Module 4 Q&A

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Chapter 10: Investment Return an d Risk Which of the following is not true with respect to IPOs? A. The return on IPOs is commonly high over the first day. B. Individual investors normally have the first shot at purchasing shares of an IPO. C. Many IPOs have performed poorly over the long term. D. All of the above are true with respect to IPOs. 1. Olaf Anu owns shares in a stock where the market value of the firm is $600 million and the number of shares outstanding is 130,000. What is the value of the stock on a per share basis? Solution Value of stock per share = Market value per share / # of share Outstanding = 600milllion/130000 = $4615.38 per share 2. Joel purchased 100 shares of stock for $19 per share. During the year, he received dividend cheques amounting to $146. After three years, Joel sold the stock for $29 per share. What was his holding period return? What is the dollar amount of Joel's return? Solution HPR= (end. Value – Begin. Value + income) / begin. Value = (29-19+(146/100)) / 19 = 60.32% Dollar returns per share = Begin. Value * HPR = 19*60.32% = $11.46 per share Dollar amount = shares owned * Dollar returns per share = 100*$11.46 = 1146 3. John purchased 100 shares of Toronto Dominion Bank in December 2019 at a total cost of $1,724. He held the shares for 15 months and then sold them for $2,226. During the period he held the stock, the company paid him $3 per share in dividends. Calculate John's holding period return. Solution End. = 2226/100 = $22.26 per share; Begin. = 1724/100 = $17.24 per share HPR= (end. Value – Begin. Value + income) / begin. Value = (22.26-17.24+3)/17.24 = 46.52% 4. The current 3-month Government of Canada Treasury Bill rate is 0.5 percent. If Anne requires 7 percent extra yield on Stock A, what is her required rate of return? Solution R = R(f) + RP = 0.5% + 7% = 7.5% 5. Abigail expects inflation to be 2 percent over the next 9 months. She would like to earn a real rate of return of 3 percent on her bond investment. If the bond is expected to provide a return of 8 percent, what was the additional return beyond the risk-free rate that she earned on her investment? Solution R = RR + IP + RP 8% = 3% + 2% +RP RP= 3%

6. Emma bought 100 shares of stock a year ago for $55 per share. She received no dividends on the stock and sold the stock today for $35 per share. What is Emma's annualized return on the stock? Solution HPR = (End. Value – Begin. Value) / Begin. Value = (35-55) / 55 = -36.36% 7. Value of Investment. Tammy has $2,850 that she wants to invest in stock. She believes she can earn a 12% annual return. What would be the value of Tammy's investment in 10 years if she is able to achieve her goal? Solution 8. Value of Investment. Dawn decides to invest $1,480 each year in stock at the end of each of the next five years. She believes that she can earn an 8% return over that time period. How much will Dawn's investment be worth at the end of five years? Solution 9. Value of Investment. Bob purchased stock in a new social media company for $37 per share shortly after the stock's IPO. The stock had been heavily publicized on the Internet. Over the next three years, the stock price declined by 13 % each year. What is the company's stock price after three years? Solution Future stock price = present stock price (1+ i)^n = 37(1-0.13)^3 = 24.36 10. Value of Investment. Morris will start investing $1,530 a year in stocks. He feels he can average a 9% return. If he follows this plan, how much will he accumulate in 10 years? In 20 years? In 30 years? Solution

change N(20, 30) to get the other results. 11. Thomas purchased 400 shares of stock A for $25 per share and sold them more than a year later for $18 per share. He purchased 480 shares of stock B for $41 per share and sold them for $56 per share after holding them for the same time period. If Thomas is in a 30 percent tax bracket, what will his owing on taxable capital gains be for the year? Solution Stock A Capital Gain = 400(18-25) = -$2800 Allowable capital loss/gain = -2800/2 = -$1,400 Stock B Capital Gain = 480(56-41) = $7200 Allowable capital loss/gain = 7200/2 = $3,600 Owing on Tax = Net Capital Gain * Tax Rate = (3600+(-1400)) * 30% = $660 12. Floyd wants to invest the $14,500 he received from his grandfather's estate. He wants to use the money to finance his education when he pursues his doctorate in five years. What amount will he have in five years if he earns a 10 percent return? If he receives a 12 percent return? A 13 percent return? All rates of return are compounded monthly. Solution Effective Interest Rate = (1+ i/12)^12 -1 Floyd’s real value of earnings = (1+ (0.1/12))^12 -1= 0.104713 Floyd’s real value of earnings = (1+ (0.12/12))^12 -1= 0.12682

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Floyd’s real value of earnings = (1+ (0.13/12))^12 -1= 0.13803 13. Odell pays $8,200 for a bond that pays an annual dividend of $300. The bond has a par value of $10,000. If Odell holds the bond until it matures in exactly three years' time, what will be his return on investment? What will be the annualized return on his investment? Solution Income for 3years= 300*3 = 900 HPR= (end. Value – Begin. Value + income) / begin. Value = (10000-8200+900)/ 8200 = 32.93% 14. Refer to the accompanying table. Between Investor A and Investor B, which is more likely to represent a retired couple? Why? Mutual fund ▼ A/B is the higher risk mutual fund since it has a ▼ smaller /larger beta. This means that investor ▼ A / B is more likely to represent the retired couple because they have ▼ less / more of their assets allocated into the riskier mutual fund. 15. ___________ is not a common investment mistake made by individuals. (Select the best answer below.) A. Borrowing to invest B. Making decisions based on unrealistic goals C. Taking risks to recover losses from previous investments D. All of the above are common investment mistakes made by individuals. 16. In the secondary market, stock prices are: determined by supply and demand 17. Which of the following statements is correct? Ans: Portfolio managers are the employees of financial institutions who make investment decisions. Mutual Fund AMutual Fund B Beta 1.7 1.1 Asset allocation - Investor A 25% 75% Asset allocation - Investor B 75% 25%

18. Investing in growth stocks usually refers to: younger companies with potential for large capital gains. 19. The difference between common and preferred stock is that preferred stock : has predictable income and more safety. 20. If you wish to have a direct voice in the running of a company, you should purchase: c ommon stock. 21. Fernando purchased 1500 shares of Johnson Enterprises Inc. for $23 per share in 2006. During 2007, Johnson Enterprises paid a dividend of $1 per share. Fernando sold his shares in Johnson Enterprises for $26 per share at the end of 2007. What was his investment return during the holding period? Round your answer to one decimal place. ANS: HPR= (26-23)/23 = 13.0% 22. Investment risk refers to: volatility in investment returns. 23. Which of the following statements regarding the trade-off between risk and return is incorrect? The risk of your investment is that the firm may be unable to make its dividend payment if its financial condition deteriorates . 24. You can reduce your investment risk most effectively through: asset allocation. 25. With respect to investment return, the benefits of portfolio diversification include: A. an equally weighted portfolio of two stocks will have a rate of return that is equal to the average return of the two stocks combined. B. all of the above. C. on average, the range of returns of a portfolio of investments is less than the range of returns of any individual investment. D. a portfolio of investments will result in a smoother trend of returns since returns are averaged among the investments in the portfolio. 26. When investment A performs well, investment E does poorly. When A performs poorly, E does well. This is referred to as: negative correlation. 27. To diversify your portfolio against weak economic conditions in Canada, it is important to diversify your stocks across: countries. 28. Lee Ann would like to diversify her individual stock portfolio with other investments. Currently, she owns a portfolio of five stocks. Which of the following investments would you be least likely to recommend to Lee Ann in order to help her achieve her goal? Real estate 29. Your current investment portfolio is equally diversified across stocks, bonds, and real estate. You have decided to reposition your portfolio based on your expectations about economic conditions. For the upcoming year, you expect stock market conditions to be weak, interest rates to decrease, and real estate conditions to be unfavourable. Which of the following investments would you most likely add to your portfolio? A bond mutual fund containing bonds with long maturities. 30. True or False ? Common stock refers to a certificate issued by a firm to raise funds that entitles shareholders to first priority to receive dividends. 31. True or False? The secondary market facilitates the trading of existing securities by enabling investors to sell their shares at any time. 32. True or False ? Value stocks represent the stocks of firms with substantial growth opportunities. 33. True or False? The price of preferred stock is not as volatile as the price of common stock. 34. True or False? Real estate can be rented to generate income in the form of rent payments. In addition, investors may earn a capital gain if they sell the property for a higher price than they paid for it. 35. True or False? A poorly managed company that suffers a decrease in its stock price is an example of systematic risk. 36. True or False ? An investment with a high standard deviation is more likely to experience a large gain or a small loss in a given period.

37. True or False? Investors expect a higher return for taking on additional risk. 38. True or False ? Portfolio construction involves the selection of investments that exhibit positive correlation. 39. True or False ? The returns on stocks and the returns on bonds are highly correlated. 40. True or False? To reduce your exposure to stock market risk, you could invest in either long−term debt securities or money market securities. Chapter 11: Investing In Stock 1. Becky short sells 200 shares of a stock for $7 per share. Refer to the margin requirements below to answer the following questions. (Assume that she incurs no additional costs.) a. How much does she need to deposit in her margin account to complete this short sale? b. How much does she need to deposit in her margin account if the original stock price was $1.50? Solution a. The total value of the short sale = 200*$7*150%= $2,100 Margin Requirement = 2100 – (200*$7) = $700 b. The total value of the short sale = 200*$3.00= $600 Margin Requirement = 600 – (200*$1.50) = $300 2. Jin buys 300 shares of a stock at $70 per share in his margin account. Refer to the margin requirements below to answer the following questions. (Assume that he incurs no additional costs.) a. What is his margin requirement in dollars? b. What is his return on investment if the stock price rises to $90 per share and he sells his shares? c. If the stock price decreases to $60 and Jin decides to sell the stock, what is his return on investment? What is the most amount of money that he could lose on this investment? Solution a. The margin requirement = 300*70*50% = $10,500 b. Total investment = 10,500+10,500 = $21,000 (the most amount of money that could lost here) Sale price = 300*$90 = $27,000 Initial investment = $10,500 Return on investment = (27,000 – 21,000)/10,500 = 57.14% c. Sale price = 300*$60 = $18,000 Initial investment = $10,500 Return on investment = (18,000 – 21,000)/10,500 = -28.57% 3. Denise has a choice between two stocks. Stock A has a current stock price of $33.25 and earnings per share of $2.51. Stock B has a current stock price of $30.65 and earnings per share of $2.92. Both

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stocks are in the same industry, and the average P/E ratio for the industry is 13. Using the P/E ratio, which stock is the better choice? Solution Stock A: P/E= 33.35/2.51= 13.29 Stock B: P/E= 30.65/2.92 = 10.50 Therefore, stock B would be better because it may be undervalued relative to the industry. 4. Accounts receivable turnover = sales / accounts receivable. Inventory turnover = cost of goods sold / inventory. Total asset turnover = sales / total assets. 5. When aggregate demand increases (decreases), unemployment decreases (increases) 6. In general, stocks perform _____Better_____ when interest rates are ______low_____. 7. An industry analysis is often necessary because a firm's stock price is also susceptible to industry conditions. True / False 8. Omega stock is currently selling at $ 60 per share. For each of the following situations, (ignoring any additional costs), calculate the percentage gain or loss that Felix realizes if he makes a 300-share transaction. a. He short sells the stock and repurchases the borrowed shares at $65 per share. b. He buys the stock and sells the stock at $70 per share. c. He short sells the stock and repurchases the borrowed shares at $30 per share. d. He buys the stock and sells the stock at $55 per share. Solution a. Margin required = 300*60*150% - 300*60 = $9,000 Gain/loss(%) = (300($ 60 -65)) / 9,000 = -16.67% b. Margin required = 300*60*150% - 300*60 = $9,000 Gain/loss(%) = (300($70- 60 )) / 9,000 = 33.33% c. Gain/loss(%) = (300($ 60 -30)) / 9,000 = 100% d. Gain/loss(%) = (300($55- 60 )) / 9,000 = -16.67% 9. Balance Sheet for Polly Corporation (in millions) Income Statement for Polly Corporation (in millions) Assets Revenue $5,000 Cash and marketable securities $175 Cost of goods sold $2,200 Accounts receivable $340 Gross profit $2,800 Inventories $430 Operating expenses $1,200 Net fixed assets $600 Earnings before interest costs and taxes (EBIT) $1600 Total assets $1,545 Interest $75 Liabilities and Shareholders' Equity Earnings before taxes $1525 Accounts payable $350 Taxes $250 Short-term debt $125 Earnings after taxes $1275 Long-term debt $325

Shareholders' equity $745 Total liabilities and shareholders' equity $1,545 The current ratio averages 2.5 in Polly's industry. Which of the following statements is true? Solution Current ratio = current assets (cash and marketable securities + accounts receivable + inventories) / current liabilities (accounts payable + short-term debt ) = (175+340+430) / (340+125) = 2.0 A firm is considered liquid if their current ratio is more than the industry average. Polly Corp.'s current ratio is less than the industry average of 2.5 , so Polly is not considered very liquid. 10. Balance Sheet for Polly Corporation (in millions) Income Statement for Polly Corporation (in millions) Assets Sales $4,800 Cash and marketable securities $175 Cost of goods sold $2,700 Accounts receivable $360 Gross profit $2,100 Inventories $430 Operating expenses $1,400 Net fixed assets $800 Earnings before interest costs and taxes (EBIT) $700 Total assets $1,765 Interest $50 Liabilities and Shareholders' Equity Earnings before taxes $650 Accounts payable $375 Taxes $250 Short-term debt $125 Earnings after taxes $400 Long-term debt $350 Shareholders' equity $915 Total liabilities and shareholders' equity $1,765 Two measure that can be used to determine Polly's financial leverage are the debt ratio and the times interest earned ratio. - A firm with a high debt ratio relative to the similar companies in its industry has a high degree of financial leverage and therefore may have a relatively high risk of default on its future debt payments. - A high times interest earned ratio means that the firm should be more capable of covering its debt payments than an average firm in its industry. Debt ratio = total debts/total assets = (accounts payable + short term debt + long term debt) / (total assets) = ($375+$125+$350)/$1,765 = 48.2% of Polly's assets are financed using debt. Polly's times interest earned ratio = EBIT/interest payments = $700/$50 = 14 11. net profit margin = earnings after taxes / sales assets = earnings after taxes / assets return on equity i= earnings after taxes / equity 12. A year ago, Rebecca purchased 100 shares of Havad stock for $20 per share. Yesterday, she placed a limit order to sell her stock at a price of $25 per share before the market opened. The stock's price opened at $23 and slowly increased to $26 in the middle of the day, before declining to $22 by the end of the day. The stock did not pay any dividends over the period in which Rebecca held it. The limit order would have been executed because the stock price increased above the limit price. Given Rebecca's initial investment of $20 per share, her return is ($25−$20 )/$20 ×100 = 25 percent. 13. A year ago, Rebecca purchased 100 shares of Havad stock for $25 per share. Yesterday, she placed a limit order to sell her stock at a price of $33 per share before the market opened. The stock's price

opened at $28 and slowly increased to $32 in the middle of the day, before declining to $27 by the end of the day. The stock did not pay any dividends over the period in which Rebecca held it. Part 1 The stock price did not reach $33. No sale would have occurred. Part 2 Therefore, Rebecca would still own the stock, her return is 0 percent. 14. Trey purchases 200 shares of Turner stock for $40 per share. Trey pays $4,000 in cash and borrows $4,000 from his broker at 15 percent interest to complete the purchase. One year later, Trey sells the stock for $50 per share. Part 2 Trey's return from selling the stock will be R = (( SP + D )−( BP + I ))/margin deposit per share, Where: SP = selling price = $50 D = dividends per share = $0 BP = purchase price = $40 I = interest paid per share on the loan = (( $4,000 × 0.15) ÷ 200) = $3.00 Part 3 Margin deposit/share = $4,000 ÷ 200 = $20 Part 4 Trey's return if the stock paid no dividends during the year is R = (( $50 + $0)−( $40 + $3.00))/ $20 = 35.0% 15. Trey purchases 200 shares of Turner stock for $50 per share. Trey pays $5,000 in cash to complete the purchase. One year later, Trey sells the stock for $60 per share. Part 2 Trey's return from selling the stock will be R = (( SP + D )−( BP + I ))/margin deposit per share , Where: SP = selling price = $60 D = dividends per share = $0 BP = purchase price = $50 I = interest paid per share on the loan = $0 Margin deposit/share = $5,000÷200= $25 Return computation: R = (( $60 + $0)−( $50 + $0))/ $25 = 40.0 percent Chapter 12 1. Bernie purchased 52 bonds with par values of $1000 each. The bonds carry a coupon rate of 6.8% payable semi-annually. How much money will Bernie receive for his first interest payment from these bonds? Solution Total Annual Interest Payment=Total Par Value × Coupon Rate = (52*1000) * 0.068 = $3536 Semi-annual interest Payment = $3536 / 2 = $1768 2. Two bonds have par values of $1,000. Bond A is a 5 percent, 15 -year bond priced to yield 6.5 percent. Bond B is a 7 percent, 20-year bond priced to yield 6 percent. Which of these has the lower price? (Assume annual compounding in both cases.) Solution Bond A PMT= 1,000* 0.05 = $50

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Bond B PMT= 1000*0.07 = $70 Therefore, Bond A has the lower price. 3. A bond that is priced in the market at $1,160 and has a coupon of 5.4 percent. Calculate the bond's current yield. Assume the bond has a par value of $1,000. Solution Bond current yield = Annual coupon payment / current market price = (1000*0.054) / 1160 = 4.66% 4. Assume that an investor is looking at two bonds: Bond A is a $ 1,000 20 -year, 9.5 percent bond that pays coupons semi-annually. The bond is priced to yield 11 percent, compounded semi- annually. Bond B is a $1,000 20 -year, 8.5 percent bond that pays coupons annually. The bond is priced to yield 7.5 percent, compounded annually. Both bonds are callable after 5 years at a price of $1,045. a. Which bond has the higher current yield? b. Which bond has the higher yield to maturity (YTM)? c. Which bond has the higher yield to call (YTC)? Solution a. Bond A PMT= $1000 * 9.5% * ½ = $47.5 N= 20 *2 = 40 (Note: semi-annually ) (Where: P/Y is payment per year, C/Y is the compounding periods per year) Current Yield = (1000*9.5%) /879.65 = 10.8% Bond B PMT= 1000*8.5% = $85 (Note: Annually ) Current yield= (1000*85) / 1,101.94 = 7.71% Notice that the current yield for Bond A is greater than the current yield for Bond B. b. Since Bond A is priced to yield at 11 percent, the yield to maturity for Bond A is 11 percent. Since Bond B is priced to yield at 7.5 percent, the yield to maturity for Bond B is 7.5 percent. Notice that the yield to maturity for Bond A is greater than the yield to maturity for Bond B.

c. Bond A Bond B 5. Bonnie paid $9,2000 for corporate bonds that have a par value of $1,000 and a coupon rate of 10.1 percent, payable quarterly. Bonnie received her first interest payment after holding the bonds for three months and then sold the bonds for $9,408. If Bonnie is in a 33 percent marginal tax bracket for federal income tax purposes, what are the tax consequences of her ownership and sale of the bonds? Solution Taxable coupon payment ($10,000 × 0.101 × 0 .25) + Taxable capital gain ($9,408−$9,200 )×0.50 = Taxable income ($ 356.5) Taxable income ×0.33 = Tax on sale of bonds (117.65) 6. Fran is evaluating ATT Ltd. bonds using the following information: $30,000 par value, maturity December 22 2023, , semi-annual coupon 7.5 percent, price $106.00 , and yield 7.15 percent. How much interest would this bond pay Fran on an annual basis? Solution amount of interest = bond's par value / annual coupon rate = 30,000/7.5% = $2250 7. Delia purchases a $9,500 real return bond that has a coupon of 3.5 percent with interest payable semi-annually. If inflation increases by 1.7 percent in the next six months, what is the effect on the bond's par value and semi-annual coupon payment. What is the effect on the bond's par value? Solution Bond inflated-Adjusted semi-annually. Increase by 1.7% >>> $ 9,500 +1.7 % × $ 9,500 = $9,662 3.5%/2 = 1.75% Adjusted Value>>> 9,662*1.75% = 169.09 Original value >>> 9,500*1.75%= 166.25 Notice that the inflation-adjusted semi-annual coupon payment is higher than the original semi- annual coupon payment of $ 169.09. 8. Katie paid $9,100 for an Ontario Hydro bond with a par value of $10,000 and a coupon rate of 6.9 percent, compounded semi-annually. Two years later Katie sold the bond for $9,325. What are her total tax consequences if she is in a 28 percent marginal tax bracket?

Solution Taxable coupon payment ($10,000 × 0.069× 2) + Taxable capital gain ($9,325−$9,100 )×0.50 = Taxable income Taxable income ×0.33 = Tax on sale of bonds (417.9) 9. Melissa purchases a one-year $50,000 Government of Canada real return bond that has a coupon rate of 8 percent, payable semi-annually. Inflation increases 3 percent over the next six months and then 2.5 percent in the following six-month period. Solution Inflation-adjusted par value = $50,000× (1 + 0.03 ) = 51500 1 st coupon payment is calculated as: Inflation-adjusted semi-annual coupon payment =(Inflation-adjusted par value× (0.08 /2)) = $2060 The par value of the bond at maturity is calculated as the initial inflation-adjusted par value of $51,500 times (1 +0.025 ) = $52,788. The final coupon payment is calculated as: Inflation-adjusted semi-annual coupon payment =(Inflation-adjusted par value× (0.08 /2)) = $2111.52 10. What is the annual yield on a $9,000 , 15 -year, 7.0% bond that makes annual coupon payments and was purchased at 107.5 ? The bond has 11 years remaining until maturity. Solution The value of a bond today is $9,000×107.5 percent= $9,675. A coupon payment would be $9,000×8.5 %= $765. The annual yield on the bond is 7.48 %. 11. Brady purchased a $24,000 , 10 percent bond redeemable at par with semi-annual coupon payments. He purchased the bond 10 years before maturity to yield 11 percent compounded semi-annually. Six years after purchasing the bond (four years before maturity), what would be his selling price if the yield to maturity has not changed? Solution PMT= 24000*10%* ½ = $1,200 N= 4*2 =8 12. Risk Premium. Sandy has a choice between purchasing $5,000 in Government of Canada bonds paying 4.6 percent interest or purchasing $5,000 in BB-rated corporate bonds with a coupon rate of 6.9 percent. Solution Coupon rate on corporate bonds - Coupon rate on Government of Canada bonds = Risk premium 6.9-4.6= 2.3% 13. Timothy has an opportunity to buy a $3,000 par value municipal bond with a coupon rate of 9 percent and a maturity of five years. The bond pays interest annually. If Timothy requires a return of 11 percent, what should he pay for the bond? Solution

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PMT = 3,000*0.09 = 270 14. Mia wants to invest in Government of Canada bonds that have a par value of $20,000 and a coupon rate of 6.6 percent. The bonds have a 15 -year maturity, and Mia requires a 9 percent return. How much should Mia pay for her bonds, assuming interest is paid annually? Solution PMT= 20,000*6.6% = 1320 15. Emma is considering purchasing bonds with a par value of $10,000. The bonds have an annual coupon rate of 8 percent and six years to maturity. The bonds are priced at $9,868. If Emma requires a 9 percent return, she should buy these bonds if the price exceeds___ Pmt= 10,000 * 8% =800 16. Mark has a Government of Canada bond that has a par value of $30,000 and a coupon rate of 7 percent. The bond has 20 years to maturity. Mark needs to sell the bond and new bonds are currently carrying coupon rates of 11 percent. At what price could Mark sell the bond? PMT = ($30,000 × 0.07 ) =$2,100 . 17. Mark has a Government of Canada bond that has a par value of $20,000 and a coupon rate of 12 percent. The bond has 10 years to maturity. Mark needs to sell the bond and new bonds are currently carrying coupon rates of 10 percent. What price can Mark expect to receive for the bond? PMT =($20,000 × 0.12)=$2,400. Chapter 13

1. _____Open-end_____ mutual funds sell shares directly to investors and repurchase those shares whenever investors wish to sell them. 2. The value of _____Closed end____ fund is usually not measured by its net asset value (NAV). 3. The market value of securities and the current liabilities for a mutual fund are $483,550,000 and $18,000,000, respectively. What is the net asset value per share (NAVPS) for this mutual fund if there are 30 million shares outstanding? Solution The net asset value per share (NAVPS) for this mutual fund is calculated using the following formula. NAVPS=Net Asset Value / Number of Shares Outstanding = ($483,550,000−$18,000,000) / 30,000,000 = $15.52 4. Calculate the net asset value per share (NAVPS) for a mutual fund with the following values. Market value of securities in the portfolio $1.5 billion Liabilities of the fund $35 million Shares outstanding 55 million NAVPS=Net Asset Value / Number of Shares Outstanding = (1.5billion – 35million) / 55 million = $26.64 5. Amount of Shares Purchased. Hope invested $14,000 in a mutual fund at a time when the price per share was $20. The fund has a load fee of $400. How many shares did she purchase? Number of Shares Purchased = (Investment−Load Fee) / Price per Share = ($14,000 - $400) /$20 = 680 shares 6. Amount of Shares Purchased . Hope had invested $14,000 in a no-load fund with price per share of $20. How many shares could she have purchased? Number of Shares Purchased = Investment / Price per Share = 14,000 / 20 = 700 shares 7. Estimating Returns. Hope invested $14,000 in a mutual fund at a time when the price per share was $20. The fund has a load fee of $400. As a result, she purchased 680 shares in the mutual fund. Hope later sold her shares in the mutual fund for $28 per share. What would her return be? If it had been a no-load fund and she purchased 700 shares, what would her return be? To calculate the return for the load fund, use the following formula: Return Load = ((Number of Shares × Selling Price) −Investment) / Investment×100 Return Load= ((680×$28) −$14,000) / $14,000 × 100=36.00% Hope's return on the load fund would be 36.00 % To calculate the return for the no-load fund, use the following formula: Return No-Load= (Number of Shares × Selling Price) −InvestmentInvestment×100 Return No-Load= (700×$28) −$14,000$14,000×100=40.00% Hope's return on the no-load fund would be 40.00 % 8. Estimating Returns. Hunter invested $10,500 in shares of a load mutual fund. The load of the fund is 11%. When Hunter purchased the shares, the NAV per share was $93. A year later, Hunter sold

the shares at a NAV of $89 per share. What is Hunter's return from selling his shares in the mutual fund? Number of Shares Purchased = (Investment−Load Fee) / Price per Share = 10,500(1-11%) / 93 =100 shares Return = ((Number of shares * Selling price) – investment) / investment = (100*89)-10500) / 10,500 = -15.24%. 9. Almost three years ago, Forrest purchased shares in Numera Canadian Equity Fund, a back-end load mutual fund. Forrest's investment is currently worth $35,000. He has decided that he would like to sell his shares. Using the declining redemption schedule (DSC) provided to determine the back- end load fee that Forrest will have to pay and how much he will receive after paying the fee. NOTE: The amount of the fee is based on the value of the fund when it is redeemed. Back-end load fee = fund value at redemption * 3 rd year (DSC) = 35,000 * 4% = $1,400 Net proceeds = fund value at redemption – back-end load fee = 35,000 – 1,400 = 33,600 10. Expense Ratio. Mark owns a mutual fund with a NAV of $80.00 per share and expenses of $1.90 per share. What is the expense ratio for Mark's mutual fund? To calculate the expense ratio, use the following formula: Expense Ratio= (Expenses per Share / NAV) × 100 Expense Ratio= ($1.90 / $80.00) ×100=2.38% The expense ratio for Mark's mutual fund is 2.38 %. 11. Rena purchased 300 shares of an equity mutual fund. During the year she received $5 per share in dividend distributions, $3 in capital gain distributions , and capital gains of $1,200 when she sold the stock after owning it eight months. What are the tax consequences of Rena's ownership of this equity fund? Rena is in a 29% marginal tax bracket. Taxable Capital Gain = 50% of capital Gain = (300*3 + 1200) *0.5 = 1050 Tax on capital gain = 1050 * 29% = aprox. $305 Complete the table. Eligible Dividends (A) Income Earned 300*5 = $1,500 (B) Enhanced Dividend Gross-up (38% of A) $570 (C) Taxable Income (A+B) $2070 (D) Federal Tax Payable ( 29% of C) $600.3 (E) Enhanced Dividend Tax Credit (15.0198% of C) $310.91 (F) Total Federal Tax Payable (D−E) $289.39 The federal tax consequences of Rena's ownership of this stock fund are 305 +289.39 = $593.89

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12. Zenia invested in the no-load Romaine Mutual Fund one year ago by purchasing 1,400 shares of the fund at a net asset value of $20 per share. The fund distributed $1.40 per share in dividends and $1.85 per share in capital gains. The net asset value of the fund today is $30 per share. What was her holding period return (HPR)? Solution The holding period return (HPR) can be found used the following formula. Notice that the dividends and capital gains are income. HPR= (ending value−beginning value +income) / beginning value = ((30-20)+(1.85+1.40)) / 20 = 66.25% 13. Zenia invested in the no-load Romaine Mutual Fund one year ago by purchasing 1,500 shares of the fund at a net asset value of $20 per share. The fund distributed $1.45 per share in dividends and $2.15 per share in capital gains. The net asset value of the fund today is $30 per share. If Romaine Mutual Fund had a front-end load charge of 3 percent, what would be the holding period return (HPR)? Assume the purchase price was $20 per share. Beg. Value = $20*1.03 = $20.60 HPR= (ending value−beginning value +income) / beginning value = ((30-20.60) + (2.15+1.45)) / 20.60 = 63.11% 14. Which of the following is not a motive for investing in mutual funds? A. Investing in a broadly diversified portfolio with a small initial investment B. The expertise of the portfolio managers who decide how to invest the money you provide C. A mutual fund is designed to meet specific investment goals D. All of the above are motives for investing in mutual funds. 15. The _____________ is a document that provides financial information about a mutual fund. a. indenture b. debenture c. prospectus d. subordinated debenture 16. All of the following are advantages of owning a mutual fund, except: A. mutual funds simplify the process of record keeping because the mutual fund company will send you a statement on a regular basis. B. your investments reflect the decisions of experienced professionals who have access to the best research available. C. mutual funds are designed for sophisticated investors seeking shortterm capital gains only. D. you can invest in a broadly diversified portfolio with a small initial investment. 17. Mutual funds, which sell units directly to investors and repurchase units from investors who want to sell, are called: Open-end funds. 18. Which of the following is true about MERs? A. MERs only include manager and sales expenses. B. All types of mutual funds have similar MERs. C. You need to subtract the MER from the posted return to figure out performance. D. Mutual funds with lower MERs tend to outperform those with higher MERs. 19. A mutual fund that aggressively seeks capital growth: A. will have an MER similar to that of a fixedincome fund.

B. will have an MER that is higher than a global fund. C. will have an MER that is approximately the same as a Tbill fund. D. will have an MER that reflects the increased costs of research. 20. __ Open-end _ mutual funds sell shares directly to investors and redeem those shares whenever investors wish to redeem them. 21. 'Since they engage in less trading than most other mutual funds, they generate a limited amount of capital gains that must be distributed to shareholders.' This statement refers to which of the following types of funds? A. Growth funds B. Dividend funds C. Index funds D. Bond funds 22. If Raymond does not want to pay any fees to invest in mutual funds, he should pick: A. Front-end load mutual funds. B. Back-end load mutual funds. C. Zero-fee mutual funds. D. No-load mutual funds . 23. If Rebecca's mutual fund has a sales charge schedule saying that if the fund is sold within the first year, the sales charge is 6 percent and if it is sold in the third year, the sales charge becomes 4.5 percent, Rebecca's mutual fund has a: A. broker commission. B. low load. C. discount fee. D. declining redemption schedule. 24. When you initially purchase a mutual fund, a Fund Facts document must be provided to you within ___ of your purchase. A. 48 hours B. 24 hours C. seven days D. three business days 25. In order to select appropriate mutual funds for yourself, you should determine your investment objectives and evaluate your risk tolerance. Then, the final step is to: A. review and compare key information from the simplified prospectuses. B. review and compare key information from the relevant Fund Facts documents. C. consult a certified financial planner. D. open an account with a broker. 26. A mutual fund that invests only in shares of gold mining companies would be called a: A. sector fund. B. small cap fund. C. growth fund. D. Canadian equity fund. 27. Given the following mutual fund price quotation, determine which of the following statements most accurately reflects the data. ABC Health Care Fund has a net asset value per share of $21.95. The net change in the NAVPS during the previous day was +0.11. The fund has generated a return of −1.1 percent since the start of the calendar year . 28. Your return from investing in ___ is primarily affected by ___. A. a Canadian equity fund; Canadian interest rates B. a Canadian equity fund; Canadian money markets C. an Australian bond fund; Australian interest rates and the value of the Australian dollar D. a European equity fund; European stock markets and the value of the Canadian dollar

29. What is the most important difference between an index mutual fund and an exchange traded fund (ETF)? ETFs trade like stocks 30. The potential benefits of investing in a segregated fund include all of the following, except: A. segregated funds are more expensive than similar mutual funds. B. segregated funds offer a guarantee on your deposits when the policy owner dies. C. segregated fund contracts are normally exempt from seizure by creditors in the event that the policy owner declares bankruptcy. D. segregated funds offer a guarantee on your deposits when the contract matures. 31. True or False? One disadvantage of mutual funds is that you could invest in a well-diversified mutual fund that is invested in a group of poorly performing companies rather than good ones. 32. True or False ? The NAVPS is determined by dividing the number of shares outstanding by the NAV. 33. True or False? Unlike an open-end fund, shares of a closed-end fund are purchased and sold on stock exchanges. 34. True or False? A declining redemption schedule is associated with a back-end load mutual fund. 35. True or False ? Recent studies on mutual funds have found that no-load funds outperform load funds on average, even when ignoring the fees paid on a load fund. 36. True or False? Mutual funds with relatively lower expenses tend to outperform other funds. 37. True or False ? Index funds have become more popular because of very low transaction costs. 38. True or False? Exchange rate risk is the result of a decrease in the value of a foreign bond because the currency denominating the bond weakens against the Canadian dollar. 39. True or False ? Short-term bonds are more sensitive to changes in interest rates than long-term bonds. 40. True or False? Equity mutual funds that have a lower expected return are also likely to have lower expected risk. 41. True or False ? The most important expense statistic mentioned in the Fund Facts document is the back-end load. 42. True or False? When investors want to assess the performance of a mutual fund, one technique is to compare the return on that mutual fund to the average return for the same type of mutual fund. 43. True or False? Diversification among bond funds is not an effective means of reducing exposure to interest rate risk. 44. True or False ? Similar to a mutual fund, ETFs are purchased in real time. 45. True or False ? With respect to segregated funds, the determination of the value of the death benefit guarantee is similar to that of the maturity guarantee.

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