FINC 325 Chapter 2,3 Problems

2.18)

A. 75.6-0.97= 74.63 B. Total AMT/Current price per share= 5000/75.6=66 C. Total number of shares*dividend per share= 66*1.88=124.08 D. Share Price/Price P.E= 75.6/10.92= 6.834

2.17) A. How much would you have to pay to purchase one of these bonds? B. What is the Coupon rate? C. What is the current yield?

A. Asking price is $98 dollars for 2040. B. 4.25% C. 4.375%

2.6) Why are higher tax bracket investors more inclined to invest in municipal binds than are low-bracket investors?

Although municipal bonds are lesser yield they offer higher tax bracket investors the perk of federal tax exemption, meaning the income received from interest on the municipal bonds does not get taxed in their high level tax bracket. High tax bracket gets higher interest income from using municipal bonds than net interest income from other types of bonds.

2.5) Describe alternative ways that an investor may add positions in international equity to his/her portfolio?

An investor may use a depository receipt to buy or sell international equity. An American Depository Receipt is a certificate traded in the US market that represents ownership of an international company.

2.9) Why are corporations more apt to hold preferred stock then other potential investors? DONE IN CLASS

Because 70% of the income received by the corporation is tax free and only 30% is taxable.

2.7) What is meant by the LIBOR rate? The Federal Funds rate?

LIBOR stands for London Inter Bank Offer Rate where banks with enormous amount of funds lend to other banks in London to make adjustments in mortgage rates and is calculated on 10 different currencies on the basis of 15 different borrowings in 1 year and is published daily. Federal Funds Rate. Every bank is required to put a certain amount of funds in the Federal Bank and that amount depends on the amount deposited by customers into each bank. Banks that are short on funds can borrow from banks that have an excess of funds at a specified interest rate.

2.8) How does a municipal revenue bond differ from a general obligation bonds? Which would you expect to have a lower yield to maturity? DONE IN CLASS

Municipal Revenue Bonds are repayments that depend upon specific projects and are more risky. General Obligation Bonds have revenues that depend on an agreement between bondholder and issuer and are less risky. The greater the risk and ROI of the project the higher the yield to maturity.

2.13) A municipal bond carries a coupon rate of 6 3/4 0/0 an is trading at par. What would be the equivalent taxable yield to a bond taxpayer in a 35% tax bracket?

Rmuni=0.0675 Taxrate=0.35 Equiv Taxable Yield=0.0657/1-0.35 =0.10 or 10%

2.1) What are the differences between common stock, preferred stock, and corporate bonds?

All are known as securities. Firm raise capital by issuing all three. Common stock reflects ownership portion of a company and common shareholders can take part in decision making where preferred shareholders cannot. Company pays dividends to common/preferred shareholders however the preferred shareholders receive a fixed rate dividend and common shareholders dividend rate may vary. Common shareholders dividend can be avoided by companies and preferred shareholders dividend will be accumulated and paid later if avoided by a firm. Company pays interest to bondholders semiannually and annually at a fixed rate. A company cannot avoid paying interest to bondholders.

2.14) Suppose that short term yield bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after tax yield if your tax bracket is? a.0% b.10% c.20% d.30%

0% gives greatest yield

2.2) Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average?

W5000 is way bigger and contains almost all of the stocks in the U.S therefore it is a better indicator of the current market trends. The DJIA is at most, 30 of the largest stocks in the U.S

2.12) Why are money market securities sometimes referred to as cash equivalents?

Because they are short tern in nature, have high liquidity, and can be converted into cash quickly with less cost.

2.3) What features of money market securities distinguish them from other fixed-income securities?

Fixed-income securities are securities that pay interest or dividend at a fixed rate such as preferred stocks or bonds. Money market securities differ in three ways: They are short term(under 1 year) in nature, They are highly marketable securities with less credit risk, They are very safe as they are highly liquid.

2.10) What is meant by Limited Liability?

In the case of bankruptcy a firms shareholders are held responsible. Shareholders assets cannot be claimed and the liability is limited to the shares.

2.11) Which of the following correctly describes a repurchase agreement?

The sale of a security with the commitment to repurchase the same security at a specified future date and designated price. "Overnight borrowing."

2.4) What are the major components of the money market? (TCCBER)

Treasury Bills, Certificates of Deposit, Commercial Paper, Bankers Acceptance, Eurodollars and Repos.

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

r= rm/(1-t) rm= r*(1-t) =0.063 or 6.3% Yield

2.16) municipal taxable yield for problen 14

when the tax bracket is 30% the municipal bond yield 5.75% is greater then the taxable bond yield 5%