FIN383

A TIPS bond with a $1,000 par value was issued three years ago with a coupon rate of 9%. In the first year inflation was 6%, in the second year 6.5% and in the third year 7%. The coupon payment at the end of the third year would be ______.

$1,000 (1.06)(1.065)(1.07)(0.09) = $108.71.

Find the promised yield to maturity for a 6% coupon, $1,000 par 15 year bond selling at $1015.80. The bond makes semiannual coupon payments.

$1015.80={ΣT=130$30(1+1/2r)T}+$1,000(1+1/2r)30;1/2r=2.92%×2=5.84%{Σ�=130$30(1+1/2�)�}+$1,000(1+1/2�)30;1/2⁢�⁢=2.92% × 2⁢ =5.84%

A stock has been trading at $38.00 per share for some time. It would make sense for an investor to enter a limit buy order at ______ per share or a limit sell order at ______ per share.

$37.75; $38.25

Find the promised yield to maturity for a 7% coupon, $1,000 par 15 year bond selling at $946.22. The bond makes semiannual coupon payments.

$946.22={ΣT=130$35(1+1/2r)T}+$1,000(1+1/2r)30;1/2r=3.80%×2=7.61%{Σ�=130$35(1+1/2�)�}+$1,000(1+1/2�)30;1/2⁢�⁢=3.80% × 2⁢ =7.61%

Find the yield to call for a 6% coupon, $1,000 par 15 year bond selling at $985.45 if the bond is callable in 7 years at a call price of $1,060. The bond makes semiannual coupon payments.

$985.45 ={ΣT−110$30(1+1/2r)T}+$1,060(1+1/2r)10;{Σ�−110⁢ $30(1+1/2�)�}+ $⁢ 1,060(1+1/2�)10⁢ ;1/2r = 3.47% × 2 = 6.95%

Find the yield to call for a 5% coupon, $1,000 par 15 year bond selling at $991.45 if the bond is callable in 8 years at a call price of $1,050. The bond makes semiannual coupon payments.

$991.45 ={ΣT−110$25(1+1/2r)T}+$1,050(1+1/2r)10;{Σ�−110⁢ $25(1+1/2�)�}+ $⁢ 1,050(1+1/2�)10⁢ ;1/2r = 2.82% × 2 = 5.64%

The current six year interest rate is 4.90% and the current five year interest rate is 4.60%. The implied forward rate from year five to year six is ______.

(1+y6)^6 = (1+y5)^5(1+5f6)^1 or 5f6 = (1.0496 / 1.0465) - 1 = 6.41%

Treasury bonds paying an 9.00% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually?

1.04500)^2 − 1 = 9.20%.

A municipal bond carries a coupon rate of 7.50% and is trading at par. Required: What would be the equivalent taxable yield of this bond to a taxpayer in a 35% combined tax bracket? (Round your answer to 2 decimal places.)

= rm/(1 − t) = 0.0750/(1 − 0.35) = 0.1154 or 11.54%

All but which one of the following will tend to reduce the required yield on a corporate bond?

A call provision with a five year deferred call.

A 6 year maturity zero coupon corporate bond has an 8% promised yield. The bond's price should equal ________.

A corporate bond has a $1,000 par value so the zero coupon bond's price = $1,000 / (1.08)6 = $630.17.

A T-bill with face value $10,000 and 84 days to maturity is selling at a bank discount ask yield of 3.1%. Required: a. What is the price of the bill? b. What is its bond equivalent yield?

A.) Bank discount of 84 days: 0.031 × (84 days/360 days) = 0.007233 Price: $10,000 × (1 − 0.007233) = $9,927.67 b. Bond equivalent yield = (Face value − Purchase price)/(Purchase price × T) = ($10,000 − $9,927.67)/($9,927.67 × (84 days/365 days)) = 0.0317 or 3.17%

The yield to maturity on one-year zero-coupon bonds is 8.4%. The yield to maturity on two-year zero-coupon bonds is 9.4%. Required: a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. If you believe in the liquidity preference theory, is your best guess as to next year's short-term interest rate higher or lower than in

A.) The forward rate (f2) is the rate that makes the return from rolling over one-year bonds the same as the return from investing in the two-year maturity bond and holding to maturity:(1 + 8.4%) ×(1 + f2) = (1 + 9.4%)^2 ⇒⇒ f2 = 0.1041 = 10.41% B.) According to the expectations hypothesis, the forward rate equals the expected value of the short-term interest rate next year, so the best guess would be 10.41%. C.) According to the liquidity preference hypothesis, the forward rate exceeds the expected short-term interest rate next year, so the best guess would be less than 10.41%.

Consider the following limit order book for FinTrade stock. The last trade in the stock occurred at a price of $135. ( there is a whole ass chart for this so gl hf) If a market buy order for 200 shares comes in, at what price will it be filled? (Round your answer to 2 decimal places.) b. At what price would the following market buy order be filled? (Round your answer to 2 decimal places.) c. If you were a security dealer, would you want to increase or decrease your inventory of this stock?

A.) The market-buy order will be filled at $134.80, the best price of limit-sell orders in the book. B.) The next market-buy order will be filled at $134.85, the next-best limit-sell order price. C.) As a security dealer, you would want to increase your inventory. There is considerable buying demand at prices just below $135, indicating that downside risk is limited. In contrast, limit-sell orders are sparse, indicating that a moderate buy order could result in a substantial price increase.

A market value-weighted index An equally weighted index

A.) Total market value at t = 0 is: ($89 × 100) + ($49 × 200) + ($98 × 200) = $38,300Total market value at t = 1 is: ($94 × 100) + ($44 × 200) + ($108 × 200) = $39,800 Rate of return = (V1/V0) − 1 = ($39,800/$38,300) − 1 = 0.0392 or 3.92% B.) The return on each stock is as follows: RA = (V1/V0) − 1 = ($94/$89) − 1 = 0.0562 or 5.62% RB = (V1/V0) − 1 = ($44/$49) − 1 = −0.1020 or −10.20% RC = (V1/V0) − 1 = ($108/$98) − 1 = 0.1020 or 10.20% The equally-weighted average is [5.62% + (−10.20%) + 10.20%]/3 = 1.87%

You are bullish on Telecom stock. The current market price is $30 per share, and you have $3,000 of your own to invest. You borrow an additional $3,000 from your broker at an interest rate of 3.5% per year and invest $6,000 in the stock. Required: a. What will be your rate of return if the price of Telecom stock goes up by 5% during the next year? (Ignore the expected dividend.) B.) How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately

A.) Your initial investment is the sum of $3,000 in equity and $3,000 from borrowing, which enables you to buy 200 shares of Telecom stock:Initial investment/Stock price = $6,000/$30 = 200 shares The shares increase in value by 5%: $6,000 × 0.05 = $300. You pay interest of = $3,000 × 0.035 = $105. The rate of return will be:($300 − $105)/$3,000 = 0.065 = 6.50% B.) The value of the 200 shares is 200P. Equity is (200P − $3,000), and the required margin is 30%. Solving (200P − $3,000)/200P = 0.30, we get P = $21.43. You will receive a margin call when the stock price falls below $21.43.

A bond has a flat price of $1,027.60 and an annual coupon of $40.00. 138 days have passed since the last coupon payment and there are 178 days separating the coupon payments. What is the bond's invoice price?

Accrued interest = ($40.00/2) x (138/178) = $15.51. The bond's invoice price is thus $1,027.60 + $15.51 = $1,043.11.

SEC Rule 415 allows which of the following?

Allows a security issue to be preregistered and offered at any time within two years.

This year Shelly invested $32,000 in a mutual fund with a 2% front end load and estimated annual expenses of 1.69%. The fund's gross return is 7.0%. What is Shelly's first year return net of loads and expenses if expenses are calculated against ending NAV?

Amount initially invested = $32,000 × (1-0.02) = $31,360. With a gross return of 7% this amount will grow to $31,360 × 1.070 = $33,555. After the expense deduction of 1.69% this will leave Shelly with $33,555 × (1-0.0169) = $32,988.10. The net rate of return = ($32,988.10 - $32,000) / $32,000 = 3.09%

Suppose you short-sell 100 shares of IBX, now selling at $152 per share. a. What is your maximum possible loss? The maximum possible loss is b. What happens to the maximum loss if you simultaneously place a stop-buy order at $162.60? (Do not round intermediate calculations. Input the amount as a positive value.) The maximum possible loss is now.

As the market value of the stock exceeds the price at which the short sale was executed, losses begin to incur, one-for-one per every dollar increase. The stop-buy order can limit these losses by buying shares of the stock when it rises above a predetermined stop-buy price. In this case, the stop-buy price is $162.60, and the loss is limited to -$162.60 + $152 = -$10.60 per share, for a total loss of $10.60 x 100 shares = $1,060.

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1) What will be the divisor for the price-weighted index in year 2? Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).

At t = 0, the value of the index is: ($88 + $48 + $96)/3 = 77.33At t = 1, the value of the index is: ($93 + $43 + $106)/3 = 80.67 The rate of return is: (V1/V0) − 1 = (80.67/77.33) − 1 = 0.0431 or 4.31% In the absence of a split, stock C would sell for $106, and the value of the index would be the average price of the individual stocks included in the index: ($93 + $43 + $106)/3 = $80.67.After the split, stock C sells at $53; however, the value of the index should not be affected by the split. We need to set the divisor (d) such that:$80.67 = $93 + $43 + $53/d →d = 2.34 The rate of return is zero. The value of the index remains unchanged since the return on each stock separately equals zero.

You buy a $10,000 par 180 day T-bill for $9,970. This bill's bank discount rate quote would be _____.

Bank discount rate = (Par - Price)/Par × (360/n) = ($10,000 - $9,970) / $10,000 × (360/180) = 0.0060 or .60%

You purchased 1,500 shares of the New Fund at a price of $20 per share at the beginning of the year. You paid a front-end load of 5%. The securities in which the fund invests increase in value by 14% during the year. The fund's expense ratio is 1.7%. What is your rate of return on the fund if you sell your shares at the end of the year?

Because the 5% load was paid up front and reduced the actual amount invested, only 95% (1.00 − 0.05) of the contribution was invested. Given the value of the portfolio increased by 14% and the expense ratio was 1.7%, we can calculate the end value of the investment against the initial contribution:1 + r = 0.95 × (1 + 0.14 − 0.017) = 1.0669 →r = 0.0669 = 6.69% Or otherwise, you can calculate the rate of return by the actual amount invested and value changes: To purchase the shares, you would have had to invest: $30,000/(1 − 0.05) = $31,579 The shares increase in value from $30,000 to $30,000 × (1.14 − 0.017) = $33,690 The rate of return was: ($33,690 − $31,579)/$31,579 = 0.0669 or 6.69%

Fill in the following blanks:________ are net borrowers.________ are net savers.________ can be either borrowers or savers.

Businesses, Households, Governments

Which of the following is a money market instrument?

Commercial paper

A bond with an annual coupon rate of 4.9% sells for $975. What is the bond's current yield?

Current yield = Annual coupon/Bond price = ($1,000 × 4.9%)/$975 = 5.03%

A security that pays a specified cash flow over a specified period..

Debt Security

Match the following descriptions to the type of market: I. Buyers and sellers locate one another on their own II. A third party acts as an intermediate buyer/seller III. A third party assists a participant in locating a buyer or seller.

Direct search, Dealer market, Brokered market

All but which one of the following statements about ETFs are true?

ETFs are guaranteed to trade at NAV

The composition of the Fingroup Fund portfolio is as follows: Stock. Shares Price A 360,000. $30 B. 460,000. 35 C. 560,000. 15 D. 760,000. 20 Required: The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $25,000. There are 6 million shares outstanding. What is the net asset value of the fund?

Given that net asset value equals assets minus liabilities expressed on a per-share basis, we first add up the value of the shares (e.g., Value of A = 360,000 × $30 = $10,800,000) to get the market value of the portfolio: Knowing that the accrued management fee, which adjusts the value of the portfolio, totals $25,000, and the number of the shares outstanding is 6,000,000, we can use the NAV equation: Net asset value = (Market value of assets − Market value of liabilities)/Shares outstanding = ($50,500,000 − $25,000)/6,000,000 = $8.41

Corporate Fund started the year with a net asset value of $14.00. By year-end, its NAV equaled $13.20. The fund paid year-end distributions of income and capital gains of $2.20. Required: What was the rate of return to an investor in the fund?

Given the NAV at the beginning and the end of the period, and the distributions during the period, we can use the equation below to solve for the rate of return of the Corporate Fund: rate of return = (Δ(NAV) + Distributions)/Start of year NAV = ($13.20 − $14.00 + $2.20)/$14.00 = 0.1000 = 10.00%

You buy a no load mutual fund share at a NAV of $38.50 and sell it one year later at $40.00. You also received a capital gain distribution of $2.00 and a dividend distribution of $0.90. What was your pre-tax HPR?

HPR = ($40.00 - $38.50 + $2.00 + $0.90) / $38.50 = 11.30%

Empirical evidence of mutual fund performance indicates I. past performance not highly predictive of future performance II. bad performance is more likely to persist than good performance III. investors should only choose funds that have top ranked performance in the prior year

I and II only

If an investor believes that markets are efficient then which of the following investment strategies fit that belief?

I. Buying and holding a diversified portfolio

Rank the following from least risky to most risky.

I. Six month certificate of deposit IV. Long term bonds II. Preferred stock III Common stock

Which of the following result from the expectations theory of the yield curve? I. The observed long-term rate includes a risk premium II. Long term rates are a function of expected future short term rates III. An upward slope means that the market is expecting higher future short term ratesIV. The observed yield curve is above the pure expectations yield curve.

II and III only

A listed call option contract for IBM with an exercise price of $150 has a price quote of $6.60. If you buy this option and hold it to expiration, the contract will generate a positive profit for you if the stock's price is ____________ at expiration.

If you purchase a call option you may choose to exercise it if the stock's price is above $150 but you won't earn a positive profit unless the stock's price rises above the exercise price plus the option cost = $150 + $6.60 = $156.60.

An investor who believes in efficient markets and who is seeking to broadly diversify in a fund with minimal turnover and expenses should choose which of the following type fund?

Index fund

Which of the following represents asset allocation?

Julia decides she wants to reduce her investment in stocks from 60% of her portfolio to 30% of her portfolio.

Which of the following characteristics of unit investment trusts (UITs) is not true?

Most UITs do not use leverage

Which of the following is not an issuer of federal agency debt?

Municipalities

f the offering price of an open-end fund is $12.60 per share and the fund is sold with a front-end load of 6%, what is its net asset value?

NAV = Offering price × (1 − load) = $12.60 × (1 − 0.06) = $11.84

A fund has a market value of securities of $1,010 million, cash and receivables of $50 million, current liabilities of $46 million and has 29 million fund shares outstanding. What is the fund's NAV per share?

NAV per share = ($1,010 + 50 - 46) / 29 = $34.97

HMW#3 Advantages to an individual of investing in investment companies instead of purchasing individual securities include all but which one of the following?

No annual investment expenses

An open-end fund has a net asset value of $11.60 per share. It is sold with a front-end load of 5%. What is the offering price?

Offering price = NAV/(1 − load) = $11.60/(1 − 0.05) = $12.21

A $1,000 par bond that pays interest semiannually has a quoted coupon rate of 4%, a promised yield to maturity of 4.6% and exactly 6 years to maturity. What is the bond's current value?

P={ΣT=112$20(1.023)T}+$1,000(1+0.023)12�⁢={Σ�=112⁢$20(1.023)�⁢}+$1,000(1+0.023)12 P = $968.85

A $1,000 par bond that pays interest semiannually has a quoted coupon rate of 6%, a promised yield to maturity of 4.8% and exactly 12 years to maturity. The present value of the coupon stream represents ______ of the total bond's value.

P={ΣT−124$30(1.024)T}+$1,000(1+0.024)24=$1,108.51 $542.53. This represents $542.53 / $1,108.51 = 48.9%

A coupon bond paying semiannual interest is reported as having an ask price of 114% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 7%, what is the invoice price of the bond? Assume that the month has 30 days.

Semi-annual coupon = $1,000 × 7% × 0.5 = $35. Accrued interest = (Annual coupon payment/2) × (Days since last coupon payment/Days separating coupon payment) = $35 × (30/182) = $5.769 At a price of 114, the invoice price is: $1,140 + $5.769 = $1,145.77

A closed-end fund starts the year with a net asset value of $16. By year-end, NAV equals $16.50. At the beginning of the year, the fund is selling at a 3% premium to NAV. By the end of the year, the fund is selling at a 8% discount to NAV. The fund paid year-end distributions of income and capital gains of $1.90. Required: a. What is the rate of return to an investor in the fund during the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b.What would have been the rate of return to an investor who held the same securities as the fund manager during the year?(

Start of year price = $16.00 × (1 + 0.03) = $16.48End of year price = $16.50 × (1 − 0.08) = $15.180Although NAV increased, the price of the fund fell by $1.300. rate of return = (Δ(Price) + Distributions)/Start of year price = (−$1.300 + $1.90)/$16.48 = 0.0364 = 3.64% An investor holding the same portfolio as the fund manager would have earned a rate of return based on the increase in the NAV of the portfolio: rate of return = (Δ(NAV) + Distributions)/Start of year NAV = ($16.50 − $16.00 + $1.90)/$16.00 = 0.1500 = 15.00%

Look at the futures listings for corn in Figure 2.11. Suppose you buy one contract for July 2021 delivery at the closing price. Required: If the contract closes in July at a price of $4.29 per bushel, what will be your profit or loss? (Each contract calls for delivery of 5,000 bushels.

The July 2020 maturity futures price is $4.1875 per bushel. If the contract closes at $4.29 per bushel in July 2021, your profit/loss on each contract (for delivery of 5,000 bushels of corn) will be: ($4.29 − $4.1875) × 5,000 = $512.50 gain.

You buy a $10,000 par 90 day T-bill that has a bank discount quote of 4.2%. This bill's cost would be _____.

The T-bill price = Par × (1 - ((bank discount × days)/360)) = $10,000 × (1 - ((0.042 × 90)/360)) = $9,895

An investor is in a 40% combined federal plus state tax bracket. If corporate bonds offer 10.00% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? (Round your answer to 2 decimal places.)

The after-tax yield on the corporate bonds is: 0.1000 × (1 − 0.40) = 0.0600 or 6.00%Therefore, the municipals must offer at least 6.00% yields.

You buy a $5,000 par 90 day T-bill for $4,930 . This bill's bond equivalent yield would be _____.

The bond equivalent yield = (Par - Price)/Price × (365/n) = ($5,000 - $4,930 ) / $4,930 × (365/90) = 0.0576 or 5.76 %

Consider a bond paying a coupon rate of 11.50% per year semiannually when the market interest rate is only 4.6% per half-year. The bond has four years until maturity. Required: a. Find the bond's price today and six months from now after the next coupon is paid. What is the total rate of return on the bond?

The bond pays $57.50 every six months. Use the following inputs: n = 8, FV = 1,000, I/Y= 4.6, PV = −942.50, PMT = 57.50, Solve for PVCurrent price:[$57.50 × Annuity factor(4.6%, 8)] + [$1,000 × PV factor(4.6%, 8)] = $1,075.54

A $1,000 par bond that pays interest semiannually has a quoted coupon rate of 6%, a promised yield to maturity of 6.5% and exactly 9 years to maturity. The present value of the coupon stream represents ______ of the total bond's value.

The bond's value is found as follows: P={ΣT−118$30(1.0325)T}+$1,000(1+0.0325)18=$966.33

A $1,000 par bond that pays interest semiannually has a quoted coupon rate of 4%, a promised yield to maturity of 4.7% and exactly 7 years to maturity. What is the bond's current value?

The bond's value is found as follows: P = $958.65 With semiannual compounding you halve the ytm and coupon and double the number of periods. P={ΣT=114$20(1.0235)T}+$1,000(1+0.0235)14�⁢={Σ�=114⁢$20(1.0235)�⁢}+$1,000(1+0.0235)14 ion get it idk

A TIPS bond with a $1,000 par value was issued three years ago with a coupon rate of 8%. In the first year inflation was 2%, in the second year 2.5% and in the third year 3%. The coupon payment at the end of the third year would be ______.

The coupon payment at the end of the third year = $1,000 (1.02)(1.025)(1.03)(0.08) = $86.15.

You buy a nine-year maturity bond that has a 7.00% current yield and a 7.00% coupon (paid annually). In one year, promised yields to maturity have risen to 8.00%. What is your holding-period return?

The current yield and the annual coupon rate of 7.00% imply that the bond price was at par a year ago.Using a financial calculator, FV = 1,000, n = 8, PMT = 70.00, and I/Y = 8.00 gives us a selling price of $942.53 this year. Holding period return = −$1,000 + $942.53 + $70.00/$1,000 = 0.0125 = 1.25%

On January 1 you buy a stock priced at $128 per share. At the end of the year you sell the stock for $115.95. You also collected a $1.40 dividend. For the year your dividend yield was ____, your capital gain yield was ____ and your total pre-tax return was ____.

The dividend yield = $1.40/$128 = 1.09%; the capital gain yield = ($115.95 - $128)/$128 = -9.414%, the total pre-tax return is the sum of the two = 1.09% + -9.414% = -8.320%

You have $24,000 to invest. You could purchase shares in one mutual fund or try to diversify on your own. From your investment class you learn that you need to hold at least 25 different securities in an equal weighted portfolio to achieve a reasonably well diversified portfolio. If you pay an average commission of 1% of the dollar value of the stock you buy you will have to pay ______ in commissions per stock for a total commission of _____.

The dollar investment per stock = $24,000 / 25 = $960. You are paying 1% × $960 = $10 per stock × 25 different stocks = $240 in commissions. This could also be found more simply as 1% × $24,000 = $240.

A municipal bond has a promised yield to maturity of 3.66%. For an investor in a 30% tax bracket this municipal bond has the same effective yield as an equivalent corporate bond with a _____ promised yield to maturity.

The equivalent corporate bond yield is found as 3.66% / (1 - 0.3) = 5.229%

You buy 545 shares of stock that are priced at $47 a share using the full amount of margin available. The maintenance margin requirement or MMR is 35%. At what stock price do you get a margin call?

The full amount of margin available is set at 50% by regulation. So you borrow the other 50% of the purchase price of 545 * $47 = $25,615, or $12,808. You receive a margin call at a stock price = Borrow/(1 - MMR)/ # shares = $12,808/(1 - 0.35)/545 = $36.15.

You buy 225 shares of stock that are priced at $50 a share using the full amount of margin available. The broker charges you a 2% interest rate on the margin loan. If you sell the stock in one year for $56 a share what was your rate of return?

The full amount of margin available is set at 50% by regulation. So your initial equity = 50% of the purchase price of 225 * $50 = $11,250, or $5,625, and the other $5,625 is the amount borrowed. At the sale price of $56 the ending position equity = ($56 * 225) - [$5,625 *(1.02)] = $6,862.50. The rate of return = (End equity / Begin equity) -1 = $6,862.50 / $5,625 - 1 = 22.00%.

HMW #4 Which of the following describes the call feature of a bond?

The issuing company may choose to call the bond and require the bondholder to turn in the bond in exchange for receiving the bond's call price.

A bond with a coupon rate of 8% makes semiannual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100.1250. What is the invoice price of the bond? The coupon period has 182 days.

The reported bond price is $1,001.250015 days have passed since the last semiannual coupon was paid, so there is an accrued interest, which can be calculated as:Accrued interest = (Annual coupon payment/2) × (Days since last coupon payment/Days separating coupon payment)= $40 × (15/182) = $3.2967The invoice price is the reported price plus accrued interest:$1,001.2500 + $3.2967 = $1,004.55

Find the after-tax return to a corporation that buys a share of preferred stock at $56, sells it at year-end at $56, and receives a $6 year-end dividend. The firm is in the 21% tax bracket.

The total before-tax income is $6. The corporations may exclude 50% of dividends received from domestic corporations in the computation of their taxable income; the taxable income is therefore: $6 × 50% = $3.00. Income tax in the 21% tax bracket: $3.00 × 21% = $0.63 After-tax income = $6 − $0.63 = $5.37 After-tax rate of return = $5.37/$56 = 0.0959 or 9.59%

All else equal which one of the following will usually have the lowest yield?

Treasury Bill

Which of the following are discount instruments?

Treasury bills

Which of the following is typically the most liquid?

Treasury bills

TIPS are

Treasury bonds whose principal is adjusted according to increases in the CPI

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8.60% with interest paid annually. If the current market price is $860, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged?

Using a financial calculator, input PV = −860, FV = 1,000, n = 10, PMT = 86. The YTM is 10.97%. In one year-Using a financial calculator, FV = 1,000, n = 9, PMT = 86, I/Y = 10.97. The new price will be 868.38. Thus, the capital gain is $8.38.

A 20-year maturity, 8.2% coupon bond paying coupons semiannually is callable in seven years at a call price of $1,110. The bond currently sells at a yield to maturity of 7.2% (3.60% per half-year). Required: a. What is the yield to call? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the yield to call if the call price is only $1,060? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What is the yield to call if the call price is $1,110 but the bond can be called in four years instead of seven years? (

Using your calculator: n = 40; I/Y = 3.60; FV = 1,000; PMT = 41.00PV = $1,105.1386 based on the 3.60% yield to maturity Using your calculator: n = 14; PV = −1,105.14; FV = 1,110; PMT = 41.00Therefore, yield to call is 3.7344% semiannually, 7.47% annually. Using your calculator: n = 14; PV = −1,105.14; FV = 1,060; PMT = 41.00Therefore, yield to call is 3.4785% semiannually, 6.96% annually. Using your calculator: n = 8; PV = −1,105.14; FV = 1,110; PMT = 41.00Therefore, yield to call is 3.7581% semiannually, 7.52% annually.

Refer to the stock options on Microsoft in the Figure 2.10. Suppose you buy a November expiration call option on 100 shares with the excise price of $135. Required: a-1. If the stock price at option expiration is $143, will you exercise your call? What is the net profit/loss on your position? What is the rate of return on your position? What is the net profit/loss on your position? What is the rate of return on your position? What if you had bought the November put with exercise price $135 instead? Would you exercise the put at a stock price of $135? What is the rate of return on your position?

Yes. As long as the stock price at expiration exceeds the exercise price, it makes sense to exercise the call. Gross profit is: ($143 − $135) × 100 shares = $800 Net profit = ($8 − $8.12) × 100 shares = $12 Loss Rate of return = $0.12/$8.12 = 0.0148 or 1.48% Loss b-1, b-2 & b-3. Yes, exercise. Gross profit is: ($143 − $130) × 100 shares = $1,300 Net profit = ($13 − $11.50) × 100 shares = $150 gain Rate of return = $1.50/$11.50 = 0.1304 or 13.04% gain c-1 & c-2. A put with an exercise price of $135 would expire worthless for any stock price equal to or greater than $135 (in this case $143). An investment in such a put would have a rate of return over the holding period of −100%.

The Arizona Stock Exchange lists a bid price of 1.06 and an ask price of 1.15 for Kicking Bird Energy Corporation. a. At what price can you buy the stock? (Round your answer to 2 decimal places.) b. What is the dealer's bid-ask spread? (Round your answer to 2 decimal places.) Bid-ask spread

You can buy the stock at the ask price of $1.15. b. The dealer's bid-ask spread is $1.15 - 1.06 = $0.09.

You sell 460 shares of stock short that are priced at $52.65 a share. You post the 50% margin required. If the maintenance margin requirement (MMR) is 30% at what stock price do you get a margin call?

You must post 50% of the sale price in your margin account = 50% × ($52.65 * 460) = $12,109.50. You must also pledge the sale proceeds to the margin account = $52.65 * 460 = $24,219. Your total margin account = $12,109.50 + $24,219 = $36,328.50. You get a margin call at a stock price = [Total margin account / (1 + MMR) / # shares] = ($36,328.50 / 1.30) / 460 = $60.75.

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $34 per share. Required: a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?

a. Initial margin is 50% of $3,400, which is $1,700. b. Total assets are $5,100 ($3,400 from the sale of the stock and $1,700 put up for margin). Liabilities are 100P. Therefore, net worth is ($5,100 − 100P). Solving ($5,100 − 100P)/100P = 0.30, we get P = $39.23. A margin call will be issued when the stock price reaches $39.23 or higher.

The Closed Fund is a closed-end investment company with a portfolio currently worth $230 million. It has liabilities of $4 million and 5 million shares outstanding. Required: a. What is the NAV of the fund? (Round your answer to 2 decimal places.) b.If the fund sells for $42 per share, what is its premium or discount as a percent of NAV?

a. NAV = (Market value of assets − Market value of liabilities)/Shares outstanding = ($230,000,000 − $4,000,000)/5,000,000 = $45.20 b. Premium (or discount) = (Price − NAV)/NAV = ($42 − $45.20)/$45.20 = −0.0708 = −7.08% The fund sells at an 7.08% discount from NAV.

City Street Fund has a portfolio of $432 million and liabilities of $12 million. Required:a. If there are 28 million shares outstanding, what is the net asset value? b-1.If a large investor redeems 2 million shares, what happens to the portfolio value?(Enter your answer in dollars not in millions.) b-2.If a large investor redeems 2 million shares, what happens to shares outstanding?(Enter your answer in dollars not in millions.) b-3.If a large investor redeems 2 million shares, what is the net asset value?

a. NAV = (Market value of assets − Market value of liabilities)/Shares outstanding = ($432,000,000 − $12,000,000)/28,000,000 = $15 b1, b2 & b3. Because 2,000,000 shares are redeemed at NAV = $15, the value of the portfolio decreases to:Portfolio value = $432,000,000 − ($15 × 2,000,000) = $402,000,000The number of shares outstanding will be the current shares outstanding minus the number of shares redeemed: 28,000,000 − 2,000,000 = 26,000,000.Thus, net asset value after the redemption will be: NAV = (Market value of assets − Market value of liabilities)/Shares outstanding = ($402,000,000 − $12,000,000)/26,000,000 = $15

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $85 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $85 to $95.50, and the stock has paid a dividend of $13.00 per share. Required: a. What is the remaining margin in the account? b-1. What is the margin on the short position? (Round your answer to 2 decimal places.) b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call? multiple choiceYes CorrectNo c. What is the rate of return on the investment

a. The initial margin was: $85 × 1,000 × 0.50 = $42,500.As a result of the $10.50 increase in the stock price, Old Economy Traders loses: $10.50 × 1,000 shares = $10,500.Moreover, Old Economy Traders must pay the dividend of $2 per share to the lender of the shares: $13.00 × 1,000 shares = $13,000.The remaining margin in the investor's account therefore decreases to: $42,500 − $10,500 − $13,000 = $19,000. b1. & b2. Margin on short position = Equity in account/Value of shares owed = $19,000/$95,500 = 0.1990 = 19.90% Because the percentage margin falls below the maintenance level of 30%, there will be a margin call. c. The rate of return = (Ending equity − Initial equity)/Initial equity = ($19,000 − $42,500)/$42,500 = −0.5529 = −55.29%

Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams at $28 per share. She borrows $3,000 from her broker to help pay for the purchase. The interest rate on the loan is 12%. Required:a. What is the margin in Dée's account when she first purchases the stock? b. If the share price falls to $18 per share by the end of the year, what is the remaining margin in her account? c. If the maintenance margin requirement is 30%, will she receive a margin call? multiple choiceYesNo Correct d. What is the rate of return on her investment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.

a. The stock is purchased for $28 × 400 shares = $11,200.Given that the amount borrowed from the broker is $3,000, Dee's margin is the initial purchase price net borrowing: $11,200 − $3,000 = $8,200. b. If the share price falls to $18, then the value of the stock falls to $7,200. By the end of the year, the amount of the loan owed to the broker grows to:Principal × (1 + Interest rate) = $3,000 × (1 + 0.12) = $3,360.The value of the stock falls to: $18 × 400 shares = $7,200.The remaining margin in the investor's account is:$7,200 − $3,360 = $3,840 c. Margin on long position = Equity in account/Value of stock = ($7,200 − $3,360)/$7,200 = 0.5333 = 53.33% Therefore, the investor will not receive a margin call. d. Rate of return = (Ending equity in account − Initial equity in account)/Initial equity in account = ($3,840 − $8,200)/$8,200 = −0.5317 = −53.17%

You've borrowed $23,072 on margin to buy shares in Ixnay, which is now selling at $41.2 per share. You invest 1,120 shares. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price changes to $41 per share. Required: a. Will you receive a margin call? multiple choiceYesNo Correct b. At what price will you receive a margin call?

a. You will not receive a margin call. You invest 1,120 shares of Ixnay at $41.2 per share with $23,072 in equity and $23,072 from borrowing. At $41 per share, the value of the stock becomes $45,920. Therefore, the equity changes to $22,848:Equity = Value of stock − Debt = $45,920 − $23,072 = $22,848 Percentage margin = Equity in account/Value of stock = $22,848/45,920 = 0.4976 or 49.76% The percentage margin still exceeds the required maintenance margin. b. Solving ($1,120P − $23,072)/1,120P = 0.35 or 35%, we get P = $31.69. You will receive a margin call when the stock price falls to $31.69 or lower.

The primary advantage of open end funds over closed end funds is ______________________ and the primary disadvantage is ______________________.

better liquidity for the investor; the need to keep a cash reserve

An investor begins to build her investment portfolio by choosing individual securities. She is engaging in what is called __________ or __________.

bottom up; security selection

A contract where the seller of the contract collects an annual premium (and sometimes an upfront fee) from the buyer and in exchange the seller of the contract pays the drop in value from par to the buyer if a security defaults is called a ___________________.

credit default swap

A security that provides a payoff that depends on the values of other assets.

derivative security

Done

done

The primary risk to an investor from holding a standard Treasury bond is

inflation risk

Managed investment companies are better known as ___________.

mutual funds

A market where newly issued securities are offered to the public is called a/an

primary market

HMW#2: How Firms Issue Securities A share of Microsoft stock is bought and sold among individual investors. This is an example of a _______________________. Microsoft _________________ from the transaction.

secondary market transaction; receives no funds

A zero-coupon bond with face value $1,000 and maturity of five years sells for $738.22. Required: a. What is its yield to maturity? (Round your answer to 2 decimal places.) b. What will the yield to maturity be if the price falls to $722?

sing a financial calculator, PV = −738.22, FV = 1,000, n = 5, PMT = 0. The YTM is 6.26%. (this assumes annual compounding) Using a financial calculator, PV = −722.00, FV = 1,000, n = 5, PMT = 0. The YTM is 6.73%. (this assumes annual compounding)

An investor shorted stock that is currently trading at $52.50 a share. She is now worried about taking losses from an unfavorable price move, although she is not yet ready to close out the position. It may make sense for the investor to enter a ______________ order at ______ per share.

stop buy; $54.00

Xerox, which has been a public company for a long time, hires Morgan Stanley to help Xerox market additional new stock for sale to the general public. Morgan Stanley purchases the shares from Xerox and resells the shares to the public. This is an example of a/an _____________________.

underwritten general cash seasoned offering