Question: a. A zero-coupon bond with a

> Apply the term structure of interest rate theories that were discussed in Chapter 3 to explain the shape of the existing commercial paper yield curve.

> Coral Inc. has purchased shares of stock M at $28 per share. It will sell the stock in six months. It considers using a strategy of covered call writing to partially hedge its position in this stock. The exercise price is $32, the expiration date is six

> DePaul Insurance Company purchased a call option on a stock index futures contract. The option premium is quoted as $6. The exercise price is $1,430. Assume the index on the futures contract becomes $1,440. Should DePaul exercise the call option or let i

> A put option on Indiana stock specifies an exercise price of $23. Today the stock’s price is $24. The premium on the put option is $3. Assume the option will not be exercised until maturity, if at all. Complete the following table:

> A put option on Iowa stock specifies an exercise price of $71. Today the stock’s price is $68. The premium on the put option is $8. Assume the option will not be exercised until maturity, if at all. Complete the following table for a sp

> A call option on Michigan stock specifies an exercise price of $55. Today the stock’s price is $54 per share. The premium on the call option is $3. Assume the option will not be exercised until maturity, if at all. Complete the followin

> A call option on Illinois stock specifies an exercise price of $38. Today’s price of the stock is $40. The premium on the call option is $5. Assume the option will not be exercised until maturity, if at all. Complete the following table

> Marks Insurance Company sold stock index futures that specified an index of 1690. When the position was closed out, the index specified by the futures contract was 1,720. Determine the profit or loss, ignoring transaction costs.

> R. C. Clark sold a futures contract on Treasury bonds that specified a price of 92-10. When the position was closed out, the price of Treasury bond futures contract was 93-00. Determine the profit or loss, ignoring transaction costs.

> Egan Company purchased a futures contract on Treasury bonds that specified a price of 91-00. When this position was closed out, the price of the Treasury bond futures contract was 90-10. Determine the profit or loss, ignoring transaction costs.

> a. Assume that as of today, the annualized two-year interest rate is 13 percent, while the one-year interest rate is 12 percent. Use this information to estimate the one-year forward rate. b. Assume that the liquidity premium on a two-year security is 0.

> Which circumstances might cause a stimulative monetary policy to be ineffective?

> Rude Dynamics, Inc., sold T-bill futures contracts when the quoted price was 93-26. When this position was closed out, the quoted price was 93-90. Determine the profit or loss per contract, ignoring transaction costs.

> Toland Company sold Treasury bond futures contracts when the quoted price was 94-00. When this position was closed out, the quoted price was 93-20. Determine the profit or loss per contract, ignoring transaction costs.

> Suerth Investments, Inc., purchased Treasury bond futures contracts when the quoted price was 95-00. When this position was closed out, the quoted price was 93-60. Determine the profit or loss per contract, ignoring transaction costs.

> Spratt Company purchased Treasury bond futures contracts when the quoted price was 93-50. When this position was closed out, the quoted price was 94-75. Determine the profit or loss per contract, ignoring transaction costs.

> Suppose that you buy a stock for $48 by paying $25 and borrowing the remaining $23 from a brokerage firm at 8 percent annualized interest. The stock pays an annual dividend of $0.80 per share, and after one year, you are able to sell it for $65. Calculat

> Assume that Duever stock is priced at $80 per share and pays a dividend of $2 per share. An investor purchases the stock on margin, paying $50 per share and borrowing the remainder from the brokerage firm at 12 percent annualized interest. If after one y

> Assume that Vogl stock is priced at $50 per share and pays a dividend of $1 per share. An investor purchases the stock on margin, paying $30 per share and borrowing the remainder from the brokerage firm at 10 percent annualized interest. If after one yea

> A stock has a beta of 2.2, the risk-free rate is 6 percent, and the expected return on the market is 12 percent. Using the CAPM, what would you expect the required rate of return on this stock to be? What is the market risk premium?

> A share of common stock currently sells for $110. Current dividends are $8 per share and are expected to grow at 6 percent per year indefinitely. What is the rate of return required by investors in the stock?

> Why might the Fed want to focus its efforts on reducing long-term interest rates rather than short-term interest rates during a weak economy? Explain how it might use a monetary policy focused on influencing long-term interest rates. Why might such a po

> You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two secur

> Suppose you know that a company just paid a dividend of $1.75 per share on its stock and that the dividend will continue to grow at a rate of 8 percent per year. If the required return on this stock is 10 percent, what is the current share price?

> Micro, Inc. will pay a dividend of $2.30 per share next year. If the company plans to increase its dividend by 9 percent per year indefinitely, and you require a 12 percent return on your investment, what should you pay for the company’s stock?

> Suppose that you are interested in buying the stock of a company that has a policy of paying a $6 per share dividend every year. Assuming no changes in the firm’s policies, what is the value of a share of stock if the required rate of return is 11 percen

> You discovered that Olmsted Stock is expected to generate earnings of $4.38 per share this year, and that the mean PE ratio for its industry is 27.195. Use the PE valuation method to determine the value of Olmsted shares.

> Assume Mess stock has a beta of 1.2. If the risk-free rate is 7 percent, and the market return is 10 percent, what is the expected return on Mess stock?

> a. When computing the price of the stock with the dividend discount model, how would the price of a stock be affected if the required rate of return is increased. Explain the logic of this relationship. b. When computing the price of a stock using the co

> Assume that the standard deviation of daily returns for a particular stock in a recent historical period is 1.8 percent. Assume that the expected daily return of the stock is 0.01 percent. Estimate the maximum percentage one-day loss based on a 95 percen

> Using the information from Problem 12, suppose that you instead decide to invest $20,000 in Stock D, $30,000 in Stock E and $50,000 in Stock F. What is the beta of your portfolio now?

> Assume the following information: Beta of Stock D = 1.31 Beta of Stock E = 0.85 Beta of Stock F = 0.94 If you invest 40 percent of your money in Stock D, 30 percent in Stock E and 30 percent in Stock F, what is your portfolio’s beta?

> In a weak economy, the Fed commonly implements a stimulative monetary policy to lower interest rates and presumes that firms will be more willing to borrow money. Even if banks are willing to lend such funds, why might such a presumption about the willin

> Suppose you bought a stock at the beginning of the year for $76.50. During the year, the stock paid a dividend of $0.70 per share and had an ending share price of $99.25. What is the total percentage return from investing in that stock over the year?

> what is the market consensus forecast about the one-year forward rate one year from now? Is this rate above or below today’s one-year interest rate? Explain.

> You are considering investing in a stock that has an expected return of 13 percent. If the risk-free rate is 5 percent and the market risk premium is 7 percent, what is the beta of this stock?

> Assume the following information over a five-year period. Average risk-free rate = 6% Average return for Crane stock = 11% Average return for Load stock = 14% Standard deviation of Crane stock returns = 2% Standard deviation of Load stock returns = 4% Be

> Use an amortization table (go to www.bankrate.com and click on “amortization calculator” under “Mortgages” or use another online source) that determines the monthly mortgage payment based on a specific interest rate and principal with a 15-year maturity,

> Spartan Insurance Company plans to purchase bonds today that have four years remaining to maturity, a par value of $60 million, and a coupon rate of 10 percent. Spartan expects that in three years, the required rate of return on these bonds by investors

> Assume that you require a 14 percent return on a zero-coupon bond with a par value of $1,000 and six years to maturity. What is the price you should be willing to pay for this bond?

> Assume the following information for existing zero-coupon bonds: Par value = $100,000 Maturity = 3 years Required rate of return by investors = 12% How much should investors be willing to pay for these bonds?

> Determine how the duration of a bond be affected if the coupons were extended over additional time periods.

> Determine how the bond elasticity would be affected if the bond price changed by a larger amount, holding the change in the required rate of return constant.

> Explain why a stimulative monetary policy might not be effective during a weak economy in which there is a credit crunch.

> Does an analyst employed by a securities firm to rate firms face a conflict of interest? If so, can the conflict be resolved?

> a. How would the present value (and therefore the market value) of a bond be affected if the coupon payments are smaller and other factors remain constant? b. How would the present value (and therefore the market value) of a bond be affected if the requi

> You are interested in a bond that pays an annual coupon of 4 percent, has a yield to maturity of 6 percent and has 13 years to maturity. If interest rates remain unchanged, at what price would you expect this bond to be selling 8 years from now? Ten year

> Suppose that Treasury bills are currently paying 9 percent and the expected inflation is 3 percent. What is the real interest rate?

> You are interested in buying a $1,000 par value bond with 10 years to maturity and an 8 percent coupon rate that is paid semiannually. How much should you be willing to pay for the bond if the investor’s required rate of return is 10 percent?

> A bond has a duration of 5 years and a yield to maturity of 9 percent. If the yield to maturity changes to 10 percent, what should be the percentage price change of the bond?

> A U.S. investor obtains British pounds when the pound is worth $1.50 and invests in a one-year money market security that provides a yield of 5 percent (in pounds). At the end of one year, the investor converts the proceeds from the investment back to do

> The Treasury is selling 91-day T-bills with a face value of $10,000 for $9,900. If the investor holds them until maturity, calculate the yield.

> You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you hold it until maturity, what is the T-bill yield? What is the T-bill discount?

> Stanford Corporation arranged a repurchase agreement in which it purchased securities for $4,900,000 and will sell the securities back for $5,000,000 in 40 days. What is the yield (or repo rate) to Stanford Corporation?

> During the credit crisis of 2008, the Fed used a stimulative monetary policy. Why do you think the total amount of loans to households and businesses did not increase as much as the Fed had hoped? Are the lending institutions to blame for the relatively

> Assume an investor purchased six-month commercial paper with a face value of $1,000,000 for $940,000. What is the yield?

> Newly issued three-month T-bills with a par value of $10,000 sold for $9,700. Compute the T-bill discount.

> Phil purchased an NCD a year ago in the secondary market for $980,000. The NCD matures today at a price of $1,000,000, and Phil received $45,000 in interest. What is Phil’s return on the NCD?

> Suppose the real interest rate is 6 percent and the expected inflation is 2 percent. What would you expect the nominal rate of interest to be?

> Over the last year, Calzone Corporation paid a quarterly dividend of $0.10 in each of the four quarters. The current stock price of Calzone Corporation is $39.78. What is the dividend yield for Calzone stock?

> As an analyst at a bond rating agency, you have been asked to interpret the implications of the recent shift in the yield curve. Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, the long-term yields declined, w

> As an analyst at a bond rating agency, you have been asked to interpret the implications of the recent shift in the yield curve. Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, the long-term yields declined, w

> As a portfolio manager, you commonly take short positions in stocks that have a high short interest margin. What is the advantage of focusing on these types of firms? What is a possible disadvantage?

> As a portfolio manager of a financial institution, you are invited to numerous road shows at which firms that are going public promote themselves, and the lead underwriter invites you to invest in the IPO. Beyond any specific information about the firm,

> What is the obvious risk of such a strategy beyond the next year?

> The Fed uses a targeted federal funds rate when implementing monetary policy. However, the Fed's main purpose in its monetary policy is typically to have an impact on the aggregate demand for products and services. Reconcile the Fed's targeted federal fu

> Would the bank’s ROA likely be higher or lower over the next year if it allocates the extra funds to small business loans?

> The bank is considering a strategy of using $1 billion to offer additional loans to small businesses instead of purchasing T-bills. Using all the original assumptions provided, determine the probability distribution of ROA (assume that noninterest expens

> What would be an obvious concern about a strategy of using more one-year NCDs and fewer five-year NCDs beyond the next year?

> Is the bank’s ROA likely to be higher next year if it uses this strategy of attracting more one-year NCDs?

> The bank is considering a strategy of attempting to attract an extra $1 billion in funds in the form of one-year negotiable certificates of deposit, which will replace $1 billion of five-year NCDs. Develop the probability distribution of ROA based on thi

> Now assume that the bank wants to determine how its forecasted return on equity (ROE) next year would be affected by boosting its capital from $1 billion to $1.2 billion. (The extra capital would not be used to increase interest or noninterest revenues.)

> In recent years, private equity funds have grown substantially. Will the creation of private equity funds increase the semi-strong form of market efficiency in the stock market? Explain.

> Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on the current conditions, rec

> What are the consequences to a government in the Euroone when it obtains credit from the ECB?

> Consider the prevailing conditions for inflation (including oil prices), the economy, interest rates, and any other factors that could affect exchange rates. Based on prevailing conditions, do you think the euro’s value will likely appreciate or deprecia

> In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial i

> Back Bay Insurance Company negotiated a callable swap involving fixed payments in exchange for floating payments. Assume that interest rates decline consistently up until the swap maturity date. Do you think Back Bay might terminate the swap prior to mat

> Explain the advantage of a swap option to a financial institution that wants to swap fixed payments for floating payments.

> Bull and Finch Company wants a fixed-for-floating swap. It expects interest rates to rise far above the fixed rate that it would pay and remain very high until the swap maturity date. Should it consider negotiating for a rate-capped swap with the cap set

> Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on prevailing conditions, woul

> Short-term and long-term interest rates are presently very low. You believe that the Fed will use a monetary policy to maintain these interest rates at a very low level. Do you think financial institutions that could be adversely affected by a decline in

> Consider the prevailing conditions for inflation (including oil prices), the economy, the budget deficit, and other conditions that could affect the values of futures contracts. Based on these conditions, would you prefer to buy or sell Treasury bond fut

> Blue Devil Savings and Loan Association has a large number of 10-year fixed-rate mortgages and obtains most of its funds from short-term deposits. It uses the yield curve to assess the market’s anticipation of future interest rates. It believes that expe

> Elon Savings and Loan Association has a large number of 30-year mortgages with floating interest rates that adjust on an annual basis and obtains most of its funds by issuing five-year certificates of deposit. It uses the yield curve to assess the market

> Use a stock valuation framework to explain why the Sarbanes-Oxley Act (SOX) could improve the valuation of a stock. Why might SOX cause a reduction in the valuation of a stock?

> Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on prevailing conditions, do y

> Assume the following conditions. The last time the FOMC met, it decided to raise interest rates. At that time economic growth was very strong, and inflation was relatively high. Since the last meeting, economic growth has weakened, and the unemployment r

> Venture capital firms commonly attempt to cash out as soon as possible following IPOs. Describe the likely effect that would have on the stock price at the time of lockup expiration. Would the effect be different for a firm that relied more heavily on VC

> How have international mutual funds (IMFs) increased the international integration of capital markets among countries?

> Why do you think it is difficult for investors to assess the financial condition of a financial institution that has purchased a large amount of mortgage-backed securities?

> The U.S. Treasury attempted to resolve the credit crisis by establishing a plan to buy mortgage-backed securities held by financial institutions. Explain how the plan could improve the situation for mortgage-backed securities.

> Explain why Fannie Mae and Freddie Mac experienced mortgage problems during the credit crisis.

> Explain the role of credit rating agencies in facilitating the flow of funds from investors into the mortgage market (through mortgage-backed securities).

> Do you think that the U.S. financial system will be able to avoid a credit crisis in the future?

> Explain the problems that arise in valuing MBS.

> How did the repayment of subprime mortgages compare to the repayment of prime mortgages during the credit crisis?

> Consider the prevailing conditions for inflation (including oil prices), the economy, the budget deficit, and the Fed’s monetary policy that could affect interest rates. Based on the prevailing conditions, do you think the values of mortgages that are so

> Assume that the Fed adopts an inflation-targeting strategy. If oil prices rise abruptly by 15 percent in response to an oil shortage, describe how the Fed’s monetary policy would be affected by this situation. Do you think the inflation-targeting strateg

> Explain how the maturity of mortgage-backed securities can be affected by interest rate movements.