Finance Homework

CHAPTER 1

DISCUSSION:

1. Briefly discuss each of the eight steps in the investment planning process. (p. 1)

2. Explain the importance of client assessment and capital markets assessment. (pp. 1-2)

3. Describe the three types of investments that can be included within a portfolio. (p. 2)

4. Discuss the importance of continuous monitoring of portfolios. (p. 3)

CHAPTER 2 

DISCUSSION:

1. Describe some of the debt instruments that may be included in a money market fund and the nature of these type instruments. (p. 5)

2. Explain how an investor might manage interest rate risk through the use of CDs. (p. 7, item #8)

3. Briefly discuss the nature of fees associated with the purchase of CDs as they relate to (a) banking institutions and (b) brokerage firms. (p. 9)

CHAPTER 3 

DISCUSSION:

1. Describe why a risk adverse investor would be inclined to favor a direct issue of Treasury Department over a corporate issue of similar length to maturity. (pp. 13-14)

2. Discuss the tax ramifications of purchasing a T-bill on the open market prior to its maturity. (pp. 14-15)

3. Briefly discuss, if all government securities with like maturites have the same risk/reward characteristics, WHY an investor might be selective in the type of security he purchases? (p. 16) 

CHAPTER 4 

DISCUSSION:

1. Explain the rationale behind why an investor might choose NOT to sell bonds. (pp.20-21)

2. Discuss how interest income is usually received and the tax ramifications to an investor who receives such income in a taxable account. (pp. 21-22)

3. Briefly explain what the affect of interest rate movements are on the price of corporate bonds, especially as it relates to their term to maturity. (p. 24)

Chapter 5 

DISCUSSION:

1. Briefly discuss how a convertible security can offer a “floor” value below which an investor can protect his investment (pp. 27-28)

2. Explain why the rates offered by convertible securities are generally lower than those available on nonconvertible issues of similar quality (p. 29)

3. Tell how profits and losses on a preferred stock are treated (p. 29)

4. Discuss the major advantages of an investor who buys a “stock purchase warrant” and a nonconvertible bond (pp. 27-28)

CHAPTER 6 

DISCUSSION:

1. Distinguish between the three types of municipal bonds presented in the introduction, and decide when investors might find these financial instruments to be a useful “tool” in their portfolios (p. 35)

2. Explain why a risk averse investor might prefer investing in a “general obligation’ bond, rather than a “revenue bond” (p. 36)

3. Elaborate upon the selection process that should be considered when contemplating the direct purchase of municipal bonds (pp. 39-40)

CHAPTER 7 

DISCUSSION:

1. Briefly discuss how “stripped bonds” are “manufactured,” and how these issues are priced to be competitive. (p.43)

2. Explain why investors should exercise caution in selecting target-maturity funds. (p. 43)

CHAPTER 8 

DISCUSSION:

1. Identify a zero-coupon bond that has a convertible feature. (p. 46)

2. Discuss the tax implications of investing in zeros in a taxable account. (p. 45)

3. How might zero-coupon bonds be utilized by a parent looking to save enough dollars to fund a college education for his daughter? (p.45)

CHAPTER 10 

DISCUSSION:

1. Briefly discuss how deposits and premiums paid to an insurance company factor into the purchase of GICs that are held by it (p. 53)

2. Discuss how the term “Guaranteed” might be misunderstood by individuals looking for a safe and secure investment (pp. 53-54)

3. 3. Explain how an investor’s expectation of future interest rate movements might influence his choice of GIC type (p. 54)

CHAPTER 11 

DISCUSSION:

1. Explain why common stock ownership might be preferable to direct ownership of real estate (p. 57)

2. Discuss what investors should anticipate receiving in terms of total return (pp. 57-58)

3. Discuss the different ways in which common stock may be owned (p. 59)

4. List some of the sources that provide information such as stock listings, trading activity, and security analysis (pp. 59-60)

CHAPTER 23 

DISCUSSION:

1. Briefly discuss what is meant by the term “guaranteed,” as it relates to an annuity (pp. 167-168)

2. Explain the impact inflation may have on a long-term payout when the annutiy is (a) fixed, (b) variable (p. 169)

3. Identify the occasions when a penalty for premature distributions of annuity assets does NOT apply (pp. 169-170)

4. Discuss how annuities are treated during the accumulation phase (p. 171)

CHAPTER 28 

DISCUSSION:

1. Briefly discuss how the price of gold is generally determined (p. 243)

2. Explain when a taxable loss in a precious metal investment is recognized and one circumstance where it may not be. (p. 244)

3. List two advantages of “storage certificate programs” as opposed to taking physical delivery of a precious metal. (p. 245)

CHAPTER 9 

DISCUSSION:

1. Briefly discuss when an individual might find that the use of this tool would be advantageous (p. 48)

2. List and explain briefly the different methods by which “note” repayment may be scheduled (pp. 49-50)

3. In each of the following circumstances regarding the use of promissory notes, answer “Yes” or “No” and briefly explain the reasoning behind your answer:

A. Can a promissory note actually be sold?

B. Can a “note” agreement specify a minimum period for which the balance will be outstanding?

C. Are loan forms for promissory notes readily available or very sparse?

(pp. 49-50)

CHAPTER 12 

DISCUSSION:

1. Explain what is meant when preferred dividends are “passed,” and the implications for regular common stockholders of the company (p. 65)

2. Discuss the implication of “participating” preferred stock issue ownership (p. 66)

3. Identify the MAIN characteristic that differentiates payments issued by regular corporate bonds and those dividend payments of a preferred stock issue (pp. 65-66)

4. Describe the risk profile of an investor who expresses above average interest in owning preferred stocks (p. 68)

CHAPTER 13

DISCUSSION:

1. Distinguish between a rights offering and a warrant (pp. 71-72)

5. Explain the significance of the fundamental (intrinsic) value that a warrant possesses (p. 74)

6. Briefly discuss how longer term (LEAPs) call options parallel some of the characteristics retained by warrants (pp. 72 and 74)

7. Discuss how the use of leverage (as it relates to the exercise of a stock warrant) impacts the total return for an investor if: (a) the underlying stock price increases or (b) the underlying stock price decreases (p. 72)

CHAPTER 14 

DISCUSSION:

A. Briefly explain why “put” options work as natural opposites to “call” options (p. 81)

B. Determine if leverage plays any significant role in the use of stock options and if so, does whether it appeals only to the speculator (p. 82)

C. Explain why these options commonly referred to as “wasting assets.” (p. 83)

D. Discuss how time management plays a role in the use of a short-term call option and the purchase of a LEAP (p. 83) 

 

CHAPTER 16 

DISCUSSION:

1. Discuss how all “open” positions at a tax year’s end are treated (p. 101)

2. Briefly explain what role a “commodity pool” might play as a viable alternative to a commodity futures investment (p. 101)

3. Discuss the high risk nature of investing in these type contracts and determine what role margin plays in the “riskiness” of such investments (pp. 100-101)

CHAPTER 17 

DISCUSSION:

1. Distinguish between “no-load,” “back-load,” and “12b-1” fees (p. 108)

2. Explain the importance of a mutual fund’s historical performance and some key points to consider when utilizing this information (p. 110)

3. Discuss the importance in distinguishing between diversified and non-diversified funds in an investment portfolio, as well as how this will affect its risk profile (p. 111)

4. List some of the different sources you can research for information on mutual funds and fund investing (pp. 111-113)

CHAPTER 19 

DISCUSSION:

1. Distinguish between a mutual fund and a hedge fund (p. 133)

2. Explain the importance of a hedge fund’s historical performance and some key points to consider when utilizing this information (pp. 135-136)

3. Discuss the importance of using professional management when investing in hedge funds (p. 133)

4. List some of the different sources you can research for information on hedge funds and fund investing (p.137)

 

CHAPTER 20 

DISCUSSION:

1. Briefly discuss what a separately managed account is and how it differs from a pooled account (p. 139)

2. Explain how an SMA works (p. 139)

3. Explain when an SMA should be chosen over another form of investment (p. 140)

CHAPTER 21 

DISCUSSION:

1. Briefly discuss what a structured product is (pp. 143-144)

2. Explain how a structured product works (p. 144)

3. 3. Explain the advantages and disadvantages of investing in a structured product (pp. 144-145)

CHAPTER 24 

DISCUSSION:

1. Discuss how “psychic income” concerns may play a role in an investor desiring to invest in real estate (p. 195)

2. Identify typical expenses that an investment property owner can deduct for income tax purposes, and contrast them with activity that must be “capitalized” (pp. 195-196)

3. Describe the tax implications of IRC Section 483 on a seller of real estate (pp. 198-199)

4. Explain some benefits resulting from the real estate ownership in corporate form (pp. 202-204) 

CHAPTER 26 

DISCUSSION:

1. Distinguish between “straight” and “modified” pass-through certificates (p. 229)

2. List the three elements of a monthly distribution that an investor in a mortgage-backed security receives (p. 226)

3. Discuss the risk vs. return tradeoff when investing in mortgage-backed securities (pp. 224-225)

4. Describe the consequences of one or more mortgages in an underlying pool of mortgages going into default (p. 227)

CHAPTER 27 

DISCUSSION:

1. Briefly discuss why an investor desiring a passive role in nonfinancial asset investing might be interested in an oil and gas reserves operation. (p. 235)

2. Explain the difference between “percentage depletion” and “cost depletion.” (pp. 235-236)

3. List some of the alternatives available to risk-seeking investors who are NOT interested in oil and gas tax shelters (p. 237)

CHAPTER 28 

DISCUSSION:

1. Briefly discuss how the price of gold is generally determined (p. 243)

2. Explain when a taxable loss in a precious metal investment is recognized, and one circumstance where it may not be. (p. 244)

3. List two advantages of “storage certificate programs” as opposed to taking physical delivery of a precious metal. (p. 245)

CHAPTER 30 

DISCUSSION:

1. Distinguish between a master limited partnership and a private limited partnership (p. 255)

2. Explain the ways in which “leverage” can affect an investment in limited partnerships (p. 256)

3. State some reasons why a careful reading of any partnership agreement is important, especially as it relates to liability concerns and payments to investors (pp. 258-259)

CHAPTER 31

DISCUSSION:

1. Briefly explain what is meant by the terms “letter stock” and “mezzanine financing” (p. 263)

2. Explain why privately-placed debt issues normally provide a higher rate of return than do securities that are traded publicly (pp. 264-265)

3. Discuss how mergers and acquisitions play a role in venture firms (pp. 263-264)

CHAPTER 33 

DISCUSSION:

1. Explain why focusing only on the potential for loss in a portfolio is insufficient in explaining what investment risk really is (p. 271)

2. Distinguish between inflation risk and inflation as tax (p. 275)

CHAPTER 34

DISCUSSION:

1. Distinguish among the following risk measurement terms: beta, r-squared, covariance, and correlation coefficient (pp. 286-289)

2. Define the nature of probability distributions and the two types associated with them (pp. 281-282)

3. Discuss the importance of an investment advisor being able to explain to his or her client why a mutual fund characterized by a very low standard deviation could be riskier than a similar type fund with a higher absolute number (pp. 281-282)

4. Discuss the problem raised when calculating standard deviation using probability distributions (pp. 282-285)

CHAPTER 35

DISCUSSION:

1. Briefly discuss the main disadvantage of relying too heavily upon a mathematical “solution” to a financial planning task (pp. 298-299)

2. Explain how the valuation formula of a perpetual bond, for time value purposes, is most useful (p. 300)

3. Distinguish between the results arrived at after calculating for (a) an ordinary annuity payment and, (b) an annuity due payment (pp. 305-306)

4. Discuss what is mean by the “effective annual rate” when there is more than one compounding period in a year (p. 312)

CHAPTER 36

DISCUSSION:

1. List the six components or sources of return for which proper analysis of an investment’s return must include (pp. 317-323)

2. Briefly explain how a simple arithmetic average return for an investment over a 2-year period can overstate its “real” rate of return (pp. 318-319)

3. Discuss the implications of the following statement: “It’s not how much you earn on an investment, it’s how much you keep” (pp. 316-323)

4. Explain the shortcomings of the IRR Method, especially as it relates to cash flows emanating from an investment (pp. 328-330)

CHAPTER 37

DISCUSSION:

1. The coupon rate is also known as the stated rate. How is this interest generally paid? Is there any time when no cash flow is received from a bond? (p. 345)

2. Discuss how investors arrive at a desired rate of return for a bond (pp. 345-348)

3. Explain why a bond’s yield-to-maturity is the “effective rate” that the holder of the bond expects to receive (pp. 348-351)

4. Briefly discuss the relationship between the formulas used to calculate (a) the after-tax yield, and (b) the taxable equivalent yield of a bond (pp. 349-350)

CHAPTER 38 

DISCUSSION:

1. Briefly explain why, in valuing a stock, the variable of cash flow “estimation” may pose a problem when calculating its intrinsic value (p. 357)

2. Distinguish between the terms “capitalized earnings” and “capitalization rate” (p. 361)

3. Describe the relationship between a dividend payout ratio and a retained earnings ratio and determine whether one formula be derived from the other (pp. 361-364)

CHAPTER 39

DISCUSSION:

1. Discuss the progression of the Markowitz portfolio model into the capital market theory (p. 367)

2. Describe what is meant by the security market line being the graphic representation of the capital asset pricing model (pp. 368-369)

3. Contrast the differences between option writing and option buying (pp. 370-371)

4. Why isn’t the Black-Scholes option model based upon an American style option? (p. 374)

CHAPTER 40 

DISCUSSION:

1. Discuss the investment process and the general steps relating to it (p. 379)

2. Briefly discuss the three phases in the investor life cycle (pp. 379-380)

3. Explain the dilemma posed when attempting to measure the risk tolerance or preferences of a client, especially as it relates to (a) indifference or utility curves and, (b) Prospect Theory (pp. 380-381)

4. Discuss the importance of every financial advisor creating an investment policy statement for each client (pp. 381-383)

5. Distinguish between the different risk-adjusted performance measures: the (a) Sharpe ratio, (b) Treynor ratio, and (c) Information ratio (pp. 384-385)

CHAPTER 41 

DISCUSSION:

1. Briefly explain why having similarly correlated assets in a portfolio may actually be more risky than having assets with a low degree of correlation (pp. 389-390)

2. Describe how historical and expected relationships between assets aid in the generation of an “efficient frontier” of potential portfolios for consideration (p. 391)

3. Distinguish between strategic asset allocation and tactical asset allocation (pp. –392-394)

4. Briefly explain how the “January effect” anomaly contradicts the efficient market hypothesis or theory (p. 397)

CHAPTER 43 

DISCUSSION:

1. Discuss how strictly adhering to an investment strategy of dollar cost averaging over time should always result in a lower average cost to the investor than if a share averaging strategy was followed (pp. –413-415)

2. Describe the market environment when the investment strategies of dollar cost averaging and bond laddering work best (pp. 416-418)

3. Discuss how the strategy of immunization is related to (a) reinvestment risk and (b) interest rate risk (pp. 416-417)

CHAPTER 44

DISCUSSION:

1. Analyze the different derivative security tools involved in hedging, briefly explaining how each are used to attain its objective to lower risk (pp. 421-422)

2. Discuss the implications of employing portfolio insurance in an investment portfolio (p. 421)

3. Distinguish between the short sales of equity securities and those of exchange-traded funds (p. 426)

4. Discuss the implications of the following statement: “The derivative markets are actually negative-sum games.” (p. 428)

5. Define an offsetting notional principal contract and explain when might an investor might engage in such a transaction (p. 441)

6. Explain how a combination of a long call and a short put equates to holding a synthetic position in the underlying stock (pp. 430-431)

CHAPTER 45 

DISCUSSION:

1. Discuss the roles that initial margin and maintenance margin play in the leveraging of investment assets in a client’s portfolio (pp. 447-448)

2. Discuss the advantages and disadvantages of the leveraging of financial assets (pp. 449-450)

3. Identify some of the alternative sources for “leverage” borrowing (p. 451)

4. Discuss the tax implications of leveraging investments, especially as it relates to capital gains and dividends under “the tax rules until 2010” (p. 451)

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