Chapter Questions
In what ways is preferred stock like long-term debt? In what ways is it like equity?
Why are money market securities often called "cash equivalents"?
Which of the following correctly describes a repurchase agreement?a. The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.b. The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price.c. The purchase of a security with a commitment to purchase more of the same security at a specified future date.
What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?
What are the key differences between common stock, preferred stock, and corporate bonds?
Why are high-tax-bracket investors more inclined to invest in municipal bonds than low-bracket investors?
Turn back to Figure 2.3 and look at the Treasury bond maturing in November 2040.a. How much would you have to pay to purchase one of these bonds?b. What is its coupon rate?c. What is the yield to maturity of the bond?
Suppose investors can earn a return of $2 \%$ per 6 months on a Treasury note with 6 months remaining until maturity. What price would you expect a 6 -month-maturity Treasury bill to sell for?
Find the after-tax return to a corporation that buys a share of preferred stock at $$\$ 40$$, sells it at year-end at $$\$ 40$$, and receives a $$\$ 4$$ year-end dividend. The firm is in the $21 \%$ tax bracket.
Turn to Figure 2.8 and look at the listing for Honcywell.a. How many shares can you buy for $$\$ 5,000$$ ?b. What would be your annual dividend income from those shares?c. What must be Honcywell's earnings per share?d. What was the firm's closing price on the day before the listing?
Consider the three stocks in the following table. $P_t$ represents price at time $t$, and $Q_t$ represents shares outstanding at time $t$. Stock C splits two for one in the last period.$$\begin{array}{rrrrrrr} & P_0 & Q_0 & P_1 & Q_1 & P_2 & Q_2 \\\hline \text { A } & 90 & 100 & 95 & 100 & 95 & 100 \\B & 50 & 200 & 45 & 200 & 45 & 200 \\\text { C } & 100 & 200 & 110 & 200 & 55 & 400\end{array}$$a. Calculate the rate of return on a price-weighted index of the three stocks for the first period $(t=0$ to $t=1)$.b. What must happen to the divisor for the price-weighted index in year 2 ?c. Calculate the rate of return for the second period ( $t=1$ to $t=2$ ).
Using the data in the previous problem, calculate the first-period rates of return on the following indexes of the three stocks:a. A market-value-weighted index.b. An equally weighted index.
What would happen to the divisor of the Dow Jones Industrial Average if FedEx, with a current price of around $$\$ 300$$ per share, replaced Intel, with a current price of about $$\$ 55$$ per share?
An investor is in a $30 \%$ combined federal plus state tax bracket. If corporate bonds offer $6 \%$ yields, what yield must municipals offer for the investor to prefer them to corporate bonds?
Find the equivalemt taxable yield of a short-term municipal bond with a yield of $4 \%$ for tax brackets of (a) zero, (b) $10 \%$, (c) $20 \%$, and (d) $30 \%$.
What problems would confront a mutual fund trying to create an index fund tied to an equally weighted index of a broad stock market?
Which security should sell at a greater price?a. A 10 -year Treasury bond with a $4 \%$ coupon rate versus a 10 -year T-bond with a $5 \%$ coupon.b. A 3-month expiration call option with an exercise price of $$\$ 40$$ versus a 3-month call on the same stock with an exercise price of $$\$ 35$$.c. A put option on a stock selling at $$\$ 50$$ or a put option on another stock selling at $$\$ 60$$ (all other relevant features of the stocks and options may be assumed to be identical).
Look at the futures listings for the corn contract in Table 2.7. Suppose you buy one contract for December 2022 dellivery. If the contract closes in December at a level of $$\$ 5.03$$, what will your profit be?
Turn back to Table 2.6 and look at the Microsoft options. Suppose you buy an August expiration call option with exercise price $$\$ 285$$.a. Suppose the stock price in August is $$\$ 288$$. Will you exercise your call? What is the profit on your position?b. What if you had bought the August call with exercise price $$\$ 280$$ ?c. What if you had bought a August put with exercise price $$\$ 280$$ ?
Why do call options with exercise prices greater than the price of the underlying stock sell for positive prices?
Both a call and a put currently are traded on stock XYZ; both have strike prices of $$\$ 50$$ and expirations of 6 months. What will be the profit to an investor who buys the call for $$\$ 4$$ in the following scenarios for stock prices in 6 months? What will be the profit in each scenario to an investor who buys the put for $$\$ 6$$ ?a. $$\$ 40$$b. $$\$ 45$$c. $$\$ 50$$d. $$\$ 55$$e. $$\$ 60$$
Explain the difference between a put option and a short position in a futures contract.
Explain the difference between a call option and a long position in a futures contract.