CFP - Investments

Question 1

What is the formula for Current Yield?

Ex. Calculate the Current Yield of a $1,000 bond with a 10% coupon selling for $900.

Answer 1

Current Yield = Annual interest in dollars / Bond’s market price

Ex. Current Yield = $100 / $900 = 11.11%

Question 2

What is the formula for a property’s intrinsic value?

Ex. If the annual NOI is $40,800 and the cap rate is 10%, what is the intrinsic value?

Answer 2

Property’s intrinsic value = Net Operating Income (NOI) / Capitalization Rate

Ex. Intrinsic Value = $40,800 / 0.10 = $408,000

Question 3

What is the formula for the Intrinsic Value of a Call Option?

Ex. If the market price of a call option is $60 and the exercise price is $50, what is its intrinsic value?

Answer 3

Intrinsic Value of a Call Option = Market Price - Exercise Price

Ex. IV = $60 - $50 = $10

Question 4

What is the formula for the Intrinsic Value of a Put Option?

Ex. If the market price of a put option is $25 and the exercise price is $30, what is its intrinsic value?

Answer 4

Intrinsic Value of a Put Option = Exercise Price - Market Price

-IV = $30 - $25 = $5

Question 5

True or False: The intrinsic value of an option can be negative.

Answer 5

False

Question 6

What is the formula for Return on Equity (ROE)?

If Corporation X has a book value of $180,000,000, 6,000,000 shares outstanding, $1.5 div paid / share, $50 market price / share, and EPS of $3.00, what is the ROE?

Answer 6

ROE = Earnings available for common (EPS) / Common equity (net worth or book value)

Ex. ROE = $3.00 / ($180,000,000 / 6,000,000) = 10%

Question 7

What is the formula for Stock Yield?

Ex. Using the ROE example, what is the Stock Yield if the dividend is $1.50 and the stock price is $50?

Answer 7

Stock Yield = Dividend per share / Stock Price per share

Ex. Stock Yield = $1.50 / $50 = 3%

Question 8

What is the formula for Margin Call?

Ex. If an investor purchases 200 shares at $150 and the maintenance is 25%, what is the margin call price?

Answer 8

Margin Call = (1 - Initial margin percentage) / (1 - Maintenance margin percentage) * Purchase price of stock

Ex. Margin Call = (1 - 0.50) / (1 - 0.25) * $150 = $100

REMEBER - Options are not marginable + if initial margin is not given, assume 50%

Question 9

What is the formula for Price / Earnings Ratio (P/E Ratio)?

Ex. If a stock has estimated earnings of $3 per share and a P/E ratio of 15, what is its valuation?

Answer 9

P/E Ratio = Current market price / Earnings

Ex. Valuation = $3 * 15 = $45

Question 10

What is the formula for holding period return?

Ex. Client bought 100 shares at $100/share on 50% margin. Margin interest was 12% annually. After 1 year, client sold stock for $150/share. What’s client’s HPR?

Ex. Client purchased 100 shares in margin account for $10 per share using maximum margin. The stock pays $.10 quarterly dividend during the 12 months. The investor owns it before selling the stock for $11 per share, excluding taxes, margin interest, transaction costs, what’s the investors holding period return?

Answer 10

Note - If you don’t have MP/ending value/P1, use CY formula to find it.

Ex. ( $15,000 - ($5,000 margin + $600 margin interest) - $5,000 purchase price) / purchase price = 88%

Ex. 28% - (dividends + appreciation) / purchase price

Holding Period Return is really the gain plus income / beginning investment.

Question 11

Phantom Income Producers

Answer 11

STRIPS (who purchases? - tax deferred account like pensions)
-strips are issued directly by the US treasury and don’t have default risk

TIPS (have fixed interest rate w/ inflation adjustment that increases principal, which is phantom income that’s added to basis - hug/slug ex.)

Zeros

CATS

Question 12

Federal Securities Taxation

Answer 12

Only pay FED tax on FED securities; no state/local tax

Question 13

Mortgage Backed Securities & CMOs (mortgage-backed pools)

Answer 13

Mortgage Backed Securities
-GNMA - Guaranteed/govn. backed
-FNMA/FHLMC - If it has an F, you can get F-ed out of your money (not guaranteed)

CMOs - Has tranches A-Z (safest-riskiest + Z has no coupon)

Question 14

Bond Ratings

Answer 14

REMEMBER - BBB (Better Bad Bonds) and up, investment grade - BB (Bad Bonds) and below, speculative/junk

Question 15

Convertible Bonds

Answer 15

Question 16

Preferred Stock

Answer 16

Who buys? Corporate treasurers (Warren Buffet); preferred stock dividends, only 50% are taxed
Other feature - Infinite maturity, longer duration than bonds

Question 17

Mutual Funds

Answer 17

Are redeemable, NOT MARKETABLE

Question 18

Options, LEAPS, Warrants, Futures

Ex. Client purchased 100 shares for $52 in Jan. In June, client purchased call option w/ $60 strike price for a $1 premium. Client sells option at $5 and stock at $65 in February of next year. How much does client make?

Answer 18

Ex. To solve gain/losses from calls/puts and options, break question into two transactions.
$1,300 LTCG ($65-$52) + $400 STGC ($5-$1)

LEAPS - Remember stock must be held for 12 mo. after a LEAP is exercised for LTCG.

Warrants - Unstandardized & issued by corporations with several year maturities (unlike standardized call options issued by individuals w/ 9 mo. maturities)

Futures - If you’re long/farm corn, take short position on the corn. If you’re short, take a long position.

Question 19

Correlation Coefficient, Covariance, & SD

Ex. Client holds 2 funds in equally and covariance is 0. Fund A has a risk of 9.5% and Fund B has a risk of 12.5%. What is Standard Deviation of portfolio?

Answer 19

Correlation coefficient range = - 1 –> + 1

Ex. 12.5% + 9.5% = 22% / 2 = 11% (this is SD if correlation coefficient is + 1), so if correlation coefficient is 0, should be somewhere around 6-8% range

ALSO, 2nd formula on right side

Question 20

Coefficient of Variation (CV)

Ex. Which stock is more risky?
Stock 1 - Average/mean of 5.75% & SD of 7.59%
Stock 2 - Average/mean of 7% & SD of 10.52%

Answer 20

CV indicates risk per unit of expected return. Formula - CV = standard deviation / expected return

-Ex. Stock 2: 10.52% / 7% = 150% > 7.59% / 5.75% = 132%

Question 21

Solve for Mean & SD of stock on TI BA II

Answer 21

Step 1. Enter returns in DATA
Step 2. Solve 1-Var (2nd STAT, 2nd SET, scroll to 1-V)

When choosing what stock to buy, choose highest return (X bar), lowest risk (SD/Sx)

Ex. IV p.25

Question 22

Beta Range

Answer 22

> 1 = more volatile
1 = in line with the market
<1 = less volatile
0 = no correlation
Negative = inverse relationship

Question 23

Solve for geometric return on BA II

Ex. Annual returns have been 30%, 40%, - 40%, - 20%. What is the geometric mean over the 4 years?

Answer 23

Step 1. ( (1 + return 1) X 1+ return 2) X (1 + return 3) ) - 1 = x
Step 2. TVM Calc - x = FV, - 1 = PV, N = 3, Solve = I/y

Ex.
Step 1. 0.8736
Step 2. FV = .8736, N = 4, PV = -1, ANS = - 3.32%

Question 24

Immunize Portfolio

Ex. Calc duration - A BBB rated bond with a 20-year maturity can be called in 10 years. The bond has a 5% coupon when comparable bonds are paying 5.5%. It is currently selling for $990. If the bond can be called for $1,050, what is the duration of the bond based on it its callability?
-5.62, 7.24, 8.07, 12.85

Answer 24

Goal - Protect bond portfolio from interest rate fluctuations; in practice this looks like average duration being = to time horizon to goal

Why immunized a portfolio? Reduced bond portfolio market losses, earn specific rate of return over given time, to offset interest rate risk with reinvestment rate risk

REMEMBER - Zero coupon, duration = maturity

Ex. For exam, to estimate the duration on this callable bond, find the years to call (10) then pick the next lowest number.

Question 25

CML & SML

Answer 25

Capital Market Line (macro) - CML is tangent to Markowitz Model Point B (which is the optimal risky portfolio) -Point of tangent of Markowitz & CML = Point B -Point of intersection = Rf aka risk-free rate (100% T-Bills) Security Market Line (micro) - SML expresses the relationship between risk/return for one asset. -SML formula is same as Required Rate of Return/CAPM (right side 4 down)

Question 26

Roadmap - Jensen (alpha) / Treynor + Sharpe

Answer 26

REMEMBER 1. If R2 numbers are mixed (high and low), go for the highest Sharpe answer 2. Alpha measures manager's ability (so S&P500 Alpha = 0, Beta of S&P500 = 1) 3. R2 of S&P500 is close to 100%, R2 of sector fund is low like 25% R2 = Coefficient of determination

Question 27

Stock Split

Answer 27

I have 100 shares. Ex. 5:2 split --> 250 shares Ex. 2:5 reverse split --> 40 shares

Question 28

Ex-Div. Date - When do you have to buy a security for the dividend to get paid out?

Answer 28

Purchase 1 open market day (non-holiday + non-weekend) before Ex. Dividend Date to be on corporations books to receive dividend Ex. Friday = Purchase Date, Sat-Sun = market closed, Mon = Ex. Div. Date, Tues = Date of Record

Question 29

What is the % change in a stock? (formula)

Answer 29

Percentage Increase = ((New price - Old price) / Old price) X 100

Question 30

Covert basis points to %

Answer 30

Basis points / 100 = % Ex. 500 basis points = 5%

Question 31

Assume that MicroHard Corporation is currently paying a $3.50 per share in dividends and that investors expect dividends to grow at a rate of 5% per year for the foreseeable future. What is the estimated price of MicroHard if the market return is 9%, the risk-free rate is 3%, and the stock has a beta of 1.2?

Answer 31

$70.67

Question 32

If the standard deviation of the stock is 24% and the standard deviation of the market is 16%, what is the beta of the stock if the covariance of the stock to the market is .007?

Answer 32

.2734

Question 33

What is the investor’s required rate of return for a stock that has a market premium of 7%, a beta of 1.4, and a risk-free rate of 4%?

Answer 33

13.8%

Question 34

Roger Moore has invested $110,000 into a bond with a coupon of 5%. According to his calculations, the bond has a YTC of 3% and a YTM of 4.5%. The bond has a duration of 8.9. What percentage will the bond price change if interest rates decrease by 0.5%?

Answer 34

+ 4.26%

Question 35

Vito Scaramucci is resident of New Jersey. Due to his booming protection services business, he is in the 37% federal tax bracket. New Jersey state tax is a flat 6.625%. Because of his high tax bracket, Vito decides to purchase Treasury Notes paying 5.5%. What is his tax-equivalent yield on those bonds?

Answer 35

5.89%

Question 36

Karis Choi is a South Carolina resident. Due to her new found success as a TikTok model, she finds herself in the 37% federal tax bracket. South Carolina imposes a 6.5% state tax. Due to her high tax bracket, she found some municipal bonds issued by the State of Illinois paying 7.75%. What is her tax-equivalent yield on those bonds?

Answer 36

12.30%

Question 37

Fund A has the following annual returns of 10%, 12%, and -4%. The average rate of return on risk-free assets during the same period is 2.5% and the beta was 1.2. What is its Sharpe measure of performance?

Answer 37

.4015

Question 38

Marty McFly purchases 1,000 shares of Walmart, Inc at $80 per share on margin. The initial margin requirement is 50%. If the maintenance margin is 25%, what is the amount of the maintenance call if the stock drops to $50?

Answer 38

$2,500 At $50/share, the shares are now worth $50,000. Marty still has a margin loan balance of $40,000 and his equity is $10,000. 25% of $50,000 $12,500 equity required $50,000 - $40,000 $10,000 actual equity Maintenance call of $2,500

Question 39

Sandy Speculator is looking to make a quick buck playing the stock market. She calls her broker and puts in an order to buy 500 shares of GameStop stock on margin. GameStop is selling for $150/share but has an initial margin requirement of 70% due to its volatility and the annual margin interest is 12%. One month later, GameStop is trading at $250/share and Sandy sells her entire position. What is her holding period return (HPR)?

Answer 39

94.81%

Question 40

Factoring exchange rate into return Ex. Client invests $10,000 in US dollars into Toyota on the Tokyo exchange when the exchange rate is 100 Yen to 1 USD. The stock grows by 50%. Client sells stock when the exchange rate is 90 Yen to 1 USD. What's the client's return?

Answer 40

66.7% Step 1. Calculate initial investment in Yen. Step 2. X by growth Step 3. Divide by new exchange ratio = New value in USD Step 4. ( New value is USD - initial USD investment ) / initial = % growth factoring in the exchange rate

Question 41

Technical analysis pricing levels - Support, Resistance, breakout

Answer 41

Question 42

What is the intrinsic value of a preferred stock yielding a 7% dividend, par value of $35, and currently priced at $33 if the required rate of return is 9%?

Answer 42

$27.22

Question 43

Company MSR has a return on equity of 12.5%, a retention ratio of 50%, and a required return of 12%. Company MSR recently paid a dividend of $3.50. What is the intrinsic value of company MSR?

Answer 43

$64.70