Questions and Answers of Investments Analysis And Management

To obtain an idea of the returns that can result from changes in interest rates, consider longterm T‐bond returns over some selected years. In 1982, the return from long‐term T‐bond funds was
For the Pfizer options referenced earlier:Time value of March 25 call = $1.15 - $0.70 - $0.45Time value of March 27.50 put = $1.90 - $1.80 - $0.10
For the Pfizer options:Premium for March 25 call = $0.70 + $0.45 + $1.15Premium for March 27.50 put = $1.80 + $0.10 - $1.90
Varian, Inc. reported that “adjusted operating earnings decreased 6.0 percent to $25.9 million in the third quarter of fiscal year 2008. Adjusted operating profit margin was 10.6 percent for the
As the economy approaches a recession, many analysts believe that companies use aggressive accounting techniques to prop up earnings. Such techniques include recognizing revenues before they are
In 2014, Coca‐Cola’s equity multiplier was 3.04, calculated as total assets divided by stock-holder equity. The equity multiplier indicates the level of financial leverage a firm employs. In
Combining these two factors, ROA and leverage, for Coca‐Cola produces the following: ROE = 7.71% x 3.04 =23.44%
Lucent Technologies announced that earnings would be less than expected for a particular quarter, and at the same time it expressed doubt about earnings for the next fiscal year. Following the
In late 2011, Green Mountain Coffee Roasters announced that its revenues increased 91 percent. The stock dropped almost 40 percent immediately. Why? The market’s expectation was for revenues to
Apple Computer reported record first‐quarter earnings in a particular year. Apple earned 68 cents a share, up from 37 cents a share in the same period a year earlier. Nevertheless, its shares
In early 2015, Coke was trading at $41. ◨ Based on TTM (trailing 12‐month) earnings, the P/E was 25.7 ◨ Based on expected earnings for 2016, the P/E was 19.3
Assume that the beta for Intel is 1.10. Therefore, we know that Intel has slightly more systematic risk than the market as a whole. That is, on average, its stock price fluctuates more than average
Assume the 10‐year Treasury bond yield to maturity (YTM) is 4.54 percent, compared to 4.39 percent a week earlier. The yield has increased 15 basis points in a week, or 0.15 percent. Calculate the
According to the expectations theory, a five‐year bond will have the same expected return as a two‐year bond held to maturity plus a three‐year bond bought at the beginning of the third year.
A zero‐coupon bond has 12 years to maturity and is selling for $300. Given the 24 semiannual periods, the power to be used in raising the ratio of $1,000/$300, or 3.3333, is 0.04167 (calculated as
Assume a 15‐year, 6 percent bond is callable in 5 years at a price of $1,050. The bond currently sells for $1,075. The semiannual yield to call is calculated asI/YR, the semiannual yield to call,
Assume an investor had $1,000 to invest three years ago. This investor purchased a 10 percent coupon bond with a three‐year maturity at face value. The promised YTM for this bond was 10
Consider newly issued bond A with a three‐year maturity, a 10 percent coupon rate, and a required semiannual yield of 5 percent. Assuming semiannual interest payments of $50 for each of the next
Table 17‐2 shows prices for a 10 percent coupon bond for market yields from 6 to 14 percent and for maturity dates from 1 to 30 years. For any given maturity, if we move from the 10 percent level,
Table 17‐2 shows that for the 15‐year 10 percent coupon bond, the price would be $1,172.92 if market rates were to decline from 10 percent to 8 percent, resulting in a price appreciation of
From Table 17‐2, we can see the effect that bond maturity has on the sensitivity of bond prices to interest rate changes. For example, for two 10 percent coupon bonds, if market yields drop from 10
As we saw above, a 2‐percentage‐point drop in market yields from 10 percent to 8 percent increased the price of the 15‐year bond to $1,172.92, a 17.29 percent change, while the price of the
As an illustration of the return and risk situation for an investor who is seeking steady returns, consider long‐term Treasury securities for the period 1926–2010. The securities have no
From November 1, 2001, to April 1, 2002, the 10‐year T‐bond rate went from 4.2 percent to 5.4 percent, and the face value of these bonds went down more than 9 percent. Thus, in only five months,
In 2014, Vanguard’s total international bond fund returned 8.82 percent versus only 5.89 percent for its total U.S. bond fund. However, its emerging market bond fund returned only 4.34 percent in
The T. Rowe Price International Bond Fund provides U.S. investors with diversification away from U.S. markets. The fund invests heavily in government bonds from developed countries, although it also
With $100,000 to invest, an investor could put approximately $20,000 in each of five bonds, with the first bond maturing two years from now, the second maturing three years from now, and so forth.
The Vanguard Total Bond Market Index is one of the largest bond index funds. Its expense ratio is a mere 0.20 percent, which Vanguard states is on average 77 percent lower than other bond funds with
A report from Fidelity’s Investment Grade Bond Fund made the following observation: “Yield curve positioning was a solid contributor to fund performance during the year while the yield curve
The Fed started raising short‐term interest rates in June 2004 and raised them 14 times through early 2006. When the raises started, the 10‐year Treasury note yielded about 4.6 percent. In
Assume that Carl is optimistic about Intel’s prospects. Carl instructs his broker to buy a March call option on Intel at a strike price of $40. Assume that the stock price is $41.15, and the
Consider the credit spread, as reflected by the difference in rates between 10‐year Treasuries and corporate Baa bonds. In 2008, the spread widened to approximately 4 percent versus the average of
Table 18‐1 shows the duration calculation for a 5 percent, five‐year bond. The bond is priced at $974.17 because interest rates have risen so that the current Yield to Maturity (YTM) is 5.6
A writer (seller) of a Coca‐Cola six‐month put at $55 per share is obligated, under certain circumstances, to receive from the put holder 100 shares of Coke for which the writer will pay $55 per
A Coca‐Cola six‐month call option at $55 per share gives the buyer the right (an option) to purchase 100 shares of Coke at $55 per share from a writer (seller) of the option anytime during the
Using our same bond with a modified duration of 3.861, assume an instantaneous yield change of 20 basis points ( 0.0020), from 10 percent to 10.20 percent. The approximate change in price based on
Using the duration of 4.054 years from Example 18‐12 and the YTM of 10 percent, the modified duration isExample 18‐12Consider a 10 percent coupon bond with a YTM of 10 percent and a five‐year
Consider a 10 percent coupon bond with a YTM of 10 percent and a five‐year life. This bond has a duration of 4.054 years, approximately 1 year less than maturity. However, if the maturity of this
Equity LEAPS are available on over 2,500 individual stocks including Intel and Adobe, and Index LEAPS are available on over 20 indexes including the S&P 100 and S&P 500.
Assume that an investor buys a Microsoft three‐month call with an exercise price of $50. The payoff for the call at expiration is a function of the stock price at that time. For example, at
Assume that a writer sells a March Intel put at an exercise price of $40 when the stock price is $41.15. The premium is $0.30, or $30 for 100 shares, which the buyer of the put pays and the seller
Figure 19‐2 illustrates the profit situation for a call buyer. The stock price is assumed to be $48, and a six‐month call with an exercise price of $50 has a premium of $4. Up to the exercise
Figure 19‐5 illustrates the profit–loss position for the seller of a put. Assume that a six‐month put is sold at an exercise price of $50 for a premium of $4. The seller of a naked put receives
Assume that an investor purchased 100 shares of Hewlett‐Packard last year for $40 per share and this year, with the stock price at $48, writes a (covered) six‐month call with an exercise price of
Assume in March an investor decides to sell 600 shares of Google stock at its current price of $550 but wants to delay the sale until the next tax year. To ensure the $550 selling price, the investor
Consider a stock currently selling at $40. We analyze two options with exercise prices that are $5 on either side of the stock price. Exercise Price $45 $40 $35 Stock Price = 40 In the money put At
Assume that on February 10, Pfizer closes at $25.70 and that a March call option with a strike price of 25 is available for a price of $1.15. This option is in the money because the stock price is
Assume that there is a Pfizer March put available on February 10 with a strike price of $27.50. The current market price of the stock is $25.70. The price of the put on that day is $1.90:Intrinsic
Consider the Pfizer March 25 call option, with the stock price at $25.70. An investor who owned the call and wanted to own the common would be better off to sell the option at $1.15 and purchase the
The following is an example of the use of the Black–Scholes option pricing formula: Solve for C. AssumeS = $40E = $45r = 0.10t = 0.5 (6 months)σ = 0.45 d₁ In(40/45) + [0.10+0.5(0.45)²10.5 0.45
In Example 19‐17, N(d1) was 0.4785; therefore, to hedge a 1,000 share portfolio, the investor should write 21 call options [(1/0.4785) 1,000 2,089.86 individual options or about 21 contracts]. A $1
Consider the information for the call given earlier. Since the Black–Scholes model uses continuous interest, the discount factor is expressed in continuous form. It is equal to ert or e0.10(0.5).
The CBOE has a nice tutorial on options for investors, starting with the basics and going to more advanced topics—see www.cboe.com. The International Securities Exchange (ISE) offers an options
Assume that an investor holds an S&P 100 Index option (OEX)—the S&P 100 index consists of 100 stocks (capitalization weighted) from a broad range of industries. The strike price is 580, and the
In early April, an investor expects the stock market to rise strongly over the next two to three months. This investor decides to purchase an S&P 100 index May 590 call, currently selling for 24, on
Assume that an investor has a portfolio of NYSE blue‐chip common stocks currently worth $60,000. It is early April, and the investor is concerned about a market decline over the next couple of
Suppose a manufacturer of class rings is gathering orders to fill for this school year and wishes to ensure a price for gold to be delivered six months from now, when the rings will actually be
According to its website, CME Group is the world’s leading derivatives marketplace, handling 3 billion contracts worth approximately $1 quadrillion annually. The company offers individuals and
Assume that the initial margin is equal to 5 percent of the total value and an investor holds one contract in an account. If the price of the contract changes by 5 percent because the price of the
Table 20‐1 illustrates how accounts are marked to market daily. Consider an investor who buys a stock‐index futures contract on the DJJA using the CBOT® DJIASM futures contract. Assume that the
Assume in December a speculator buys two May wheat contracts at 624’0 ($6.24 per bushel). The margin requirement for each is $1,700, and the contract size is 5,000 bushels. Sometime later the
Let’s consider the euro/dollar (EUR/USD) futures. Assume a U.S. investor bought $270,000 of French notes in January because of their much higher yields relative to U.S. notes and plans to sell them
Assume that in November a speculator thinks interest rates will rise over the next two weeks and wishes to profit from this expectation. The investor can sell one December T‐bond futures contract
Assume that an investor with $850,000 to invest believes that the stock market will advance but has been unable to select the stocks he or she wishes to hold. The S&P 500 futures contract is at 1140.
Assume that an investor buys 10 SSF contracts on Microsoft at $50 and sells them two months later at $60. The profit on this position would be[$60 - $50] x 100 shares x 10 contracts = $10,000
Assume that an investor shorts 10 SSF contracts on Microsoft at $50 and buys them back at $57. The loss on this position would be[$50 - $57] x 100shares x 10contracts = -$7,000
At a 3 percent inflation rate, the purchasing power of a dollar is cut in half in less than 25 years. Therefore, someone retiring at age 60 who lives to approximately 85 and does not protect himself
In recent years, dividends have been taxed at 15 percent, the lowest tax rate on dividends in modern history. Furthermore, long‐term capital gains have been taxed at a maximum of 15 percent.
An investor with a 10 percent return would have an 8.5 percent after‐tax return with a longterm capital gain. The same return taxed at the top federal marginal tax rate of 35 percent would result
The cumulative gain on the S&P 500 for 1995 and 1996 was 69.2 percent, the best two‐year period in a generation and one of the best in the history of stock market returns (only four other
To appreciate the importance of the asset allocation decision, think of an investor with $10,000 to invest and a five‐year investment horizon at the beginning of 2010. If the investor, believing
Consider a 10 percent coupon bond with three years to maturity. The annual coupon is $100, which is paid $50 every six months, and the total number of semiannual periods is six. Assume that the bond
Given the following information: Standard deviation for stock X = 12 percent Standard deviation for stock Y = 20 percent Expected return for stock X = 16 percent Expected return for stock Y = 22
Given the information in Problem 8‐1, the risk (standard deviation) for a portfolio consisting of 50 percent invested in X and 50 percent invested in Y can be seen to be:a. 19 percentb. 16
Given the information in Problem 8‐1, assume now that the correlation coefficient between stocks X and Y is + 1.0. Choose the investment below that represents the minimum‐risk portfolio:a. 100
The market has an expected return of 11 percent, and the risk‐free rate is 5 percent. Pfizer has a beta of 0.9. What is the required rate of return for Pfizer?
The market has an expected return of 12 percent, and the risk‐free rate is 5 percent. Activalue Corp’s systematic risk is 80 percent that of the market as a whole. What is the required rate of
Electron Corporation’s returns are 50 percent more sensitive to market moves than the average stock. The market risk premium is 7 percent. The risk‐free rate is 5 percent. What is the required
Jay Technology is currently selling for $45 a share with an expected dividend in the coming year of $2 per share. If the expected growth rate in dividends is 9 percent, what is the required rate of
Johnson and Johnson Pharmaceuticals (J&J) is expected to earn $2 per share next year. J&J has a payout ratio of 40 percent. Earnings and dividends have been growing at a constant rate of 10 percent
Puckett Foundries is expected to pay a dividend of $0.60 next year, $1.10 the following year, and $1.25 each year thereafter. The required rate of return on this stock is 18 percent. How much should
Mansur Industries is currently paying a dividend of $1 per share, which is not expected to change in the future. The current price of this stock is $12. What is the expected rate of return on this
You expect a stock’s dividend to increase by a compound factor of 1.7835 over eight years (compound growth). The current price is $45. The expected dividend is $2.00. What is the expected return on
McMillan Company is not expected to pay a dividend for five years but is then expected to pay a $3 per‐share dividend and to maintain that dividend forever. If an investor has a 25 percent required
Batler Corp is currently selling for $50 and paying a $2 dividend. Dividends are expected to double in eight years. What is the expected rate of return for this stock?
Naidu Corporation makes advanced computer components. It currently pays no dividend, but it expects to begin paying $1 a share four years from now. The expected dividends in subsequent years are also
Go to www.morningstar.com and look at Morgan Stanley’s S&P 500 “A” shares ( symbol = SPIAX). Assuming you invest $10,000 in these shares, how much would your account be worth on the first day
Consider a portfolio manager whose portfolio has $5 billion in assets. If this manager could increase the return on the portfolio an additional two‐tenths of 1 percent, how much would that add to
Shao Electronics has total assets of $550 million and stockholder’s equity of $330 million. It has total debt of $220 million. ROA is 11.3 percent. What is the ROE for this company?
Brozik Corp. expects to earn $2.90 next year. It has a payout ratio of 40 percent. The expected growth for this stock is 8 percent per year indefinitely. The leverage factor for this company is 1.9.
Gritta Industries expects to earn $2.50 next year and pay $1.75 in dividends. The expected growth rate, g, is 7 percent and the required return is 12 percent. Determine the P/E ratio for this company.
The Porras Corporation has sales of $30,000,000, total assets of $44,000,000, stockholders’ equity of $21,500,000, book value per share of $15.46, and net income of $6,230,000. What is the EPS for
A 7 percent coupon bond has five years remaining to maturity. It is priced to yield 8 percent. What is its current price?
A 5‐year zero‐coupon bond with a face value of $1,000 is priced to yield 6.5 percent. What is the price of this bond today?
Consider a 4 percent coupon bond with 15 years to maturity. Determine the YTM that would result in a price of $300 for the bond.
Using Problem 17‐11, assume that 28 years remain to maturity. How would the YTM change? Does the current yield change?Problem 17‐11Texaco Oil’s 10 percent coupon bonds are selling at 109.375.
A seven‐year, 5 percent coupon bond is sold at par. However, soon after the bond is sold, the going rate for this bond is 5.01 percent. What is the new price of the bond?
The Saxena Corporation sells a zero‐coupon bond with a 7 percent YTM and a maturity of 20 years. Assume interest rates remain constant for four years. What will be the price of this bond in four
Consider a 6.5 percent bond with a maturity of 10 years. The price of this bond is $972.50. The Macaulay duration is 5.9 years. What is the modified duration for this bond?
Closing prices for SilTech and New Mines for the years 1999–2014 are shown below.a. Calculate the total returns for each stock for the years 2000–2014 to three decimal places. Note that the

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