Financial Instruments Week 2 Exercises

1. What are the advantages of investing in the common stock rather than the corporate bonds of a company? Compare the certainty of returns for a bond with those for a common stock.

2. Discuss three factors that cause U.S. investors to consider including global securities in their portfolios.

3. Discuss why international diversification reduces portfolio risk. Specifically, why would you expect low correlation in the rates of return for domestic and foreign securities?

4. When you invest in Japanese or German bonds, what major additional risks must you consider besides yield changes within the country?

5. Some investors believe that international investing introduces additional risks. Discuss these risks and how they can affect your return. Give an example.

6. TMP has been experiencing increasing demand from its institutional clients for information and assistance related to international investment management. Recognizing that this is an area of growing importance, the firm has hired an experienced analyst/portfolio manager specializing in international equities and market strategy. His first assignment is to represent TMP before a client company’s investment committee to discuss the possibility of changing their present “U.S. securities only” investment approach to one including international investments. He is told that the committee wants a presentation that fully and objectively examines the basic, substantive considerations on which the committee should focus its attention, including both theory and evidence. The company’s pension plan has no legal or other barriers to adoption of an international approach; no non-U.S. pension liabilities currently exist. a. Identify and briefly discuss three reasons for adding international securities to the pension portfolio and three problems associated with such an approach. b. Assume that the committee has adopted a policy to include international securities in its pension portfolio. Identify and briefly discuss three additional policy-level investment decisions the committee must make before management selection and actual implementation can begin.

11. 8. Define a primary and secondary market for securities and discuss how they differ. Briefly explain the difference between a competitive bid underwriting and a negotiated underwriting. and discuss why they are considered liquid and illiquid. You have $40. Define market and briefly discuss the characteristics of a good market. Limit order c. Discuss why the primary market is dependent on the secondary market. 10. Ignoring taxes and commissions. Market order b. Stop loss order 12. Define liquidity and discuss the factors that contribute to it. Give examples of a liquid asset and an illiquid asset. 9. show in detail the impact on your rate of return if the stock rises to $100 a share and if it declines to $40 a share assuming (a) you pay cash for the stock. 2 .7. Briefly define each of the following terms and give an example: a. The initial margin requirement is 60 percent.000 to invest in a stock selling for $80 a share. Short sale d. and (b) you buy it using maximum leverage.

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