Fundamentals of Investments: Valuation and Management 8th Edition

Chapter 1 A Brief History of Risk and Return Slides 1.1. Chapter 1 1.2. A Brief History of Risk and Return 1.3. Learning Objectives 1.4. Example I: Who Wants To Be A Millionaire? 1.5. Example II: Who Wants To Be A Millionaire? 1.6. A Brief History of Risk and Return 1.7. Dollar Returns 1.8. Percent Returns 1.9. Example 1.1: Concannon Plastics

Chapter 1 A Brief History of Risk and Return Concept Questions 1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return. investment, the higher is its expected return. investment, the higher is its expected return. 2. Since

Chapter 10 Bond Prices and Yields Slides 10-1. Chapter 10 10-2. Bond Prices and Yields 10-3. Learning Objectives 10-4. Bond Prices and Yields 10-5. Bond Basics, I. 10-6. Bond Basics, II. 10-7. Straight Bond Prices and Yield to Maturity 10-8. The Bond Pricing Formula 10-9. Example: Using the Bond Pricing Formula 10-10. Example: Calculating the Price of this Straight Bond Using Excel 10-11.

Chapter 10 Bond Prices and Yields Concept Questions 1. Premium (par, discount) bonds are bonds that sell for more than (the same as, less than) their face or par value. 1. Premium (par, discount) bonds are bonds that sell for more than (the same as, less than) their face or par value. 1. Premium

Chapter 11 Diversification and Risky Asset Allocation Slides 11-1. Chapter 11 11-2. Diversification and Risky Asset Allocation 11-3. Learning Objectives 11-4. Diversification 11-5. Diversification and Asset Allocation 11-6. Expected Returns, I. 11-7. Expected Return, II. 11-8. Expected Return, III. 11-9. Calculating Expected Returns 11-10. Expected Risk Premium 11-11. Calculating the Variance of Expected Returns 11-12. Example: Calculating Expected Returns and Variances: Equal State Probabilities 11-13.

Chapter 11 Diversification and Risky Asset Allocation Concept Questions 1. Based on market history, the average annual standard deviation of return for a single, randomly chosen stock is about 50 percent. The average annual standard deviation for an equally-weightedportfolio of many stocks is about 20 percent. chosen stock is about 50 percent. The

Chapter 12 Return, Risk, and the Security Market Line Slides 12-1. Chapter 12 12-2. Return, Risk, and the Security Market Line 12-3. Learning Objectives 12-4. Return, Risk, and the Security Market Line 12-5. Expected and Unexpected Returns 12-6. Announcements and News 12-7. Systematic and Unsystematic Risk 12-8. Systematic and Unsystematic Components of Return 12-9. Diversification and Risk 12-10. The Systematic Risk Principle 12-11.

Chapter 12 Return, Risk, and the Security Market Line Concept Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion of the total risk can be almost completely eliminated at little cost. On the other hand,

Chapter 13 Performance Evaluation and Risk Management Slides 13-1. Chapter 13 13-2. Performance Evaluation and Risk Management 13-3. Learnig Objectives 13-4. Performance Evaluation and Risk Management 13-5. Performance Evaluation Measures, I. 13-6. Performance Evaluation Measures, II. 13-7. Performance Evaluation Measures, III. 13-8. Performance Evaluation Measures, IV. 13-9. Jensens Alpha 13-10. Another Method to Calculate Alpha, I. 13-11. Another Method to Calculate Alpha, II. 13-12. Estimating

Chapter 13 Performance Evaluation and Risk Management Concept Questions 1. The Sharpe ratio is calculated as a portfolios risk premium, or excess return, divided by the standard deviation of the portfolios return. The Treynor ratio is the portfolio risk premium divided by theportfolios beta coefficient. deviation of the portfolios return. The Treynor ratio

Chapter 14 Futures Contracts Slides 14-1. Chapter 14 14-2. Futures Contracts 14-3. Learning Objectives 14-4. Futures Contracts 14-5. Forward Contract Basics, I. 14-6. Forward Contract Basics, II. 14-7. Futures Contract Basics, I. 14-8. Futures Contract Basics, II. 14-9. Organized Futures Exchanges 14-10. Financial Futures 14-11. Futures Contracts Basics 14-12. Futures Prices in the Wall Street Journal 14-13. Futures Prices in the Wall Street Journal, Cont. 14-14.

Chapter 14 Futures Contracts Concept Questions 1. a. Three are visible in Figure 14.1; wheat futures are traded on the Chicago Board of Trade (CBT), Kansas City Board of Trade (KC), and Minneapolis Grain Exchange (MPLS). There are at least two others, the Winnipeg Commodity Exchange (WPG) and the MidAmericaCommodity Exchange (MCE), not

Chapter 15 Stock Options Slides 15-1. Chapter 15 15-2. Stock Options 15-3. Learning Objectives 15-4. Stock Options 15-5. Option Basics, I. 15-6. Option Basics, II. 15-7. Listed Option Quotations for Intel (INTC) 15-8. Option Price Quotes 15-9. Listed Option Quotes for Starbucks (SBUX) at Yahoo! Finance 15-10. The Options Clearing Corporation 15-11. Why Options? 15-12. Example: Buying the Underlying Stock versus Buying a Call

Chapter 15 Stock Options Concept Questions 1. Assuming American-style exercise rights, a call option confers the right, without the obligation, to buy an asset at a given price on or before a given date. An American-style put option confers the right, without the obligation, to sell an asset at a given price on

Chapter 16 Option Valuation Slides 16-1. Chapter 16 16-2. Option Valuation 16-3. Learning Objectives 16-4. Option Valuation 16-5. Just What is an Option Worth? 16-6. A Simple Model to Value Options Before Expiration, I. 16-7. A Simple Model to Value Options Before Expiration, II. 16-8. The One-Period Binomial Option Pricing ModelThe Assumptions 16-9. The One-Period Binomial Option Pricing ModelThe Setup 16-10.

Chapter 16 Option Valuation Concept Questions 1. The six factors are the stock price, the strike price, the time to expiration, the risk-free interest rate, the stock price volatility, and the dividend yield. the stock price volatility, and the dividend yield. the stock price volatility, and the dividend yield. 2. Increasing the time to expiration

Chapter 17 Projecting Cash Flow and Earnings Slides 17-1. Chapter 17 17-2. Projecting Cash Flow and Earnings 17-3. Learning Objectives 17-4. Earnings and Cash Flow Analysis 17-5. Sources of Financial Information, I. 17-6. Sources of Financial Information, II. 17-7. Sources of Financial Information, III. 17-8. Three Important Financial Statements 17-9. The Balance Sheet 17-10. Borg Corporation Balance Sheet 17-11. Borg Corporation, Condensed Balance

Chapter 17 Projecting Cash Flow and Earnings Concept Questions 1. The 10K and 10Q are reports public firms must file with the SEC. They contain, among other things, financial statements including balance sheets, income statements, and cash flow statements. Theeasiest way to retrieve them is on-line from EDGAR. financial statements including balance

Chapter 18 Corporate and Government Bonds Slides 18-1. Chapter 18 18-2. Corporate and Government Bonds 18-3. Learning Objectives 18-4. Corporate and Government Bonds 18-5. Corporate Bond Basics, I. 18-6. Corporate Bond Basics, II. 18-7. Corporate Bond Basics, III. 18-8. Bond Market Trading 18-9. Types of Corporate Bonds 18-10. Bond Indentures 18-11. Bond Indentures, Seniority Provisions 18-12. Bond Indentures, Fixed-Price Call Provisions 18-13. Maximum Price of

Chapter 18 Corporate Bonds Concept Questions 1. A bond refunding is a call in which an outstanding issue is replaced with a lower coupon issue. The point is simply to replace a relatively high coupon issue with a lower coupon issue. All bondrefundings involve a call, but not all calls involve a

Chapter 19 Global Economic Activity and Industry Analysis Slides 19.1. Chapter 19 19.2. Global Economic Activity and Industry Analysis 19.3. Learning Objectives 19.4. Global Economic Activity and Industry Analysis 19.5. Top Down Analysis, I. 19.6. Top Down Analysis, II. 19.7. Global Macroeconomic Activity, I. 19.8. Global Macroeconomic Activity, II. 19.9. GDP versus Market Capitalization (15 leading economies in the world, as

Chapter 19 Global Economic Activity and Industry Analysis Concept Questions 1. If the economy is in recession, the Federal Reserve would likely undertake a loose monetary policy. This may involve reducing the discount rate or conducting open market purchases.2. Investors want to invest in assets that are appreciating. As such, an appreciating

Chapter 2 The Investment Process Slides 2-1 Chapter 2 2-2 The Investment Process 2-3 Learning Objectives 2-4 Investing Overview 2-5 Objectives: Risk and Return 2-6 Investor Constraints 2-7 Investment Strategies and Policies 2-8 Asset Allocation or Security Selection? 2-9 Choosing a Broker/Advisor, I. 2-10 Choosing a Broker/Advisor, II. 2-11 Securities Investor Protection Corporation 2-12 Advisor-Customer Relations 2-13 Two Types of Brokerage Accounts 2-14 A Cash Account 2-15

Chapter 2 The Investment Process Concept Questions 1. Purchasing on margin means borrowing some of the money used to buy securities. You do it because you desire a larger position than you can afford to pay for, recognizing that using margin is a form offinancial leverage. As such, your gains and losses

Chapter 20 Mortgage-Backed Securities Slides 20-1. Chapter 20 20-2. Mortgage-Backed Securities 20-3. Learning Objectives 20-4. Mortgage-Backed Securities 20-5. A Brief History of Mortgage-Backed Securities, I. 20-6. A Brief History of Mortgage-Backed Securities, II. 20-7. Fixed-Rate Mortgages 20-8. Fixed-Rate Mortgage, Monthly Payments 20-9. Mortgage Payments Using a Spreadsheet 20-10. Mortgage Payments, by Rate and Time 20-11. Fixed-Rate Mortgage Amortization 20-12. Example: Fixed-Rate Mortgage Amortization 20-13. Fixed-Rate

Chapter 20 Mortgage-Backed Securities Concept Questions 1. Mortgage securitization benefits borrowers by reducing interest rates. Interest rates are reduced because securitization increases liquidity in the mortgage market. More liquid mortgages have higherprices and, hence, lower interest rates. because securitization increases liquidity in the mortgage market. More liquid mortgages have higherprices and, hence, lower

Chapter 3 Overview of Security Types Slides 3-1 Chapter 3 3-2 Overview Of Security Types 3-3 Learning Objectives 3-4 Security Types 3-5 Classifying Securities 3-6 Interest-Bearing Assets 3-7 Money Market Instruments 3-8 Fixed-Income Securities 3-9 Quote Example: Fixed-Income Securities 3-10 Equities 3-11 Common Stock 3-12 Common Stock Price Quotes 3-13 Common Stock Price Quotes Online: http://finance.yahoo.com 3-14 Some Investors Want High Dividend Yields www.wsj.com 3-15 Derivatives,

Chapter 3 Overview of Security Types Concept Questions 1. The two distinguishing characteristics are: (1) all money market instruments are debt instruments (i.e., IOUs), and (2) all have less than 12 months to maturity when originally issued. (i.e., IOUs), and (2) all have less than 12 months to maturity when originally issued. (i.e., IOUs),

Chapter 4 Mutual Funds and Other Investment Companies Slides 4-1. Chapter 4 4-2. Mutual Funds and Other Investment Companies 4-3. Learning Objectives 4-4. Mutual Funds: Overview 4-5. Mutual Funds: Overview, Cont. 4-6. Advantages of Mutual Fund Investing 4-7. Drawbacks of Mutual Fund Investing 4-8. Investment Companies and Fund Types, I. 4-9. Investment Companies and Fund Types, II. 4-10. Investment Companies and Fund

Chapter 4 Mutual Funds Concept Questions 1. Mutual funds are owned by fund shareholders. A fund is run by the fund manager, who is hired by the funds directors. The funds directors are elected by the shareholders. the funds directors. The funds directors are elected by the shareholders. the funds directors. The funds directors

Chapter 5 The Stock Market Slides 5-1. Chapter 5 5-2. The Stock Market 5-3. Learning Objectives 5-4. The Stock Market 5-5. Private Equity 5-6. The Structure of Private Equity Funds 5-7. Types of Private Equity Funds: Venture Capital 5-8. Venture Capital, II 5-9. Types of Private Equity Funds: Middle Market 5-10. Types of Private Equity Funds: Leveraged Buyouts 5-11. Selling Securities to the

Chapter 5 The Stock Market Concept Questions 1. The new car lot is a primary market; every new car sold is an IPO. The used car lot is a secondary market. The Chevy retailer is a dealer, buying and selling out of inventory. market. The Chevy retailer is a dealer, buying and selling

Chapter 6 Common Stock Valuation Slides 6-1. Chapter 6 6-2. The Stock Market 6-3. Learning Objectives 6-4. Common Stock Valuation 6-5. Security Analysis: Be Careful Out There 6-6. The Dividend Discount Model 6-7. Example: The Dividend Discount Model 6-8. The Dividend Discount Model: the Constant Growth Rate Model 6-9. Example: The Constant Growth Rate Model 6-10. The Dividend Discount Model: the Constant

Chapter 6 Common Stock Valuation Concept Questions 1. The basic principle is that we can value a share of stock by computing the present value of all future dividends, which is the relevant cash flow for equity holders. 1. The basic principle is that we can value a share of stock by computing

Chapter 7 Stock Price Behavior and Market Efficiency Slides: 7-1. Chapter 7 7-2. Stock Price Behavior and Market Efficiency 7-3. Learning Objectives 7-4. Controversy, Intrigue, and Confusion 7-5. Market Efficiency 7-6. What Does Beat the Market Mean? 7-7. Three Economic Forces that Can Lead to Market Efficiency 7-8. Forms of Market Efficiency, (i.e., what information is used?) 7-9. Information Sets for

B. Event Studies We have included an event study for Advanced Medical Optics, Inc. (formerly, EYE) in the text. On Friday, May 25, 2007, executives of Advanced Medical Optics Inc. recalled a contact lens solution called Complete MoisturePlus Multi Purpose Solution. The company took this voluntary action after the Centers for

Chapter 7 Stock Price Behavior and Market Efficiency Concept Questions 1. The market is not weak-form efficient. 1. The market is not weak-form efficient. 1. The market is not weak-form efficient. 2. Unlike gambling, the stock market is a positive sum game; everybody can win. Also, speculators provide liquidity to markets and

Chapter 8 Behavioral Finance and the Psychology of Investing Slides 8-1. Chapter 8 8-2. Behavioral Finance and the Psychology of Investing 8-3. Learning Objectives 8-4. Behavioral Finance, Introduction 8-5. Behavioral Finance, Definition 8-6. Three Economic Conditions that Lead to Market Efficiency 8-7. Prospect Theory 8-8. Investor Behavior Consistent with Prospect Theory Predictions 8-9. Frame Dependence, I. 8-10. Frame Dependence, II.

Chapter 8 Behavioral Finance and the Psychology of Investing Concept Questions 1. There are three trends at all times, the primary, secondary, and tertiary trends. For a market timer, the secondary, or short-run trend, might be the most important, but, for most investors, it is the primary,or long-run trend that matters. secondary, or

Chapter 9 Interest Rates Slides 9-1. Chapter 9 9-2. Interest Rates 9-3. Learning Objectives 9-4. Interest Rates 9-5. U.S. Interest Rate History, 1800-2014 9-6. Money Market Interest Rates 9-7. Money Market Rates, I. 9-8. Money Market Rates, II. 9-9. Money Market Prices and Rates 9-10. The Bank Discount Basis 9-11. Example: Calculating a Price Using a Bank Discount Rate 9-12. Treasury Bill Quotes (online

Chapter 9 Interest Rates Concept Questions 1. Short-term rates have ranged between zero and 14 percent. Long-term rates have fluctuated between about two and 13 percent. Long-term rates, which are less volatile, have historically been in the four-to-five percent range (the 1960 - 1980 experience is the exception). Short-term rates have about

1 Answer: B Explanation: See Section 1.1 Difficulty: 1 Easy Section: 1.1 Returns Topic: Stock returns and yields Learning Objective: 01-01 How to calculate the return on an investment using different methods. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: B Explanation: See Section 1.1 Difficulty: 1 Easy Section:

21 Answer: E Explanation: $0.70 / $25.50 = 2.75 percent Difficulty: 1 Easy Section: 1.1 Returns Topic: Stock returns and yields Learning Objective: 01-01 How to calculate the return on an investment using different methods. Bloom's: Level 3 Apply Accessibility: Keyboard Navigation 21 Answer: E Explanation: $0.70 / $25.50 =

39 Answer: B Explanation: Annual returns are: ($37 - $42) / $42 = -0.119048; ($44 - $37) / $37 = 0.189189; ($46 - $44) / $44 = 0.045455 Average = (-0.119048 + 0.189189 + 0.045455) / 3 = 3.85 percent Difficulty: 1 Easy Section: 1.5 More on Average Returns Topic:

1 Answer: C Explanation: See Section 10.2 Difficulty: 1 Easy Section: 10.1 Bond Basics Topic: Bond yields and returns Learning Objective: 10-01 How to calculate bond prices and yields. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: C Explanation: See Section 10.2 Difficulty: 1 Easy Section: 10.1 Bond Basics

21 Answer: B Explanation: See Section 10.5 Difficulty: 1 Easy Section: 10.5 Duration Topic: Duration Learning Objective: 10-03 Interest rate risk and Malkiels theorems. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: B Explanation: See Section 10.5 Difficulty: 1 Easy Section: 10.5 Duration Topic: Duration Learning Objective: 10-03 Interest

41 Answer: B Explanation: CP = $60.00 Using a financial calculator: Input: 5 3.15 -1044.54 30 N I/Y PV PMT FV Solve for: 1059.9988 1060.00 Call Premium = 1060 - 1000 = $60 Difficulty: 2 Medium Section: 10.3 More on Yields Topic: Bond valuation Learning Objective: 10-01 How to calculate

1 Answer: C Explanation: See Section 11.1 Difficulty: 1 Easy Section: 11.1 Expected Returns and Variances Topic: Risk premiums Learning Objective: 11-01 How to calculate expected returns and variances for a security. Bloom's: Remember Accessibility: Keyboard Navigation 1 Answer: C Explanation: See Section 11.1 Difficulty: 1 Easy Section: 11.1 Expected

21 Answer: E Explanation: See Section 11.5 Difficulty: 2 Medium Section: 11.5 The Markowitz Efficient Frontier Topic: Efficient frontier Learning Objective: 11-04 The efficient frontier and the importance of asset allocation. Bloom's: Remember Accessibility: Keyboard Navigation 21 Answer: E Explanation: See Section 11.5 Difficulty: 2 Medium Section: 11.5 The Markowitz

39 Answer: B Explanation: State of the Economy Probability E(R) A E(R) B E(R) Weight 55 % 45 % Portfolio Portfolio Boom 0.15 19 % 12 % 15.85 % 0.023775 Normal 0.65 11 % 7 % 9.20 % 0.0598 Recession 0.20 -16 % 1 % -8.35 % -0.0167 6.6888 %

1 Answer: D Explanation: See Section 12.2 Difficulty: 1 Easy Section: 12.2 Risk: Systematic and Unsystematic Topic: Systematic and unsystematic risk Learning Objective: 12-02 The difference between systematic risk and unsystematic risk. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: D Explanation: See Section 12.2 Difficulty: 1 Easy Section:

21 Answer: E Explanation: See Section 12.7 Difficulty: 2 Medium Section: 12.7 Extending CAPM Topic: Capital asset pricing model Learning Objective: 12-03 The security market line and the capital asset pricing model. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: E Explanation: See Section 12.7 Difficulty: 2 Medium Section:

36 Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill 66) Farm Tractors, Inc., stock has a beta of 1.12 and an expected return of 12.8 percent. The risk- free rate is 3.84 percent. What is the market rate of return? A) 6.67 percent B) 8.90 percent C) 9.08 percent D)

1 Answer: A Explanation: See Section 13.1 Difficulty: 1 Easy Section: 13.1 Performance Evaluation Topic: Portfolio performance evaluation Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: A Explanation: See Section 13.1 Difficulty: 1 Easy Section: 13.1 Performance Evaluation

21 Answer: C Explanation: Sharpe ratio = (0.1507 0.036) / 0.159 = 0.72 Difficulty: 1 Easy Section: 13.1 Performance Evaluation Topic: Risk-adjusted performance measures Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Bloom's: Level 3 Apply Accessibility: Keyboard Navigation 21 Answer: C Explanation: Sharpe ratio = (0.1507

36 Answer: B Explanation: Difficulty: 2 Medium Section: 13.2 Comparing Performance Measures Topic: Risk-adjusted performance measures Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Bloom's: Level 3 Apply 36 Answer: B Explanation: Difficulty: 2 Medium Section: 13.2 Comparing Performance Measures Topic: Risk-adjusted performance measures Learning Objective: 13-01

1 Answer: A Explanation: See Section 14.1 Difficulty: 1 Easy Section: 14.1 Futures Contracts Basics Topic: Futures contracts Learning Objective: 14-01 The basics of futures markets and how to obtain price quotes for futures contracts. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: A Explanation: See Section 14.1 Difficulty:

21 Answer: D Explanation: See Section 14.2 Difficulty: 1 Easy Section: 14.2 Why Futures? Topic: Hedging/speculating with futures contracts Learning Objective: 14-04 How futures contracts can be used to transfer price risk. Bloom's: Level 2 Understand Accessibility: Keyboard Navigation 21 Answer: D Explanation: See Section 14.2 Difficulty: 1 Easy Section:

37 Answer: D Explanation: Savings = 8 50,000 ($0.6510 - $0.6450) = $2,400 Difficulty: 2 Medium Section: 14.2 Why Futures? Topic: Futures prices and profits Learning Objective: 14-04 How futures contracts can be used to transfer price risk. Bloom's: Level 3 Apply Accessibility: Keyboard Navigation 37 Answer: D Explanation: Savings

1 Answer: A Explanation: See Section 15.1 Difficulty: 1 Easy Section: 15.01 Options on Common Stocks Topic: Options Learning Objective: 15-01 The basics of option contracts and how to obtain price quotes. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: A Explanation: See Section 15.1 Difficulty: 1 Easy Section:

21 Answer: E Explanation: See Section 15.6 Difficulty: 1 Easy Section: 15.06 Option Payoffs and Profits Topic: Option payoffs and profits Learning Objective: 15-02 The difference between option payoffs and option profits. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: E Explanation: See Section 15.6 Difficulty: 1 Easy Section:

38 Answer: E Explanation: Break-even stock price = $35 + $1.10 = $36.10 Difficulty: 1 Easy Section: 15.06 Option Payoffs and Profits Topic: Option payoffs and profits Learning Objective: 15-02 The difference between option payoffs and option profits. Bloom's: Level 3 Apply Accessibility: Keyboard Navigation 38 Answer: E Explanation: Break-even

1 Answer: C Explanation: See Section 16.7 Difficulty: 1 Easy Section: 16.07 Measuring the Impact of Stock Price Changes on Option Prices Topic: Black-Scholes option pricing inputs and effects Learning Objective: 16-02 How to price options using the Black-Scholes model. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: C

21 Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill 41) Repricing an employee stock option involves which one of the following? A) stock-split B) stock dividend C) change in option strike price D) change in option expiration date E) change in option premium Answer: C Explanation: See Section

37 Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill 55) What is the put option premium given the following information? Time (years) 0.5 Strike price $ 25.00 Stock price $ 24.50 Risk-free rate 2.00 % Volatility 30 %

1 Answer: D Explanation: See Section 17.1 Difficulty: 1 Easy Section: 17.1 Sources of Financial Information Topic: Financial information Learning Objective: 17-01 How to obtain financial information about companies. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: D Explanation: See Section 17.1 Difficulty: 1 Easy Section: 17.1 Sources of

21 Answer: B Explanation: See Section 17.2 Difficulty: 1 Easy Section: 17.2 Financial Statements Topic: Ratio analysis Learning Objective: 17-03 How to use performance and price ratios. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: B Explanation: See Section 17.2 Difficulty: 1 Easy Section: 17.2 Financial Statements Topic: Ratio

40 Answer: C Explanation: Cash = ($98,800 + $19,100 + $34,000) - ($22,500 + $20,200 + $78,300) = $30,900 Difficulty: 1 Easy Section: 17.2 Financial Statements Topic: Financial statements Learning Objective: 17-02 How to read basic financial statements. Bloom's: Level 3 Apply 40 Answer: C Explanation: Cash = ($98,800 +

1 Answer: A Explanation: See Section 18.1 Difficulty: 1 Easy Section: 18.1 Corporate Bond Basics Topic: Bond types and features Learning Objective: 18-01 The basic types of corporate bonds. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: A Explanation: See Section 18.1 Difficulty: 1 Easy Section: 18.1 Corporate Bond

21 Answer: D Explanation: See Section 18.4 Difficulty: 1 Easy Section: 18.4 U.S. Treasury Bills, Notes, Bonds, and STRIPS Topic: Bond price and quotes Learning Objective: 18-01 The basic types of corporate bonds. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: D Explanation: See Section 18.4 Difficulty: 1 Easy

41 Answer: A Explanation: Conversion value = ($1,000 / $33.33) $33.10 = $993.10 The call price of $1,025 exceeds the conversion value of $993.10. Bondholders should redeem their bonds at the call price because that price exceeds the conversion value. Difficulty: 1 Easy Section: 18.2 Corporate Bond Indentures Topic: Convertible

55 Answer: D Explanation: Equivalent taxable yield = 0.048 / (1 0.24) = 6.32 percent Difficulty: 1 Easy Section: 18.7 Municipal Bonds Topic: Bond yields and returns Learning Objective: 18-03 The different types of government bonds. Bloom's: Level 3 Apply Accessibility: Keyboard Navigation 55 Answer: D Explanation: Equivalent taxable yield

1 Answer: D Explanation: See Section 19.2 Difficulty: 1 Easy Section: 19.2 Global Macroeconomic Activity Topic: Global economy and macroeconomics Learning Objective: 19-02 Be able to measure the level of economic activity both globally and domestically. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: D Explanation: See Section 19.2

20 Answer: C Explanation: $50,000 / $1.35 / = 37,037.04 37,037.04 1.13 = 41,851.85 41,851.85 $1.40 / = $58,592.59 ($58,592.59 - 50,000) / 50,000 = 17.19% Difficulty: 2 Medium Section: 19.2 Global Macroeconomic Activity Topic: International investing-risks, returns, and benefits Learning Objective: 19-02 Be able to measure the level of

1 Answer: D Explanation: See Section 2.1 Difficulty: 1 Easy Section: 2.3 Types of Accounts Topic: Asset allocation and security selection Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins. Bloom's: Level 3 Apply Accessibility: Keyboard Navigation 1 Answer: D Explanation: See Section 2.1

21 Answer: E Explanation: See Section 2.4 Difficulty: 1 Easy Section: 2.4 Types of Positions Topic: Short sales Learning Objective: 02-04 The workings of short sales. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: E Explanation: See Section 2.4 Difficulty: 1 Easy Section: 2.4 Types of Positions Topic: Short

39 Answer: C Explanation: Initial investment = 500 $35 0.70 = $12,250 Loan repayment = [500 $35 (1 - 0.70)] [1 + (0.0475 + 0.02)]8/12 = $5,483.67 HPR = [(500 $37.50) - $5,483.67 - $12,250 / $12,250 = 0.0830 EAR = (1 + 0.0830)12 / 8 - 1 = 12.70

1 Answer: E Explanation: See Section 20.1 Difficulty: 1 Easy Section: 20.1 A Brief History of Mortgage-Backed Securities Topic: Fixed-rate mortgages Learning Objective: 20-01 The workings of a fixed-rate mortgage. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: E Explanation: See Section 20.1 Difficulty: 1 Easy Section: 20.1 A

21 Answer: E Explanation: See Section 20.3 Difficulty: 1 Easy Section: 20.3 Government National Mortgage Association Topic: Government National Mortgage Association Learning Objective: 20-02 The governments role in the secondary market for home mortgages. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: E Explanation: See Section 20.3 Difficulty: 1

38 Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill 76) What is the monthly mortgage payment on a $255,000, 25-year loan if the interest rate is 5.50 percent? A) $1,034.07 B) $1,468.75 C) $1,565.92 D) $1,893.14 E) $2,622.47 Answer: C Explanation: Calculator solution: N 300 I/Y 0.0045833 PV

1 Answer: C Explanation: See Section 3.2 Difficulty: 1 Easy Section: 3.2 Interest-Bearing Assets Topic: Fixed-income securities Learning Objective: 03-01 Various types of interest-bearing assets. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: C Explanation: See Section 3.2 Difficulty: 1 Easy Section: 3.2 Interest-Bearing Assets Topic: Fixed-income securities Learning

21 Answer: A Explanation: See Section 3.5 Difficulty: 1 Easy Section: 3.5 Option Contracts Topic: Option contracts and quotes Learning Objective: 03-04 Option contracts. Bloom's: Level 2 Understand Accessibility: Keyboard Navigation 21 Answer: A Explanation: See Section 3.5 Difficulty: 1 Easy Section: 3.5 Option Contracts Topic: Option contracts and quotes

34 Answer: B Explanation: Total value = 60,000 $9.0275 = $541.650.00 Difficulty: 1 Easy Section: 3.4 Derivatives Topic: Futures - commodities Learning Objective: 03-03 Futures contracts. Bloom's: Level 3 Apply 34 Answer: B Explanation: Total value = 60,000 $9.0275 = $541.650.00 Difficulty: 1 Easy Section: 3.4 Derivatives Topic: Futures -

1 Answer: C Explanation: See Section 4.2. Difficulty: 1 Easy Section: 4.2 Investment Companies and Fund Types Topic: Open-end funds Learning Objective: 04-01 The different types of mutual funds. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: C Explanation: See Section 4.2. Difficulty: 1 Easy Section: 4.2 Investment Companies

21 Answer: E Explanation: See Section 4.6. Difficulty: 1 Easy Section: 4.6 Long-Term Funds Topic: Fund classifications Learning Objective: 04-01 The different types of mutual funds. Bloom's: Level 2 Understand Accessibility: Keyboard Navigation 21 Answer: E Explanation: See Section 4.6. Difficulty: 1 Easy Section: 4.6 Long-Term Funds Topic: Fund classifications

36 Answer: C Explanation: Offering price = $51.06/(1 - 0.044) = $53.41 Difficulty: 1 Easy Section: 4.4 Mutual Fund Costs and Fees Topic: Fund pricing Learning Objective: 04-02 How mutual funds operate. Bloom's: Level 3 Apply Accessibility: Keyboard Navigation 36 Answer: C Explanation: Offering price = $51.06/(1 - 0.044) =

1 Answer: B Explanation: See Section 5.1 Difficulty: 1 Easy Section: 5.1 Private Equity versus Selling Securities to the Public Topic: Primary and secondary markets Learning Objective: 05-01 The differences between private and public equity, and primary and secondary stock markets. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer:

21 Answer: C Explanation: See Section 5.1 Difficulty: 1 Easy Section: 5.1 Private Equity versus Selling Securities to the Public Topic: Private equity Learning Objective: 05-01 The differences between private and public equity, and primary and secondary stock markets. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: C Explanation:

41 Answer: D Explanation: Allocation = 200 [800 / (200 + 300 + 100 + 500)] = 145 shares Difficulty: 1 Easy Section: 5.1 Private Equity versus Selling Securities to the Public Topic: Costs of issuing securities Learning Objective: 05-01 The differences between private and public equity, and primary and

1 Answer: E Explanation: See Section 6.2 Difficulty: 1 Easy Section: 6.2 The Dividend Discount Model Topic: Dividend discount model Learning Objective: 06-01 The basic dividend discount model. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: E Explanation: See Section 6.2 Difficulty: 1 Easy Section: 6.2 The Dividend Discount

21 Answer: D Explanation: p0 = $15 + $40 = $42.66 (1.16)1 (1.16)2 Difficulty: 1 Easy Section: 6.2 The Dividend Discount Model Topic: Dividend discount model Learning Objective: 06-01 The basic dividend discount model. Bloom's: Level 3 Apply 21 Answer: D Explanation: p0 = $15 + $40 = $42.66 (1.16)1

40 Answer: D Explanation: p4 = $0.25(1.04) = $3.25 0.12 0.04 p0 = $3.25 + 0.25 = $2.22 1.124 Difficulty: 2 Medium Section: 6.3 The Two-Stage Dividend Growth Model Topic: Multi-stage growth stock Learning Objective: 06-02 The two-stage dividend growth model. Bloom's: Level 3 Apply 40 Answer: D Explanation: p4

1 Answer: D Explanation: See Section 7.12 Difficulty: 1 Easy Section: 7.02 What Does Beat the Market Mean? Topic: Stock returns and yields Learning Objective: 07-01 The foundations of market efficiency. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: D Explanation: See Section 7.12 Difficulty: 1 Easy Section:

21 Answer: C Explanation: See Section 7.7 Difficulty: 1 Easy Section: 7.07 Informed Traders and Insider Trading Topic: Financial market regulation and protections Learning Objective: 07-02 The implications of the forms of market efficiency. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: C Explanation: See Section 7.7 Difficulty:

35 Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill 71) The primary purpose of the NYSE circuit breakers is to: A) halt short selling. B) encourage program trading. C) limit trading by specialists. D) minimize institutional trading. E) slow a market decline. Answer: E Explanation: See Section

1 Answer: A Explanation: See Section 8.2 Difficulty: 1 Easy Section: 8.2 Prospect Theory Topic: Behavioral theories Learning Objective: 08-01 Prospect theory. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: A Explanation: See Section 8.2 Difficulty: 1 Easy Section: 8.2 Prospect Theory Topic: Behavioral theories Learning Objective: 08-01

21 Answer: D Explanation: See Section 8.7 Difficulty: 1 Easy Section: 8.7 Technical Analysis Topic: Technical analysis Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Bloom's: Level 2 Understand Accessibility: Keyboard Navigation 21 Answer: D Explanation: See Section 8.7 Difficulty: 1 Easy Section: 8.7

33 Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill Copyright 2018 McGraw-Hill 68) Given the following information, what is the value of the advance/decline line on the third day of this 3-day period? Issues Issues Advancing Declining Day 1 1,315 1,416 Day 2 1,650 1,128 Day 3 1,300

1 Answer: A Explanation: See Section 9.1. Difficulty: 1 Easy Section: 9.1 Interest Rate History and Money Market Rates Topic: Interest rates Learning Objective: 09-01 Money market prices and rates. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 1 Answer: A Explanation: See Section 9.1. Difficulty: 1 Easy Section: 9.1 Interest

21 Answer: B Explanation: See Section 9.2. Difficulty: 1 Easy Section: 9.2 Money Market Prices and Rates Topic: Money market securities Learning Objective: 09-01 Money market prices and rates. Bloom's: Level 1 Remember Accessibility: Keyboard Navigation 21 Answer: B Explanation: See Section 9.2. Difficulty: 1 Easy Section: 9.2 Money Market

36 Answer: D Explanation: BEY = 365 0.0300 = 3.07 % 360 - 120 0.0300 Difficulty: 1 Easy Section: 9.2 Money Market Prices and Rates Topic: Bond yields and returns Learning Objective: 09-01 Money market prices and rates. Bloom's: Level 3 Apply 36 Answer: D Explanation: BEY = 365 0.0300