You purchase a 6 percent $10,000 bond for $9,180 plus $156 in accrued interest for a total outlay of $9,336. Subsequently you receive a $300 interest payment. You are in the 20 percent income tax bracket. How much tax do you owe on the interest payment?
> What is the difference between the discount rate and the targeted federal funds rate?
> What differentiates inflation and deflation? If both GDP and unemployment were simultaneously rising, would this period be classified as a recession?
> If interest rates rise, bond prices will fall. Given the following pairs of bonds, indicate which bond’s price will experience the greater price decline. a) Bond A Coupon: 10% Maturity: 5 years Bond B Coupon: 6% Maturity: 5 years b) Bond A Coupon: 10% Ma
> Why is a barbell strategy more flexible than a laddered strategy if an investor anticipates a decline in interest rates?
> What differentiates the term of a bond and its duration? If bond A has a 10 percent coupon while bond B has a 5 percent coupon and they both mature after ten years,which bond has the shorter duration?
> What is the relationship between interest rates and the length of time to maturity? Figures 13.1 through 13.3 give various yield curves for U.S. Treasury securities. What is the current yield curve for U.S. Treasury securities? Possible sources for the a
> What is the yield to call? How does it differ from the yield to maturity?
> Although all bond prices fluctuate, which bond prices tend to fluctuate more?
> Define the current yield and the yield to maturity. How are they different?
> What causes bond prices to fluctuate?
> How do Treasury inflation-indexed securities help the investor manage risk?
> (This problem uses the material in Appendix 14B concerning bond valuation.) Two bonds have the following features: The structure of yields is a) What is the valuation of each security based on the yield to maturity for a five-year bond? b) What is the v
> In the section on the yield to call, a bond pays annual interest of $80 and matures after ten years. The bond is valued at $1,147 if the comparable rate is 6 percent and the bond is held to maturity. If, however, an investor expects the bond to be called
> Portfolio A consists entirely of $1,000 zero coupon bonds that mature in 8, 9, and 10 years. Portfolio B consists of $1,000, 8 percent coupons that mature in 10, 15, and 20 years. a) Based on this information, which portfolio appears to be riskier? Why?
> You own the following $1,000 bonds: Currently the structure of yields is positive so that each bond sells for its par value. However, you expect that inflation will increase and cause interest rates to rise so that the structure of yields becomes inverte
> A ten-year bond with a 9 percent coupon will sell for $1,000 when interest rates are 9 percent. What is the duration of this bond? Using duration to forecast the change in the price of the bond, calculate the difference between the forecasted and the act
> What is the difference between the following? a) The indenture and the trustee b) The coupon rate and the current rate of interest c) Debentures and secured bonds d) A sinking fund and a call feature e) Mortgage bonds and equipment trust certificates f)
> What is the price of each of the following bonds ($1,000 principal) if the current interest rate is 9 percent? b) What is the duration of each bond? c) Rank the bonds in terms of price fluctuations with the least volatile bond first and the most volatil
> Compute the duration for bond C, and rank the bonds on the basis of their price volatility. The current rate of interest is 8 percent, so the prices of bonds A and B are $1,000 and $1,268, respectively. Confirm your ranking by calculating the percentage
> The prices of longer-term bonds are more volatile than the prices of shorter-term bonds with the same coupon. The prices of bonds with smaller coupons are more volatile than bonds with larger coupons for the same term to maturity. However, you cannot com
> You purchase a 7 percent $1,000 bond with a term of ten years and reinvest all interest payments. If interest rates rise to 10 percent after you purchase the bond, what is the return on your investment in the bond?
> Stella’s Dog Biscuits Inc. has outstanding a high-yield bond with the following features: The current interest rate on comparable debt is 8 percent. a) If you expect that interest rates will be 8 percent five years from now, how much w
> An extendable bond has the following features: a) If comparable yields are 12 percent, what will be the price of the bond if investors anticipate that it will be retired after eight years? b) What impact will the expectation that the bond will be retire
> Tinker Spy Corp. has a high-yield junk bond with the following features: The current interest rate on comparable debt is 10 percent. If you expect that the interest rate will be 8 percent five years from now, what is your potential gain or loss if your e
> A bond has the following terms: a) Why do you believe that the terms were constructed as specified? b) What is the bond’s price if comparable debt yields 12 percent? c) What is the bond’s current yield? d) Even thoug
> What is the price of the following split coupon bond if comparable yields are 12 percent? If comparable yields decline to 10 percent, what is the appreciation in the price of the bond? Principal $1,000 Maturity 12 years Annual coupon 0% (S0) for year
> A high-yield bond has the following features: a) If comparable yields are 12 percent, what should be the price of this bond? b) Would you expect the firm to call the bond if yields are 12 percent? c) If comparable yields are 8 percent, what should be t
> When you purchase a bond, why do you have to pay accrued interest?
> Company X has the following bonds outstanding: Initially, both bonds sold at $1,000 with yields to maturity of 8 percent. a) After two years, the interest rate on comparable debt is 10 percent. What should be the price of each bond? b) After two additio
> What should be the prices of the following preferred stocks if comparable securities yield 6 percent, 8 percent, and 10 percent? a) MN Inc., $4 preferred ($100 par). b) CH Inc., $4 preferred ($100 par with the additional requirement that the firm must re
> a) If a preferred stock pays an annual dividend of $6 and investors can earn 10 percent on alternative and comparable investments, what is the maximum price that should be paid for this stock? b) If the preferred stock in part (a) had a call feature and
> a) A stock costs $900 and pays an annual $40 cash dividend. If you expect to sell the stock for $1,000 after five years, what is your anticipated return on the investment? b) A $1,000 bond has a 4 percent coupon and currently sells for $900. The bond mat
> Given the following information: XY Inc. 5% bond AB Inc. 14% bond Both bonds are for $1,000, mature in 20 years, and are rated AAA. a) What should be the current market price of each bond if the interest rate on triple-A bonds is 10 percent? b) Which bon
> A $1,000 zero coupon bond sells for $519 and matures after five years. What is the current yield and the yield to maturity?
> A company has two bonds outstanding. The first matures after five years and has a coupon rate of 8.25 percent. The second matures after ten years and has a coupon rate of 8.25 percent. Interest rates are currently 10 percent. What is the present price of
> A $1,000 bond has a coupon rate of 10 percent and matures after eight years. Interest rates are currently 7 percent. a) What will the price of this bond be if the interest is paid annually? b) What will the price be if investors expect that the bond will
> A $1,000 bond has a coupon rate of 8 percent and matures after ten years. a) What is the current price of the bond if the comparable rate of interest is 8 percent? b) What is the current price of the bond if the comparable rate of interest is 10 percent?
> How is the value of a convertible bond in terms of stock determined? What effect does this conversion value have on the price of the bond?
> You sell a 6 percent $10,000 bond for $9,180 plus $156 in accrued interest for a total of $9,336. Soon thereafter the company makes a $300 interest payment. You are in the 20 percent income tax bracket. a) How much tax do you owe on the interest? b) Comp
> Why is the debt of the federal government considered to be the safest of all possible investments?
> Identify which government securities may be appropriate for the following investors: a) A retired couple seeking income b) An individual in the highest tax bracket seeking a liquid investment c) An individual seeking a government bond for inclusion in an
> If interest rates increase, what should happen to the following? a) The price of a Ginnie Mae bond and the price of a municipal bond b) The payments received from a Ginnie Mae bond and the payments received from a municipal bond Contrast your answers to
> What is a mortgage pass-through bond? What risks are associated with investing in Ginnie Mae bonds? What is the composition of the payment received from a mortgage pass-through bond?
> What is the difference between a term bond issue and a serial bond issue? Why are many capital improvements made by state and local governments financed through serial bonds?
> What are the sources of risk from investing in the following? a) Federal government debt b) Municipal debt
> What is the difference between the following? a) A bond secured by a moral obligation and a bond secured by full faith and credit b) A revenue bond and a general obligation bond Are there any similarities between a bond secured by a moral obligation and
> When interest rates rise, what happens to the price of federal government bonds? What happens to the price of state and local government bonds?
> What distinguishes EE bonds from Treasury bills?
> If a six-month Treasury bill is purchased for $0.9675 on a dollar (i.e., $96,750 for a $100,000 bill), what is the discount yield, the annual rate of interest, and the compound rate? What will these yields be if the discount price falls to $0.94 on a dol
> (This problem is designed to illustrate the potential savings from paying a mortgage off faster. It may be viewed as an illustration of an assured, risk-free return, except that the return is the interest you save instead of interest you earn.)You have a
> You acquire a debt security that is a claim on a mortgage pool (e.g., a Ginnie Mae pass through security). The mortgages pay 9 percent and have an expected life of 20 years. Currently, interest rates are 9 percent, so the cost of the investment is its pa
> As a result of lower interest rates, you are considering refinancing your mortgage. The existing mortgage has a 12 percent interest rate. The balance owed is $50,000, and the remaining term is 18 years, and your annual payment (i.e., interest plus princi
> Determine the annual repayment schedule for the first two years (i.e., interest, principal repayment, and balance owed) for each of the following. (Assume that only one payment is made annually.) Compare the payments required by each mortgage. What concl
> (This problem illustrates the impact of a call feature. Review the material in the previous chapter, if necessary.) In 2005, a brokerage firm offered a tax-exempt 4.5 percent Ocean City, New Jersey, bond that was due in 11 years for a price of $105.30 wi
> (This problem illustrates “riding the yield curve,” which is covered in the appendix to this chapter.) The U.S. Treasury issues a ten-year, zero coupon bond. a) What will be the original issue price if comparable yield
> The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note). The second pays a real yield of 3 percent with the amount of interest being adjusted with changes in
> A six-month $10,000 Treasury bill is selling for $9,844. What is the annual yield according to the discount method? Does this yield understate or overstate the true annual compound yield? Explain.
> You are in the 28 percent federal income tax bracket. A corporate bond offers you 6.8 percent while a tax-exempt bond with the same credit rating and term to maturity offers 4.1 percent. On the basis of taxation, which bond should be preferred? Explain.
> What is the price of the following zero coupon bonds if interest rates are (a) 4 percent, (b) 7 percent, and (c) 10 percent? • Bond A: zero coupon; maturity 5 years • Bond B: zero coupon; maturity 10 years • Bond C: zero coupon; maturity 20 years What
> Molly Matters Inc. issues a split-coupon $1,000 bond that matures in seven years. Interest payments are $80 a year (8 percent) and start after three years have lapsed. The bond initially sells for a discounted price of $794. a) You are in the 30 percent
> An investor in the 35 percent tax bracket may purchase a corporate bond that is rated double B and is traded on the New York Stock Exchange (the bond division). This bond yields 9.0 percent. The investor may also buy a double-B-rated municipal bond with
> An investor is in the 28 percent income tax bracket and can earn 3.3 percent on a nontaxable bond. What is the comparable yield on a taxable bond? If this same investor can earn 5.9 percent on a taxable bond, what must be the yield on a nontaxable bond s
> What differentiates convertible bonds from other bonds?
> Kris Trejo, who recently retired, has come to you for financial help. At the initial consultation, you realized that he is an investor with a very low risk tolerance who wants to increase current income. Trejo has $300,000 invested in certificates of dep
> Fiona Corcoran is responsible for meeting distributions for EEM Health and Life Insurance Company. An actuary, Robert Bjornsund, has forecasted that a specific policy will require $210,000 after ten years. Current interest rates are 8 percent, and RPM Re
> Stephanie Waldron is an aggressive individual whose career as a self-employed management consultant has blossomed. Waldron is both willing and able to bear substantial risk in order to earn a higher return. She is also very independent, preferring to mak
> What advantages do discounted bonds offer to investors? Why may a bond be called if it is selling at a premium?
> What are the holding period and the annualized compounded returns if you buy a zero coupon bond for $519 and it is redeemed after five years for $1,000? Compare the answer to the answer for Problem 5. Data from Problem 5: A $1,000 zero coupon bond sell
> The Sourland Mountain in New Jersey investment club has recently asked you to give a presentation on investing in corporate bonds. Club members have previously invested solely in corporate stocks, but several members have expressed an interest in diversi
> Which Dow Jones Industrial Average stocks would be considered “dogs”? Determine the Dow dogs as of January 1; invest $1,000 in each dog. At the end of a time period such as the semester or year, compare the dogs’ performance with the performance of the D
> What is the impact on GDP if consumer spending increases? Would the answer be different if the consumer spending was directed toward foreign goods?
> Your clients, Eva and Walther Sachs, operate a successful catering business specializing in Germanic and eastern European foods. It is a family business with part-time workers during peak periods. Most of the part-time employees have regular full-time jo
> You are given the following information concerning several mutual funds: During the time period, the Standard & Poor’s stock index exceeded the Treasury bill rate by 10.5 percent (i.e., rm 2 rf 5 10.5%). a) Rank the performance of
> Consider the following four investments. a) You invest $3,000 annually in a mutual fund that earns 10 percent annually, and you reinvest all distributions. How much will you have in the account at the end of 20 years? b) You invest $3,000 annually in a m
> Why does technical analysis receive little support from academically oriented students of investments
> If an investor buys shares in a no-load mutual fund for $31.40 and the share appreciate to $44.60 in a year, what would be the percentage return on the investment? If the fund charges an exit fee of 1 percent, what would be the return on the investment?
> How does the Fed pursue its economic goals? How may the tools of monetary policy affect securities prices?
> What is the Federal Reserve? What are its economic goals?
> What factors, besides the expected rate of inflation, may affect the rate of interest a borrower pays?
> As a portfolio manager, you are required to provide clients with a measure of your performance, a comparison with the market, and a measure of risk. Initially, your portfolio was worth $10 a share. During the last five years, the ending values of the por
> Christina Molitoris is preparing for a meeting of the board of directors of Chesapeake Bay Corporation, a developer of moderate-priced homes and vacation homes in the Chesapeake Bay area. The combination of the location near major metropolitan areas with
> This chapter illustrated the calculation of financial ratios using the financial statements of Chloe’s CoatS, a manufacturer and marketer of clothing. Tinker’s TrouserS also manufactures clothing. Given selected financial data for Tinker&rs
> A firm with earnings before interest and taxes of $500,000 needs $1 million of additional funds. If it issues debt, the bonds will mature after 20 years and pay interest of 8 percent. The firm could issue preferred stock with a dividend rate of 8 percent
> Two firms have sales of $1 million each. Other financial information is as follows: What are the operating profit margins and the net profit margins for these two firms? What is their return on equity? Why are they different? If total assets are the sam
> You have taken the following information from a firm’s financial statements. As an investor in the firm’s debt instruments, you are concerned with its liquidity position and its use of financial leverage. What conclusi
> What is the difference between “support” and “resistance” in technical analysis?
> A company whose stock is selling for $60 has the following balance sheet: / a) Construct a new balance sheet showing the effects of a 3-for-1 stock split. What is the new price of the stock? b) Construct a new balance sheet showing the effects of a 10 p
> A firm has the following items on its balance sheet: Describe how each of these accounts would appear after the following: a) A cash dividend of $1 per share b) 10 percent stock dividend (fair market value of stock is $13 per share) c) A 3-for-1 stock s
> An investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the dividend reinvestment plan. a) If neither the dividend nor the price changes, how many shares will the investor h
> Determine the times-dividend-earned ratio given the following information: 30% corporate income tax rate $10,000 earnings before interest and taxes $2,000 interest owed $2,000 preferred stock dividends
> If a firm has sales of $42,791,000 a year, and the average collection period for the industry is 40 days, what should be this firm’s accounts receivable if the firm is comparable to the industry?
> A firm with sales of $500,000 has average inventory of $200,000. The industry average for inventory turnover is four times a year. What would be the reduction in inventory if this firm were to achieve a turnover comparable to the industry average?
> What is the debt/equity ratio and the debt ratio for a firm with total debt of $700,000 and equity of $300,000?
> You purchased $1,000 of IBM stock at the end of each quarter from 2000 through 2006. Excluding commissions, how many shares have you accumulated? As of January 2010, IBM was selling for $130. What was the position worth in January 2010? (For questions 7
> What is dollar cost averaging? What is averaging down? Why may averaging down result in poor investment decisions? What were the percentage changes for these measures of the stock market in subsequent years? Dow Jones Industrial Average (ADJI) 11,4
> What is dollar cost averaging? What is averaging down? Why may averaging down result in poor investment decisions?
> What is the problem with time lags in technical analysis and why may the analysis lead to self-fulfilling predictions?
> What is the advantage of using a relative rather than an absolute scale to construct graphs of security prices?
> Historically, what rates of return have investors earned on investments in common stocks?
> Why may averaging percentage changes produce an inaccurate measure of the true rate of return?
