Investments An Introduction 9th Edition Herbert B Mayo - Solutions

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Based on the above answers, what are some suggested courses of actions the Bruckners should consider taking?
If their combined life expectancy is 15 years at retirement, can they maintain their standard of living if their funds as a whole earn 7 percent after they retire? What is the future rate of infl ation assumed in your answer to the previous question? Is that assumption reasonable?
Based on the rate of infl ation in Exhibit 10.2, goods and services costing $100 will cost how much at their retirement? How much annual income is necessary to maintain their standard of living?
If the Bruckners do not need the funds to fi -nance their daughters’ college education, how much will be in each account when they approach retirement in their mid-60s under the original allocation?
Given the values in Question 3, what is the portfolio’s asset allocation after ten years have passed? What steps should be taken?
What would have been the impact on the terminal amounts in Question 3 if the allocation had been 40 percent large cap companies and 60 percent small cap companies?
Since historical returns are averages, how much will be in each account assuming that the worstand best-case scenarios based on Exhibit 10.4 were to occur? (Be careful to select the appropriate time horizon for the comparisons.)
Based on the historical returns in Exhibit 10.2, how much will be in each account when the girls approach college age ten years from now?
How much is allocated to each class of assets?
You are given the following information concerning a 52-year-old male:Car and consumer loans $ 14,000 Cash and savings accounts 3,000 Cash value of life insurance 10,000 Education loans 26,000 Home (estimated value) 175,000 Home mortgage 68,000 Home equity loan 14,000 Pension plan 95,000 Retirement
Which of the following should be part of a balance sheet and which should be part of a cash budget?a) Mortgage owedb) Principal payment to be madec) Dividend paymentsd) Social Security paymentse) IRA accountf) Gifts to children g) Mutual fund shares h) Interest owed i) Antiques j) Credit card
What are the steps for constructing a fi nancial plan? What is a pro forma balance sheet or cash budget? How do they differ, and what role do they play in the construction of fi nancial plans?
The portfolio manager of a hedge fund believes that stock A is undervalued and stock B is overvalued. Currently their prices are $30 and $30, respectively. The portfolio manager of the fund buys 100 shares of A and sells 100 shares of B short.a) Why does the portfolio manager establish these two
Colonial Properties Trust’s (CLP) earnings per share (EPS), funds from operations(FFO), and dividends are as follows:EPS FFO Dividends 2001 $2.02 $3.75 $2.52 2002 2.61 3.83 2.64 2003 1.29 3.45 2.66 2004 1.45 3.64 2.68 2005 5.13 3.62 2.70a) Compute the ratio of dividends to earnings and the ratio
You purchase a REIT for $50. It distributes $3 consisting of $1 in income, $0.50 in long-term capital gains, $0.30 in short-term capital gains, and $1.20 in return of capital. After a year, you sell the stock for $56. If you are in the 30 percent income tax bracket and 15 precent long-term capital
What is the expected cash fl ow and tax liability (or savings) for the fi rst two years for an investment in an apartment building given the following information?Cost of the building $800,000 Cost of the land 200,000 Required down payment 25%Interest on balance owed 10%Annual principal repayment
In 1990 the average and median prices of a new single-family home were approximately$95,200 and $118,200, respectively. Ten years later, these prices had risen to $139,000 and $177,000. During the same time period the Dow Jones Industrial Average rose from 2,633 to 10,646 and the S&P 500 stock
You acquire land for $100,000 and sell it after fi ve years for $150,000.a) What was the annual rate of appreciation in the value of the land?b) Each year you paid $2,000 in property tax, $300 for liability insurance, and $700 for upkeep (e.g., mowing). What was the true annualized return on the
In 1982, Marc Chagall’s Orphee sold for $120,000. In 2001, approximately 20 years later, it sold for $500,000. If the commission on the sale was 10 percent, what was the annual rate of growth in the value of Chagall’s piece? The Mei/Moses American Fine Art Price Index rose from its base of 100
Using the information in the Point of Interest on the taxation of REIT distributions, what was the tax status of the 2006 and 2007 distributions made by the following REITs?Plum Creek Timber (PCL)United Dominion REIT (UDR)Washington REIT (WRE)
What are the risks associated with investing in real estate and how are they similar and dissimilar to those of investments in stock and bonds? What advantages do REITs offer over direct investments in real estate properties?
What differentiates a real estate investment trust from a fi rm involved in building and developing properties? What differentiates a mortgage trust from an equity trust?
What impact does each of the following have on a real estate investment’s cash fl ow?a) An increase in depreciation expenseb) A decrease in rental incomec) An increase in principal repaymentd) A decrease in interest rates
How is cash fl ow or funds from operations determined for an investment in rental properties?
What are the different sources of mortgage money for fi nancing the purchase of a home? What are features that differentiate mortgage loans? What advantage does an ARM offer over a fi xed-rate mortgage? What advantage does the fi xed-rate mortgage offer over an ARM?
Why are investments in timber more like operating a business than managing a portfolio of fi nancial assets?
How do the secondary markets for nonfi nancial, tangible assets differ from the secondary markets for fi nancial assets?
What are the risks associated with investing in nonfi nancial assets? What role does specialized knowledge perform in the management of these risks?
What are the tax implications of investing in nonfi nancial assets?
What are the sources of return from investing in collectibles and other real assets?What are the special expenses associated with investing in collectibles and tangible assets?
How would each of the following affect a U.S.investor’s willingness to acquire foreign stocks?a) The dollar is expected to strengthen.b) Infl ation in the foreign country is expected to increase.c) Globalization of fi nancial markets should accelerate.
Should a Japanese investor who owns only Japanese stocks acquire U.S. stocks?
Even though the risk reduction is greater for the Brazilian fund, why may the U.S. investor prefer the Japanese fund?
What happens to the portfolio standard deviation as the investor substitutes the foreign securities for the U.S. securities? What combination of U.S. and Japanese stocks and U.S. and Brazilian stocks minimizes risk?
The annual returns for the S&P 500 and the Europe, Australia, and Far East index (EAFE) were given in Figure 22.3. The high correlation between the two indexes for 1996 through 2004 suggested that investing in the foreign markets covered by the EAFE would have little impact on the diversifi cation
A portfolio manager owns a bond worth £2,000,000 that will mature in one year.The pound is currently worth $1.65, and the one-year future price is $1.61. If the value of the pound were to fall, the portfolio manager would sustain a loss. If the value of the pound were to rise, the portfolio
You anticipate buying a Volvo in six months for $30,000. Currently the spot price of the Swedish krona is $0.50 and the six-month futures price is $0.505. You anticipate that the value of the dollar relative to the krona will decline. What course of action should you take and how much will it cost
The futures price of British pounds is $2.00. Futures contracts are for 10,000 pounds, so a contract is worth $20,000. The margin requirement is $2,000 a contract, and the maintenance market requirement is $1,200. A speculator expects the price of the pound to fall and enters into a contract to
You purchase 100 ADRs of British Oil for $12 per ADR. What is the value of the shares in dollars, given the following information?Time Price of the Stock in Pounds Dollar Price of the Pound 1/1/X0 £6.00 $2.00 4/1/X0 7.80 2.10 7/1/X0 9.30 1.85 10/1/X0 10.20 1.70 1/1/X1 14.00 1.65 Compare the
An American investor buys 100 shares of EuroCorp. The stock sells for 10 euros and the euro is worth $1.09. The investor sells the stock for 13 euros when the euro is worth $0.97.a) What is the percentage return to the American investor?b) What is the percentage return on the investment to an
Last year Stella Shoes Inc. had investments in Paris worth 500,000 euros. At that time, the euro was worth $1.20. Today the euro is trading for $1.30. What is the gain or loss on the investment in dollars?
What is the cost of $1.00 in each of the following currencies?British pound $1.7770 Canadian dollar 0.7190 Russian ruble 0.3454 Japanese yen 0.08798
What is a nation’s cash infl ow (outfl ow) on its current account and its capital account, given the following information? Was there a net currency infl ow or outfl ow?imports $314 exports 201 direct investments abroad 53 foreign investments in the country 42 foreign purchases of domestic
What is a nation’s cash infl ow (outfl ow) on its current account and its capital account, given the following information? Was there a net currency infl ow or outfl ow?imports $245 exports 311 direct investments abroad 172 foreign investments in the country 243 foreign purchases of domestic
From Exhibit 22.5 select a country iShares and a closed-end investment company specializing in the same country. Compare their monthly returns for three years and compute the correlation coeffi cient between the two sets of returns. You may obtain historical prices from Yahoo! Finance (http://fi
Why may the development of the European Monetary Union reduce the potential for diversifi cation but increase the potential for economic growth?
Why may investing in iShares be preferable to investing in mutual funds that specialize in foreign investments?
Why may investing in mutual funds with foreign investments be preferable to purchasing foreign stocks?
Why may the addition of foreign securities to a U.S. investor’s portfolio reduce this individual’s risk exposure?
If a British investor who purchased French securities anticipates that the value of the euro may fall but does not wish to sell the securities, what should this investor do?
What does a defi cit in a country’s balance of trade imply? Can a country have a surplus in its balance of payments?
Would a U.S. investor who owned foreign securities prefer a devaluation or revaluation of the U.S. dollar?
What are the sources of risk associated with foreign investments? How can the individual investor manage those risks?
What are foreign exchange and the foreign exchange market? What causes the prices of currencies to fl uctuate?
Does the strategy of using futures contracts achieve its objective?
When the contracts expire, will DeLuca have to deliver the securities he owns to cover the contracts?
Suppose the beta of the portfolio is 0.75 and DeLuca sells 15 contracts. The market then rises by 10 percent; what are the profi ts and losses on the portfolio and on the contracts?What is the net profi t or loss?
If the beta of the portfolio were less than 1.0, could DeLuca hedge his position by selling fewer contracts? If the beta were 0.75, how many contracts would be necessary to hedge the portfolio?
If the beta of his portfolio is 1.0 and the market declines by 5 percent, how much would he lose on a $1,000,000 portfolio?
If the market declined by 5 percent, what will happen to the value of the contracts? Could DeLuca take funds out of the position to reduce the interest lost?
How much cash will DeLuca have to put up to meet the margin requirement? If the annual interest rate on money market securities is 6 percent, what is the interest lost from the margin requirement if the position must be maintained for two months?
How many contracts would DeLuca have to sell to hedge $1,000,000? Why should DeLuca sell rather than purchase the contracts?
What is the value of the contract in terms of the index?
Two institutional investors execute a swap agreement for $10,000,000 in which one party agrees to remit to the counterparty the return on the EAFE, an index of European, Australasian, and Far-Eastern stocks. The counterparty agrees to remit payments based on the return on the S&P 500. During the
The current price of wheat is $3.70 and the expenses for carrying wheat (combined cost of storage, insurance, shipping) are 20 percent of the price. Based on this information, what should be the price of wheat after a year? What would you do if the futures price were $4.55?
One use for futures markets is “price discovery,” that is, the futures price mirrors the current consensus of the future price of the commodity. The current price of gold is $350 but you expect the price to rise to $400. If the futures price were$390, what would you do? If your expectation is
This problem illustrates hedging with currency futures. The questions lead you through the process of hedging. While this material was not explicitly covered in the text material, your instructor may use this problem to show how hedging may reduce the risk of loss from fl uctuations in the price of
You expect the stock market to decline, but instead of selling stocks short, you decide to sell a stock index futures contract based on an index of New York Stock Exchange common stocks. The index is currently 600 and the contract has a value that is $250 times the amount of the index. The margin
The futures price of gold is $650. Futures contracts are for 100 ounces of gold, and the margin requirement is $5,000 a contract. The maintenance margin requirement is $1,500. You expect the price of gold to rise and enter into a contract to buy gold.a) How much must you initially remit?b) If the
The futures price of corn is $2.00. The contracts are for 10,000 bushels, so a contract is worth $20,000. The margin requirement is $2,000 a contract, and the maintenance margin requirement is $1,200. A speculator expects the price of the corn to fall and enters into a contract to sell corn.a) How
How does the swapping of payments reduce a fi rm’s risk exposure? When would an individual fi nd it desirable to enter a swap agreement?
How do changes in the futures market for stock indexes affect the stock market?Why may stock index futures and programmed trading result in dramatic price changes in individual stocks?
What is the difference between the long and the short positions in a contract for the future delivery of the S&P 500 stock index? If you expect stock prices to fall, do you buy or sell stock index futures?
If you anticipated that the price of the British pound would rise and wanted to speculate on that increase, should you sell or buy a contract for the delivery of pounds?
What is a fi nancial futures contract? If you expect interest rates to rise, should you buy or sell a fi nancial futures contract?
How may government intervention affect commodity prices? Are commodity futures markets subject to government regulation?
If an investor anticipates a decline in a commodity’s price, which futures position should he or she take?
Why do farmers and other users of commodity futures hedge their positions?
What is margin and why is it a source of leverage? What is a margin call? How does margin for futures differ from margin for stocks?
What is the difference between a long and a short position in a commodity future?
Why is investing in commodity futures considered to be speculative?
What is a futures contract? What are the spot price and the futures price of a commodity?When must the two prices be equal?
An insider purchased a stock prior to the IPO for $10 a share. Once public, the stock runs up to $55 a share but the insider cannot sell the stock for a year. Since put and call options exist, the individual decides to construct a collar for protection from a possible decline in the price of the
As an executive, you received stock options that you recently exercised. However, you cannot legally sell the stock for the next six months. Currently the stock is selling for $38.25. A call to buy the stock at $40 is selling for $3.38 and a put to sell the stock at $35 is selling for $1.94. How
A straddle occurs when an investor purchases both a call option and a put option.Such a strategy makes sense when the individual expects a major price movement but is uncertain as to the direction. For example, a fi rm may be a rumored takeover candidate. If the rumor is wrong, the stock’s price
Given the following:Price of the stock $18 Price of a three-month call at $20 2 Price of a three-month call at $15 5a) What is the profi t (loss) at the expiration date of the options if the price of the stock is $14, $20, or $25 and if the investor buys the option with the$20 strike price and
A put and a call have the following terms:Call: strike price $30 term three months price $3 Put: strike price $30 term three months price $4 The price of the stock is currently $29. You sell the stock short. Illustrate how to use the call or the put to reduce your risk exposure.a) What is the
Many warrants were initially issued attached to bonds. They were subsequently detached and traded separately from the bonds. In some cases, the bond could be used in lieu of cash to exercise the warrant. Suppose a warrant is the option to buy stock at $10 a share ($1,000 for 100 shares). Currently
Currently a stock that sells for $57 has a put option at $55 and another at $60.The prices of the options are $6 and $3, respectively. What would you do? Illustrate and explain your actions.
Given the following:Price of the stock $26 Price of a six-month call at $25 2 Price of a six-month call at $30 4 An investor buys the $25 call and sells the $30 call. What are the profi ts if the stock’s price at expiration is $20, $25, $30, or $35? Arbitrage implies what about the price of the
One useful piece of information derived from the Black-Scholes model for the valuation of a call option is the hedge ratio, which gives the slope of the line relating the change in the price of an option to the change in the price of the stock.a) If the delta is 0.6 and the investor owns 600 shares
Put–call parity basically says that combination of a stock and a put produces the same return as the comparable position in a call and a risk-free bond. If not, at least one market is in disequilibrium. The resulting arbitrage alters the securities’prices until the value of the stock plus the
Put–call parity asserts that if the markets are in equilibrium, a long position in a stock and a put produces the same return (or profi t/loss) as a long position in a discounted bond and call with the same strike price as the put. You are given the following information:Price of the stock $50
Put–call parity in effect states that long positions in a call and a risk-free bond plus a short position in a put must be the same value as the underlying stock. If not, at least one market is in disequilibrium. The resulting arbitrage alters the securities’prices until the value of the three
In the body of this chapter, disequilibrium of the following equation indicated an opportunity for a riskless arbitrage:0 5 Ps 1 Pp 2 Pc 2 Pe 11 1 i 2n or Ps 1 Pp 5 Pc 1 Pe 11 1 i 2n.The equation was illustrated as follows. A stock sells for $105; the strike price of both the put and call is $100.
A call option is the right to buy stock at $50 a share. Currently the option has six months to expiration, the volatility of the stock (standard deviation) is 0.30, and the rate of interest is 10 percent (0.1 in Exhibit 20.2).a) What is the value of the option according to the Black-Scholes model
A stock sells for $30. What is the value of a one-year call option to buy the stock at $25, if debt currently yields 10 percent? (Assume F(d1) and F(d2) 5 1.)
The Black-Scholes valuation model shows that higher interest rates result in higher call option valuations. Do these higher interest rates and call valuations imply that put values will also rise?
If you thought a stock was fairly valued and its price would not change, how could you use a straddle to take advantage of your valuation? If you follow this strategy and the stock’s price does not remain stable, have you increased your risk exposure?
How do collars, the hedge ratio, the protective call, and the protective put help investors manage risk?

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Investments An Introduction 9th Edition Herbert B Mayo - Solutions

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