13 × 12 = N 5000 +/- PV 100 +/- PMT 7 ÷ 12 = I/YR FV
John chooses to lease a car valued at $42,000 over a 5-year period. The lease provides for an option to buy the car at the end of the lease for $28,500. If the dealer requires a 7% yield on this lease, what is John's monthly payment?
$431.05 BEG mode 7 /12 = I/YR 42,000 +/- PV 28,500 FV 12 (5) = N PMT
George and Barbara would like to save $30,000 for a down payment on a home they are planning to buy in 5 years. Their financial planner tells them they could earn a 4% after-tax rate of return on these funds by investing in a government bond fund. If this is correct, how much will George and Barbara need to save at the end of each year to accomplish their goal?
$5,539 END mode 30,000 FV 5 N 4 I/YR PMT
An investor wants to have $150,000 available at the end of 15 years. He plans to make equal year-end payments into an investment that is expected to yield a 7.5% annual rate of return. What is the annual amount of each of these required payments?
$5,743 150,000 FV 15 N 7.5 I/YR PMT
Nate wants to establish a fund over the next 5 years for his daughter's college education. Nate figures that the $15,000 annual cost today will increase by 6% each year, but he can earn 9% on the funds set aside for his daughter. How much money does Nate need to set aside today to fund his daughter's college education?
$70,983.63 BEG mode 15000 +/- PMT 5 N 1.09 ÷ 1.06 - 1 × 100 = I/YR PV
If $5,00 is placed in an account that pays 8% interest compounded monthly, how much will be in the account after 5 years?
$7449.23 5000 +/- PV 12(5) N 8/12 I/YR FV
Olivia finances the purchase of a new car priced at $47,000 with a 5% down payment and a 6-year loan at a 7% annual interest rate. What is the amount of her monthly payment?
$761.24 END mode 47000 - 2350 = 44650 PV (price - down payment) 6 × 12 = N 7 ÷ 12 = I/YR PMT
If $4,000 is invested at 7% annually, how much will be in the account after 10 years?
$7868.61 4000 +/- PV 10 N 7 I/YR FV
Charles is expecting to receive an inheritance of $125,000 from his parent's trust in 5 years. If Charles had this money today, he believes he can earn an after-tax rate of return of 8%. What is the present value of these funds to Charles?
$85,073 125,000 FV 5 N 8 I/YR PV
Kevin and Carol took out a 30-year, 5.5%, $100,000 mortgage note when they purchased their home. Their monthly payment is $567.79. They plan to sell the home in 7 years. What will be the balance of their remaining mortgage at that time?
$88,816 END mode 100000 PV 567.79 +/- PMT 5.5/12 I/YR 7(12) N FV
An excessive amount of debt reflected on the balance sheet of a firm is most symptomatic of
.2162 R = 87 ÷ (22.6 × 17.8)
Last year's risk-free rate was 5.2% and the market return was 14.4%. Using the following data, what is the Treynor ratio for the ABC Fund? Rate of return = 16.8% Standard deviation = 10.5% Beta = 0.90
0.1289 (0.168-0.052)/0.90
Assume the standard deviation of Stock X is 15%, and the standard deviation for the respective market index is 10%. The correlation coefficient between Stock X and the index is .85. What is the beta of Stock X?
1.275 [.85(15)]/10
Observe the following information: Portfolio actual return: 9% Market actual return: 12% Portfolio standard deviation: 4% Market standard deviation: 7% Portfolio beta: 0.65 Risk-free rate of return: 3% What is the portfolio's Sharpe ratio?
1.50 (.09-.03)/.04
Assume ADM stock had the following series of annual returns for the past 4 years: Year 1: -8% Year 2: 15% Year 3: -5% Year 4: 2% What is the standard deviation of these returns?
10.23% 8 [+/-] [Σ+] 15 [Σ+] 5 [+/-] [Σ+] 2 [Σ+] [shift] [Sx,Sy]
XYZ stock has had the following annual rates of return for the past 5 years: Year 1: 10% Year 2: 20% Year 3: -3.5% Year 4: -6% Year 5: 8%. What is the standard deviation of Stock XYZ for the 5-year period?
10.6% 10 Σ+ 20 Σ+ 3.5 +/- Σ+ 6 +/- Σ+ 8 Σ+ shift, Sx,Sy
Jose invested $5,000 in a mutual fund 1 year ago. The fund paid dividends of $100, $125, $130, and $90 at the end of each quarter, all of which were distributed to Jose. At the time of the last dividend payment, the mutual fund had grown to a value of $5,125. What was the compound internal rate of return (IRR) for the fund?
11.30% 5,000 +/- CFj 125 CFj 130 CFj 5125 CFj shift, IRR/YR x 4
One year ago, Paige bought 200 shares of ACME Corp. at $8.50 per share. During the past year, the stock has paid dividends of $.90 per share. What is Paige's 1-year holding period return, if the stock's current price per share is $9.10? (Round to the nearest percent.)
18% (9.10-8.50+.90)/8.50=.1765
Steven owns an investment currently producing a 7% annual rate of return. He is in the 33% marginal income tax bracket, and inflation is currently 2.5% per year. What is the fund's after-tax inflation-adjusted rate of return?
2.13% .67 × .07 = .0469 + 1 = 1.0469 ÷ 1.025 = 1.0213 - 1 = .0213
Eugene has purchased a bond for $1,016.50 with a coupon rate of 2.5%. The bond matures in 10 years and pays interest semiannually. What is the yield to maturity on his bond?
2.31% 1,016.50 +/- PV 1,000 FV 12.50 PMT 20 N I/YR x 2
Marcy earns a 5% annual nominal rate of return on her investment, and inflation has averaged 2.5% over this same period. What has been the investment's real rate of return?
2.43% [(1.05/1.025)-1](100)
Assume Tammy has a 2.5% rate of return on an investment that she has held for 270 days. What is her annualized rate of return?
3.38% [(2.5/270)(365)]/100
Terry owns a bond that is paying a 6.5% coupon rate. Last year, the inflation rate was 3%. This rate is expected to be the same this year. What is Terry's real rate of return on the bond?
3.40% [(1.065 ÷ 1.03) - 1] × 100 = 3.3981
Richard has a corporate bond with a coupon rate of 3.75% that is currently trading at $990. What is the bond's current yield?
3.79% 37.50 ÷ 990 = .03787
Taunya Belleview has an IRA with a current balance of $24,000. How many years will it take for her account to grow to $150,000 at a 6% annual rate of return?
31.45 years 24000 +/- PV 150000 FV 6 I/YR N
JEM portfolio has a realized rate of return of 6.5%. The portfolio's expected performance, based on the CAPM, is 2.5%. What is the alpha of DEF portfolio?
4% 6.5%-2.5%
Brian and Jenny Larson would like to accumulate $75,000 for a down payment on a new home. If they are able to save $1,000 at the end of each month and these funds earn 6.5% per year, how many years will it take to accumulate the $75,000?
5.24 years END mode 75000 FV 1000 +/- PMT 6.5 ÷ 12 = I/YR N 62.82 ÷ 12
Amy purchased a $10,000 zero-coupon bond 12 years ago for $5,235. The bond has now matured. What is Amy's compound rate of return on the bond?
5.54% 5235 +/- PV 10,000 FV 12 N I/YR
Tom owns a taxable investment that earns 8% interest annually. Tom pays taxes at a marginal rate of 28%. What is the after-tax rate of return that Tom will receive on this investment?
5.76% 0.08 × (1 − 0.28)
Nancy purchased several hundred shares of stock 3 years ago for a total of $5,000. Over the course of the next 3 years, this stock annually returned a total of $100, $150, and $250 in cash dividends. At the end of year 3, she sold the stock for $5,400. What has been Nancy's compound rate of return on this stock over the 3-year period?
5.80% 5000 +/- CFj 100 CFj 150 CFj 5400 + 250 = CFj shift, IRR/YR
Harry and Jane consider themselves to be moderate risk tolerance investors. Which of the following asset allocations may be most appropriate for their investment portfolio?
50% bonds, 25% large-cap stocks, 15% international stocks, 5% small-cap stocks, 5% money market funds
Elayne is earning a pretax rate of return of 9% on her investment. She is in a 28% federal and 2% state marginal income tax bracket. What is her after-tax rate of return on this investment?
6.30% .09[1-(.28+.02)]
Jack has earned a 4.75% rate of return on an investment that he has held for 270 days. What is his annualized rate of return?
6.42% 4.75 ÷ 270 =, × 365, ÷ 100 = .0642
QRS stock has a beta coefficient of .98 and a correlation coefficient of .89. The standard deviation of the market currently is 8.2%, the risk-free rate is 3%, and the expected return for a market portfolio is 7%. What is the expected rate of return for QRS stock?
6.92% .03 + [(.07 - .03) × .98]
An individual bought 100 shares of stock 10 years ago at $25 per share and liquidated the position today for $50 per share. The stock did not pay any dividends during this time. What is the annual rate of return on this investment?
7.18% 25 +/- PV 50 FV 10 N I/YR
Which of the following is NOT an advantage of bond laddering?
Bond laddering offers the advantages of an automatic and forced savings program and reduced brokerage commissions.
Which of the following is NOT considered to be an investment objective?
Capital expenditure
Which of the following represent an equity interest in a company?
Common stock and preferred stock
Earnings typically exceed expenses and individuals are past the midpoint of their working careers during which of the phases of the financial life cycle?
Conservation
Review the sample asset allocation. 40% Bonds 30% Money markets 20% Large-cap equity 5% International equity 5% Small-cap equity Which type of investor is it most suitable for?Conservative risk-tolerant investor
Conservative risk-tolerant investor
What type of investment strategy is being used when an investor seeks to purchase securities at below-market prices that are neglected by the majority of investors and then wait for the market to recognize their value?
Contrarian strategy
Which of the following terms is defined as the acquisition of assets that have different risk characteristics to lower overall portfolio risk?
Diversification
Which of the following are forms of returns provided by an investment in common stock?
Dividend payments and capital appreciation
Which of the following are steps in the wealth management process?
Establishing and defining the client-planner relationship; Developing and communication financial planning recommendations; Implementing the recommendations; Monitoring the plan
Review the sample asset allocation. 20% Bonds 50% Large-cap equity 20% International equity 10% Small-cap equity Which type of investor is it most suitable for?
High risk-tolerant investor
Which of the following are client considerations in developing the proper asset allocation strategy?
Level of investment risk; Tax status; Past investment experience level; Required rate of return for the portfolio
A person in the conservation/protection phase of the financial life cycle is likely to have which of the following goals?
Long-term goals, such as investing for retirement
Which of the following is NOT considered a constraint when developing an investment policy statement?
Market conditions
Review the sample asset allocation. 40% Bonds 5% Money markets 35% Large-cap equity 15% International equity 5% Small-cap equity Which type of investor is it most suitable for?
Moderate risk-tolerant investor
What is the primary difference between a money market mutual fund and a money market deposit account?
Money market deposit accounts are federally insured; money market mutual funds are not
Which of the following is NOT a characteristic of a mutual fund?
Mutual funds are easily available but require a significant initial investment
Which of the following statements concerning risk is/are CORRECT?
Neither
Troy needs a 15% return to meet his financial goals. He is interested in a mutual fund with a beta of 1.3. If the market return has averaged 11% over the past 10 years and the U.S. Treasury bill rate (risk-free rate) is currently 4%, should Troy invest in this fund?
No, as the fund's expected rate of return is less than Troy's required rate of return. 4%+(11%-4%)1.3=13.1%
The following portfolios are being considered for investment. During the period under consideration, the risk-free rate was 6.5%. Portfolio A: Rate of Return 0.15; Beta 0.9; Standard Deviation 5% Portfolio B: Rate of Return 0.20; Beta 1.5; Standard Deviation 10% Portfolio C: Rate of Return 0.10; Beta 0.6; Standard Deviation 2% Portfolio D: Rate of Return 0.17; Beta 1.2; Standard Deviation 8% Using the Sharpe ratio, which one of these portfolios performed the best on a risk-adjusted basis?
Portfolio C (.10 − .065) ÷ .02 = 1.75
What are the advantages for investors who participate in a dividend reinvestment program (DRIP) offered by a company or mutual fund?
Reduced brokerage commissions; An automatic and forced savings program; Dollar cost averaging
Bonds
Represent a loan to the issuer from the holder; Are typically issued to raise working capital
Which of the following strategies involves purchasing the same number of shares regardless of the market price?
Share averaging
Stock P offers an expected return of 20%, a standard deviation of 6%, and a beta of 1.3. Stock Q offers an expected return of 16%, a standard deviation of 4%, and a beta of 1.1. Which stock should be recommended?
Stock Q, because it has a lower coefficient of variation
Which of the following statements regarding systematic and unsystematic risk is NOT correct?
Systematic risk is investment risk that can be diversified away.
Which of the following statements is CORRECT when considering systematic risk?
Systematic risk is investment risk that cannot be diversified away.
In what form of asset allocation, if any, do changes in capital market conditions consistently result in the rebalancing of assets within a portfolio?
Tactical asset allocation
In allocating assets within a portfolio, what is the fundamental risk experienced with an overallocation of bonds or a fixed-income type of investment?
The erosion of purchasing power caused by inflation
Which of the following would be true of an investor who is interested in a purchase of preferred stock?
The investor is interested in a fixed-income return, such as the payment of a dividend
Which of the following is generally considered to be a cash equivalent type of investment vehicle?
U.S. Treasury bill
What are debentures?
Unsecured notes backed by the general credit of the issuing corporation
Which of the following statements is CORRECT when considering unsystematic risk?
Unsystematic risk can be diversified away and should be considered in the proper construction of a portfolio.
Bonds that do NOT make regular interest payments are known as
Zero-coupon bonds
One of your clients is interested in a mutual fund as a long-term investment with the possibility of significant capital appreciation. You should recommend
a growth fund
The investment policy statement may include a _________ against which a portfolio or portfolio manager's performance can be managed.
benchmark
An investor wants all of her bonds to mature in 10 years. She buys 2 bonds immediately, 2 bonds 2 years from now, and 2 more bonds 4 years from now. As a result, the bonds purchased immediately have a maturity of 10 years, the bonds purchased 2 years later have a maturity of 8 years, and the bonds purchased 4 years later have a maturity of 6 years. This is an example of
bond bulleting
Assume that interest rates have been rising over the past several weeks. Therefore, the price of bonds traded in the secondary market has
decreased
Frequently used in the time value of money, discounting
determines the value of funds to be received in the future in terms of their present value
The periodic and systematic purchase of shares of stock or securities at regular intervals, no matter the share price, is called
dollar cost averaging
An excessive amount of debt reflected on the balance sheet of a firm is most symptomatic of
financial risk
Two assets exhibit a correlation coefficient of -1. This means that these assets
move in exactly opposite directions to one another
All of the following are reasons for analyzing a client's cash flow EXCEPT
providing a snapshot of the client's net worth on any given date
The asset allocation strategy that attempts to find an optimal balance of assets generating a maximum rate of return for a minimum level of risk over a long-term investment horizon is referred to as
strategic asset allocation
The efficient market hypothesis (EMH) states that
the current market prices of securities reflect all information presently available to investors
The smaller the standard deviation of returns for a given investment
the lower the risk