What makes for a good investment? Use the approximate yield formula or a financi
ID: 2815976 • Letter: W
Question
What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Round the answers to two decimal places. Do not round intermediate calculations.
A) Buy a stock for $50 a share, hold it for 3 years, then sell it for $80 a share (the stock pays annual dividends of $3 a share).
B) Buy a security for $25, hold it for 2 years, then sell it for $65 (current income on this security is zero). Do not round intermediate calculations.
C) Buy a 1-year, 10 percent note for $940 (assume that the note has a $1,000 par value and that it will be held to maturity). Do not round intermediate calculations.
Explanation / Answer
Using financial calculator BA II Plus - Input details:
A
B
C
FV = Future Value / Face Value =
-$80.00
-$65.00
-$1,000.00
PV = Present Value =
$50.00
$25.00
$940.00
N = Number of years remaining x frequency =
3
2
1
PMT = Payment = Coupon or Dividend / frequency =
-$3.00
$0.00
-$100.00
CPT > I/Y = Rate per period or YTM per period =
22.156082
61.245155
17.021277
Convert Yield in annual and percentage form = Yield*frequency / 100 =
22.16%
61.25%
17.02%
Rank =
2
1
3
Rank 1 is given highest yield --- Option B which is 61.25%
Rank 2 is given second highest yield ---- Option A which is 22.16%
Rank 3 is given to third highest yield ---- Option C which is 17.02%
Using financial calculator BA II Plus - Input details:
A
B
C
FV = Future Value / Face Value =
-$80.00
-$65.00
-$1,000.00
PV = Present Value =
$50.00
$25.00
$940.00
N = Number of years remaining x frequency =
3
2
1
PMT = Payment = Coupon or Dividend / frequency =
-$3.00
$0.00
-$100.00
CPT > I/Y = Rate per period or YTM per period =
22.156082
61.245155
17.021277
Convert Yield in annual and percentage form = Yield*frequency / 100 =
22.16%
61.25%
17.02%
Rank =
2
1
3
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