On March 9, 2009, the Dow Jones Industrial Average reached a new low. The index closed at 6,547.05, which was down 79.89 that day. What was the return (in percent) of the stock market that day?
> If the present value of an ordinary, 7-year annuity is $6,500 and interest rates are 7.5 percent, what’s the present value of the same annuity due?
> What’s the present value, when interest rates are 8.5 percent, of a $75 payment made every year forever?
> What’s the present value, when interest rates are 7.5 percent, of a $50 payment made every year forever?
> What’s the present value of a $700 annuity payment over six years if interest rates are 10 percent?
> At your full-service brokerage firm, it costs $140 per stock trade. How much money do you receive after selling 200 shares of Nokia Corporation (NOK), which trades at $20.13?
> What’s the present value of a $900 annuity payment over five years if interest rates are 8 percent?
> Suppose that the 2016 actual and 2017 projected financial statements for AFS are initially shown as follows. In these tables, sales are projected to rise by 14 percent in the coming year, and the components of the income statement and balance sheet that
> Compute the present value of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8 percent interest rate.
> Compute the present value of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent.
> What is the future value of a $700 annuity payment over six years if interest rates are 10 percent?
> What is the future value of a $900 annuity payment over five years if interest rates are 8 percent?
> Compute the future value in year 7 of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8% interest rate.
> Compute the future value in year 9 of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 using a 10 percent interest rate.
> Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,000 and $2,000 are made in years 1 and 3, respectively, and a withdrawal of $700 is made in year 4.
> A mortgage broker is offering a $279,000, 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4.5 percent APR interest rate. After the second year, the mortgage interest rate charged
> At your discount brokerage firm, it costs $9.50 per stock trade. How much money do you need to buy 300 shares of Time Warner, Inc. (TWX), which trades at $22.62?
> Explain what we mean when we say that one portfolio dominates another portfolio?
> A mortgage broker is offering a $183,900, 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4 percent APR interest rate. After the second year, the mortgage interest rate charged i
> Hank purchased a $20,000 car two years ago using a 9 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What’s the minimum price Hank would need to receive for his car?
> Why is debt often referred to as leverage in finance?
> Rachel purchased a $15,000 car three years ago using an 8 percent, 4-year loan. She has decided that she would sell the car now, if she could get a price that would pay off the balance of her loan. What is the minimum price Rachel would need to receive f
> Ross has decided that he wants to build enough retirement wealth that, if invested at 7 percent per year, will provide him with $3,000 of monthly income for 30 years. To date, he has saved nothing, but he still has 20 years until he retires. How much mon
> Monica has decided that she wants to build enough retirement wealth that, if invested at 8 percent per year, will provide her with $3,500 of monthly income for 20 years. To date, she has saved nothing, but she still has 30 years until she retires. How mu
> Create the amortization schedule for a loan of $5,000, paid monthly over two years using an 8 percent APR.
> Create the amortization schedule for a loan of $15,000, paid monthly over three years using a 9 percent APR.
> A car company is offering a choice of deals. You can receive $1,000 cash back on the purchase, or a 2 percent APR, 5-year loan. The price of the car is $20,000 and you could obtain a 5-year loan from your credit union, at 7 percent APR. Which deal is ch
> A car company is offering a choice of deals. You can receive $500 cash back on the purchase, or a 3 percent APR, 4-year loan. The price of the car is $15,000 and you could obtain a 4-year loan from your credit union, at 6 percent APR. Which deal is cheap
> Suppose that Lil John Industries’ equity is currently selling for $37 per share and that there are 2 million shares outstanding. If the firm also has 30 thousand bonds outstanding, which are selling at 103 percent of par, what are the firm’s current capi
> To borrow $700, you are offered an add-on interest loan at 9 percent with 12 monthly payments. First, compute the 12 equal payments and then compute the EAR of the loan:
> To borrow $2,000, you are offered an add-on interest loan at 10 percent with 12 monthly payments. First, compute the 12 equal payments and then compute the EAR of the loan:
> Given a 9 percent interest rate, compute the year 6 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respectively, and a withdrawal of $600 is made in year 5.
> Would you expect a utility company to have high or low debt levels? Why?
> If we observe a 1-year Treasury security rate that is higher than the 2-year Treasury security rate, what can we infer about the 1-year rate expected one year from now?
> What is a forward interest rate?
> What should happen to a security’s equilibrium interest rate as the security’s liquidity risk increases?
> What are six factors that determine the nominal interest rate on a security?
> Discuss and compare the three explanations for the shape of the yield curve.
> What factors cause the demand for funds curve to shift?
> At your discount brokerage firm, it costs $7.95 per stock trade. How much money do you need to buy 200 shares of Pfizer, Inc. (PFE), which trades at $31.40?
> What factors cause the supply of funds curve to shift?
> Who are the demanders of loanable funds?
> Who are the suppliers of loanable funds?
> How do FIs alleviate the problem of liquidity risk faced by investors wishing to invest in securities of corporations?
> If the U.S. government completely eliminated taxation at the corporate level, how would this influence the capital structures of firms in a world with bankruptcy?
> The capital budgeting decision techniques that we’ve discussed all have strengths and weaknesses, but they do comprise the most popular rules for valuing projects. Valuing entire businesses, on the other hand, requires that some adjustm
> How do FIs reduce monitoring costs associated with the flow of funds from fund suppliers to fund users?
> Why would a world limited to the direct transfer of funds from suppliers of funds to users of funds likely result in quite low levels of fund flows?
> How would economic transactions between suppliers of funds (e.g., households) and users of funds (e.g., corporations) occur in a world without FIs?
> What are the different types of financial institutions? Include a description of the main services offered by each.
> Classify the following financial instruments as money market securities or capital market securities:
> Classify the following transactions as taking place in the primary or secondary markets:
> Are the unbiased expectations and liquidity premium theories explanations for the shape of the yield curve completely independent theories? Explain why or why not.
> A particular security’s default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 percent. The security’s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85
> Assume the current interest rate on a 1-year Treasury bond (1R1) is 4.50 percent, the current rate on a 2-year Treasury bond (1R2) is 5.25 percent, and the current rate on a 3-year Treasury bond (1R3) is 6.50 percent. If the unbiased expectations theory
> The Wall Street Journal reports that the rate on 3-year Treasury securities is 1.20 percent and the rate on 5-year Treasury securities is 2.15 percent. According to the unbiased expectations theories, what does the market expect the 2-year Treasury rate
> Explain why, in a world with both corporate taxes and the chance of bankruptcy, a small firm with volatile EBIT is unlikely to have much debt.
> Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year−E(2r1)−to be 4 percent, and the expected 1-year rate the following year−E(3r1)−to be 6 percent. If the unbiased expectations theory of the term
> The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 2.25 percent and on 20-year Treasury bonds is 4.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10- year Treasury bond purchase
> The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 1.85 percent and on 10-year Treasury bonds is 3.35 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5- year Treasury bond purchased
> On March 5, 2013, the Dow Jones Industrial Average set a new high. The index closed at 14,253.77, which was up 125.95 that day. What was the return (in percent) of the stock market that day?
> The Wall Street Journal reports that the current rate on 8-year Treasury bonds is 5.85 percent, on 15-year Treasury bonds is 6.25 percent, and on a 15-year corporate bond issued by MHM Corp. is 7.35 percent. Assume that the maturity risk premium is zero.
> The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 7.25 percent, on 20-year Treasury bonds is 7.85 percent, and on a 20-year corporate bond issued by MHM Corp. is 8.75 percent. Assume that the maturity risk premium is zero
> You note the following yield curve in The Wall Street Journal. According to the unbiased expectations theory, what is the 1-year forward rate for the period beginning one year from today, 2f1? Maturity Yield One day……………… …………...2.00% One year………
> Suppose we observe the following rates: 1R1 = 0.75%, 1R2 = 1.20%, and E(2r1) = 0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?
> The Wall Street Journal reports that the rate on 3-year Treasury securities is 5.25 percent and the rate on 4-year Treasury securities is 5.50 percent. The 1-year interest rate expected in three years is, E(4r1), 6.10 percent. According to the liquidity
> The Wall Street Journal reports that the rate on 4-year Treasury securities is 1.60 percent and the rate on 5-year Treasury securities is 2.15 percent. According to the unbiased expectations theories, what does the market expect the 1-year Treasury rate
> Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year interest rate expected one year from now, E(2r1)?
> Suppose you were the financial manager for a firm and were considering a proposed increase in the amount of debt in the firm’s capital structure. If you thought the firm was going to consistently earn a level of EBIT above its break-even level of EBIT (b
> Nikki G’s Corporation’s 10- year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next ten years. The liquidity ris
> Tom and Sue’s Flowers, Inc.’s, 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation premium is 2.25 percent annually and the real risk-free rate is expected to be 3.50 percent annually over the next 15 years. The default
> A fast growing firm recently paid a dividend of $0.40 per share. The dividend is expected to increase at a 25 percent rate for the next four years. Afterwards, a more stable 11 percent growth rate can be assumed. If a 12.5 percent discount rate is approp
> One-year Treasury bills currently earn 2.25 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.45 percent and that two years from now, 1-year Treasury bill rates will increase to 2.95 percent. The liquidity premium
> One-year Treasury bills currently earn 3.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.65 percent. The liquidity premium on 2-year securities is 0.05 percent. If the liquidity premium theory is correct, what
> One-year Treasury bills currently earn 2.15 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.65 percent and that two years from now, 1-year Treasury bill rates will increase to 3.05 percent. If the unbiased expect
> One-year Treasury bills currently earn 1.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 1.65 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securitie
> A 2-year Treasury security currently earns 1.94 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.50 percent per year. Calculate the maturity risk premium on th
> Dakota Corporation 15-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.50 percent. The security’s liquidity risk premium is 0.25 percent and maturi
> You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.25 percent. Your broker has determined the following informat
> On March 11, 20XX, the existing or current (spot) 1-, 2-, 3-, and 4-year zero-coupon Treasury security rates were as follows:
> If an investor wanted to reduce the risk of a levered stock in their portfolio, how could they go about doing so while still retaining shares in the company?
> Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:
> A fast growing firm recently paid a dividend of $0.35 per share. The dividend is expected to increase at a 20 percent rate for the next three years. Afterwards, a more stable 12 percent growth rate can be assumed. If a 13 percent discount rate is appropr
> Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 = 0.65% E(2r1) = 1.75% L2 = 0.05% E(3r1) = 1.85% L3 = 0.10% E(4r1) = 2.15% L4 = 0.12%
> Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
> Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
> A recent edition of The Wall Street Journal reported interest rates of 1.25 percent, 1.60 percent, 1.98 percent, and 2.25 percent for 3-year, 4-year, 5-year, and 6-year Treasury security yields, respectively, According to the unbiased expectation theory
> From discussions with your broker, you have determined that the expected inflation premium is 1.35 percent next year, 1.50 percent in year 2, 1.75 percent in year 3, and 2.00 percent in year 4 and beyond. Further, you expect that real risk-free rates wil
> What is the difference in the trading volume between Treasury bonds and corporate bonds? Give examples and/or evidence.
> Explain why high income and wealthy people are more likely to buy a municipal bond than a corporate bond.
> Explain how a bond’s interest rate can change over time even if interest rates in the economy do not change.
> Why does a Treasury bond offer a lower yield than a corporate bond with the same time to maturity? Could a corporate bond with a different time to maturity offer a lower yield? Explain.
> The average annual return on the S&P 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these ten years?
> Campbell Supper Co. paid a $0.632 dividend per share in 2013, which grew to $0.76 in 2016. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required return is 8.7 percent?
> What is the purpose of computing the equivalent taxable yield of a municipal bond?
> What is the yield to call and why is it important to a bond investor?
> Compare and contrast the advantages and disadvantages of the current yield computation versus yield to maturity calculations.
> All else equal, which bond’s price is more affected by a change in interest rates, a bond with a large coupon or a small coupon? Why?
> All else equal, which bond’s price is more affected by a change in interest rates, a short-term bond or a longer-term bond? Why?
> Describe the differences in interest payments and bond price between a 5 percent coupon bond and a zero coupon bond.
> Provide the definitions of a discount bond and a premium bond. Give examples.
