Questions and Answers of Fundamentals Of Investing

Define and differentiate between real estate and other tangibles. Give examples of each of these forms of investment.
How does real estate investment differ from securities investment? Why might adding real estate to your investment portfolio decrease your overall risk? Explain.
Define and differentiate between income property and speculative property. Differentiate between and give examples of residential and commercial income properties.
Briefly describe the following important features to consider when making a real estate investment.a. Physical propertyb. Property rightsc. Time horizond. Geographic area
What role does demand and supply play in determining the value of real estate? What are demographics and psychographics, and how are they related to demand? How does the principle of substitution
How do restrictions on use, location, site, improvements, and property management affect a property’s competitive edge?
Are real estate markets efficient? Why or why not? How does the efficiency or inefficiency of these markets affect both promotion and negotiation as parts of the property transfer process?
What is the market value of a property? What is real estate appraisal? Comment on the following statement: “Market value is always the price at which a property sells.”
Briefly describe each of the following approaches to real estate market value:a. Cost approachb. Comparative sales approachc. Income approach
What is real estate investment analysis? How does it differ from the concept of market value?
What is leverage, and what role does it play in real estate investment? How does it affect the risk–return values of a real estate investment?
What is net operating income (NOI)? What are after-tax cash flows? Why do real estate investors prefer to use ATCFs?
What is the net present value? What is the IRR? How are the NPV and IRR used to make real estate investment decisions?
List and briefly describe the 5 steps in the framework for real estate investment analysis shown in Figure 18.1. FIGURE 18.1 Framework for Real Estate Investment Analysis This framework depicts a
Define depreciation from a tax viewpoint. Explain why it is said to offer tax shelterpotential. What real estate investments provide this benefit? Explain.
Explain why, despite its being acceptable on the basis of NPV or of IRR, a real estate investment still might not be acceptable to a given investor.
What are other tangibles? Briefly describe the conditions that tend to cause tangibles to rise in price.
What are the three basic forms of tangible investments? Briefly discuss the investment merits of tangibles. Be sure to note the key factors that affect the future prices of tangibles.
Describe the different ways in which one can hold gold and other precious metals as a form of investing. Discuss gemstone investments in terms of quality, commissions, and liquidity.
What are some popular types of collectibles? What important variables should be taken into account when investing in them?
Assume you have inherited a large sum of money and wish to use part of it to make a real estate investment.a. Would you invest in income property or speculative property? Why? Describe the key
Imagine that you have been hired by a wealthy out-of-town investor to find him a residential income property investment with 5 to 10 units located within a 5-mile radius of the college or university
Contact a local commercial realtor and obtain a copy of a valuation he or she has performed on an investment property in your general geographic area.a. Review the analysis and critically evaluate
Contact a stockbroker and obtain and study a copy of a prospectus for a currently popular real estate investment trust (REIT).a. Indicate what type of REIT (equity, mortgage, or hybrid) it
Assume you’re interested in investing in gold to protect against an expected significant decline in consumer confidence and securities values.a. Isolate and evaluate the various alternatives for
Charles Cook, an investor, is considering two financing plans for purchasing a parcel of real estate costing $$50,000.$ Alternative X involves paying cash; alternative Y involves obtaining 80%
In the coming year, the Sandbergs expect a rental property investment costing $$120,000$ to have gross potential rental income of $$20,000,$ vacancy and collection losses equaling 5% of gross
Walt Hubble is contemplating selling rental property that originally cost $$200,000.$ He believes that it has appreciated in value at an annual rate of 6% over its 4-year holding period. He will
Bezie Foster has estimated the annual after-tax cash flows and after-tax net proceeds from sale (CFR) of a proposed real estate investment as noted below for the planned 4-year ownership period.The
Gary Sofer wants to estimate the market value of the Wabash Oaks Apartments, a 12-unit building with 6 one-bedroom units and 6 two-bedroom units. The present owner of Wabash Oaks provided Gary with
Dr. Marilyn Davis, a single, 34-year-old heart specialist, is considering the purchase of a small office condo. She wants to add some diversity to her investment portfolio, which now contains only
Apple stock is selling for $$120$ per share. Call options with a $$117$ exercise price are priced at $$12.$ What is the intrinsic value of the option, and what is the time value?
Twitter is trading at $$34.50.$ Call options with a strike price of $$35$ are priced at $$2.30$ . What is the intrinsic value of the option, and what is the time value?
Ibrahim bought 200 shares of a stock trading in the Abu Dhabi Securities Exchange at AED 12 (United Arab Emirates dirham) per share. Over time, the price of the stock increased to AED 18 per share.
Refer to Problem 14.9. What would the loss of the seller of the put option be if, at expiration, XLB is trading at $$20?$ What would the profit of the seller be if, at expiration, XLB is trading at
Name five variables that can affect the price of options, and briefly explain how each affects prices. How important are intrinsic value and time value to in-the-money options? To out-of-the-money
Which of the following methods is an investor least likely to use to terminate a futures contract?a. Exchanging cash for physical assetsb. Permitting the contract to expire worthlessc. Making an
Consider a put with a strike price of $$20$ and a premium of $$4.$ If the stock price is currently $$18,$ what is the breakeven price for the buyer of the put?a. $$16$b. $22c. $24
Consider a put with a strike price of $$20$ and a premium of $$4.$ If the stock price is currently $$18,$ what is the maximum loss to the naked writer of the put?a. $$16$b. $20c. Unlimited
Consider the following statements about a futures clearinghouse:Statement 1: “A clearinghouse in futures contracts allows for the offsetting of contracts prior to delivery.”Statement 2: “A
Consider the following statements regarding futures contracts that may be settled by delivery:Statement 1: “The long initiates the delivery process.”Statement 2: “For many such contracts,
Unless far out-of-the-money or far in-the-money, for otherwise identical call options, the longer the term to expiration, the lower the price fora. American call options but not European call
Compare an American call with a strike of 50 that expires in 90 days to an American call on the same underlying asset that has a strike of 60 and expires in 120 days. The underlying asset is selling
A call with a strike price of $$40$ is available on a stock currently trading for $$35$. The call expires in one year and the risk-free rate of return is 10%.The lower bound on this call’s
An investor writes a call option priced at $$3$ with an exercise price of $$100$ on a stock that he owns. The investor paid $$85$ for the stock. If at expiration of the call option the stock
An investor paid $$10$ for an option that is currently in-the-money $$5.$ If the underlying is priced at $$90,$ which of the following best describes that option?a. Call option with an exercise
A quote for a futures contract for British pounds is 1.6683. The contract size for British pounds is 62,500. What is the dollar equivalent of this contract?
The recent price per share of Dragon Vacations Inc. is $$50$ per share. Calls with exactly six months left to expiration are available on Dragon with strikes of $$45,$ $$50,$ and $$55.$ The
The recent price per share of Win Big, Inc., is €50 per share. Verna Hillsborough buys 100 shares at €50. To protect against a fall in price, Hillsborough buys one put, covering 100 shares of Win
Alessandro reads in an Italian newspaper that the European economy is heading into a deflationary period, and the ECB is using different stimulus strategies to support growth in the Eurozone. At the
Define a preferred stock. What types of prior claims do preferred shareholders enjoy? How do trust preferreds differ from traditional preferreds?
Briefly describe each of the following, and note how each differs from a conventional preferred stock.a. Convertible preferredsb. Floating-rate preferredsc. Prior preferred stocksd. Trust preferreds
An adjustable-rate preferred share is currently selling at a dividend yield of 9%. Assume that the dividend rate on the stock is adjusted once a year and that it is currently paying an annual
Kathleen “Penni” Jock is a young career woman who has built a substantial investment portfolio. Most of her holdings are preferred stocks—a situation she does not want to change. Penni is now
Preferred stock is a unique type of equity and is referred to as a hybrid security—it has characteristics of both bonds and common stock. In practice, preferred stocks are valued more like bonds,
The regular dividend on Hecla Mining preferred stock is $$0.875$ per quarter, or $$3.50$ per year. In December 2015, Hecla Preferred shares sold for $$57.$ What was their dividend yield?
In what ways is a preferred stock like equity? In what ways is it like a bond?
Is it possible for a firm to pass (miss) dividends on preferred stocks, even if it earns enough to pay them? Explain. What usually happens when a company passes a dividend on a cumulative preferred
The Bullorbear Company has 500,000 shares of $$2$ preferred stock outstanding. It generates an EBIT of $$40$ million and has annual interest payments of $$2$ million. Given this information,
What are the advantages and the disadvantages of investing in preferreds?
The Bullorbear Company has 500,000 shares of $$2$ trust preferred stock outstanding. The firm generates an EBIT of $$40$ million and has annual interest payments of $$2$ million.Given this
Distinguish a cumulative preferred share from a callable preferred share. Do cumulative dividend provisions and call features affect the investment merits of preferred issues? Explain.
You purchased 100 shares of a $$2$ preferred stock 1 year and 1 day ago for $$25$ per share. You sold the stock today for $$30$ per share. Assuming you are in a 25% tax bracket, calculate your
Describe how high-grade preferred stocks are priced in the market. What role does dividend yield play in the valuation of preferred stocks? Could you use the zero-growth dividend valuation model to
Assume that you are evaluating several investments, including the stock of a mature company that pays annual dividends of $$2$ and is currently trading at $$25.$ Another investment is a trust
Select one of the preferred stocks listed in Table 16.1—assume the dividends qualify for the preferential tax rate. Using the resources at your campus or public library or on the Internet,
Discuss why dividend yield is critical in evaluating the investment merits of high-grade preferred stocks during periods when market yields are expected to decline.
Identify several investment uses of preferred stocks. Would preferreds be suitable for both conservative and aggressive investors? Explain.
Sara-J Co. has a preferred stock outstanding that pays annual dividends of $3.50 a share. At what price would this stock be trading if market yields were 7.5%? Use one of the dividend valuation
Charlene Weaver likes to speculate with preferred stock by trading on movements in market interest rates. Right now, she believes the market is poised for a big drop in rates.Accordingly, she is
Using Table 17.1, calculate Ed Robinson’s income tax due on his $35,000 taxable income, assuming that he files as a single taxpayer. After you make the calculation, explain to Ed what his marginal
Obtain a copy of the most recent year’s Form 1040 (U.S. Individual Income Tax Return), along with Schedules A (Itemized Deductions), B (Interest and Dividend Income), and D (Capital Gains and
Hal and Terri Wilson had most of their funds invested in common stock in late 2016. The Wilsons didn’t really do very much investment planning, and they had practically no background or
What is tax planning? Describe the current tax rate structure and explain why it is considered progressive.
During the year just ended, Jean Sanchez’s taxable income of $$48,000$ was twice as large as her younger sister Rachel’s taxable income of $$24,000.$ Use the tax rate schedule in Table 17.1
Assume you have a sizable gain on 200 shares of stock that you bought 2 years ago for $$22$ per share and that is now (December 15) selling for $$50$ per share. Given a just announced tax rate
What is a capital asset? Explain how capital asset transactions are taxed, and compare their treatment to that of ordinary income.
Sheila and Jim Mendez reported the following income tax items in 2014:If Sheila and Jim claim 3 dependents and file a joint return for 2014 (with taxes due by April 15, 2015), calculate their income
Imagine that, given your current age and marital status, you have decided to make the maximum contribution to an individual retirement arrangement (IRA) each year from now until age 65. (Assume that
Describe the steps involved in calculating a person’s taxable income. How do tax credits differ from tax deductions?
The Akais just finished calculating their taxable income for their 2014 joint federal income tax return. It totaled $$68,750$ and showed no tax credits. Just prior to filing their return, the Akais
Obtain from a licensed salesperson or stockbroker a prospectus and any other literature available on a popular deferred annuity. Analyze the terms, and answer the following questions.a. What is the
How does tax avoidance differ from tax deferral? Explain whether either of these is a form of tax evasion.
Shawn Healy bought 300 shares of Apple Computer common stock at $$132$ a share. Fifteen months later, in December, Apple was up to $$147$ a share and Shawn was considering selling her shares
What is a tax shelter? What is the tax advantage of organizing certain business activities as a sole proprietorship or a partnership rather than as a corporation?
Karen Jones purchased 200 shares of Mex Inc. common stock for $$10$ per share exactly 2 years ago, in December 2014. Today, December 15, 2016, the stock is selling for $$18$ per share. Because
What is tax-favored income? Briefly describe the following forms of income excluded from taxation.a. Tax-free municipal bond interestb. Treasury and government agency issuesc. Sale of a personal
Juan Gonzalez, a single person working for Harla, Inc., will earn $$48,000$ in 2015 and contribute $$7,000$ to the firm’s 401(k) plan. If Juan is in the 25% tax bracket, what will his
Explain conditions that favor the following strategies for deferring tax liabilities to the next year.a. A put hedgeb. Selling a deep-in-the-money call option When is it best simply to hold the stock
Briefly describe each of the following programs for deferring taxes to retirement.a. 401(k) plansb. Keogh plansc. Individual retirement arrangements (IRAs)
Describe and compare the key features of each of the following types of individual retirement arrangements.a. Traditional deductible IRAb. Roth IRAc. Nondeductible IRAd. SIMPLE IRA
Describe and compare the key features of the following types of educational savings plans.a. Coverdell Education Savings Account (ESA)b. Section 529 College Plan
What are guaranteed investment contracts (GICs), and what role do they play in 401(k) plans? What investment vehicles might be suitable for funding a Keogh or IRA?
Briefly describe each of the following strategies that trade current income for capital gains income.a. Growth stocksb. Deep-discount bondsc. Income property depreciation
Describe how a tax swap can be used to reduce or eliminate a tax liability without significantly altering the composition of one’s portfolio.
Define an annuity, explain the role it might play in an investment portfolio, and differentiate betweena. single-premium and installment annuities.b. immediate and deferred annuities.c. fixed and
Define the following terms as they are related to deferred annuities.a. Current interest rateb. Minimum guaranteed interest ratec. Payout
Explain how a deferred annuity works as a tax shelter. How does a tax-sheltered annuity work, and who is eligible to purchase one? Discuss whether a deferred annuity is a better tax shelter than an
Discuss the investment suitability of a deferred annuity, particularly its positive and negative features. Briefly describe the procedures for buying annuities.
How does a limited partnership (LP) differ from a corporation and a general partnership? How did the Tax Reform Act of 1986 affect the popularity of LPs as tax shelters?

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