Investments Flashcards

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1
Q

Kim values individual assets using the SML required rate of return line. She uses it to buy and sell individual stocks; sometimes she even shorts stocks. She also believes in which form of EMH?

A

Weak

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2
Q

What are three main categories of people/entities that would invest in a preferred stock paying a high qualified dividend?

A
  1. pension plan
  2. individual in a low tax bracket
  3. Regular C corp with excess funds to invest
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3
Q

At what rate would a regular C corp be taxed on mortgage reit income?

A

corporate tax rate

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4
Q

At what rate would an s corp be taxed on mortgage reit income?

A

It would be a conduit to shareholders

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5
Q

T/F

ADR holders do not receive foreign tax credits for income tax paid to a foreign country.

A

False

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6
Q

A stock is trading at $56-1/4 in early January. The following call options are available:

Strike price $53
January $3-1/4
April $4
July $5-3/8

Which of the following most affects this call series of options?

A

Time
As time diminishes and the option approaches expiration, its value declines. A volatile stock is more attractive to a speculator than an option on a stock whose price tends to be stable. These numbers don’t indicate any volatility. The stock is $3-1/4 in the money, and the option about to expire is $3-1/4 (zero time and volatility).

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7
Q

How do you calculate the dollar amount of a maintenance call?

A

30% of the current value is required
A client buys 100 shares of stock at $75 per share. The initial margin is 50%. The maintenance margin is 30%. If the stock suddenly drops to $40, what will be the dollar amount of the maintenance call?

30% of the current value is required.

30% of $4,000 = $1,200
$4,000 - $3,750* = $250
Maintenance call = $1,200 - $250 = $950

*100 shares at $75 = $7,500; 50% margin is $3,750 margin loan

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8
Q

Is the down jones price weighted or value weighted?

A

price

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9
Q

Harry has been tracking a stock for years. The company repeatedly increases its dividend. The dividend is currently $2 per share. Harry thinks the dividend will increase by 15% for 3 years and then increase constantly at 10% per year due to a hot product. His required rate of return for purchases of this type is 12%. What is the maximum he should pay for this stock using the DDM shortcut method?

A

V = [$2.00 (1 + 0.10)] / (0.12 - 0.10) = $110.00

Then pick the next highest number above $110.00. The question is asking about the maximum. Naturally, if he could buy it for 108.32, that would be a good buy. But, the question is asking about the maximum.

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10
Q

Long invests $10,000 U.S. dollars in Toyota (Tokyo Exchange) when the exchange rate is 100 yen (¥) to the dollar ($). Toyota increases in value by 25%. Mr. Long sells the Toyota stock when the exchange rate is ¥80 to the U.S. dollar. This is an example of which of the following?

A

Yen revaluation
Mr. Long received $15,625, a 56.25% return on his original $10,000 investment. His 25% return was enhanced by the increase in the value of the ¥ relative to dollars (devaluation of the dollar).

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11
Q

Harry buys stock at $60 per share (100 shares on margin (50%). The margin interest is 12% annually. After 3 months, he sells the stock for $65. What is his holding period return?

A

HPR = [($6,500 - $3,090) - $3,000] / $3,000

HPR = $410 / $3,000

HPR = 13.67

Factor in the margin interest ($90 for the quarter). He only bought 100 shares. He only paid for 50 shares. The other 50 shares were bought on margin.

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12
Q

In the APT model, when a factor is zero, the factor has no impact on the return because it is _____ or _____.

A

expected or anticipated

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13
Q

A client buys 100 shares of stock at $75 per share. The initial margin is 50%. The maintenance margin is 30%. At what trade price will the margin call start?

A

(1 - 0.50) / (1 - 0.30) x $75

Short cut: Take 2/3 of $75 and look for the next highest number

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14
Q

A REMIC is established as a corporation. How is its income taxed?

A

The initial form of the issuing entity is ignored, and the entity is taxed under unique REMIC rules (pass-through entity).

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15
Q

Are annuity contract premiums deductible?

A

Yes, annuity contract premiums are deductible when the annuity premiums are paid in the form of a bonus to the employee (the employee owns the annuity).

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16
Q

At the point of tangency (CML & Efficient Frontier), the investor will hold _____.

A

100% treasuries

17
Q

Under Black/Scholes, what will decrease the value

of a stock option?

A

an increase in the strike price

An increase in the price of the stock, the time to expiration, the volatility of the stock and in interest rates will increase the value of a call option.

18
Q

An investor purchases 200 shares of X at $150 per share on margin. The initial margin requirement is $15,000. If the maintenance margin is 25%, what is the amount of the maintenance call if the stock drops to $90?

A

200 shares x 90 = $18,000

25% x $18,000 = $4,500 equity required

$18,000 - $15,000 = -$3,000 actual equity

maintenance call = $1,500

19
Q

If a bond is selling at a discount how does the relationship between current yield and yield to maturity change?

A

It’s yield to maturity exceeds the current yield

When the current yield declines, the bond becomes a premium bond.

20
Q

How do you calculate the conversion price of a bond?

A

Conversion = ($1,000/$50 what it’s convertible at) x $58 (market price of common) = $1,160

This is higher than what the bond sells for. he should buy it based on conversion value.

*Needs to be in 2 payments per year

21
Q

Janet is interested in purchasing XYZ stock. Calculate the intrinsic value of the stock using the dividend discount model (DDM) presuming a current dividend of $2. The dividend is expected to grow for three years at 15% and then at 10% thereafter. Janet’s required rate of return is 12%. What should she pay for the stock?

A

Shortcut method: Since the 1st return is higher than the 2nd return, calculate the value using the DDM with the 2nd return (10%) to get $110 and then choose the next highest number which is $125.34.

P = [D (1 + g)] / (r - g)
P = [$2.00 (1 + 0.10)] / (0.12 - 0.10)
P = $110.00 (After calculating, choose the next highest number.)
22
Q

characteristics of EE bond in UTMA

A

owned by the child

taxed as ord income at redemption

23
Q

characteristics of EE education bonds

A

normally owned by parent

tax free if parent’s AGI is less than phaseout at redemption

24
Q

If the covariance is 0, what is the correlation?

so then house do you find the SD of a portfolio of two stocks OF EQUAL PROPORTION given the SD and risk of each?

A

0

you square the two risks, add together, and take the square root