Fundamentals of Investing 14th editon by Scott Smart, Chad Zutter 013489779X 9780134897790

Part One Preparing to Invest

1 The Investment Environment

Learning Goals

Investments and the Investment Process

Attributes of Investments

Securities or Property

Direct or Indirect

Debt, Equity, or Derivative Securities

Low- or High-Risk Investments

Short- or Long-Term Investments

Domestic or Foreign

The Structure of the Investment Process

Types of Investments

Short-Term Investments

Common Stock

Fixed-Income Securities

Bonds

Convertible Securities

Preferred Stock

Mutual Funds

Exchange-Traded Funds

Hedge Funds

Derivative Securities

Options

Futures

Other Popular Investments

Making Your Investment Plan

Writing an Investment Policy Statement

Summarize your current situation

Specify your investment goals

Articulate your investment philosophy

Set investment selection guidelines

Assign responsibility for selecting and monitoring investments

Considering Personal Taxes

Basic Sources of Taxation

Types of Income

Ordinary Income

Capital Gains and Losses

Investments and Taxes

Tax-Advantaged Retirement Savings Plans

Investing over the Life Cycle

Investing over the Business Cycle

Meeting Liquidity Needs with Short-Term Investments

The Role of Short-Term Investments

Interest on Short-Term Investments

Risk Characteristics

Advantages and Disadvantages of Short-Term Investments

Common Short-Term Investments

Investment Suitability

Careers in Finance

Developing Skills for Your Career

Critical Thinking

Communication and Collaboration

Financial Computing Skills

Discussion Questions

Problems

Case Problem 1.1 Investments or Golf?

Case Problem 1.2 Preparing Susan Bowen’s Investment Plan

2 Securities Markets and Transactions

Learning Goals

Securities Markets

Types of Securities Markets

The Primary Market

Public Offerings: The IPO Process

Public Offerings: The Investment Bank’s Role

Public Offerings: The Direct Listing Process

The Secondary Market

Broker Markets and Dealer Markets

Broker Markets

The New York Stock Exchange

Trading Activity

Listing Policies

Options Exchanges

Futures Exchanges

Dealer Markets

Nasdaq Stock Market

The Over-the-Counter Market

Electronic and High-Frequency Trading

Electronic Communications Networks

High-Frequency Trading

General Market Conditions: Bull or Bear

Globalization of Securities Markets

Growing Importance of International Markets

International Investment Performance

Ways to Invest in Foreign Securities

Risks of Investing Internationally

Trading Hours and Regulation of Securities Markets

Trading Hours of Securities Markets

Regulation of Securities Markets

Basic Types of Securities Transactions

Long Purchase

Margin Trading

Essentials of Margin Trading

Magnified Profits and Losses

Advantages and Disadvantages of Margin Trading

Making Margin Transactions

Initial Margin

Maintenance Margin

The Basic Margin Formula

Return on Invested Capital

Uses of Margin Trading

Short Selling

Essentials of Short Selling

Making Money When Prices Fall

Who Lends the Securities?

Margin Requirements and Short Selling

Advantages and Disadvantages

Uses of Short Selling

Discussion Questions

Problems

Case Problem 2.1 Darren’s Dilemma: What to Buy?

Case Problem 2.2 Ravi Dumar’s High-Flying Margin Account

3 Investment Informationand Securities Transactions

Learning Goals

Investment Research and Planning

Getting Started in Investment Research

Investment Education Sites

Investment Tools

Planning

Screening

Charting

Stock Quotes and Portfolio Tracking

A Word of Caution About Internet Trading

Types and Sources of Investment Information

Types of Information

Sources of Information

Economic and Current Event Information

Financial Journals

Institutional News

Business Periodicals

Government Publications

Special Subscription Services

Industry and Company Information

Fair Disclosure Rules

Stockholders’ Reports

Comparative Data Sources

Subscription Services

Brokerage Reports

Investment Letters

Price Information

Other Online Investment Information Sources

Bond Sites

Mutual Fund Sites

International Sites

Investment Discussion Forums

Avoiding Scams

Understanding Market Averages and Indexes

Stock Market Averages and Indexes

The Dow Jones Averages

Standard & Poor’s Indexes

NYSE, NYSE MKT, and Nasdaq Indexes

Value Line Indexes

Other Averages and Indexes

Bond Market Indicators

Bond Yields

Bond Indexes

Making Securities Transactions

The Role of Stockbrokers

Brokerage Services

Types of Brokerage Firms

Selecting a Stockbroker

Opening an Account

Single or Joint

Cash or Margin

Wrap

Odd-Lot and Round-Lot Transactions

Basic Types of Orders

Market Order

Limit Order

Stop-Loss Order

Online Transactions

Day Trading

Technical and Service Problems

Tips for Successful Online Trades

Transaction Costs

Investor Protection: SIPC and Arbitration

Investment Advisors and Investment Clubs

Using an Investment Advisor

Regulation of Advisors

Robo-Advisors

The Cost and Use of Investment Advice

Investment Clubs

Discussion Questions

Problems

Case Problem 3.1 Emily’s Good Fortune

Case Problem 3.2 Donald and Laurie’s Choices of Brokers and Advisors

Part Two Important Conceptual Tools

4 Return and Risk

Learning Goals

The Concept of Return

Components of Return

Income

Capital Gains (or Losses)

Why Return is Important

Historical Performance

Expected Return

Level of Return

Internal Characteristics

External Forces

Historical Returns

The Time Value of Money and Returns

Measuring Return

Real, Risk-Free, and Required Returns

Inflation and Returns

Risk and Returns

Holding Period Return

Understanding Return Components

Computing the Holding Period Return

Using the HPR in Investment Decisions

The Internal Rate of Return

IRR for a Single Cash Flow

Calculator Use

Spreadsheet Use

IRR for a Stream of Income

Calculator Use

Spreadsheet Use

Finding Growth Rates

Calculator Use

Spreadsheet Use

Risk: The Other Side of the Coin

Sources of Risk

Business Risk

Financial Risk

Purchasing Power Risk

Interest Rate Risk

Liquidity Risk

Tax Risk

Event Risk

Market Risk

Risk of a Single Asset

Standard Deviation: A Measure of Return Volatility

Historical Returns and Risk

Assessing Risk

Risk-Return Characteristics of Alternative Investments

An Acceptable Level of Risk

Steps in the Decision Process: Combining Return and Risk

Discussion Questions

Problems

Case Problem 4.1 Coates’s Decision

Case Problem 4.2 The Risk-Return Tradeoff: Molly O’Rourke’s Stock Purchase Decision

Questions

Chapter-Opening Problem

4A Appendix The Time Value of Money

Interest: The Basic Return to Savers

Simple Interest

Compound Interest

Computational Aids for Use in Time Value Calculations

Financial Calculators

Computers and Spreadsheets

Future Value: An Extension of Compounding

Future Value of an Annuity

Present Value: An Extension of Future Value

Present Value of a Stream of Returns

Present Value of a Mixed Stream

Present Value of an Annuity

Problems

5 Modern Portfolio Concepts

Learning Goals

Principles of Portfolio Planning

Portfolio Objectives

Portfolio Return and Standard Deviation

Correlation and Diversification

Correlation

Diversification

international Diversification

Effectiveness of International Diversification

Methods of International Diversification

Costs of International Diversification

The Capital Asset Pricing Model

Components of Risk

Beta: A Measure of Undiversifiable Risk

Estimating Beta

Interpreting Beta

Applying Beta

The CAPM: The Connection Between Beta and Expected Return

The Equation

The Security Market Line

Some Closing Comments

Traditional Versus Modern Portfolio Management

The Traditional Approach

Modern Portfolio Theory

The Efficient Frontier

Portfolio Betas

Risk Diversification

Calculating Portfolio Betas

Interpreting Portfolio Betas

Reconciling the Traditional Approach and MPT

Discussion Questions

Problems

Case Problem 5.1 Traditional Versus Modern Portfolio Theory: Who’s Right?

Case Problem 5.2 Susan Lussier’s Inherited Portfolio: Does It Meet Her Needs?

Chapter-Opening Problem

Questions

CFA Exam Questions

The Investment Environment and Conceptual Tools

Part Three Investing in Common Stocks

6 Common Stocks

Learning Goals

What Stocks Have to Offer

The Appeal of Common Stocks

Putting Stock Price Behavior in Perspective

A Real Estate Bubble Goes Bust and So Does the Market

The Pros and Cons of Stock Ownership

The Advantages of Stock Ownership

The Disadvantages of Stock Ownership

Basic Characteristics of Common Stock

Common Stock as a Corporate Security

Issuing New Shares

Stock Spin-Offs

Stock Splits

Treasury Stock

Classified Common Stock

Buying and Selling Stocks

Reading the Quotes

Transaction Costs

Common Stock Values

Par Value

Book Value

Market Value

Investment Value

Common Stock Dividends

The Dividend Decision

Corporate Versus Market Factors

Some Important Dates

Types of Dividends

Cash Dividends

Stock Dividends

Dividend Reinvestment Plans

Types and Uses of Common Stock

Types of Stocks

Blue-Chip Stocks

Income Stocks

Growth Stocks

Tech Stocks

Speculative Stocks

Cyclical Stocks 

Defensive Stocks

Market-Cap Stocks

Investing in Foreign Stocks

Comparative Returns

Going Global: Direct Investments

Going Global with ADRs

Putting Global Returns in Perspective

Measuring Global Returns

Currency Exchange Rates

Alternative Investment Strategies

Buy-and-Hold

Current Income

Quality Long-Term Growth

Aggressive Stock Management

Speculation and Short-Term Trading

Discussion Questions

Problems

Case Problem 6.1 Sara Decides to Take the Plunge

Case Problem 6.2 Wally Wonders Whether There’s a Place for Dividends

7 Analyzing Common Stocks

Learning Goals

Security Analysis

Principles of Security Analysis

The Top-Down Approach to Security Analysis

Who Needs Security Analysis in an Efficient Market?

Economic Analysis

Economic Analysis and the Business Cycle

Key Economic Factors

Developing an Economic Outlook

Assessing the Potential Impact on Share Prices

The Market as a Leading Indicator

Industry Analysis

Key Issues

The Industry Growth Cycle

Developing an Industry Outlook

Fundamental Analysis

The Concept

Financial Statements

The Balance Sheet

The Income Statement

The Statement of Cash Flows

Financial Ratios

What Ratios Have to Offer

Liquidity Ratios

Current Ratio

Quick Ratio

Net Working Capital

Activity Ratios

Accounts Receivable Turnover

Inventory Turnover

Total Asset Turnover

Leverage Ratios

Debt-Equity Ratio

Equity Multiplier

Times Interest Earned

Profitability Ratios

Net Profit Margin

Return on Assets

Return on Equity

Breaking Down ROA and ROE

Going from ROA to ROE

An Expanded ROE Equation

Common-Stock Ratios

Price-to-Earnings Ratio

Dividends per Share

Payout Ratio

Book Value per Share

Interpreting the Numbers

Using Historical and Industry Standards

Looking at the Competition

Discussion Questions

Problems

Case Problem 7.1 Some Financial Ratios Are Real Eye-Openers

Case Problem 7.2 Anna Looks at an Auto Issue

Chapter-Opening Problem

8 Stock Valuation

Learning Goals

Valuation: Obtaining a Standard of Performance

Valuing a Company Based on Its Future Performance

Forecasted Sales and Profits

Forecasted Dividends and Prices

Estimating the P/E Ratio

A Relative Price-to-Earnings Multiple

Estimating Earnings per Share

Pulling It All Together

Developing a Forecast of Universal’s Financial Performance

The Valuation Process

Required Return

Stock Valuation Models

The Dividend Valuation Model

Zero Growth

Constant Growth

Estimating the Dividend Growth Rate

Stock-Price Behavior over Time

Variable Growth

Applying the Variable-Growth DVM

Defining the Expected Growth Rate

Other Approaches to Stock Valuation

Free Cash Flow to Equity

Zero Growth in Free Cash Flow

Constant Growth in Free Cash Flow

Variable Growth in Free Cash Flow

Using IRR to Solve for the Expected Return

The Price-to-Earnings (P/E) Approach

Other Price-Relative Procedures

A Price-to-Cash-Flow (P/CF) Procedure

Price-to-Sales (P/S) and Price-to-Book-Value (P/BV) Ratios

Discussion Questions

Problems

Case Problem 8.1 Chris Looks for a Way to Invest His Wealth

Case Problem 8.2 An Analysis of a High-Flying Stock

Chapter-Opening Problem

9 Market Efficiency and Behavioral Finance

Learning Goals

Efficient Markets

The Efficient Markets Hypothesis

Weak Form

Semi-Strong Form

Strong Form

Arbitrage and Efficient Markets

Market Anomalies

Calendar Effects

Small-Firm Effect

Post–Earnings Announcement Drift (or Momentum)

The Value Effect

Possible Explanations

Behavioral Finance: A Challenge to the Efficient Markets Hypothesis

Investor Behavior and Security Prices

Overconfidence and Self-Attribution Bias

Loss Aversion

Representativeness

Overreaction

Underreaction

Narrow Framing

Belief Perseverance

Anchoring

Familiarity Bias

Implications of Behavioral Finance for Security Analysis

Technical Analysis

Measuring the Market

The Confidence Index

Market Volume

Breadth of the Market

Short Interest

Odd-Lot Trading

Trading Rules and Measures

Advance-Decline Line

New Highs–New Lows

The Arms Index

Mutual Fund Cash Ratio

On-Balance Volume

Relative Strength

Charting

Chart Formations

Moving Averages

Discussion Questions

Problems

Case Problem 9.1 Brett Runs Some Technical Measures on a Stock

Case Problem 9.2 Deb Takes Measure of the Market

CFA Exam Questions

Investing in Common Stocks

Answers:

Part Four Investing in Fixed-Income Securities

10 Fixed-Income Securities

Learning Goals

Why Invest in Bonds?

A Brief History of Bond Prices, Returns, and Interest Rates

Historical Returns

Bonds Versus Stocks

Exposure to Risk

Essential Features of a Bond

Bond Interest and Principal

Maturity Date

Principles of Bond Price Behavior

Quoting Bond Prices

The Call Feature

Sinking Funds

Secured or Unsecured Debt

Bond Ratings

How Ratings Work

What Ratings Mean

The Market for Debt Securities

Major Market Segments

Treasury Bonds

Inflation-Protected Securities

Agency Bonds

Municipal Bonds

Tax Advantages

Taxable Equivalent Yields

Corporate Bonds

Specialty Issues

Zero-Coupon Bonds

Mortgage-Backed Securities

Collateralized Mortgage Obligations

Asset-Backed Securities

Junk Bonds

A Global View of the Bond Market

U.S.-Pay Versus Foreign-Pay Bonds

Dollar-Denominated Bonds

Foreign-Pay Bonds

Convertible Securities

Convertibles as Investment Outlets

Convertible Notes and Bonds

Conversion Privilege

LYONs

Sources of Value

Measuring the Value of a Convertible

Conversion Value

Conversion Premium

Payback Period

Investment Value

Calculator Use

Discussion Questions

Problems

Case Problem 10.1 Max and Veronica Develop a Bond Investment Program

Case Problem 10.2 The Case of the Missing Bond Ratings

Chapter-Opening Problem

11 Bond Valuation

Learning Goals

The Behavior of Market Interest Rates

Keeping Tabs on Market Interest Rates

What Causes Rates to Move?

The Term Structure of Interest Rates and Yield Curves

Types of Yield Curves

Plotting Your Own Curves

Explanations of the Term Structure of Interest Rates

Expectations Hypothesis

Liquidity Preference Theory

Market Segmentation Theory

Which Theory Is Right?

Using the Yield Curve in Investment Decisions

The Pricing of Bonds

The Basic Bond Valuation Model

Annual Compounding

Calculator Use

Spreadsheet Use

Semiannual Compounding

Calculator Use

Spreadsheet Use

Accrued Interest

Measures of Yield and Return

Current Yield

Yield to Maturity

Using Annual Compounding

Calculator Use

Spreadsheet Use

Using Semiannual Compounding

Calculator Use

Spreadsheet Use

Finding the Yield on a Zero

Calculator Use

Spreadsheet Use

Yield to Call

Calculator Use

Spreadsheet Use

Expected Return

Calculator Use

Spreadsheet Use

Valuing a Bond

Duration and Immunization

The Concept of Duration

Measuring Duration

Duration for a Single Bond

Spreadsheet Use

Duration for a Portfolio of Bonds

Bond Duration and Price Volatility

Effective Duration

Uses of Bond Duration Measures

Bond Immunization

Bond Investment Strategies

Passive Strategies

Trading on Interest Rate Forecasts

Bond Swaps

Discussion Questions

Problems

Case Problem 11.1 The Bond Investment Decisions of Dave and Marlene Carter

Case Problem 11.2 Grace Decides to Immunize Her Portfolio

CFA Exam QuestionsInvesting in Fixed-Income Securities

Answers:

Part Five Portfolio Management

12 Mutual Funds and Exchange-Traded Funds

Learning Goals

The Mutual Fund Concept

An Overview of Mutual Funds

Pooled Diversification

Active Versus Passive Management

Attractions and Drawbacks of Mutual Fund Ownership

Performance of Mutual Funds

How Mutual Funds Operate

Open- or Closed-End Funds

Closed-End Mutual Funds

Exchange-Traded Funds

Some Important Considerations

Load and No-Load Funds

Other Fees and Costs

Other Types of Investment Companies

Real Estate Investment Trusts

Hedge Funds

Types of Funds and Services

Types of Mutual Funds

Growth Funds

Aggressive-Growth Funds

Value Funds

Equity-Income Funds

Balanced Funds

Growth-and-Income Funds

Bond Funds

Money Market Funds

Index Funds

Sector Funds

Socially Responsible Funds

Asset Allocation Funds

International Funds

Investor Services

Automatic Investment Plans

Automatic Reinvestment Plans

Regular Income

Conversion Privileges

Retirement Programs

Investing in Mutual Funds

Investor Uses of Mutual Funds

Accumulation of Wealth

Storehouse of Value

Speculation and Short-Term Trading

The Selection Process

Objectives and Motives for Using Funds

What the Funds Offer

Whittling Down the Alternatives

Stick with No-Loads or Low-Loads

Investing in Closed-End Funds

Some Key Differences Between Closed-End and Open-End Funds

What to Look For in a Closed-End Fund

Measuring Performance

Sources of Return

Measures of Return

HPR with Reinvested Dividends and Capital Gains

Measuring Long-Term Returns

Returns on Closed-End Funds

The Matter of Risk

Discussion Questions

Problems

Case Problem 12.1 Reverend Mark Thomas Ponders Mutual Funds

Case Problem 12.2 Calvin Jacobs Seeks the Good Life

Chapter-Opening Problem

13 Managing Your Own Portfolio

Learning Goals

Constructing a Portfolio Using an Asset Allocation Scheme

Investor Characteristics and Objectives

Portfolio Objectives and Policies

Developing an Asset Allocation Scheme

Approaches to Asset Allocation

Fixed Weightings

Flexible Weightings

Tactical Asset Allocation

Asset Allocation Alternatives

Applying Asset Allocation

Evaluating the Performance of Individual Investments

Obtaining Data

Return Data

Economic and Market Activity

Indexes of Investment Performance

Measuring the Performance of Investments

Stocks and Bonds

Stocks

Bonds

Mutual Funds

Options and Futures

Comparing Performance to Investment Goals

Balancing Risk and Return

Isolating Problem Investments

Assessing Portfolio Performance

Measuring Portfolio Return

Measuring the Amount Invested

Measuring Income

Measuring Capital Gains

Measuring the Portfolio’s Holding Period Return

Comparison of Return with Overall Market Measures

Sharpe’s Measure

Treynor’s Measure

Jensen’s Measure (Jensen’s Alpha)

Portfolio Revision

Timing Transactions

Formula Plans

Dollar-Cost Averaging

Constant-Dollar Plan

Constant-Ratio Plan

Variable-Ratio Plan

Using Limit and Stop-Loss Orders

Limit Orders

Stop-Loss Orders

Warehousing Liquidity

Timing Investment Sales

Tax Consequences

Achieving Investment Goals

Discussion Questions

Problems

Case Problem 13.1 Assessing the Stalchecks’ Portfolio Performance

Case Problem 13.2 Evaluating Formula Plans: Charles Spurge’s Approach

CFA Exam Questions

Portfolio Management

Answers:

Part Six Derivative Securities

14 Options: Putsand Calls

Learning Goals

Call and Put Options

Basic Features of Calls and Puts

The Option Contract

Seller versus Buyer

How Calls and Puts Work

Advantages and Disadvantages

Options Markets

Conventional Options

Listed Options

Stock Options

Stock Option Provisions

Strike Price

Expiration Date

Put and Call Transactions

Options Pricing and Trading

The Profit Potential from Puts and Calls

Intrinsic Value

In the Money/Out of the Money

Put-Call Parity

What Drives Option Prices?

Time Value and Time to Expiration

Volatility and Option Prices

Interest Rates and Option Prices

Option-Pricing Models

Trading Strategies

Buying for Speculation

Speculating with Calls

Speculating with Puts

Hedging: Modifying Risks

Protective Puts: Limiting Capital Loss

Protective Puts: Protecting Profits

Enhancing Returns: Options Writing and Spreading

Writing Options

Naked Options

Covered Options

Spreading Options

Option Straddles

Stock-Index and Other Types of Options

Contract Provisions of Stock-Index Options

Valuing Stock-lndex Options

Full Value Versus Fractional Value

Investment Uses

Index Options as Hedging Vehicles

A Word of Caution

Other Types of Options

Options on Exchange-Traded Funds

Interest Rate Options

Currency Options

LEAPS

Discussion Questions

Problems

Case Problem 14.1 The Franciscos’ Investment Options

Case Problem 14.2 Luke’s Quandary: To Hedge or Not to Hedge

Chapter-Opening Problem

15 Futures Markets and Securities

Learning Goals

The Futures Market

Market Structure

Futures Contracts

Options Versus Futures Contracts

Major Exchanges

Trading in the Futures Market

Trading Mechanics

Margin Trading

Commodities

Basic Characteristics

A Commodities Contract

Price Behavior

Return on Invested Capital

Trading Commodities

Speculating

Spreading

Financial Futures

The Financial Futures Market

Foreign Currencies, Interest Rates, and Stock Indexes

Contract Specifications

Prices and Profits

Trading Techniques

Speculating in Financial Futures

Going Long a Foreign Currency Contract

Going Short an Interest Rate Contract

Trading Stock Index Futures

Hedging with Stock Index Futures

Hedging Other Securities

Hedging Foreign Currency Exposure

Financial Futures and the Individual Investor

Options on Futures

Discussion Questions1

Problems

Case Problem 15.1 T. J.’s Fast-Track Investments: Interest Rate Futures

Case Problem 15.2 Jim and Polly Pernelli Try Hedging with Stock Index Futures

CFA Exam Questions Derivative Securities

Answers:

Glossary

Index

Key Equations

Web Chapters (at http://www.pearsonhighered.com/smart)

16 Investing in Preferred Stocks

Learning Goals

Preferred Stocks

Preferred Stocks as Investments

Advantages and Disadvantages

Sources of Value

Issue Characteristics

Rights of Preferred Stockholders

Preferred Stock Provisions

Valuing and Investing in Preferred Stocks

Putting a Value on Preferred Stocks

Dividend Yield: A Key Measure of Value

Expected Return

Calculator Use

Book Value

Fixed Charge Coverage

Agency Ratings

Investment Strategies

Looking for Yields

Trading on Interest Rate Swings

Speculating on Turnarounds

Discussion Question

Problems

Case Problem 16.1 Penni Shows a Preference for Preferreds

Chapter-Opening Problem

17 Tax-Advantaged Investments

Learning Goals

Tax Fundamentals

Taxable Income

Determining Taxable Income

Gross Income

Adjustments to Gross Income

Itemized Deductions

Taxable Income

Tax Credits

Taxes Due or Refundable

The Alternative Minimum Tax

Tax Strategies

Tax Avoidance and Tax Deferral

Tax Shelters

Tax-Favored Income

Income Excluded from Taxation

Tax-Free Municipal Bond Interest

Treasury and Government Agency Issues

Sale of Personal Residence

Strategies That Defer Tax Liabilities

Put Hedge

Deep-in-the-Money Call Option

Summary of the Strategies

Programs That Defer Tax Liabilities to Retirement

401(k) Plans

Keogh Plans

Individual Retirement Arrangements (IRAs)

Roth IRA

Nondeductible IRA

IRA Features

Funding Keoghs and IRAs

Tax-Deferred Investing in Education Savings Plans

Coverdell Education Savings Account (ESA)

Section 529 College Savings Plans

Strategies That Trade Current Income for Capital Gains

Growth Versus Income Stocks

Deep-Discount Bonds

Income Property Depreciation

Tax Swaps: A Strategy That Reduces or Eliminates a Tax Liability

Deferred Annuities

Annuities: An Overview

Characteristics of Deferred Annuities

Special Tax Features

Investment Payout

Deferred Annuities and Retirement Plans

Fixed versus Variable Annuity

Annuities as Investment Vehicles

Investment Suitability

Buying Annuities

Syndicated Investments: Limited Partnerships and Limited Liability Corporations

Investing in Limited Partnerships and Limited Liability Companies

Discussion Questions

Problems

Case Problem 17.1 Tax Planning for the Wilsons

18 Real Estate and Other Tangible Investments

Learning Goals

Investing In Real Estate

Investor Objectives

Investment Characteristics

Constraints and Goals

Analysis of Important Features

Determinants of Value

Demand

Supply

The Property

Restrictions on Use

Location

Site

Improvements

Property Management

Property Transfer Process

Real Estate Valuation

Estimating Market Value

The Cost Approach

The Comparative Sales Approach

The Income Approach

Using an Expert

Performing Investment Analysis

Market Value Versus Investment Analysis

Retrospective Versus Prospective

Impersonal Versus Personal

Unleveraged Versus Leveraged

NOI versus After-Tax Cash Flows

Calculating Discounted Cash Flow

Calculating the Internal Rate of Return

An Example of Real Estate Valuation

Set Investor Objectives

Analyze Important Features of the Property

Collect Data on Determinants of Value

Demand

Supply

The Property

Property Transfer Process

Perform Valuation and Investment Analysis

The Numbers

Cash Flow Analysis

Proceeds from Sale

Discounted Cash Flow

Internal Rate of Return (IRR)

Synthesize and Interpret Results of Analysis

Real Estate Investment Securities

Real Estate Investment Trusts

Basic Structure

Investing in REITs

Other Forms of Real Estate Investment

Other Tangible Investments

Other Tangibles as Investment Outlets

Investment Merits

Investing in Tangibles

Gold and Other Precious Metals

Gemstones

Collectibles

Discussion Questions

Problems

Case Problem 18.1 Gary Sofer’s Appraisal of the Wabash Oaks Apartments

Case Problem 18.2 Analyzing Dr. Davis’s Proposed Real Estate Investment