Essentials of Investments (BKM 7
th
Ed.)
Answers to Suggested Problems – Lecture 1
Chapter 2:
8.
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 = 83.3333
The rate of return is: (83.3333/80) – 1 = 4.167%
b.
In the absence of a split, stock C would sell for 110, and the value of the index
would be: (95 + 45 + 110)/3 = 83.3333
After the split, stock C sells at 55.
Therefore, we need to set the divisor (D) such
that:
83.3333 = (95 + 45 + 55)/D
or
D = 2.340
c.
The rate of return is zero.
The index remains unchanged, as it should, since the
return on each stock equals zero.
9.
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
The return on the value-weighted index equals:
(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 return on the equally-weighted index equals:
[0.0556 + (-0.10) + 0.10]/3 = 0.0185 = 1.85%
10.
The after-tax yield on the corporate bonds is: [0.09 x (1 – 0.30)] = 0.0630 = 6.30%
Therefore, municipal bonds must offer a yield of at least 6.30%.
12.
The equivalent taxable yield (r) is: r = r
m
/(1 – t)
a.
4.00%
b.
4.44%
c.
5.00%
d.
5.71%

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