FINE 4110 Chp2.1-2.3 Asset Classes and Finance Firms

Treasury notes have initial maturities between _______ years.

1 and 10

A T-bill quote sheet has 90-day T-bill quotes with a 5.32 ask and a 5.26 bid. If the bill has a $10,000 face value, an investor could sell this bill for _____.

10000 x {1- [(0.0526 x 90) / 360)]} = $9868.5//

The maximum maturity on commercial paper is _______.

270 days or about 9 months

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

360

A municipal bond carries a coupon rate of 6.50% and is trading at par. 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.)

6.50%/(1-0.35) = 10%

An investor purchases one municipal bond and one corporate bond that pay rates of return of 8% and 9.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

8% and 7.99% After-tax return on municipal bond = 0.08 After-tax return on corporate bond = 0.094(1 − 0.15) = 0.0799 = 7.99%

Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______. A. inflation is lower than anticipated over the investment period B. inflation is higher than anticipated over the investment period Correct C. the U.S. dollar increases in value against the euro D. the spread between commercial paper and Treasury securities remains low

B. inflation is higher than anticipated over the investment period

Which one of the following is a true statement? > Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors. > Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock. > Preferred stockholders have voting power. > Investors can sue managers for nonpayment of preferred dividends.

Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.

TIPS are ______. A. Treasury bonds that pay no interest and are sold at a discount B. U.K. bonds that protect investors from default risk C. securities that trade on the Toronto stock index D. Treasury bonds that protect investors from inflation

D. Treasury bonds that protect investors from inflation

Which of the following is not a characteristic of a money market instrument? > Liquidity > Marketability > Low risk > Maturity greater than 1 year

Maturity greater than 1 year

Which of the following is not a money market instrument? Treasury bill Commercial paper Preferred stock Bankers' acceptance

Preferred stock

Which of the following is most like a short-term collateralized loan? Certificate of deposit Repurchase agreement Bankers' acceptance Commercial paper

Repurchase agreement

The bid price of a Treasury bill is _______. > the price at which the dealer in Treasury bills is willing to sell the bill > the price at which the dealer in Treasury bills is willing to buy the bill > greater than the ask price of the Treasury bill expressed in dollar terms > the price at which the investor can buy the Treasury bill

The price at which the dealer in Treasury bills is willing to buy the bill

The most marketable money market securities are _______.

Treasury bills

An investor in a T-bill earns interest by _______. > receiving interest payments every 90 days > receiving dividend payments every 30 days > converting the T-bill at maturity into a higher-valued T-note > buying the bill at a discount from the face value to be received at maturity

buying the bill at a discount from the face value to be received at maturity

A dollar-denominated deposit at a London bank is called _______.

eurodollars

An investor is in a 35% combined federal plus state tax bracket. If corporate bonds offer 9.75% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? (Round your answer to 2 decimal places.)

0.0975 * (1-0.35) = 6.34%

Which of the following are true statements about T-bills? 1. T-bills typically sell in denominations of $10,000. 2. Income earned on T-bills is exempt from all federal taxes. 3. Income earned on T-bills is exempt from state and local taxes.

1 and 3 only

Which of the following is not a true statement regarding municipal bonds? > A municipal bond is a debt obligation issued by state or local governments. > A municipal bond is a debt obligation issued by the federal government. > The interest income from a municipal bond is exempt from federal income taxation. > The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

A municipal bond is a debt obligation issued by the federal government.

The yield on tax-exempt bonds is ______. A. usually less than 50% of the yield on taxable bonds B. normally about 90% of the yield on taxable bonds C. greater than the yield on taxable bonds D. less than the yield on taxable bonds

D. less than the yield on taxable bonds

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. > The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price. > The purchase of a security with a commitment to purchase more of the same security at a specified future date.

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

Which of the following is not a typical characteristic of common stock ownership? A. Residual claimant B. Unlimited liability C. Voting rights D. Right to any dividend paid by the corporation.

Unlimited liability

A T-bill with face value $10,000 and 87 days to maturity is selling at a bank discount ask yield of 3.4%. a. What is the price of the bill? (Use 360 days a year. Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is its bond equivalent yield? (Use 365 days a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

a. Bank Discount Rate = 10,000 - Market Price of T Bill / 10,000 x 360/ days to maturity 0.034 = [(10,000 - Market Price of T Bill) / (10,000)] x 360/87 = 9917.83// b. [(10,000 - 9917.83) / 9917.83]*365/87 = 3.475%//

A T-bill with face value $10,000 and 97 days to maturity is selling at a bank discount ask yield of 4.4%. a. What is the price of the bill? (Use 360 days a year. Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is its bond equivalent yield? (Use 365 days a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

a. Bank Discount Rate = 10,000 - Market Price of T Bill / 10,000 x (360/ days to maturity) 0.044 =[(10,000 - Market Price of T Bill) / (10,000)] x 360/97 = 9881.44// b. [(10000 - 9881.5)/9881.5] x 365/97 = 4.51249%//

Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after-tax yield if your combined tax bracket is: Higher After Tax Yield a. Zero b. 10% c. 20% d. 30%

a. The taxable bond. 0 tax bracket, taxable bonds 5% yield, municipal bonds 4% yield b. The taxable bond. 10% tax bracket, taxable bond : 0.05 x (1 - 0.10) = 0.045 or 4.50%. yield municipal bonds 4% yield c. Neither. taxable bond is: 0.05 x (1 - 0.20) = 0.4 or 4%. yield municipal bond. 4% yield d. The municipal bond taxable bond is: 0.05 x (1 - 0.30) = 0.035 or 3.5%. yield municipal bond. 4% yield.

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

Deposits of commercial banks at the Federal Reserve are called _______.

federal funds

Preferred stock is like long-term debt in that _______.

it promises to pay to its holder a fixed stream of income each year

Commercial paper is a short-term security issued by ______ to raise funds.

large well-known companies

__________ is not a money market instrument. A. A certificate of deposit B. A Treasury bill C. A Treasury bond D. Commercial paper

treasury bond, issued in terms of 30 years