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Unformatted text preview: Chapter 02 - Asset Classes and Financial Instruments Chapter 2 Asset Classes and Financial Instruments 1. Taxable equivalent yield = .0675 / (1-.35) = .1038 2. c 3. a. You would have to pay the asked price of: 118:31 = 118.9688% of par = $1,189,688 b. The coupon rate is 11.750%, implying coupon payments of $117.50 annually or, more precisely, $58.75 semiannually. c. Current yield = Annual coupon income/price = 11.75/118.9688= 0.0988 = 9.88% 4. 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. 5. Money market securities are referred to as “cash equivalents” because of their great 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. 6. The total before-tax income is $4. After the 70% exclusion, taxable income is: 0.30 x $4 = $1.20 Therefore: Taxes = 0.30 x $1.20 = $0.36 After-tax income = $4 – $0.36 = $3.64 After-tax rate of return = $3.64 / $40 = 9.10% 2-1 Chapter 02 - Asset Classes and Financial Instruments...
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This note was uploaded on 08/22/2009 for the course FNCE 4330 taught by Professor Jianyang during the Fall '09 term at University of Colorado Denver.
- Fall '09