FINA 3303 Chapter Notes - Chapter 2: Wilshire 5000, Common Stock, Salomon Brothers

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lilacmule890

22 Mar 2016

School

Northeastern University

Department

Finance & Insurance

Course

FINA 3303

Professor

Gary Porter

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Document Summary

The money market is a subsector of the debt market and it consists of very short-term debt securities that are highly marketable. Treasury bills: most marketable of all money market instruments, represent the simplest form of borrowing, government raises money by selling bills to the public, investors buy the bills at a discount from the stated maturity value. Maturities of 4,13,26, or 52 weeks: local and state tax exempt, the ask price is the price you would have to pay to buy a t- Commercial paper: short-term unsecured debt issued by large corporations, maturities range up to 270 days, recently financial firms have issued asset-backed commercial paper. Bankers acceptances: an order to a bank by a customer to pay a sum of money at a future date, maturity usually 6-months, acceptances sell at a discount from the face value of the payment order.

Related Questions

A current account deficit commonly is accompanied by:

a) a financial account deficit and a government budget surplus

b) a financial account deficit and a government budget deficit

c) a financial account surplus and a government budget deficit

d) a financial account surplus and a government budget surplus

In hedging foreign currency receivables, the outcome from a forward position will be identical to the outcome from a money market hedge (also known as a spot transaction hedge) if

a) purchasing power parity holds

b) interest rate parity holds

c) either purchasing power parity or interest rate parity holds

d) both purchasing power parity and interest rate parity hold

An American multinational wants to hedge a euro receivable. Which of the following strategies does

NOT provide a hedge for the euro receivable?

a)buy put options on the euro with strike prices in dollars

b)buy put options on the euro with strike prices in pounds

c) buy call options on the euro with strike prices in pounds

d) buy call options on the euro with strike prices in dollars

In the spot market in New York, $0.80 may be exchanged for one Canadian dollar and $1.60 may be exchanged for one pound sterling. You may assume that bid and ask quotes are the same. If you can only exchange currency in New York, how many Canadian dollars would you receive in exchange for 1 pound sterling?

a) 0.5

b) 1.0

c) 1.6

d) 2.0

Observe the following dealer quotes for the euro in the New York spot market: The bid is $1.30 and the ask is $1.31. The dealer quotes for the euro in the Frankfurt spot market are the following: The bid is $1.28 and the ask is $1.29. Given these quotes, which of the following strategies would you employ to profit from an arbitrage opportunity?

a) Simultaneously buy euro in New York and sell euro in Frankfurt

b) Simultaneously buy euro in Frankfurt and sell euro in New York

c) Buy euro in Frankfurt and wait for euro to appreciate in Frankfurt before selling euro

d) Sell euro in New York and wait for euro to depreciate in New York before buying euro

Question 1.1. Effectively planning your spending and saving decisions provides for: (Points : 2)

A foundation for wise money management today
Will guarantee you a million dollars
Financial prosperity in the future
Both A and B
Both A and C

Question 2.2. The majority of people invest their money to: (Points : 2)

Enhance their current income
Accumulate funds for major expenditures
Save for retirement
Shelter their income from taxes
All of the above

Question 3.3. The federal government regulates securities markets through the: (Points : 2)

Department of Commerce
Federal Reserve System
National Association of Securities Dealers
Securities and Exchange Commission
Federal Securities Agency

Question 4.4. A certified financial planner can provide you with a companyâs ______ describing the firm and the security issue it wishes to sell. (Points : 2)

advertisement
prospectus
underwriting journal
dealer newsletter
None of these

Question 5.5. What investment portfolio is most diversified? (Points : 2)

Equal amounts of stock in IBMÂ®, IntelÂ®, and MicrosoftÂ®
Municipal bonds issued by New York, Houston, and Chicago
One-year, five-year, and ten-year certificates of deposit
100 shares of Wal-Mart stock, an IBM bond, and a two-year certificate of deposit

Question 6.6. What are the returns from shares of stock? (Points : 2)

Stock splits
Capital depreciation
Dividends
The ability to buy bonds

Question 7.7. The total interest that has accumulated after more than one interest period is called: (Points : 2)

Simple interest
Compound interest
Variable interest
Fixed interest

Question 8.8. An investment plan is: (Points : 2)

A statement that states how money is to be invested to obtain a specified goal
A statement that shows how much you owe
A plan to go into debt
A plan to cover your losses

Question 9.9. Ask price is: (Points : 2)

The price you sell a security
The price the security is worth
The price at which one can purchase a security
None of these

Question 10.10. The process of choosing securities from different industries and different risk levels is called: (Points : 2)

Discount broking
Asset Management
Diversification
Compounding
None of these

ceruleankangaroo744

Please can someone help me with this :

Minicase 1

Interest Rates, Bond Yields, and Duration

CONCEPTS IN THIS CASE

simple loans
fixed-payment loans
coupon bonds
present value
yield-to-maturity
current yield
nominal and real interest rates
rate of return
capital gain
interest-rate and reinvestment risk
duration

You have been hired to analyze the debt securities of your organization. The firm has outstanding loans and bonds. A quick review of the balance sheet shows the following:

	Liability Amount ($)	Nominal Interest (coupon) Rate	Years to Maturity
Selected Liabilities of the firm
Simple Loans	800	5%	1
Fixed-Payment Loans	5,000	12%	19
Long-term Bonds #1	500,000	10%	4
Long-term Bonds #2	1,080,000	10%	10
Liabilities Total	1,585,800

Market Price for Bond #1	930.50
Market Price for Bond #2	859.50
Face Value of Each Bond	1,000.00
Selected Current Assets of the firm
Marketable Securities:
Treasury Bills	100,000

Note: Treasury Bills have a $10,000 face value, which matures in one year. Each Treasury Bill has a cost of $9,580.00

How much interest would the firm pay each year on the simple-interest loan?

How much would you write a cheque for to pay off the loan in one year?

What is the monthly payment needed to pay off the fixed-payment loans?

What is the current yield for each bond if the current price is:

$930.50 for Bond #1?

$859.50 for Bond #2?

What is the expected yield to maturity for each bond?

Bond #1 selling for $930.50?

Bond #2 selling for $859.50

What is the rate of capital gain if both bonds sell for $900.00 in one year?

Bond #1 selling for $930.50 today?

Bond #2 selling for $859.50 today?

If the Yield to Maturity expected by investors changes to 11%:

What will be the market price of Bond #1?

What will be the market price for Bond #2?

What will be the dollar change in price for Bond #1?

What will be the dollar change in price for Bond #2?

What will be the percent change in price for Bond #1?

What will be the percent change in price for Bond #2?

Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?

If investors holding our 4-year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity,

What will be the total interest earned on the bond over the next four years?

What will be the face value received at maturity?

Given the following projected income stream for Bond #1:

			Projected Reinvestment Rates
Year	Coupon Interest ($)	Face Value ($)	10%	5%
1	100
2	100		10.00	5.00
3	100		21.00	10.25
4	100	1000	33.10	15.76
Total Income	400	1000	64.10	31.01

What is the total cash available over the next four years to the bond holder earning

10%

15%

What is the average annual rate of return for the bond holder earning

10%

15%

Why does the reinvestment rate affect the annual rate of return for the same bond?

If the expected rate of return on our bonds is 10%, what is the duration of Bond #1?

What is the yield to maturity on the Treasury Bills (a discount bond)?

What is the real rate of interest if the nominal rate is 10% and the inflation rate is 3%?

amethystcrow453

FINA 3303 Chapter Notes - Chapter 2: Wilshire 5000, Common Stock, Salomon Brothers

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