Question 1
Suppose you’re a financial advisor and a client asks you about the differences between government, corporate, and municipal bonds regarding yield, risk, and tax treatment. How would you explain the differences between these fixed-income securities in regards to each of these issues?
Question 2
As a financial advisor, you’ve been asked to review the portfolio allocation of a new client. The client is 35 years of age and is investing for long-term growth. Her goal is for her investments to grow at a rate of at least 13 percent per year—which is above the long-term average of the broad stock market—to fund her spending in retirement. She plans to retire in 30 years. Her current portfolio is shown below:
Asset Category Allocation yearly performance
Small-company stocks 10% 17.5%
Large-company stocks 20% 11.7%
U.S. Govt. long-term bonds 40% 6.2%
U.S. Treasury bills 30% 3.7%
Answer the following questions for the client. For each question, use only the asset classes listed in the portfolio and be sure to explain the reasoning underlying your advice.
a. Review the portfolio and tell what changes, if any, you would advise that she makes to the portfolio to increase the likelihood of achieving her long-term objectives.
b. Show the average return of the portfolio you recommend and how you computed it.
c. Does attempting to accomplish the client’s return objectives involve bearing additional risk and, if so, what would be your advice to the client about taking on such risk?
Question 3
Identify and explain two traditional theories which seek to define the term structure of interest rates. What are some problems with these arguments from a modem perspective? Explain what the modern view has to say about how investors approach investing in short-term and long-term bonds and the reason why they are supposed to take this approach.
PART B
1. Consider the following two bonds:
• Bond A’s market value is $941, it pays an annual coupon of $90, and it will mature in five years, paying $1,000. The yield to maturity is 10 percent.
• Bond B’s market value is $945, it pays an annual coupon of $70, and it will mature in three years, paying $1,000. The yield to maturity is 8 percent.
Which of the two bonds trades at a smaller discount to its present value? Show your work and explain how you arrived at your answer.
Question 2
Identify two commonly used stock price ratios and explain what they can be used for.
Question 3
Suppose you’re a portfolio manager looking to hedge your holdings of $15 million of large-company stocks. Assume you use S&P 500 call options with a delta of .489 to do so. You see that the S&P index has a value of 1854. How many contracts would be needed to hedge this portfolio fully? Show your work and explain how you arrived at your answer, and also explain what delta is.
Question 4
What does a historical study of financial markets reveal in regards to risk and return?
Question 5
Identify one of the tools the Federal Reserve can use to help it achieve its objectives, and explain how the toot functions.
ANSWER WILL BE SENT BY EMAIL.
