Questions and Answers of Fundamentals Of Investments Valuation

A STRIPS traded on November 1, 2022, matures in 12 years on November 1, 2034. The quoted STRIPS price is 62.75. What is its yield to maturity?
A STRIPS traded on May 1, 2022, matures in 18 years on May 1, 2040. Assuming a 4.1 percent yield to maturity, what is the STRIPS price?
A 20-year municipal bond is currently priced at par to yield 5.53 percent. For a taxpayer in the 33 percent tax bracket, what equivalent taxable yield would this bond offer?a. 8.25 percentb. 10.75
A municipal bond carries a coupon of 6 3/4 percent and is trading at par. To a taxpayer in the 34 percent tax bracket, what would the taxable equivalent yield of this bond be?a. 4.5 percentb. 10.2
Which one of the following generally is not true of an insured municipal bond?a. The price on an insured bond is higher than that on an otherwise identical uninsured bond.b. The insurance can be
A revenue bond is distinguished from a general obligation bond in that revenue bonds have which of the following characteristics?a. They are issued by counties, special districts, cities, towns, and
Which of the following investors is most likely to invest in locally issued municipal bonds?a. High-income individual with a need for liquidityb. High-income individual living in a triple income
Which statement applies to a bond issued by an agency of the U.S. government?a. It is exempt from the federal income tax on interest.b. It becomes a direct obligation of the U.S. Treasury in case
When trading U.S. Treasury securities, Treasury dealers:a. Buy at the bid price and sell at the ask price.b. Sell at the bid price and buy at the ask price.c. Buy at the stop-out bid price and
Which of the following statements about single-price Treasury auctions is true?a. Competitive bidders pay their bid prices.b. Noncompetitive bidders pay the stop-out bid plus a 10 percent
Treasury bills are sold on a discount basis, meaning that the difference between their issue price and their redemption value is:a. The same for all T-bill issues.b. The imputed interest on the
What is the yield to maturity of a STRIPS maturing in 10 years with a face value of $10,000 and a price of $5,200?
A convertible bond has an 8 percent coupon, paid semiannually, and will mature in 15 years. If the bond were not convertible, it would be priced to yield 9 percent. The conversion ratio on the bond
Assume that LKD Energy, Inc., sold a total of $1.25 billion worth of notes and bonds, and the first tranche issue of $300 million in notes has the following terms:If these notes were called
Centerland Partners has collected information on the recent purchases of three small shopping centers. Centerland is considering the purchase of a similar property with an NOI of $3.1
Review the homepage for hedge funds in Bloomberg.
You purchase 25 call option contracts on Blue Ox stock. The strike price is $22 and the premium is $1. If the stock is selling for $24 per share at expiration, what are your call options worth? What
When originally issued, a 10-year-maturity Treasury note can be stripped into how many separate components?a. 10b. 11c. 20d. 21.
The following are quotes for an agency bond:If the face value of the bond is $1,000, the price an investor should pay for the bond is closest
A convertible bond sells at $1,000 par with a conversion ratio of 40 and an accompanying stock price of $20 per share. The conversion price and conversion value are, respectively:a. $20 and
Which one of the following statements about convertible bonds is false?a. The yield on the convertible bond will typically be higher than the yield on the underlying common stock.b. The convertible
The refunding provision of an indenture allows bonds to be retired unless:a. They are replaced with a new issue having a lower interest cost.b. The remaining time to maturity is less than five
a. Does a low credit rating necessarily imply that a bond is a bad investment?b. What factors besides the credit rating might be important in deciding whether a particular bond is a worthwhile
Which of the following most accurately measures interest rate sensitivity for bonds with embedded options?a. Convexityb. Effective durationc. Modified durationd. Macaulay duration.
a. An investor with a marginal tax rate of 30 percent is interested in a tax-exempt bond with a yield of 6 percent. What is the equivalent taxable yield of this bond?b. A taxable bond has a yield
A bond with negative convexity is best described as having a price-yield relationship displaying:a. Positive convexity at high yields and negative convexity at low yields.b. Negative convexity at
What does positive convexity on a bond imply?a. The direction of change in yield is directly related to the change in price.b. Prices increase at a faster rate as yields drop than they decrease as
a. The Federal Reserve announces an offering of Treasury bills with a face value amount of $25 billion. The response is $5 billion of noncompetitive bids, along with the following competitive
Two bonds are identical, except one is callable and the other is noncallable. Compared to the noncallable bond, the callable bond has:a. Negative convexity and a lower price.b. Negative convexity
a. What are some possible reasons why individual investors might prefer to buy Treasury STRIPS rather than common stocks?b. What are some possible reasons why individual investors might prefer to
Examine the credit rating summary for Visa (V).
Which of the following describes a bond with a call feature?a. It is attractive because the immediate receipt of principal plus premium produces a high return.b. It is more likely to be called when
A particular investor faces a 40 percent tax rate. If an AA-rated municipal bond yields 4 percent, what must a similar taxable issue yield for the investor to be impartial to them?
Collect a list of inflation-linked bonds that are available to investors.
Who primarily benefits from a call provision on a corporate bond?a. The issuerb. The bondholdersc. The trusteed. The government regulators.
a. What is the purpose of bond seniority provisions?b. After a call protection period has elapsed, why is the call price an effective ceiling on the market price of a callable bond with a
What is the price of a STRIPS maturing in 20 years with a face value of $10,000 and a yield to maturity of 7.5 percent?
What does the call feature of a bond mean?a. An investor can call for payment on demand.b. An investor can only call if the firm defaults on an interest payment.c. The issuer can call the bond
a. What are the fundamental differences between corporate bonds and stock?b. Why do corporate bonds represent an attractive investment for insurance companies?
Find the amount and type of debt that Costco (COST) has outstanding.
A form of real estate investment that typically involves a fund manager issuing ownership shares that are publicly traded on the stock market is called a:a. REIT.b. CREF.c. TIAA.d. PVSC.
Using price data from several recent housing transactions in a particular area, Polaris Real Estate Group has identified the main characteristics that affect prices. The estimated value impact of
You have identified a rental property that you would like to purchase. If your cap rate is 12 percent and you estimate the property’s NOI to be $190,000, what is the maximum price you would
Which of the following real estate valuation approaches finds the present value of a perpetuity of a property’s net operating income (NOI)?a. Cost approachb. Sales comparisonc. Income
Which of the following is not a risk of investing in cryptocurrency?a. Losing the digital wallet on which the cryptocurrency is storedb. Higher volatility that traditional assetsc. Uncertainty in
A hedge fund with $25 million of assets under management has a standard 2/20 fee structure and earns 14 percent this year. Assume that management fees are paid at the beginning of each year and
A style of hedge fund that primarily invests in commodity-related securities is:a. Distressed security.b. M&A arbitrage.c. Short selling.d. Managed futures.
Which of the following choices is a distinguishing characteristic of a commodity-based ETN, as compared to an ETF?a. An ETN typically holds spot positions.b. An ETF is taxed like a
A commodity ETF that uses futures contracts to mimic the return of an underlying commodity will experience a roll yield if the market is in:a. Contango.b. Convexity.c. Backwardation.d. Parity.
Which of the following choices correctly identifies the order of steps that a private equity firm goes through in its investing process?a. Deal flow, valuation, deal structure, value creation,
A private placement memorandum (PPM) will typically address all of the following items except:a. Planned acquisitions.b. The fund’s anticipated life.c. The fund’s target size.d. Leverage
a. Beyond serving as an investment, how does cryptocurrency add value to transaction markets?b. What is a big risk with holding bitcoin on a digital wallet?
A venture capital fund will typically invest in which stage of a business’s development?a. Early stageb. Middle stagec. Late staged. None of the above.
Which of the following is not a common investing style of hedge funds?a. Market neutralb. Short sellingc. Market timingd. Buy and hold.
a. What are the primary approaches to valuing real estate?b. How might the recent cap on mortgage interest deductions affect real estate values?
a. What are some basic ways to invest in commodities?b. Why does the rolling of futures contracts create a cost when a futures market is in contango?
Review the cap rate for different types of real estate investments over time.
You are attempting to compare the performance of a particular hedge fund to a reported composite benchmark. If there is a survivorship bias in the composite benchmark, its return
a. What restricts a private equity manager from taking too much carried interest?b. What are the basic steps of the private equity or venture capital investment process?
A hedge fund has a 2/20 fee structure. If the fund has $12 million of assets under management, what is the yearly management fee?a. $24,000b. $240,000c. $1,320,000d. $2,400,000.
Suppose silver is currently trading at $17 per troy ounce. You are evaluating a four-month carry trade opportunity using silver. The appropriate interest rate is 3 percent, and the carrying cost is
a. Explain the workings of a 2/20 fee structure with a high-water mark provision.b. Identify some common hedge fund strategies.
Define what is meant by an “accredited” investor. Why do you think the federal government limits some investments to only these investors?
All of the following prevent alternative investment managers from generating excessive performance fees except a:a. High-water mark provision.b. Clawback provision.c. Contango provision.d. Hurdle
FRS Capital Advisors, a private equity firm, is considering purchasing Tom’s Auto, a private company. Tom’s EBITDA is $4.1 million, and FRS has collected information on two similar transactions.
a. How is it possible to add a volatile asset to a portfolio yet actually lower overall risk?b. What are some of the primary risks associated with alternative investments?
Check to see if your college is on the list of the largest endowments.
All of the following are limitations of alternative investments except:a. Low volatility.b. Limited liquidity.c. High costs.d. Limited transparency.
a. What is a call option? What is a put option?b. What are the six basic contract terms that an option contract must specify?c. What is an option chain?
Identify the most active options traded on Microsoft (MFST).
Suppose you bought 100 shares of stock at $50 per share. If the stock price goes up to $60 per share, what is the percentage return on your investment? If, instead, the stock price falls to $40 per
You invested $1,000,000 with a hedge fund that has a standard 2/20 fee structure and a high-water mark provision. Suppose the returns over the first two years are −5 percent and 25 percent,
Tango Corp. has made an offer to acquire Cash Corp. The deal specifies that one share of Tango will be exchanged for two shares of Cash. Tango is currently trading at $50 per share, and, after a
Centerwire Capital Partners is considering an investment in Glass Technologies. Glass has an EBITDA of $12.2 million, and Centerwire determines that similar deals have recently closed at a 5.5 times
Scenic Ventures is considering an investment in a start-up firm offering ecotourism excursions in Costa Rica. Scenic Ventures estimates that, if the venture is successful, the ecotourism company will
You are considering a rental property investment. You estimate gross potential income of $100,000 per year. You expect, however, an average vacancy rate of 5 percent. Operating costs will average
Heating oil futures contracts are traded on the New York Mercantile Exchange (NYM), a division of the CME Group. The standard contract size for heating oil futures is 42,000 gallons per contract. You
High Rollers Hedge Fund has a standard 20 percent performance fee. If High Rollers were able to raise $10 million and generate a 25 percent return in its first year of operation, what would be the
Arm Technologies has offered to purchase Hammer Group by exchanging one share of Arm for three shares of Hammer. Arm is currently trading at $50 per share and Hammer is currently selling for $15 per
Private Partner Ventures is a private equity fund that just formed a new $1 billion fund. It recently made its first capital call for $300 million. If it uses a standard 2/20 fee structure, what is
Assume Cambridge Ventures raises $10,000,000 for a private equity fund with a one-year life. The fund has a hurdle rate of 6 percent, above which it earns a carried interest of 20 percent. If
A company with an EBITDA of $2.9 million was recently acquired for $18.6 million. What is the valuation multiple implied in this price?
You have decided to use futures contracts to invest in silver at a settle price of $15 per ounce. Each futures contract has a standard size of 5,000 troy ounces and an initial margin requirement of
Given the information in the previous problem, what is the leverage factor associated with these contracts. If silver rises to $17 per ounce, what is your total percentage return?Problem 17.6You have
Assume the spot price of wheat is $3.17 per bushel. The appropriate interest rate is 3 percent, and there are no storage costs. Under spot-futures parity, calculate the price for a six-month wheat
A potential investment property has an NOI of $425,000 and a capitalization rate of 15 percent. Using the income approach, calculate the value of this investment property.
A real estate investment company just bought an office building. The company estimates that the building will generate $945,000 in net operating income annually. If the building was purchased for
Two years ago, you invested $750,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water mark provision.Suppose the first year the fund manager lost 10
Robbin Partners, a private equity fund, has identified Nest Corp. as a potential acquisition target. Nest has an EBITDA of $28 million. Robbin knows that these similar deals have recently
Vista Venture Partners is considering an investment in a start-up firm that has developed a new technology for streaming data. If the venture is successful, Vista estimates it will be able to grow
In isolation, alternative investments are extremely volatile. So, why might even a moderately conservative investor consider these investments for her portfolio?
Discuss why evaluating the performance of hedge funds and private equity funds is difficult.
Briefly explain how a high-water mark prevents hedge fund managers from manipulating their performance fee.
What are the advantages and disadvantages of a funds of funds approach to investing in hedge funds?
Briefly explain why investors in private equity funds will often demand a clawback provision with respect to carried interest.
Why do venture capital funds often use convertible preferred stock in their investments?
Define contango in futures markets and discuss how it creates a potential roll cost.
Describe the relative disadvantages of spot positions versus futures contracts for investing in commodities.
What are the disadvantages of investing in exchange-traded notes (ETNs) as compared to exchange-traded funds (ETFs)?
What are the risks of investing in cryptocurrency?

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