Measures of Investment Returns - Review Questions Flashcards
If an investor bought a call option for $400 two weeks ago, and sold the option today for $540, what would the HPR be?
$540−$400$ / 400=.35=35%
The HPR can easily be asked for a bond. An investor pays $875 for a bond with an annual coupon of 6%. There is exactly 7 years to go before the bond matures. Assuming that the investor does hold the bond until maturity, what is the HPR of the bond?
$1,000−$875+420 / 875=62.3%
This could have been asked as a capital appreciation and income yield component: $1,000−$875 / $875=14.3%
(Capital gain component) and $420 (7 coupon payments × $60) divided by $875 = 48%. The two together would sum to the total of 62.3%.
The HPR can easily be asked for a bond. An investor pays $875 for a bond with an annual coupon of 6%. There is exactly 7 years to go before the bond matures. Assuming that the investor does hold the bond until maturity, what is the capital appreciation (Capital gain component)?
Capital appreciation : $1,000−$875 / $875=14.3%
(Capital gain component)
The HPR can easily be asked for a bond. An investor pays $875 for a bond with an annual coupon of 6%. There is exactly 7 years to go before the bond matures. Assuming that the investor does hold the bond until maturity, what is the income yield component?
Income yield component: $420 (7 coupon payments × $60) divided by $875 = 48%.
Dan purchased a round lot of 100 shares of Dannon stock for $2,000 or $20/share. Two years later, he sold his shares for $32/share. Dan also received dividends of $4/share. What would be the holding period return?
($3,200+$400−$2,000) / $2,000=.80 or 80%
When Maura was laid off, she rolled over her 401k into 3 funds in an IRA: $2,000 in a Growth Fund, $4,000 in a Growth & Income Fund and $2,500 in a Small Company Fund. After 5 years, her statement reflected balances in the Growth fund of $2,782, Growth & Income Fund of $5,699, and Small Company Fund of $3,127. Which one the funds had the best holding period return?
Growth & Income Fund had the best holding period return.
Growth & Income Fund: ($5,699−$4,000)$4,000=42%
Growth Fund: ($2,782−$2,000)$2,000=39%
Small Company Fund: ($3,127−$2,500)$2,500=25%
Kerry held an S&P Index Fund for three years. Her returns during that time were 20%, -10%, and 5% respectively. What was her arithmetic mean return?
(1 / 3)(.20−.10+.05)=.05
Or
(.20−.10+.05) / 3=.05
or 5%
Kerry held an S&P Index Fund for three years. Her returns during that time were 20%, -10%, and 5% respectively. What was her geometric mean return?
[(1 + .2)(1 - .1)(1 + .05)]1/3 - 1
= [(1.2)(.9)(1.05)]1/3 - 1
= (1.134)1/3 - 1
= 4.28%
What would Kerry’s geometric return be if her portfolio yielded -20% return in year one, 40% in year two and 20% in year three?
[(1 − .2)(1+.4)(1 + .2)]^1/3 − 1 = 10.357%.
Jed was in the 31% tax bracket and his taxable investments had a total return of 45%. What was his after-tax return?
Jed’s after-tax return is equal to his taxable return times reciprocal of his tax bracket. 45%(1 − 0.31) = 31.05%
Which of the following statements are true about YTM and YTC? (Check all that are true.)
1) YTM is based on maturity date of the bond
2) YTC is based on first callable date
3) YTM is appropriate for callable bonds
4) YTC is appropriate for non-callable bonds
1) YTM is based on maturity date of the bond
2) YTC is based on first callable date
YTM is the yield to the maturity date of the bond. The YTC is the yield up to the first date that the yield can be called. The appropriate yield to choose for callable bonds may be the lower of the YTC and YTM. YTC cannot be determined for a non-callable bond.
Joe purchases 100 shares of ABC stock for $40 per share. Two years later, Joe sells the 100 shares for $52 per share. In addition, Joe received a dividend of $2 per share in the first year and a dividend of $3 per share in the second year. What is Joe’s single period rate of return?
1) 33.5%
2) 42.5%
3) 28.7%
4) 45.6%
2) 42.5%
The sales price is $5,200 (100 X $52). The purchase price (beginning value) is $4,000 (100 X $40). The cash flow is $500 (100 X $2) + (100 X $3). Therefore the holding period return is:
$5,200 - $4,000 + $500/$4,000 = 42.5%
The Orion Fund has the following returns for each of the last five years:
Year 1 Year 2 Year 3 Year 4 Year 5
15.2% 9.1% 6.5% 18.3% 16.8%
What is the geometric return for this entire set of returns?
1) 11.12%
2) 14.08%
3) 13.09%
4) 15.65%
3) 13.09%
5√[(1+0.152)(1+0.091)(1+0.065)(1+0.183)(1+0.168)]
HP 12C
1.152 ENTER 1.091 x 1.065 x 1.183 x 1.168 x 5 1/x y(x power) 1 -
Conglomerate Industries, Inc. is offering a $1,000 bond that matures in 11 years, pays an 8.8% coupon paid semi-annually, and is currently priced at $960.00. What is the bond’s yield-to-maturity?
1) 12.01%
2) 11.49%
3) 9.39%
4) 8.79%
3) 9.39%
Using the HP-12 C calculator, make the following entries to arrive at the yield-to-maturity (internal rate of return):
g, END
11, ENTER, 2, x, n
960, CHS, PV
1000, FV
88, ENTER, 2, ⁄, PMT
i
2, x
James recently bought a bond for $900 that is callable in seven years at $1,200. The bond matures in 20 years and has an 11.5% coupon, paid semiannually. What is the yield to call (YTC) on the bond?
1) 12.59%
2) 8.03%
3) 15.57%
4) 13.75%
3) 15.57%
The inputs required to find the yield to call are as follows: PV= -900, FV= 1200, N=7 X 2 = 14, PMT = (1,000 × 0.115)/2 = 57.5. Solve for the interest rate. The interest rate must be doubled to find the annual yield to call. Remember to use years to call as the number of years. Also, use the call price as the future value.
