Q1) Suppose that there are two closed-end mutual funds, A and B. Both trade at $8, where the net asset value per share is $10. Fund A is a terminated fund. (A terminated fund is a fund with a termination date, the date at which the assets are liquidated and distributed to the shareholders. Its termination date is in 1 year from now. Fund B is not a terminated fund.
a) Calculate the premium or discount corresponding to these two funds.
b) Suppose that the net asset value of both funds will increase to $12 one year from now.
Calculate the rate of return to the investor in Fund A for this year. Can you calculate the rate of return corresponding to Fund B under these circumstances?
Q2) An ADR of Honda Motor is traded on the NYSE for $22. The exchange rate is 100 yen per dollar. Suppose that Honda Motor is trading in Japan for 2,500 yen. How can you use this information to make a profit? Explain.
Q3) Suppose a bond is sold for $1,000 and pays an annual interest rate of 10% on the par value, which is also $1,000. The bond was issued 20 years ago and will mature in one week. You own some of these bonds. The yield on these bonds suddenly goes way up, to 15%. Calculate your loss. Explain your results?
Q4) Suppose a bond has a par value of $1,000 and a market value of $1,100. It is convertible into 40 shares of stock, and the current stock price is $26.
a. What is the conversion ratio?
b. What is the conversion price?
c. What is the conversion value?
Q5) Suppose you buy a stock for $100. You receive $4 as a cash dividend at the end of the year. The stock price at the end of the year is $95.
a. What is the rate of return on your investment?
b. What is the dividend yield as measured at the beginning of the year? At the end of the year?
Q6) The net asset value of a mutual fund is $12. The share price is $13.
a. Is it an open-end fund or a closed-end fund?
Calculate the premium or discount.
Q7) Bill buys a $1000 par value 10-year bond for $850. It pays $75 a year in interest. Calculate Bill’s yield to maturity on the bond using a financial calculator or software.
Q8) Alex holds a convertible bond with a market value of $1700. If the conversion ratio is 50 and the stock’s price is $39 per share, should he convert the bond or sell the bond?
Q9) Classify each of the following types of assets as either money market securities or capital market securities.
U.S. Treasury notes __________ Commercial paper __________
Municipal bonds __________ Mortgages __________
Federal funds __________ Treasury bills __________
Eurodollars __________ Corporate bonds __________
Common stocks __________ Negotiable CDs __________
Q10) Arrange the following from earliest to latest:
Ex-dividend date
Declaration date
Payment date
Date of record
Q11) Bravo Company stock currently sells for $100 per share. Bravo’s board of directors’ has declared a $1 per share dividend, and the ex-dividend date is tomorrow. Ignoring the effect of any other new information, what would you expect to happen to the price of Bravo stock tomorrow?
Q12) Jeff owns 300 shares of Cappa Company stock. Each share is worth $30. If the stock splits 3-for-1, how many shares will Jeff own? What will each share be worth? Reconsider the preceding problem. How many shares will Jeff own, and what will each share be worth, if the stock splits 5-for-2?
Q13) Forest Company has convertible bonds outstanding with a $1,000 par value and a 6% coupon. Forest’s common stock currently sells for $80 per share. The bonds’ conversion ratio is 20. Calculate the bonds’ conversion price and conversion value. Do you think the bonds’ conversion premium is large or small?
Q14) What is the difference between buying a call option and buying a futures contract? Distinguish among interest rate risk, price risk, and reinvestment rate risk for bondholders?
Q16) What are the advantages and disadvantages of investing in bonds?
Q17) A junk bond is trading for $800 and matures exactly 1 year from now at $1,000. There is no interest paid between now and maturity.
a. Calculate the yield to maturity on the bond.
How do you explain your results, knowing that the interest rate on government bonds is only 5% a year?
Q18) What is the P/E ratio, and how is it calculated?
Q19) Give an example of how futures are used to hedge financial price risk and to speculate on the direction of future prices.
Q20) The prices of the stock of Alamo Rent-A-Car and the S&P 500 index are as follows:
Year 1 2 3 4
Alamo $100 $114 $110 $112
S&P $300 $280 $240 $260
Is Alamo’s stock a defensive stock? Why?
Q21) Divide the following assets into marketable and non-marketable assets: common stock, stamps, art, bonds, real estate, super computers, and mutual funds.
Q22) You are considering opening up a department store or purchasing shares of stock in a national chain of department stores such as Dayton Hudson traded on the NYSE. Which of the two investments have a more flexible investment holding period? Which is more liquid?
Q23) Joe-Bob from L.A. decided to invest $950 (price) in a 12% semiannual, 3-year bond. What is the yield to maturity (internal rate of return, or IRR) if the par value is $1,000?
Q24) A bond is sold for $700 and matures in 5 years. It pays $20 at the end of each year. The par value is $1,000. Calculate the yield to maturity (IRR) on the bond using a calculator or software.
