Investments Flashcards
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?
Weak
What are three main categories of people/entities that would invest in a preferred stock paying a high qualified dividend?
- pension plan
- individual in a low tax bracket
- Regular C corp with excess funds to invest
At what rate would a regular C corp be taxed on mortgage reit income?
corporate tax rate
At what rate would an s corp be taxed on mortgage reit income?
It would be a conduit to shareholders
T/F
ADR holders do not receive foreign tax credits for income tax paid to a foreign country.
False
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?
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).
How do you calculate the dollar amount of a maintenance call?
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
Is the down jones price weighted or value weighted?
price
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?
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.
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?
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).
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?
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.
In the APT model, when a factor is zero, the factor has no impact on the return because it is _____ or _____.
expected or anticipated
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?
(1 - 0.50) / (1 - 0.30) x $75
Short cut: Take 2/3 of $75 and look for the next highest number
A REMIC is established as a corporation. How is its income taxed?
The initial form of the issuing entity is ignored, and the entity is taxed under unique REMIC rules (pass-through entity).
Are annuity contract premiums deductible?
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).