Question

Show formula and steps please

7) Suppose I invest $1,000 and suffer a loss of 10%, what return would be required at that point to get back to $1,000 (assuming no new deposit of money)? What about after a loss of 20% or 50%?

8) Summarize the differences between preferred stock and common stock (refer to the class notes for this).

9) Summarize the possible explanations for a bond having a negative yield.

Answer 1

Answer to 7 is:-

Investment = $1,000

Loss = 10% i.e 1000*10% = $100

Now your Investment becomes $900 ( $1,000- $100)

Now, The return required at this point of time to get back to $1,000 is explained as follows:-

Return in amount required to get Back to $1000 is $100

Investment is $ 900

Rate of Return = (Return Amount / Investment) *100

= (100 / 900 ) * 100

=11.11%

Similarly, When suffer a loss of 20% , then

Investment Remains = $800 ( $1000 - 20% of $1000)

Return required to get back to $ 1000 is $ 200

=> Rate of return = (200/800)*100

= 25%

Similarly, When suffer a loss of 50% , then

Investment Remains = $500 ( $1000 - 50% of $1000)

Return required to get back to $ 1000 is $ 500

=> Rate of return = (500/500)*100

= 100%