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Questions and Answers of Accounting

Why do financial assets show up as a component of household wealth, but not of national wealth? Why do financial assets still matter for the material well-being of an economy?
Wall Street firms have traditionally compensated their traders with a share of the trading profits that they generated. How might this practice have affected traders’ willingness to assume risk?
What reforms to the financial system might reduce its exposure to systemic risk?
In what ways is preferred stock like long-term debt? In what ways is it like equity?
Why are money market securities sometimes referred to as “cash equivalents”?
Which of the following correctly describes 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.
What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?
What are the key differences between common stock, preferred stock, and corporate bonds?
Why are high-tax-bracket investors more inclined to invest in municipal bonds than low-bracket investors?
Turn back to figure and look at the Treasury bond maturing in February 2039.a. How much would you have to pay to purchase one of these notes?b. What is its coupon rate?c. What is the current yield of
Suppose investors can earn a return of 2% per 6 months on a Treasury note with 6 months remaining until maturity. What price would you expect a 6-month maturity Treasury bill to sell for?
Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket.
Turn to Figure and look at the listing for General Dynamics.a. How many shares could you buy for $5,000?b. What would be your annual dividend income from those shares?c. What must be General Dynamics
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.a. Calculate the rate of
Using the data in the previous problem, calculate the first-period rates of return on the following indexes of the three stocks:a. A market-value-weighted index.b. An equally weighted index.
An investor is in a 30% tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds?
Find the equivalent taxable yield of a short-term municipal bond currently offering yields of 4% for tax brackets of zero, 10%, 20%, and 30%.
What problems would confront a mutual fund trying to create an index fund tied to an equally weighted index of a broad stock market?
Which security should sell at a greater price?a. A 10-year Treasury bond with a 9% coupon rate versus a 10-year T-bond with a 10% coupon.b. A 3-month expiration call option with an exercise price of
Look at the futures listings for the corn contract in Figure.a. Suppose you buy one contract for March delivery. If the contract closes in March at a level of 3.875, what will your profit be?b. How
Turn back to Figure and look at the Intel options. Suppose you buy a November expiration call option with exercise price $21.a. Suppose the stock price in November is $21.75.Will you exercise your
Why do call options with exercise prices greater than the price of the underlying stock sell for positive prices?
Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. What will be the profit to an investor who buys the call for $4 in the following
Explain the difference between a put option and a short position in a futures contract.
Explain the difference between a call option and a long position in a futures contract.
A firm’s preferred stock often sells at yields below its bonds becausea. Preferred stock generally carries a higher agency rating.b. Owners of preferred stock have a prior claim on the firm’s
A municipal bond carries a coupon of 6¾% and is trading at par. What is the equivalent taxable yield to a taxpayer in a combined federal plus state 34% tax bracket?
Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed?a. Write a call
The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is 8%. Both bonds sell at par. At what tax bracket (marginal tax rate) would an investor be indifferent between the two
Who sets the bid and asked price for a stock traded over the counter? Would you expect the spread to be higher on actively or inactively traded stocks?
Suppose you short sell 100 shares of IBM, now selling at $120 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 $128?
A market order has:a. Price uncertainty but not execution uncertainty.b. Both price uncertainty and execution uncertainty.c. Execution uncertainty but not price uncertainty.
Where would an illiquid security in a developing country most likely trade?a. Broker markets.b. Electronic crossing networks.c. Electronic limit-order markets.
Dée 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
Old Economy Traders opened an account to short sell 1,000 shares of Internet Dreams from the previous problem. The initial margin requirement was 50%. (The margin account pays no interest.) A year
Consider the following limit-order book of a specialist. The last trade in the stock occurred at a price of $50.a. If a market buy order for 100 shares comes in, at what price will it be filled?b. At
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 at an interest rate of 8% per
You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share.a. How much in cash or securities must you put into your brokerage account if the
Suppose that Intel currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin
Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account.a. If you earn no interest on the funds in your
Here is some price information on Marriott:You have placed a stop-loss order to sell at $20. What are you telling your broker? Given market prices, will your order be executed?You have placed a
Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer market. Bid Asked55.25 ..... 55.50a. Suppose you have submitted an order to your broker to buy at market.
Now reconsider the previous problem assuming that Fincorp sells in an exchange market like the NYSE.a. Is there any chance for the market buy order considered in part (a) to be executed at a price
You’ve borrowed $20,000 on margin to buy shares in Disney, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two
On January 1, you sold short one round lot (that is, 100 shares) of Lowes stock at $21 per share. On March 1, a dividend of $2 per share was paid. On April 1, you covered the short sale by buying the
FBN, Inc., has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $70,000. The offering price for the shares was $50, but immediately upon issue, the share
Specialists on the New York Stock Exchange do all of the following except:a. Act as dealers for their own accounts.b. Execute limit orders.c. Help provide liquidity to the marketplace.d. Act as
Would you expect a typical open-end fixed-income mutual fund to have higher or lower operating expenses than a fixed-income unit investment trust? Why?
What are some comparative advantages of investing in the following?a. Unit investment trusts.b. Open-end mutual funds.c. Individual stocks and bonds that you choose for yourself.
Open-end equity mutual funds find it necessary to keep a significant percentage of total investments, typically around 5% of the portfolio, in very liquid money market assets. Closed-end funds do
Balanced funds, life-cycle funds, and asset allocation funds all invest in both the stock and bond markets. What are the differences among these types of funds?
Why can closed-end funds sell at prices that differ from net asset value while open-end funds do not?
What are the advantages and disadvantages of exchange-traded funds versus mutual funds?
An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6%. What is the offering price?
If the offering price of an open-end fund is $12.30 per share and the fund is sold with a front-end load of 5%, what is its net asset value?
The composition of the Fingroup Fund portfolio is as follows:The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30,000. There are 4
Reconsider the Fingroup Fund in the previous problem. If during the year the portfolio manager sells all of the holdings of stock D and replaces it with 200,000 shares of stock E at $50 per share and
The Closed Fund is a closed-end investment company with a portfolio currently worth $200 million. It has liabilities of $3 million and 5 million shares outstanding.a. What is the NAV of the fund?b.
Corporate Fund started the year with a net asset value of $12.50. By year-end, its NAV equaled $12.10. The fund paid year-end distributions of income and capital gains of $1.50. What was the (pretax)
A closed-end fund starts the year with a net asset value of $12.00. By year-end, NAV equals $12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. By the end of the year,
a. Impressive Fund had excellent investment performance last year, with portfolio returns that placed it in the top 10% of all funds with the same investment policy. Do you expect it to be a top
Consider a mutual fund with $200 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end
The New Fund had average daily assets of $2.2 billion last year. The fund sold $400 million worth of stock and purchased $500 million during the year. What was its turnover ratio?
If New Fund’s expense ratio (see the previous problem) was 1.1% and the management fee was .7%, what were the total fees paid to the fund’s investment managers during the year? What were other
You purchased 1,000 shares of the New Fund at a price of $20 per share at the beginning of the year. You paid a front-end load of 4%. The securities in which the fund invests increase in value by 12%
Loaded-Up Fund charges a 12b-1 fee of 1.0% and maintains an expense ratio of .75%. Economy Fund charges a front-end load of 2% but has no 12b-1 fee and an expense ratio of .25%. Assume the rate of
City Street Fund has a portfolio of $450 million and liabilities of $10 million.a. If 44 million shares are outstanding, what is net asset value?b. If a large investor redeems 1 million shares, what
The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full
You are considering an investment in a mutual fund with a 4% load and expense ratio of .5%. You can invest instead in a bank CD paying 6% interest.a. If you plan to invest for 2 years, what annual
Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–asked spreads amount to .4% of the value of the trade. If the portfolio turnover rate is 50%, by
You expect a tax-free municipal bond portfolio to provide a rate of return of 4%. Management fees of the fund are .6%. What fraction of portfolio income is given up to fees? If the management fees
Suppose you observe the investment performance of 350 portfolio managers for 5 years and rank them by investment returns during each year. After 5 years, you find that 11 of the funds have investment
The Fisher equation tells us that the real interest rate approximately equals the nominal rate minus the inflation rate. Suppose the inflation rate increases from 3% to 5%. Does the Fisher equation
You’ve just stumbled on a new dataset that enables you to compute historical rates of return on U.S. stocks all the way back to 1880. What are the advantages and disadvantages in using these data
You are considering two alternative 2-year investments: You can invest in a risky asset with a positive risk premium and returns in each of the 2 years that will be identically distributed and
You have $5,000 to invest for the next year and are considering three alternatives:a. A money market fund with an average maturity of 30 days offering a current yield of 6% per year.b. A 1-year
Use Figure in the text to analyze the effect of the following on the level of real interest rates:a. Businesses become more pessimistic about future demand for their products and decide to reduce
You are considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year “Inflation-Plus” CD offering 1.5% per year plus the rate of
Suppose your expectations regarding the stock price are as follows:Use Equations to compute the mean and standard deviation of the HPR onstocks.
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with an 8% coupon if it is currently selling at par and the probability distribution of its yield to maturity a
What is the standard deviation of a random variable q with the following probability distribution:Value of q Probability0 ...........0.251 ...........0.252 ...........0.50
The continuously compounded annual return on a stock is normally distributed with a mean of 20% and standard deviation of 30%. With 95.44% confidence, we should expect its actual return in any
Using historical risk premiums over the 1926–2009 periods as your guide, what would be your estimate of the expected annual HPR on the S&P 500 stock portfolio if the current risk-free interest rate
You can find annual holding-period returns for several asset classes at our Web site (www.mhhe.com/bkm); look for links to Chapter 5. Compute the means, standard deviations, skewness, and kurtosis of
During a period of severe inflation, a bond offered a nominal HPR of 80% per year. The inflation rate was 70% per year.a. What was the real HPR on the bond over the year?b. Compare this real HPR to
Suppose that the inflation rate is expected to be 3% in the near future. Using the historical data provided in this chapter, what would be your predictions for:a. The T-bill rate?b. The expected rate
An economy is making a rapid recovery from steep recession, and businesses foresee a need for large amounts of capital investment. Why would this development affect real interest rates?
You are faced with the probability distribution of the HPR on the stock market index fund given in Spreadsheet 5.1 of the text. Suppose the price of a put option on a share of the index fund with
Take as given the conditions described in the previous problem, and suppose the risk-free interest rate is 6% per year. You are contemplating investing $107.55 in a 1-year CD and simultaneously
Given $100,000 to invest, what is the expected risk premium in dollars of investing in equities versus risk-free T-bills (U.S. Treasury bills) based on the followingtable?
Based on the scenarios below, what is the expected return for a portfolio with the following return profile?Use the following scenario analysis for Stocks X and Y to answer CFA Problems 3 through 6
What are the expected rates of return for Stocks X andY?
What are the standard deviations of returns on Stocks X andY?
Assume that of your $10,000 portfolio, you invest $9,000 in Stock X and $1,000 in Stock Y. What is the expected return on yourportfolio?
Probabilities for three states of the economy and probabilities for the returns on a particular stock in each state are shown in the table below.What is the probability that the economy will be
An analyst estimates that a stock has the following probabilities of return depending on the state of the economy:What is the expected return of thestock?
Suppose that your wealth is $250,000. You buy a $200,000 house and invest the remainder in a risk-free asset paying an annual interest rate of 6%. There is a probability of .001 that your house will
If the cost of insuring your house is $1 per $1,000 of value, what will be the certainty equivalent of your end-of-year wealth if you insure your house at:a. ½ its value.b. Its full value.c. 1½
On January 1, 2011, Franklin Industries leased equipment on an eight-year term at $15,000 annual rental payments, paid in advance. There is a bargain purchase option on December 31, 2018 (end of
On January 2, 2011, the Wilcox Studios leased six computers for use in the engineering department. The lease period is for 13 years and the estimated economic life of the leased property is 15 years.

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