CHAPTER 2: ASSET CLASSES AND FINANCIAL
INSTRUMENTS
PROBLEM SETS
1. Preferred stock is like long-term debt in that it typically promis a fixed payment each year. In this way, it is a perpetuity. Preferred stock is also like long-term debt in that it does not give the holder voting rights in the firm.
Preferred stock is like equity in that the firm is under no contractual obligation to make the preferred stock dividend payments. Failure to make payments does not t off corporate bankruptcy. With respect to the priority of claims to the asts of the firm in the event of corporate bankruptcy, preferred stock has a higher priority than common equity but a lower priority than bonds.
2. Money market curities are called cash equivalents becau of their high level of liquidity. The prices of money market curities are very stable, and they can be converted t
o cash (i.e., sold) on very short notice and with very low transaction costs. Examples of money market curities include Treasury bills, commercial paper, and banker's acceptances, each of which is highly marketable and traded in the condary market.
3. (a) A repurcha agreement is an agreement whereby the ller of a curity agrees to “repurcha” it from the buyer on an agreed upon date at an agreed upon price. Repos are typically ud by curities dealers as a means for obtaining funds to purcha curities.
4. Spreads between risky commercial paper and risk-free government curities will widen. Deterioration of the economy increas the likelihood of default on commercial paper, making them more risky. Investors will demand a greater premium on all risky debt curities, not just commercial paper.
古天乐萱萱5.
| Corp. Bonds | Preferred Stock | Common Stock |
Voting rights (typically) | | | Yes |
contractual obligation | 领带打法图解 Yes | | |
Perpetual payments | | Yes | Yes |
Accumulated dividends | | Yes 李达安 | |
Fixed payments (typically) | Yes | Yes | |
Payment preference | First | Second | Third |
| | | |
6. Municipal bond interest is tax-exempt at the federal level and possibly at the state level as well. When facing higher marginal tax rates, a high-income investor would be more inclined to invest in tax-exempt curities.
7. a. You would have to pay the ask price of:
161.1875% of par value of $1,000 = $1611.875
员工转正评语怎么写b. The coupon rate is 6.25% implying coupon payments of $62.50 annually or, more precily, $31.25 miannually.
c. The yield to maturity on a fixed income curity is also known as its required return and is reported by The Wall Street Journal and others in the financial press as the ask yield. In this ca, the yield to maturity is 2.113%. An investor buying this curity today and holding it until it matures will earn an annual return of 2.113%. Students will learn in a later chapter how to compute both the price and the yield to maturity with a financial calculator.
8. Treasury bills are discount curities that mature for $10,000. Therefore, a specific T-bill price is simply the maturity value divided by one plus the mi-annual return:
P = $10,000/1.02 = $9,803.92
9. The total before-tax income is $4. After the 70% exclusion for preferred stock dividends, the taxable income is: 0.30 $4 = $1.20
wi名词Therefore, taxes are: 0.30 $1.20 = $0.36
After-tax income is: $4.00 – $0.36 = $3.64
Rate of return is: $3.64/$40.00 = 9.10%
10. a. You could buy: $5,000/$64.69 = 77.29 shares. Since it is not possible to trade in fractions of shares, you could buy 77 shares of GD.
b. Your annual dividend income would be: 77 $2.04 = $157.08
c. The price-to-earnings ratio is 9.31 and the price is $64.69. Therefore:
$截图快捷键64.69/Earnings per share = 夏季古诗9.3 Earnings per share = $6.96
d. General Dynamics clod today at $64.69, which was $0.饮一杯65 higher than yesterday’s price of $64.04
11. a. At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80
At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.333
The rate of return is: (83.333/80) 1 = 4.17%
b. In the abnce of a split, Stock C would ll for 110, so the value of the index would be: 250/3 = 83.333 with a divisor of 3.
After the split, stock C lls for 55. Therefore, we need to find the divisor (d) such that: 83.333 = (95 + 45 + 55)/d d = 2.340. The divisor fell, which is always the ca after one of the firms in an index splits its shares.
c. The return is zero. The index remains unchanged becau the return for each stock parately equals zero.
12. a. Total market value at t = 0 is: ($9,000 + $10,000 + $20,000) = $39,000
Total market value at t = 1 is: ($9,500 + $9,000 + $22,000) = $40,500
Rate of return = ($40,500/$39,000) – 1 = 3.85%
b.The return on each stock is as follows:
rA = (95/90) – 1 = 0.0556
rB = (45/50) – 1 = –0.10
rC = (110/100) – 1 = 0.10
