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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

12. You own 100 shares of HP stock, which you purchased at $41.20. What is the potential gain and the maximum loss on the stock?
11. You are examining the common stocks of two closely related companies, company ABC, whose goal is to merge with another company, company XYZ. You have astrong expectation that the deal will go
b. From the information above, what would be the yield on the 2-year Treasury note?
a. Why are investors interested in bonds offered by Fannie Mae? What do they think about the riskiness of such issues?
10. In October 2010, global investors placed huge orders for 2-year bonds issued by mortgage giant Fannie Mae and yielding 0.507%, or offering 13 basis points above 2-year Treasuries. At the same
9. What is interest-rate risk, and what is reinvestment-rate risk? Can these two risks offset each other? Explain.
8. Look again at Figure 5.4 and the spread between the 3-month Treasury bill and the 3-month Certificate of Deposit (CD) rate. What would you expect to happen to that spread if the economy slipped
7. Why do spreads narrow during good economic times and widen during bad economic times?
. What would happen to the value of the US dollar against the currencies of emerging economies that are experiencing worse economic conditions relative to the United States?
b. What is the impact on the value of the dollar when the Fed cuts interest rates?(In fact, on December 12, 2008, the Fed was pondering reducing the fed funds rate to just above 0%.)
a. What would be the implication for the investors’ degree of risk aversion?
“The reversal also could signal a modest stabilization for the global financial system, since investors became willing to take on some risk.”“Of course investors remain highly nervous. This
6. Answer the questions below based on the following statements:“The dollar weakened against all major currencies, breaking out of the range since late October 2008; at that time, when global stock
b. What yield would a taxable bond have to offer if municipal bonds offered a 5%yield (ignoring the short-run period mentioned in the text)? Assume that you belong to a 30% income-tax bracket. Show
a. Why would investors abandon tax-exempt securities for (partially) taxable bonds? Explain from an economic point of view.
5. Answer the two questions below based on the following statement:“As of October 2008, as investors shunned tax-exempt securities for corporate bonds, the yields of municipal securities rose to
b. What do you conclude, and why?
a. Verify that the 13-week investment rate is 0.132 and the discount rate is 0.130.
4. Refer to Table 5.2 in the text where the recent T-bill auctions results are shown.Then answer the following questions/problems:
c. What is the impact of competition between Treasury bonds and corporate bonds on the prices of each of these bond categories?
b. Why are they now returning to corporate bonds?
a. Why did investors abandon corporate bonds in the first place? Can you provide some reasons?
3. Answer the three questions below based on the following statement:“Investors who initially had placed their funds into high-yielding corporate bonds are now withdrawing their funds and placing
. Now that the Fed has stepped in to support the market, what do you think would happen to this market? If you were an investor, would you purchase commercial paper? Explain your answer.
a. What does this “risk-averse” investor behavior mean for the commercial paper market and for the yields of such instruments?
2. Answer the two questions below based on the following statement:“The Fed sped up its purchases of commercial paper from the money market mutual fund industry in an effort to balance the deposit
1. Why is commercial paper so important for investors? What kinds of services does this market provide?
10. What is the pricing function of the financial markets? Does this function ensure the realization of a “fair price”?
9. Explain in your own words the circular flow of funds in the global financial market.
8. This question can be answered by reading the text of this chapter's International Focus. Why is London having hard financial times even though the city is one of the world’s biggest financial
7. Find the current euro/dollar exchange rate and calculate the domestic and foreign rates of return on $100 invested in a stock of a European country (of your choice) for a year (to keep the
2. What is the impact of the globalization of financial markets?The question below pertains to Box 4.3.Define the term margin calls and explain how such calls might accentuate market declines.
1. Do you think that the world is ready for a truly global monetary authority?Why or why not?
6. The following questions are from Boxes 4.1 and 4.3.The next two questions pertain to Box 4.1.
. Do you think that the tumbling of (major) currencies had anything to do with the massive outflow of capital? (Hint: where would US investors invest if the US dollar were weak relative to other
b. During periods of financial crisis (like the one in 2008), why do investors move their capital out of stocks? (Actually investors have moved more than $100 billion from only three
a. What do these stock market declines mean about the way these markets are related (or move coordinately with each other)?
4. What would be the impact on a stock market (index) if any of the following actual situations happened?
What does this move by Deutsche Börse AG (the German stock exchange) mean in terms of competition and globalization of the world’s stock exchanges?
3. Use the following statement from the financial news and answer the question below: “Deutsche Börse AG has become the largest European financial market in 2 months, following NYSE Euronext, to
c. In general, when would a country raise its interest rate and when would it lower it? (Hint: think of the country’s economic outlook—that is, bleak or overheated.)
b. What other impact would that move have on the country’s inflation rate (the country’s inflation rate was 15.9%)?
“Iceland’s central bank raised its benchmark interest rate by six percentage points to 18% in an attempt to support the country’s currency (the Icelandic krona) and refresh the country’s
2. Use the following statement from the financial news and answer the questions below:
1. Use the following statement from the financial news and answer the question below:“Fannie Mae requires that banks speed up transfers of mortgage payments to investors as a precautionary move
15. Nick is a risk-averse investor and Haris is a less risk-averse investor than Nick.Given the same return, which one would accept (tolerate) higher risk?
14. Explain how a fair game relates to a risk-averse investor’s attitude toward speculation and risk and how the utility function reflects this attitude.
13. What are the differences between risk lovers, risk-averse investors, and risk-neutral investors? Answer in terms of expected returns.
c. If you are a risk-averse investor, would you sell it for, say, $4,900?
b. If you are a risk-neutral investor, would you sell the ticket for, say, $4,900?
a. What is the ticket’s expected value?
a 50:50 chance.
12. Assume that you had a lottery ticket that would pay you either $10,000 or $0, with
11. Assume that your friend challenges you to a game of coin flipping. If you flip a head, you win $10, but if you flip a tail, you lose $10. You started playing the game with $10. What would be your
10. What is the relationship between the effective annual yield and the holding period yield?
9. Your credit card company advertises that it charges you a 16.99% annual percentage rate (APR) on purchases. If your payments are monthly, what is the real APR charged by the credit card company?
8. What would happen to the expected rate of return if you thought that the riskiness of stocks had become greater?
c. What conclusion can you draw and why?
b. What would be your total return using the time-weighted rate of return?
a. What would be your total rate of return using the arithmetic mean?
4. How does risk affect your speculative and precautionary motives to holding cash balances?
3. Recall from your microeconomics course the concept of marginal utility and the law of diminishing marginal utility. As an example for the latter, consider your thirst: as you drink more and more
2. Contrast an investment in a savings account with one in a stock. What are the differences between the two investments? What would entice you to select the stock investment?
1. Suppose a friend of yours approaches you and offers to give you $110 in a year if you agree to give him $100 now. Assume that you are absolutely certain that you will be repaid. What is your
c. Compute the new weights of each risky asset when you shift $10,000 from stock H to the money market account
b. Now compute the fractions (weights) invested in each asset relative to the total investment budget. Add these percentages up. What is your total?
a. Compute the fractions you invested in each asset.
13. Say you want to invest $300,000 in a portfolio of securities. Of that amount, you allocate $90,000 to a money market account and the rest to risky assets. The risky assets are stock H and bond N;
b. What if you placed a stop-loss order at $55?
a. What would be the maximum possible loss, theoretically speaking?
12. Assume that you sell short 100 shares of AXZ company, which currently sell for$50 per share.
b. What is the meaning of that number?
a. How was the “days to cover” number derived?
11. Assume that you are given the following information on the Green Mountain company regarding the short sales of its stock:Shares shorted (000s): 9,184.5 Percent float: 49.4 Days to cover: 27
10. Assume that you wish to invest $200 in a security on a monthly basis and the current market price of the security is $15. Assume also that the price of the security changes by $2.00 every month.
b. If your broker has a maintenance margin of 25% of the value of your short position, how far can the price of the stock rise before you get a margin call?
a. What is the maximum amount of cash equivalent that you must put up with your broker to abide by the Federal Reserve’s initial margin requirement of 50%?
9. Assume that you expect the price of a stock to go down in the near future and you sell short 100 shares of that stock. The current market price of the share is $50.
e. Finally, what did your use of margin do to your rate of return in this case?
d. Now assume that your optimistic (bullish) expectations were not realized and the stock’s price actually declined by 15%. What would be your rate of return in this case?
c. What would be your rate of return if you had bought the stock with your own money? What did the use of margin do to your rate of return?
b. If your broker has a maintenance margin of 25%, how far can the price of the stock fall before he makes you a margin call?
a. If you are optimistic about the stock’s prospects, expecting it to go up by 15%during next year, what would be your rate of return?
8. Assume that the price of a share of company N trades at $50. You have $5,000 to invest and borrow another $5,000 from your broker, so that you invest $10,000 in the stock. The broker charges you
7. Assume that you sold short at $50 and the current market price of the stock is$40. What type of order can you place at, say, $45, to protect yourself from the short sale?
If you wish to protect your investment against downside risk, what kind of order can you place with your broker when you ask him to act if the price of the share hits $58?
6. Assume that you paid $50 for a share of company H, which is now trading at $60.
5. If you begin your investment experience with a decision on how much money to put in, say three asset classes, and then you proceed to choose among the available securities in each asset class,
4. Why do we say that the use of margin is a “double-edged sword”?
3. If you instruct your broker to buy 100 shares of Microsoft Corporation at the best current price, what type of order are you placing?
2. Why do people buy stocks and bonds rather than just placing their money in safe bank accounts or into other safe cash instruments?
1. Although we stated in the text that the average investor is risk-averse, can you think of some investors who are risk lovers or risk-neutral?
???? Know how to engage in margin purchases and short sales as well as their pros and cons ???? Learn the various types or orders for securities purchases or sales
???? Understand the two steps of the investment process ???? Grasp the risk-return trade-off all investors face ???? See how investors apply the investment process ???? See the difference between
11. Which business has more or less financial and/or real assets, a bank or IBM? What is each business’s social function
10. Classify the following assets as real or financial: factory, stock, option, pencil, knowledge, education.
9. How do you understand the term efficiency as applied to the financial markets?
8. Would you be willing to accept more risk if you expected to earn higher return? If so, which attitude toward risk would you have?
7. We discussed social responsibility in the text. Can you advance an argument for the mandatory and for the nonvoluntary requirement of such behavior for firms by government law?
6. We discussed the conflicts that arise between existing and new stockholders when management wishes to undertake new projects financed by equity. Now consider the following scenario: The management

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