Investments and Portfolio Management BKM 9th solutions

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1、Chapter2-AssetClassesandFinancialInstrumentsCHAPTER2:ASSETCLASSESANDFINANCIALINSTRUMENTSPROBLEMSETS1.Preferredstockislikelong-termdebtinthatittypicallypromisesafixedpaymenteachyear.Inthisway,itisaperpetuity.Preferredstockisalsolikelong-termdebtinthatitdoesnotgivethehol

2、dervotingrightsinthefirm.Preferredstockislikeequityinthatthefirmisundernocontractualobligationtomakethepreferredstockdividendpayments.Failuretomakepaymentsdoesnotsetoffcorporatebankruptcy.Withrespecttothepriorityofclaimstotheassetsofthefirmintheeventofcorporatebankrupt

3、cy,preferredstockhasahigherprioritythancommonequitybutalowerprioritythanbonds.2.Moneymarketsecuritiesarecalled“cashequivalents”becauseoftheirgreatliquidity.Thepricesofmoneymarketsecuritiesareverystable,andtheycanbeconvertedtocash(i.e.,sold)onveryshortnoticeandwithveryl

4、owtransactioncosts.3.(a)Arepurchaseagreementisanagreementwherebythesellerofasecurityagreesto“repurchase”itfromthebuyeronanagreedupondateatanagreeduponprice.Reposaretypicallyusedbysecuritiesdealersasameansforobtainingfundstopurchasesecurities.4.Thespreadwillwiden.Deteri

5、orationoftheeconomyincreasescreditrisk,thatis,thelikelihoodofdefault.Investorswilldemandagreaterpremiumondebtsecuritiessubjecttodefaultrisk.5.Corp.BondsPreferredStockCommonStockVotingRights(Typically)YesContractualObligationYesPerpetualPaymentsYesYesAccumulatedDividend

6、sYesFixedPayments(Typically)YesYesPaymentPreferenceFirstSecondThird6.MunicipalBondinterestistax-exempt.Whenfacinghighermarginaltaxrates,ahigh-incomeinvestorwouldbemoreinclinedtopicktax-exemptsecurities.2-240Chapter2-AssetClassesandFinancialInstruments7.a.Youwouldhaveto

7、paytheaskedpriceof:86:14=86.43750%ofpar=$864.375b.Thecouponrateis3.5%implyingcouponpaymentsof$35.00annuallyor,moreprecisely,$17.50semiannually.c.Currentyield=Annualcouponincome/price=$35.00/$864.375=0.0405=4.05%8.P=$10,000/1.02=$9,803.929.Thetotalbefore-taxincomeis$4.A

8、fterthe70%exclusionforpreferredstockdividends,thetaxableincomeis:0.30´$4=$1.20Therefore,taxesare:0.30´$1.20=$0.36Afte