Investment Management Chapter 2

A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value, an investor could buy this bill for _____.

$9,878.50 $9,878.50 = $10,000 x [1- (0.486*90)/360)]

The minimum tick size, or spread between prices in the Treasury bond market, is

1/128 of a point

When computing the bank discount yield, you would use ____ days in the year.

360

A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

8.68% 6.25%/(1-.28)

Which one of the following is a true statement regarding corporate bonds?

A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares.

Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. (Round your answer to 2 decimal places.)

After-tax rate of return = 9.10 % The total before-tax income is $4. The corporations may exclude 70% of dividends received from domestic corporations in the computation of their taxable income; the taxable income is therefore: $4 × 30% = $1.20. Income tax in the 30% tax bracket: $1.2 × 30% = $0.36 After-tax income = $4 - $0.36 = $3.64 After-tax rate of return = $3.64/$40 = 0.091 or 9.10%

Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _________.

Commercial Paper

All but which one of the following indices is value weighted?

DJIA

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III.The Wilshire 5000

I, II, and III

The interest rate charged by large banks in London to lend money among themselves is called _________.

LIBOR

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds?

Minimum Municipals Offer --> 6.3 The after-tax yield on the corporate bonds is: 0.09 × (1 - 0.30) = 0.063 or 6.3%. Therefore, the municipals must offer at least 6.3% yields.

A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

Repurchase Agreement

Which of the following is most like a short-term collateralized loan?

Repurchase agreement

Which of the following correctly describes a repurchase agreement?

The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price correct

Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and maturities of six months. a. What will be the profit/loss to an investor who buys the call for $4 in the following scenarios for stock prices in six months? (Loss amounts should be indicated by a minus sign.) Stock Price Profit/Loss a. $40 b. $45 c. $50 d. $55 e. $60

a. -4 b. -4 c. -4 d. 1 e. 6 a. Value of Call at Expiration Initial Cost Profit/Loss a. 0 4 −4 b. 0 4 −4 c. 0 4 −4 d. 5 4 1 e. 10 4 6

Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and maturities of six months. . What will be the profit/loss in each scenario to an investor who buys the put for $6? (Loss amounts should be indicated by a minus sign.) Stock Price Profit/Loss a. $40 b. $45 c. $50 d. $55 e. $60

a. 4 b. -1 c. -6 d. -6 e. -6 Value of Call at Expiration Initial Cost Profit/Loss a. 10 6 4 b. 5 6 −1 c. 0 6 −6 d. 5 6 −6 e. 10 6 −6

Currently, the Dow Jones Industrial Average is computed by _________.

adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?

an equally weighted index

In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.

by adjusting the divisor

An index computed from a simple average of returns is a/an _____.

equal weighted index

The rate of interest on short-term loans among financial institutions is _____.

federal funds

If you thought prices of stock would be rising over the next few months, you might want to __________________ on the stock.

purchase a call option