1. A stock sells for $20 per share and you purchase 100 shares. If the value of stock doubles to $40 in 1 year what would be the total return? What would be the total return if the required margin where:
a. Required margin 75%?
b. Required margin 50%?
c. Required margin 25%?
2. A person places $5,000 in a certificate of deposit that matures in 20 years and pays annual interest rate of 3%. What will be the value at maturity if the interest is reinvested in the deposit?
a. How much interest will accumulate after 20 years?
b. How much would they receive annually if they chose not to reinvest the interest and what would be the total interest paid out over 20 years?
c. Why are answers a and b different?
3. If a person invests $2,400 each year into a retirement account that pays 4%, how much will the account be worth in 30 years?
a. After 30 years they stop making additions to the account but they allow it to grow for an additional 5 years. How much would it be worth in an additional 5 years?
b. If they continued investing $2,400 each year for an additional 5 years how much would the account be worth?
4. An investor buys 500 shares of stock at $50 and the stock pays a 4% annual dividend.
a. If the investor holds the stock for 10 years and the neither the price nor the dividend change and the investor chooses to reinvest the dividends into stock what will be the value of the stock holdings and how many shares will the investor have?
b. If the investor holds the stock for 10 year and the stock price increases by 5% per year and the dividend remains the same, what will be the value of the holdings if the investor reinvests the dividends in additional stock holdings and how many shares of stock will the investor have?
c. If the investor holds the stock for 10 year and the stock price increases by 5% per year and the dividend remains the same, what will be the value of the holdings if the investor does not reinvest the dividends how many shares of stock will the investor have and how much will they be worth?
d. What is the difference between a, b, c and how significant are the additions from reinvesting?
5. A company has two bonds outstanding. The first matures after five years and it has a coupon rate of 3%. The second matures after ten years and it has a coupon rate of 5%. Interest rates are currently 7%. What is the present value of each $1,000 bond? Why are these values different?