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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

LG2 Identify the major types and sources of traditional and online investment information.
LG3 Explain the key aspects of the commonly cited stock and bond market averages and indexes.
LG4 Review the role of stockbrokers, including the services they provide, selection of a stockbroker, opening an account, and transaction basics.
LG5 Describe the basic types of orders, online transactions, transaction costs, and the legal aspects of investor protection.
LG6 Discuss the roles of investment advisers and investment clubs.
3.1 Discuss the impact of the Internet on the individual investor and summarize the types of resources it provides.
3.2 Identify the four main types of online investment tools. How can they help you become a better investor?
3.3 What are some of the pros and cons of using the Internet to choose and manage your investments?
3.6 Briefly describe the types of information that the following resources provide.a. Stockholders' reportc. Standard & Poor's Corporatione. Value Line Investment Surveyb. Comparative data sourcesd.
3.7 How would you access each of the following types of information, and how would the content help you make investment decisions?a. Prospectusesc. Investment lettersb. Back-office research reportsd.
3.8 Briefly describe several types of information that are especially well suited to being made available on the Internet. What are the differences between the online and print versions, and when
3.10 List each of the major averages or indexes prepared by (a) Dow Jones & Company and (b) Standard & Poor's Corporation. Indicate the number and source of the securities used in calculating each
3.12 Discuss each of the following as they are related to assessing bond market behavior.a. Bond yieldsb. Bond indexes
3.13 Describe the types of services offered by brokerage firms, and discuss the criteria for selecting a suitable stockbroker.
3.14 Briefly differentiate among the following types of brokerage accounts:a. Single or jointc. Cashe. Wrapb. Custodiald. Margin
3.15 Differentiate among market orders, limit orders, and stop-loss orders. What is the ratio- nale for using a stop-loss order rather than a limit order?
3.16 Differentiate between the services and costs associated with full-service, premium dis- count, and basic discount brokers. Be sure to discuss online transactions.
3.17 What is day trading, and why is it risky? How can you avoid problems as an online trader?
3.20 Describe the services that professional investment advisers perform, how they are regu- lated, online investment advisers, and the cost of investment advice.
3.21 What benefits does an investment club offer the small investor? Why do investment clubs regularly outperform the market and the pros? Would you prefer to join a regular or an online club, and
Q3.2 Innovative Internet-based bookseller Amazon.com has expanded into other retail cate- gories. Gather appropriate information from relevant sources to assess the following with an eye toward
Q3.3 Visit four financial portals or other financial information Web sites listed in Table 3.4. Compare them in terms of ease of use, investment information, investment tools, advisory ser- vices,
Q3.8 Learn more about day trading at sites such as Edgetrade (www.edgetrade.com), Daytradingthemarkets.com (www.daytradingthemarkets.com), TrendVue (www.1daytrading- stockadviceandpicks.com), and The
P3.2 Imagine that the Mini-Dow Average (MDA) is based on the closing prices of five stocks. The divisor used in the calculation of the MDA is currently 0.765. The closing prices for each of the five
P3.3 The SP-6 index (a fictitious index) is used by many investors to monitor the general behavior of the stock market. It has a base value set equal to 100 at January 1, 1975. In the accompanying
P3.4 Deepa Chungi wishes to develop an average or index that can be used to measure the gen- eral behavior of stock prices over time. She has decided to include six closely followed, high- quality
P3.5 Al Cromwell places a market order to buy a round lot of Thomas, Inc., common stock, which is traded on the NYSE and is currently quoted at $50 per share. Ignoring brokerage com- missions, how
P3.6 Imagine that you have placed a limit order to buy 100 shares of Sallisaw Tool at a price of $38, although the stock is currently selling for $41. Discuss the consequences, if any, of each of the
P3.8 You sell 100 shares of a stock short for $40 per share. You want to limit your loss on this transaction to no more than $500. What order should you place?
P3.12 Angel and Marie Perez own a small pool hall located in southern New Jersey. They enjoy run- ning the business, which they have owned for nearly three years. Angel, a retired professional pool
P3.13 Paul Chang and Deborah Barry, friends who work for a large software company, decided to leave the relative security of their employer and join the staff of OnlineSpeed Inc., a 2-year-old
P3.14 Peter Tanaka is interested in starting a stock portfolio. He has heard many financial reporters talk about the Dow Jones Industrial Average (DJIA) as being a proxy for the overall stock market.
LG1 Review the concept of return, its components, the forces that affect the level of return, and historical returns.
LG2 Discuss the role of time value of money in measuring return and defining a satisfactory investment.
LG3 Describe real, risk-free, and required returns and the calculation and application of holding period return.
LG4 Explain the concept and the calculation of yield, and how to find growth rates.
LG5 Discuss the key sources of risk that might affect potential investment vehicles.
LG6 Understand the risk of a single asset, risk assessment, and the steps that combine return and risk.
4.3 What is a satisfactory investment? When the present value of benefits exceeds the cost of an investment, what can you conclude about the rate of return eamed by the investor relative to the
4.5 What is meant by the holding period, and why is it advisable to use holding periods of equal length when comparing alternative investment vehicles? Define the holding period return (HPR), and
4.8 Explain how either the present value (of benefits versus cost) or the yield measure can be used to find a satisfactory investment. Given the following data, indicate which, if any, of these
4.11 Briefly describe standard deviation as a measure of risk or variability.
4.12 Differentiate among the three basic risk preferences: risk-indifferent, risk-averse, and risk-seeking. Which of these behaviors best describes most investors?
4.13 Describe the steps involved in the investment decision process. Be sure to mention how returns and risks can be evaluated together to determine acceptable investments.
Q4.1 Choose a publicly traded company that has been listed on a major exchange or in the over- the-counter market for at least five years. Use any data source of your choice to find the annual cash
Q4.2 Estimate the amount of cash you will need each year over the next 20 years to live at the standard you desire. Also estimate the rate of return you can reasonably expect to earn annually, on
Q4.3 Access appropriate estimates of the expected inflation rate over the next year, and the cur- rent yield on 1-year risk-free securities (the yield on these securities is referred to as the
Q4.4 Choose three NYSE-listed stocks and maintain a record of their dividend payments, if any, and closing prices each week over the next six weeks.a. At the end of the six-week period, calculate the
P4.1 How much would an investor earn on a stock purchased one year ago for $63 if it paid an annual cash dividend of $3.75 and had just been sold for $67.50? Would the investor have expe- rienced a
P4.2 An investor buys a bond for $10,000. The bond pays $300 interest every six months. After 18 months, the investor sells the bond for $9,500. Describe the types of income and/or loss the investor
P4.3 Assuming you purchased a share of stock for $50 one year ago, sold it today for $60, and during the year received three dividend payments totaling $2.70, calculate the following.a. Incomeb.
P4.4 Assume you purchased a bond for $9,500. The bond pays $300 interest every six months. You sell the bond after 18 months for $10,000. Calculate the following:a. Incomeb. Capital gain or lossc.
P4.5 Consider the historical data given in the accompanying table.a. Calculate the total return (in dollars) for each year.b. Indicate the level of return you would expect in 2012 and in 2013.c.
P4.6 Refer to the table in Problem 4.5. What is the total return in dollars and as a percentage of your original investment if you purchased 100 shares of the investment at the beginning of 2007 and
P4.7 Given a real rate of interest of 3%, an expected inflation premium of 5%, and risk pre- miums for investments A and B of 3% and 5%, respectively, find the following.a. The risk-free rate of
P4.8 The risk-free rate is 7%, and expected inflation is 4.5%. If inflation expectations change such that future expected inflation rises to 5.5%, what will the new risk-free rate be?
P4.9 Calculate the holding period return (HPR) for the following two investment alternatives. Which, if any, of the return components is likely not to be realized if you continue to hold cach of the
P4.10 You are considering two investment alternatives. The first is a stock that pays quarterly dividends of $0.50 per share and is trading at $25 per share; you expect to sell the stock in six
P4.11 You are considering purchasing a bond that pays annual interest of $50 per $1,000 of par value. The bond matures in one year, when you will collect the par value and the interest pay- ment. If
P4.13 You invest $7,000 in stock and receive $65, $70, $70, and $65 in dividends over the fol- lowing four years. At the end of the four years, you sell the stock for $7,900. What was the yield on
P4.14 Your friend asks you to invest $10,000 in a business venture. Based on your estimates, you would receive nothing for four years, at the end of year 5 you would receive interest on the
P4.15 Use a financial calculator or an Excel spreadsheet to estimate the yield for each of the fol- lowing investments. Investment Initial Investment Future Value End of the Year A B $ 1,000 10,000 $
P4.16 Sara Holliday must earn a return of 10% on an investment that requires an initial outlay of $2,500 and promises to return $6,000 in eight years.a. Use present-value techniques to estimate the
P4.17 Use a financial calculator or an Excel spreadsheet to estimate the yield for each of the fol- lowing two investments. Investment A B Initial Investment $8,500 $9,500 End of Year Income 1 $2,500
P4.18 Elliott Dumack must earn a minimum rate of return of 11% to be adequately compen- sated for the risk of the following investment. Initial Investment $14,000 End of Year Income 1 $6,000 23 2
P4.19 Assume that an investment generates the following income stream and can be purchased at the beginning of 2011 for $1,000 and sold at the end of 2017 for $1,200. Estimate the yield for this
P4.20 For each of the following streams of dividends, estimate the compound annual rate of growth between the earliest year for which a value is given and 2011.Dividend Stream Year A B C 2002 $1.50
P4.21 A company paid dividends of $1.00 per share in 2003, and just announced that it will pay $2.21 in 2010. Estimate the compound annual growth rate of the dividends.
P4.22 A company reported net income in 2006 of $350 million. In 2010, the company expects net income to be $441.7 million. Estimate the annual compound growth rate of net income.
P4.23 The historical returns for two investments-A and B are summarized in the table below for the period 2007 to 2011. Use the data to answer the questions that follow.Investment A B Year Rate of
P4.24 Dave Coates, a 23-year-old mathematics teacher at Xavier High School, recently received a tax refund of $1,100. Because Dave didn't need this money for his current living expenses, he decided
P4.25 Over the past 10 years, Molly O'Rourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a total market value
P4.26 From her Investment Analysis class, Laura has been given an assignment to evaluate several secu- ritics on a risk-return tradeoff basis. The specific securities to be researched are
P4.27 The table below shows the annual change in the average U.S. home price from 1999-2008 according to the S&P/Case-Shiller index. Calculate the average annual return and its standard deviation.
4A.1 What is the time value of money? Explain why an investor should be able to earn a posi bye return.
4A.2 Define, discuss, and contrast the following terms.a. Interestc. Compound interestb. Simple interestd. True rate of interest (or return)
4A.3 When interest is compounded more frequently than annually at a stated rate, what hap- pens to the true rate of interest? Under what condition would the stated and true rates of interest be
4A.4 Describe, compare, and contrast the concepts of future value and present value. Explain the role of the discount rate in calculating present value.
4A.5 What is an annuity? How can calculation of the future value of an annuity be simplified? What about the present value of an annuity?
4A.6 What is a mixed stream of retums? Describe the procedure used to find the present value of such a stream
P4A.1 For each of the savings account transactions in the accompanying table, calculate the following.a. End-of-year account balance. (Assume that the account balance at December 31, 2010, is
P4A.2 Using a financial calculator or spreadsheet, calculate the following.a. The future value of a $300 deposit left in an account paying 7% annual interest for 12 years.b. The future value at the
P4A.3 For each of the following initial investment amounts, calculate the future value at the end of the given investment period if interest is compounded annually at the specified rate of return
P4A.4 Using a financial calculator or spreadsheet, calculate the future value in two years of $10,000 invested today in an account that pays a stated annual interest rate of 12%, com- pounded monthly.
P4A.5 For each of the following annual deposits into an account paying the stated annual interest rate over the specified deposit period, calculate the future value of the annuity at the end of the
P4A.6 If you deposit $1,000 into an account at the end of each of the next five years, and the account pays an annual interest rate of 6%, how much will be in the account after five years?
P4A.7 If you could earn 9% on similar-risk investments, what is the least you would accept at the end of a six-year period, given the following amounts and timing of your investment?a. Invest $5,000
P4A.8 For each of the following investments, calculate the present value of the future sum, using the specified discount rate and assuming the sum will be received at the end of the given year.
P4A.9 A Florida state savings bond can be converted to $1,000 at maturity eight years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 6% interest compounded
P4A.10 Referring to Problem 4A.9 above, at what price would the bond sell if U.S. savings bonds were paying 8% interest compounded annually? Compare your answer to your answer to the preceding
P4A.11 How much should you be willing to pay for a lump sum of $10,000 five years from now if you can earn 3% every six months on other similar investments?
P4A.12 Find the present value of each of the following streams of income, assuming a 12% dis- count rate. A B C End of End of End of Year Income Year Income Year Income 1 $2,200 1 $10,000 1-5
P4A.13 Consider the streams of income given in the following table.a. Find the present value of each income stream, using a 15% discount rate.b. Compare the calculated present values and discuss them
P4A.14 For each of the investments below, calculate the present value of the annual end-of-year returns at the specified discount rate over the given period. Investment Annual Returns $ 1,200
P4A.15 Congratulations! You have won the lottery! Would you rather have $1 million at the end of each of the next 20 years or $15 million today? (Assume an 8% discount rate.)
P4A.16 Using a financial calculator or an Excel spreadsheet, calculate the following.a. The present value of $500 to be received four years from now, using an 11% dis- count rate.b. The present value
P4A.17 Terri Allessandro has an opportunity to make any of the following investments. The purchase price, the amount of its lump-sum future value, and its year of receipt are given below for each
P4A.18 Kent Weitz wishes to assess whether the following two investments are satisfactory. Use his required return (discount rate) of 17% to evaluate each investment. Make an investment rec-
P4A.19 You purchased a car using some cash and borrowing $15,000 (the present value) for 50 months at 12% per year. Calculate the monthly payment (annuity).
P4A.20 Referring to Problem 4A.19 above, assume you have made ten payments. What is the balance (present value) of your loan?

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