1. If your investment return last year was 5% and your marginal tax bracket is 1

Question

1. If your investment return last year was 5% and your marginal tax bracket is 14%, what is your after-tax return?

2. Michael has an investment with the following annual returns the past four years:

Year 1    20%

Year 2   -3%

Year 3   8%

Year 4   4%

What is the arithmetic average return over this four year period?

3. Susan has an investment with the following annual returns the past four years:

Year 1    19%

Year 2   -4%

Year 3   2%

Year 4   10%

What is the geometric average return over this four year period?

4. You are considering refinancing your current mortgage and you are considering a loan with a 7% APR that compounds weekly. What is the Effective Annual Rate (EAR) of this loan?

5. You purchased a stock six months ago for $50 and have since received two quarterly dividend payments of $3 each.  The stock currently sells for $56.  What is your holding period return on this stock?

6. You have a saving account that you were told has an effective annual return of 20% and compounds daily.  What is the Annual Percentage Rate you on this account?

7. An investor purchased a bond for $1,000, received $6 in interest, and then sold the bond for $977 after holding it for seven months. What is the holding period return?

8. The type of risk which CANNOT be eliminated through diversification is:

9.Which of the following would be considered a systematic risk?

10. The risk which a firm may not be able to meets its debt obligations is known as:

Explanation / Answer

1.

Pre tax return = 5%

Tax rate = 14%

After tax return = Pre tax return * (1-Tax rate) = 5%*(1-0.14) = 4.3%

2.

Arithmetic average = (20%-3%+8%+4%)/4 years = 7.25%

3.

Geometric average = (1.19*0.96*1.02*1.10)1/4 – 1 = 0.0640 = 6.40%

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