Chapter 3, End-of-Chapter Problems
Problem 3.
Suppose you short sell 100 shares of IBM, now selling at $120 per share.
a. What is the maximum possible loss?
b. What happens to the maximum loss if you simultaneously place a stop-buy order
at $128?
Problem
'age
via-
. To
jdilce.
The investor's degree of risk aversion is characterized by the slope of his or her indiffercm:c
curve. Indifference curves show, at any level of expected return and risk, the required risk premium for taking on one additional percen
1
Practice Questions
Chapter 3- How Securities Are Traded
1. Which one of the following statements regarding orders is false?
A. A market order is simply an order to buy or sell a stock immediately at the prevailing market price.
B. A limit sell order is
Example 1. Scenario-based approach to estimating mean and standard
deviation
Calculating average return, i.e. mean
State
Prob. of State r in State (%) Probabilityweighted r
(%)
Excellent
0.25
31
=0.25*31= 7.75
Good
0.45
14
=0.45*14= 6.30
Poor
0.25
-6.75
=
1
Chapter 14
Bond Prices and Yields
1. Of the following four investments, _ is considered the safest.
A. commercial paper
B. corporate bonds
C. U. S. Agency issues
D. Treasury bonds
E. Treasury bills
Only Treasury issues are insured by the U. S. governmen
1
Notes and formulas
Part I. Introduction
Chapter 3 How securities are traded
1. Type of orders (understand their differences)
a. Market order
b. Limited orders
b.i. Limited buy order
b.ii. Limited sell order
2. Buy on margin
a. Concept
b. Calculations ba
Introduction
1
Topics
Real assets versus financial assets
How securities are traded
2
I.RealAssetsversusFinancial
Assets
Section1.1
3
Realassets
Real assets contribute directly to the
productivity of the economy.
Tangible/physical assets, e.g. land, machi
Homework set 4
Chapter 14 Bond Prices and Yields
Problem 9. Consider an 8% coupon bond selling for $953.10 with 3 years until maturity making annual coupon
payments. The interest rates in the next 3 years will be, with certainty, r1=8%, r2=10%, and r3=12%
BondYields
CHAPTER14
1
Topics
Bond yields
Yield to maturity
Yield to call
Realized compound return versus yield to
maturity
Default risk and bond pricing
Financial ratios
Credit Default spread
2
I.BondYields
Read:Section14.3
3
Yieldtomaturityexample
Suppo
TheTermStructure&Bond
Pricing
Chapter15
Read:Section15.1
1
Pricesandyieldstomaturitiesonzerocoupon
bonds($1,000parvalue)
2
Thetermstructure
The term structure of interest rates, also
known as the yield curve, is a graph that
displays the relationship betw
ForwardInterestRates&
TheoriesoftheTermStructure
Chapter15
1
I.ForwardInterestRates
Read:Sections15.2&15.3
2
UsingthetermstructureinTable15.1tolockinthe
interestratetobedeliveredinyear2
Suppose you want to invest for 2
years.
Buy and hold a 2-year zero
-
Formula for pricing a bond if its discount rate is provided
C (1 (1 r ) n ParValue
PB
r
1 r n
PB = Price of the bond
C = coupon payments for each period
n = number of periods to maturity or number of coupon payments over the life of the bond
r = discount
IntroductiontoReturn,Riskand
theHistoricalRecord
1
Topics
Historical record
Introduction to interest rates
Expected return & standard deviation
Time series analysis of past rates of return
2
I.HistoricalRecord
3
Returnandriskgohandinhand
Average annual
ra
Topics to be covered
1. Bond basic terms
2. Special provisions, such as call, put, and convertibility
3. Given bond basic terms and discount rate, calculate bond price
4. Important relations of bond pricing
a. The implication of difference between coupon
HW #1 (Fall 2015)
Investments and Security Analysis
(FNBU3441)
Name:_
Student ID:_
Please turn your work in at the start of class on 9/21/2015. To receive full credit, you
need to show all your works and are expected to communicate well in writing.
1. Sup
1. What percentage of their portfolio would you advise an investor to place in cash,
stocks and bonds and what is the complete portfolios expected return and risk, if they
wanted to (a) achieve a targeted return of 14% annually or (b) achieve a portfolio
Investments Quiz 3
1. What is the price you would pay for a 10-year to maturity zero-coupon U.S. government
bond and a 10-year to maturity 6% semi annual coupon U.S. government if both were priced
to yield 3%?
2. What is the price you would pay and yield
weight
to the
m for a
. rate of
IIl1al interest rate
Inlcrest rate
lIve annual rate (EAR)
ual percentage rate (APR)
llcnd yield
(ree rate
premium
1
excess return
risk aversion
normal distribution
event tree
skew
kurtosis
value at risk (VaR)
expected short
ValuationofUPSCommonStock
ATopdownApproach
1
Contents
Investment Summary
Company Overview
Macroeconomic Analysis
Industry Analysis
The US economy
The global economy
Diesel price
Relative stock performance in recessions
ATA Truck Tonnage Index
Valuation
Va
Determinants of Bond Yields
1
Major determinants
Maturity: The length of time before the
bond matures
Default risk: The risk of not receiving
coupon and principal payments
Tax effect: The tax status of the flows
Complex options: The existence of
provision
BondBasicsandPricing
CHAPTER14
1
Topics
Bond basics
Basic terms
Special provisions on corporate bonds
Bond pricing
Generic formula
Pricing coupon bonds
Pricing zero-coupon bonds
2
Topics
Important relationships for bond pricing
Coupon rate, market interes
Risk and Return - Some Related Formulas:
1 n
Expected return : E(r) = r = rt
n t=1
n
1
Variance : 2
[rt r ]2
n 1 t 1
Covariance and correlation:
A, B
1 N
(rA,t rA )(rB ,t rB )
N 1 t 1
A, B p( s )[rA ( s ) E (rA )][rB ( s) E (rB )]
s
Also A, B A, B A B
Historical Return Analysis
Month
1
2
3
4
5
Stock A
5%
10%
-10%
0%
15%
Stock B
3%
8%
-6%
12%
8%
In this problem there is NO expected return. We are using actual historical returns.
Step 1: Calculate the average return
Arithmetic Average (rA) = (5% + 10% -1
Chapter 14 Bond Prices and Yields Answer Key
28. A coupon bond is a bond that _.
A. pays interest on a regular basis (typically every six months)
29. A _ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified
Chapter 1 Reviews Notes for Midterm
Define an investment.
-An investment is the current commitment of money in expectation of money or other
resources in the expectation of reaping future benefits.
-Higher returns can only be obtained with higher risk.
-
CHAPTER 6
Efficient Diversification
Overview
In the previous lectures we learned how to
combine one risky asset (or portfolio or mutual
fund) and a risk-free asset (T-bills) to get the
capital allocation line (CAL).
We also learned why and how different i
Investments and Security Analysis Homework Set 2
Hard copy should be submitted to me on Tuesday, 3/7, at the beginning of class
1. Microgen had the following returns over the last four years.
Year
2000
2001
2002
2003
Annual return
-10%
15%
-4%
23%
a) What
