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fundamentals of investing

Questions and Answers of Fundamentals Of Investing

Q11.3 Briefly explain what will happen to a bond’s duration measure if each of the following events occur.a. The yield-to-maturity on the bond falls from 8.5% to 8%.b. The bond gets one year closer
Q11.2 Using the RBA website (www.rba.gov.au) or the Australian Financial Review, find the bond yields for Treasury securities with the following maturities: three months, six months, one year, three
Q11.1 Briefly describe each of the following theories of the term structure of interest rates.a. Expectations hypothesisb. Liquidity preference theoryc. Market segmentation theory According to these
11.14 Why is interest sensitivity important to bond speculators? Does the need for interest sensitivity explain why active bond traders tend to use high-grade issues? Explain
11.13 What strategy would you expect an aggressive bond investor (someone who’s looking for capital gains) to employ?
11.12 Briefly describe a bond ladder and note how and why an investor would use this investment strategy. What is a tax swap and why would it be used?
11.11 Describe the process of bond portfolio immunisation, and explain why an investor would want to immunise a portfolio. Would you consider portfolio immunisation a passive investment strategy
11.10 What does the term duration mean to bond investors and how does the duration of a bond differ from its maturity? What is modified duration, and how is it used? What is effective duration, and
11.9 Why is the reinvestment of interest income so important to bond investors?
11.8 Briefly describe the term bond-equivalent yield. Is there any difference between promised yield and bond-equivalent yield? Explain.
11.7 What’s the difference between current yield and yield-to-maturity? Between promised yield and realised yield? How does YTC differ from YTM?
11.6 Why are bonds generally priced using semi-annual compounding? Does it make much difference if you use annual compounding?
11.5 Explain how market yield affects the price of a bond. Could you price a bond without knowing its market yield? Explain.
11.1 Is there a single market rate of interest applicable to all segments of the bond market, or are there a series of market yields? Explain and note the investment implications of such a market
Discuss various bond investment strategies and the different ways these securities can be used by investors.
Understand the basic concept of duration, how it can be measured, and its use in the management of bond portfolios.
Describe the various measures of yield and return and explain how these standards of performance are used in bond valuation.
Understand how bonds are valued in the marketplace.
Describe the term structure of interest rates and note how yield curves can be used by investors.
3. As of 13 January 2010, GPC shares had a close price of $26.20. The price of GPC shares in January 2007 was $25.25. The share paid a 2007 dividend of $0.46, a 2008 dividend of$0.46 and a 2009
2. Calculate the holding period returns under the following three scenarios:a. Purchased the 5.3 bonds for 990 on 13 January 2009.b. Purchased the 6.65s for 988 on 13 January 2009.c. Purchased the
1. Calculate the current yields for these three GPC corporate debentures.Bonds Current Yield Volume Close GPC 5.3 13 ? 25 105.8 GPC 6.65s 20 ? 45 103.0 GPC 7.4 22 ? 37 104.7
3. Of the remaining four companies, one carries an AA rating, one carries an A rating and two are BB-rated.Which companies are they?
2. One of these six companies is an AAA-rated firm and one is B-rated. Identify those two companies. Briefly explain your selection.
1. Three of these companies have bonds that carry investment-grade ratings, and the other three companies carry junk-bond ratings. Judging by the information in the table, which three companies have
2. List several different types of bonds that you would recommend for their portfolio, and briefly indicate why you would recommend each.
1. Describe the type of bond investment program you think the Lasnickas should follow. In answering this question, give appropriate consideration to both return and risk factors.
P10.16 Find the conversion value of a convertible preference share that carries a conversion ratio of 1.8, given that the market price of the underlying ordinary share is $40. Would there be any
P10.15 Assume you just paid $1200 for a convertible bond that carries a 7.5% coupon and has 15 years to maturity. The bond can be converted into 24 shares, which are now trading at $50.Find the bond
P10.14 An 8% convertible bond carries a par value of $1000 and a conversion ratio of 20.Assume that an investor has $5000 to invest and that the convertible sells at a price of $1000(which includes a
P10.13 A certain 6% annual pay convertible bond (maturing in 20 years) is convertible at the holder’s option into 20 shares. The bond is currently trading at $800. The share (which pays 75¢a share
P10.12 You are considering investing $850 in Whichway Corporation. You can buy shares at$25; this share pays no dividends. You can also buy a convertible bond that is currently trading at $850 and
P10.11 A certain convertible bond has a conversion ratio of 21 and a conversion premium of 20%. The current market price of the underlying share is $40. What is the bond’s conversion equivalent?
P10.10 Red Electrica España SA (E.REE) is refinancing its bank loans by issuing Eurobonds to investors. You are considering buying $10 000 of these bonds, which will yield 6%. You are also looking
P10.9 Letticia Garcia, an aggressive bond investor, is currently thinking about investing in a foreign (non-dollar-denominated) government bond. In particular, she’s looking at a Swiss Government
P10.7 Rhett purchased a 13% zero-coupon bond with a 15-year maturity and a $20 000 par value 15 years ago. The bond matures tomorrow. How much will Rhett receive in total from this investment,
P10.6 In early January 2004, you purchased $30 000 worth of some high-grade corporate bonds. The bonds carried a coupon of 8.1% and mature in 2018. You paid 94.125 when you bought the bonds. Over the
P10.5 Colwyn buys a 10% corporate bond with a current yield of 6%. When he sells the bond one year later, the current yield on the bond is 7%. How much did Col make on this investment?
P10.4 Assume that you pay $850 for a long-term bond that carries a 7.5% coupon. Over the course of the next 12 months, interest rates drop sharply. As a result, you sell the bond at a price of
P10.2 Zack buys a 10% corporate bond with a current yield of 6%. How much did he pay for the bond?P10.3 Which of the following three bonds offers the highest current yield?a. A 9.5%, 20-year bond
P10.1 A 12%, 20-year bond is currently trading at $1250. What is its current yield?
Q10.6 Using the resources available at your campus or public library or on the Internet, find the information requested below.a. Select any two convertible (notes or bonds) and determine the
Q10.4 Why do companies like to issue convertible securities? What’s in it for them?
Q10.2 ‘Treasury securities are guaranteed by the Australian Government. Therefore, there is no risk in the ownership of such bonds.’ Briefly discuss the wisdom (or folly) of this statement.Q10.3
10.15 Explain why it is necessary to examine both the bond and share properties of a convertible debenture when determining its investment appeal.
10.14 Identify the equity kicker of a convertible security and explain how it affects the value and price behaviour of convertibles.
10.8 From the perspective of an individual investor, what good are bond ratings? Do bond ratings indicate the amount of market risk embedded in a bond? Explain.
10.7 What are bond ratings, and how can they affect investor returns? What are split ratings?
10.3 Identify and briefly describe the five types of risk to which bonds are exposed. What is the most important source of risk for bonds in general? Explain.
10.1 What appeal do bonds hold for investors? Give several reasons why bonds make attractive investment outlets.
Describe the basic features and characteristics of convertible securities, and measure the value of a convertible.
Discuss the global nature of the bond market and the difference between dollar-denominated and non-dollar-denominated foreign bonds.
Explain how bonds are priced in the market and why some bonds are more volatile than others.Identify the different types of bonds and the kinds of investment objectives these securities can fulfil.
Describe the essential features of a bond, note the role that bond ratings play in the market, and distinguish among different types of call, refunding and sinking-fund provisions.
Explain the basic investment attributes of bonds and their use as investment vehicles.
7. Is there a point at which the MA direction was contrary to that of the share price, and the signal indicated that you should have sold/bought?
6. Does the MA move up or down over the 6–8-month period? What about the price?
5. Looking at the 6–8-month period as a whole, does the MA line predict movements in share price?
4. Is this movement in line with what a technician would predict?
3. During the following 15 days, how did the price of the share behave?
2. Was the MA moving up, moving down or staying steady at this time?
1. Choose a date at the end of the previous three months. What was the relation between the daily price for SGP and its moving average in each of the three months?
3. Comment on the time periods used in the table, which are not defined here. What if they were relatively long intervals of time? What if they were relatively short? Explain how the length of the
2. Discuss each measure individually and note what it indicates for the market as it now stands. Taken collectively, what do these four measures indicate about the current state of the market?
1. Based on the data presented in the table, calculate a value (where appropriate) for periods 1 through 5, for each of the four measures listed above. Chart your results, where applicable.
4. Based on the technical measures and charts you’ve prepared, what course of action would you recommend that Brett take with regard to Nautilus Navigation? Explain.
3. Prepare a point-and-figure chart of the closing prices for Nautilus Navigation. (Use a one-point system, in which each box is worth $1.) Discuss how technical analysts use this and similar charts.
2. Based on the above closing share prices, prepare a moving-average line covering the period shown in the table;use a 10-day time frame to calculate the individual average values.a. Plot the daily
1. Use the closing share prices in the table above to compute the share’s relative strength index (RSI) for (1) the 20-day period from 30/09/10 to 31/10/10; and (2) the 22-day period from 30/11/10
P9.7 You find the closing prices for a share you own. You want to use a 10-day moving average to monitor the share. Calculate the 10-day moving average for days 11 through 20.Based on the data in the
P9.6 You are presented with the following data:Week Managed Fund Cash Position Managed Fund Total Assets Most recent $281 478 000 $2 345 650 000 2 258 500 000 2 350 000 000 3 234 800 000 2 348 000
P9.5 You have collected the following NH–NL indicator data:Day NH-NL Indicator 1 (yesterday) 100 2 95 3 61 4 43 5 –15 6 –45 7 –82 8 –86 9 –92 10 –71 If you are a technician following a
P9.4 You are given the following information:Day New Highs New Lows 1 (yesterday) 117 22 2 95 34 3 84 41 4 64 79 5 53 98 6 19 101 7 19 105 8 18 110 9 19 90 10 22 88a. Calculate the 10-day moving
P9.3 Below are figures representing the number of shares making new highs and new lows for each month over a six-month period:Month New Highs New Lows July 117 22 August 95 34 September 84 41 October
P9.2 Compute the level of on-balance volume (OBV) for the following three-day period for a share, if the beginning level of OBV is 50 000 and the share closed yesterday at $25.Day Closing Price
P9.1 Compute the arms index for the S&P ASX 200 over the following three days:Number of Shares Number of Shares Volume for Shares Volume for Shares Day Rising in Price Falling in Price Rising in
Q9.5 Describe each of the following approaches to technical analysis and note how it would be used by investors.a. Arms indexb. Trading actionc. Odd-lot tradingd. Chartinge. Moving averagesf.
Q9.4 Briefly describe how technical analysis is used as part of the share valuation process. What role does it play in an investor’s decision to buy or sell a share?
Q9.1 Much has been written about the concept of an efficient market. It’s probably safe to say that some of your classmates believe the markets are efficient and others believe they are not.Have a
9.10 What is a share chart? What kind of information can be put on charts, and what is the purpose of charting?a. What is the difference between a bar chart and a point-and-figure chart?b. What are
9.8 Briefly describe each of the following and explain how it is used in technical analysis:a. Breadth of the marketb. Short interestc. Odd-lot trading
9.7 Can the market really have a measurable effect on the price behaviour of individual securities? Explain.
9.3 What are market anomalies and how do they come about? Do they support or refute the EMH? Briefly describe each of the following:a. The January effectb. The size effectc. The value effect
9.1 What is the random walk hypothesis, and how does it apply to shares? What is an efficient market? How can a market be efficient if its prices behave in a random fashion?
Compute and use technical trading rules for individual shares and the market as a whole.
Describe some of the approaches to technical analysis, including, among others, the Dow theory, moving averages, charting and various indicators of the technical condition of the market.
Explain how behavioural finance links market anomalies to investors’cognitive biases.Discuss the purpose of technical analysis and explain why the performance of the market is important to share
List four ‘decision traps’ that may lead investors to make systematic errors in their investment decisions.
Describe the characteristics of an efficient market, explain what market anomalies are, and note some of the challenges that investors face when markets are efficient.
5. Determine the total intrinsic value of Rhyhorn shares based on your calculations above.
4. Having determined the expected future price of Rhyhorn shares in part 3, discount the price of the share back to its present value.
3. What do you believe the price of Rhyhorn shares will be at the end of the initial growth period (2012)?
2. Determine the present value of dividends during the initial variable-growth period.
1. Calculate the projected annual dividends over the years 2010, 2011 and 2012.
2. Because of several intrinsic and market factors, Dodier feels that 25% is a viable figure to use for a desired rate of return.a. Using the 25% rate of return and the forecasted figures you came up
1. Determine the average annual rate of growth in sales over the past five years. (Assume sales in 2005 amounted to $7.5 million.)a. Use this average growth rate to forecast revenues for next year
2. Looking at Chris’s investment program in general:a. What do you think of his investment program? What do you see as its strengths and weaknesses?b. Are there any suggestions you would make?c. Do
1. Looking first at the share:a. Compute the company’s net profits and EPS for each of the next three years.b. Compute the price of the share three years from now.c. Assuming that all expectations
P8.24 World Wide Web Wares (4W, for short) is an online retailer of small kitchen appliances and utensils. The firm has been around for a few years and has created a nice market niche for itself. In
P8.23 Newco is a young company that has yet to make a profit. You are trying to place a value on the share, but it pays no dividends and you obviously cannot calculate a P/E ratio. As a result, you

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