Solutions Suggested to Selected Problems Chap 3-4 Fin 367 Spring 2008 Professor Bing Han
Solution to Chap3 problems 7. a. You buy 200 shares of Telecom for $10,000 (you invest $5000, and borrow another $5000). These shares increase in value by 10%, or $1,000. You pay interest of: (0.08 5,000) = $400. The rate of return will be:
$1,000 $400 = 0.12 = 12% $5,000
b.
The value of the 200 shares is 200P. Equity is (200P $5,000). You will receive a margin call when:
200P $5,000 = 0.30 200P
when P = $35.71 or lower
12. The broker is instructed to attempt to sell your Marriott stock as soon as the Marriott stock trades at a bid price of $38 or less. Here, the broker will attempt to execute, but may not be able to sell at $38, since the bid price is now $37.25. The price at which you sell may be more or less than $38 because the stop-loss becomes a market order to sell at current market prices.
Chapter 4: 8. a. Start of year price = $12.00 End of year price = $12.10 1.02 = $12.24 0.93 = $11.25
Although NAV increased, the price of the fund fell by $0.99.
Rate of return = 4.17% b.
(Pr ice) Distributi ons = Start of year price
$0.99 $1.50 = 0.0417 = $12.24
An investor holding the same portfolio as the close-end fund manager would have earned a rate of return based on the increase in the NAV of the portfolio: Rate of return = 13.33% Note that investors who do not buy the close-end fund will not be affected by the close-end fund premium or discount.
( NAV ) Distributions $0.10 $1.50 = = 0.1333 = $12.00 Start of year NAV
10. Open-end funds are obligated to redeem investor's shares at net value, asset and thus must keep cash or cash-equivalent securities on hand in order to meet potential redemptions. Closed-end funds do not need the cash reserves because there are no redemptions for closed-end funds. Investors in closed-end funds sell their shares when they wish to cash out.
Additional Multiple Choices Questions: 1.__________ is called the Big Board. A) The American Stock Exchange B) The New York Stock Exchange C) The Pacific Stock Exchange D) The Tokyo Stock Exchange Answer: B
2. Purchases of new issues of stock take place __________. A) at the desk of the Fed B) in the primary market C) in the secondary market D) none of the above Answer: B
3. Initial margin requirements on stocks are set by __________. A) the Federal Deposit Insurance Corporation B) the Federal Reserve C) the New York Stock Exchange D) the Securities and Exchange Commission Answer: B
4. Hedge funds ___. A) allow private investors to pool assets to be invested by a fund manager B) are not subject to SEC regulation C) investment strategies can make heavy use of derivatives and leverage D) all of the above Answer: D
5. Assume that you have just purchased some shares in an investment company reporting $300 million in assets, $20 million in liabilities, and 30 million shares outstanding. What is the Net Asset Value (NAV) of these shares? A) $10 B) $9.33 C) $15 D) $1.50 Answer: B
6. Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________. A) income funds B) balanced funds C) asset allocation funds D) index funds Answer: B