TUTORIAL – SESSION 01
CHAPTER 01
1. Discuss the agency problem.
2. Discuss the similarities and differences between real and financial assets.
3. Discuss the following ongoing trends as they relate to the field of investments:
globalization, financial engineering, securitization, and computer networks.
CHAPTER 02
Use the following to answer questions 1 to 3:
Consider the following three stocks:
1. The price-weighted index constructed with the three stocks is A) 30 B) 40 C) 50 D) 60 E) 70
Answer: B Difficulty: Easy Rationale: ($40 + $70 + $10)/3 = $40.
2. The value-weighted index constructed with the three stocks using a divisor of 100 is A) 1.2 B) 1200 C) 490 D) 4900 E) 49
Answer: C Difficulty: Moderate
Rationale: The sum of the value of the three stocks divided by 100 is 490: [($40 x 200) + ($7
0 x 500) + ($10 x 600)] /100 = 490
3. Assume at these prices the value-weighted index constructed with the three stocks is
490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1? A) 265 B) 430 C) 355
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D) 490 E) 1000
Answer: D Difficulty: Moderate
Rationale: Value-weighted indexes are not affected by stock splits.
4. An investor purchases one municipal and one corporate bond that pay rates of return
of 8% and 10%, respectively. If the investor is in the 20% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 8% and 10% B) 8% and 8% C) 6.4% and 8% D) 6.4% and 10% E) 10% and 10% Answer: B Difficulty: Moderate
Rationale: rc = 0.10(1 - 0.20) = 0.08, or 8%; rm = 0.08(1 - 0) = 8%.
5. A 5.5% 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in
the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of: A) 8.20%. B) 10.75%. C) 11.40%. D) 4.82%. E) none of the above. Answer: B Difficulty: Moderate
Rationale: 0.072 = rm (1-t); 0.072 = rm / (0.67); rm = 0.1075 = 10.75% 6. In order for you to be indifferent between the after tax returns on a corporate bond
paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be? A) 33% B) 72% C) 15% D) 28% E) Cannot tell from the information given .0612 = .085(1-t); (1-t) = 0.72; t = .28
7. Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and
a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni? A) 15.4% B) 23.7% C) 39.5% D) 17.3% E) 12.4%
tm = 1 - (5.93%/7.17%) = 17.29%
Use the following to answer questions 8 to 9:
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8. Based on the information given, for a price-weighted index of the three stocks
calculate: A) the rate of return for the first period (t=0 to t=1). B) the value of the divisor in the second period (t=2). Assume that Stock A had a 2-1
split during this period.
C) the rate of return for the second period (t=1 to t=2).
A. The price-weighted index at time 0 is (70 + 85 + 105)/3 = 86.67. The price-weighted index
at time 1 is (72 + 81 + 98)/3 = 83.67. The return on the index is 83.67/86.67 - 1 = -3.46%.
B. The divisor must change to reflect the stock split. Because nothing else fundamentally
changed, the value of the index should remain 83.67. So the new divisor is (36 + 81 + 98)/83.67 = 2.57. The index value is (36 + 81 + 98)/2.57 = 83.67.
C. The rate of return for the second period is 83.67/83.67 - 1 = 0.00%
9. Based on the information given for the three stocks, calculate the first-period rates of
return (from t=0 to t=1) on A) a market-value-weighted index. B) an equally-weighted index. C) a geometric index.
A. The total market value at time 0 is $70 * 200 + $85 * 500 + $105 * 300 = $88,000. The
total market value at time 1 is $72 * 200 + $81 * 500 + $98 * 300 = $84,300. The return is $84,300/$88,000 - 1 = -4.20%.
B. The return on Stock A for the first period is $72/$70 - 1 = 2.86%. The return on Stock B
for the first period is $81/$85 - 1 = -4.71%. The return on Stock C for the first period is $98/$105 - 1 = -6.67%. The return on an equally weighted index of the three stocks is (2.86% - 4.71% - 6.67%)/3 = -2.84%
C. The geometric average return is [(1+.0286)(1-.0471)(1-.0667)](1/3)-1 =
[(1.0286)(0.9529)(0.9333)]0.3333 -1 = -2.92%
10. Discuss the advantages and disadvantages of common stock ownership, relative to other investment alternatives.
CHAPTER 03
1. Assume you purchased 200 shares of XYZ common stock on margin at $70 per share
from your broker. If the initial margin is 55%, how much did you borrow from the broker? A) $6,000 B) $4,000 C) $7,700 D) $7,000 E) $6,300
Answer: E Difficulty: Moderate
Rationale: 200 shares * $70/share * (1-0.55) = $14,000 * (0.45) = $6,300.
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2. You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was A) $4,800. B) $12,000. C) $5,600. D) $7,200. E) none of the above.
Answer: D Difficulty: Moderate
Rationale: 200 shares * $60/share * 0.60 = $12,000 * 0.60 = $7,200
3. You purchased 100 shares of ABC common stock on margin at $70 per share.
Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. A) $21 B) $50 C) $49 D) $80 E) none of the above
Answer: B Difficulty: Difficult
Rationale: 100 shares * $70 * .5 = $7,000 * 0.5 = $3,500 (loan amount); 0.30 = (100P -
$3,500)/100P; 30P = 100P - $3,500; -70P = -$3,500; P = $50.
4. You purchased 100 shares of common stock on margin at $45 per share. Assume the
initial margin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin. A) 0.33 B) 0.55 C) 0.43 D) 0.23 E) 0.25
Answer: E Difficulty: Difficult
Rationale: 100 shares * $45/share * 0.5 = $4,500 * 0.5 = $2,250 (loan amount); X = [100($30)
- $2,250]/100($30); X = 0.25.
5. You purchased 300 shares of common stock on margin for $60 per share. The initial
margin is 60% and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin. A) 25% B) -33% C) 44% D) -42% E) –54%
Answer: D Difficulty: Difficult
Rationale: 300($60)(0.60) = $10,800 investment; 300($60) = $18,000 *(0.40) = $7,200 loan;
Proceeds after selling stock and repaying loan: $13,500 - $7,200 = $6,300; Return = ($6,300 - $10,800)/$10,800 = - 41.67%.
6. Assume you sell short 100 shares of common stock at $45 per share, with initial
margin at 50%. What would be your rate of return if you repurchase the stock at
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$40/share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. A) 20% B) 25% C) 22% D) 77% E) none of the above
Answer: C Difficulty: Moderate
Rationale: Profit on stock = ($45 - $40) * 100 = $500, $500/$2,250 (initial investment) =
22.22%
7. You want to purchase XYZ stock at $60 from your broker using as little of your own
money as possible. If initial margin is 50% and you have $3000 to invest, how many shares can you buy? A) 100 shares B) 200 shares C) 50 shares D) 500 shares E) 25 shares
Answer: A Difficulty: Moderate
Rationale: .5 = [(Q * $60)-$3,000] / (Q * $60); $30Q = $60Q-$3,000; $30Q = $3,000; Q=100.
8. You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of
50%. The next day Qualitycorp's price drops to $25 per share. What is your actual margin? A) 50% B) 40% C) 33% D) 60% E) 25%
Answer: B Difficulty: Moderate
Rationale: AM = [300 ($25) - .5 (300) ($30) ] / [300 ($25)] = .40
9. You sold short 100 shares of common stock at $45 per share. The initial margin is
50%. Your initial investment was A) $4,800. B) $12,000. C) $2,250. D) $7,200. E) none of the above.
Answer: C Difficulty: Moderate
Rationale: 100 shares * $45/share * 0.50 = $4,500 * 0.50 = $2,250
10. List three factors that are listing requirements for the New York Stock Exchange.
Why does the exchange have such requirements?
CHAPTER 04
1. Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of
$17,000,000. There were 24,300,000 shares in the fund at year-end. What was
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