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Investments 11th Edition Bodie Solutions Manual
Full clear download( no error formatting) at: https://goo.gl/ZyF8LF
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Chapter 2 - Asset Classes and Financial Instruments 2-1
Investments 11th Edition Bodie Solutions Manual Full clear download( no error formatting) at: https://testbanklive.com/download/investments-11th-edition-bodie-solutions-manual/ Investments 11th Edition Bodie Test Bank Full clear download( no error formatting) at: https://testbanklive.com/download/investments-11th-edition-bodie-test- bank/
CHAPTER 2: ASSET CLASSES AND FINANCIAL INSTRUMENTS
PROBLEM SETS
1. Preferred stock is like long-term debt in that it typically promises 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 set off corporate bankruptcy. With respect to the priority of claims to the assets 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 securities are called
cash equivalents
because of their high level of liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice and with very low transaction costs. Examples of money market securities include Treasury bills, commercial paper, and banker's acceptances, each of which is highly marketable and traded in the secondary market. 3. (a) A repurchase agreement is an agreement whereby the seller of a security agrees to
“re
purchase
”
it from the buyer on an agreed upon date at an agreed upon price. Repos are typically used by securities dealers as a means for obtaining funds to purchase securities. 4. Spreads between risky commercial paper and risk-free government securities will widen. Deterioration of the economy increases the likelihood of default on commercial paper, making them more risky. Investors will demand a greater premium on all risky debt securities, not just commercial paper.
Chapter 2 - Asset Classes and Financial Instruments 2-2
5. Corp. Bonds Preferred Stock Common Stock Voting rights (typically) Yes contractual obligation Yes Perpetual payments Yes Yes Accumulated dividends Yes Fixed payments (typically) Yes Yes Payment preference First Second Third
Chapter 2 - Asset Classes and Financial Instruments 2-3
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 securities. 7. a. You would have to pay the ask price of: 111.8203% of par value of $1,000 = $1118.203 b. The coupon rate is 3.125% implying coupon payments of $31.25 annually or, more precisely, $15.625 semiannually. c. The yield to maturity on a fixed income security 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 case, the yield to maturity is 2.496%. An investor buying this security today and holding it until it matures will earn an annual return of 2.496%. 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 securities that mature for $10,000. Therefore, a specific T- bill price is simply the maturity value divided by one plus the semi-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 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/$142.97 = 34.97 shares. Since it is not possible to trade in fractions of shares, you could buy 34 shares of GD. b. Your annual dividend income would be: 34
×
$3.04 = $103.36 c. The price-to-earnings ratio is 15.39 and the price is $142.97. Therefore: $142.97/Earnings per share = 15.39
⇒
Earnings per share = $9.29 d. General Dynamics closed today at $142.97, which was $0.47 lower than yesterday
’
s price of $143.44.
Chapter 2 - Asset Classes and Financial Instruments 2-4
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 absence of a split, Stock C would sell for 110, so the value of the index would be: (95+45+110)/3 = 250/3 = 83.333 with a divisor of 3. After the split, stock C sells 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 case after one of the firms in an index splits its shares. c. The return is zero. The index remains unchanged because the return for each stock separately 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:
r
A
= (95/90)
–
1 = 0.0556
r
B
= (45/50)
–
1 =
–
0.10
r
C
= (110/100)
–
1 = 0.10 The equally weighted average is: [0.0556 + (-0.10) + 0.10]/3 = 0.0185 = 1.85% 13. The after-tax yield on the corporate bonds is: 0.09
×
(1
–
0.30) = 0.063 = 6.30% Therefore, municipals must offer a yield to maturity of at least 6.30%. 14. Equation (2.2) shows that the equivalent taxable yield is:
r
=
r
m
/(1
–
t
), so simply substitute each tax rate in the denominator to obtain the following: a. 4.00% b. 4.44% c. 5.00% d. 5.71%

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