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Investment

II. You are working for an investment firm and have been asked to analyze and explain investments to your boss and clients who do not understand the various aspects of your job. You are working with the analysis of stocks, bonds and mutual funds. The following questions are examples of some of the analysis type problems that your boss has asked you to explain. Be sure to be thorough with your explanations.

In the old days, bond prices were expressed in terms of 1/32's and multiples thereof. An old letter in your files references a bond price that goes from 82 1/3 to 80 7/8. How much did it change?
You bought a bond GMAC 8s15 on 1-1-07 at a price of 45. What is the price in dollars? How many years before it expires (assume it expired Dec 31)? How much total interest will be received from the bond by the expiration date? What is the annual yield? How much risk is associated with this bond (low, medium or high) and how do you know?

You have invested in stock for 1 year. If you start with $125 worth, a 8.25% increase in value will cause it to be worth how much? If you start with $125 of stock and then it grows to $215, what was the growth rate?
One of your investments, a mutual fund, was bought by you for $15.80 on January 1 this year with a sales charge at that time of 3% of the NAV. It increased in value since then by $3. What is the current YTD NAV (that is, what can you sell it for today)? What is the YTD % return?
One of your clients has some stock he needs to distribute dividends to. However, the dividends for last year were never distributed. The total amount of dividends to be distributed is $120,000. It is to be distributed to 55,000 preferred shares at a fixed dividend of $1 per share. Your client wants to know how many dollars are distributed to preferred shareholders? How much per share is distributed to 20,000 common shareholders?
A client wants to know your best guess about the probable price of stock in 3 years. Historical data are listed below.Use Excel to graph the data and come up with the equation of a line to fit the data and use for predicting the price of the stock in 3 years.

Year Price, $

1963 115

1965 125

1967 130

1969 140

1971 110

1973 130

1975 140

1977 152

1979 170

1981 150

1983 140

1985 150

1987 177

1989 190

1991 175

1993 172

1995 170

1997 176

1999 184

2001 189

2003 198

2005 230

Solution Preview

In the old days, bond prices were expressed in terms of 1/32's and multiples thereof. An old letter in your files references a bond price that goes from 82 1/3 to 80 7/8. How much did it change?

*To find the difference in the price, use 24ths:
82 1/3 = 82 8/24
80 7/8 = 80 21/24
The difference will be 82 8/24 - 80 21/24 = 1 11/24

You bought a bond GMAC 8s15 on 1-1-07 at a price of 45. What is the price in dollars? How many years before it expires (assume it expired Dec 31)? How much total interest will be received from the bond by the expiration date? What is the annual yield? How much risk is associated with this bond (low, medium or high) and how do you know?

*The price is already listed at $45.
The 15 in "8s15" shows the bond will expire in 2015. If the bond was bought on 1-1-07, it will expire in 8 years.
The bond pays 8% ...

Solution Summary

This solution explains how to find:

1) Change in bond prices
2) Bond yield
3) Value of an investment over time
4) Net asset value
5) Dividend payouts
6) Projected stock price

$2.19