bkmsol_ch02 - CHAPTER 2: FINANCIAL INSTRUMENTS 1. 2. 3. 4....

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1. (d) 2. (b) [6.75%/(1 - 0.34) = 10.2%] 3. (a) Writing a call entails unlimited potential losses as the stock price rises. 4. a. You would have to pay the asked price of: 112:05 = 112.15625% of par = $1,121.5625 b. The coupon rate is 5.625% implying coupon payments of $56.25 annually or,  more precisely, $28.125 semiannually. c. Current yield = (Annual coupon income/price)  = $56.25/$1,121.5625 = 0.0502 = 5.02% 5. 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. 6. Money market securities are called “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. 7.
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bkmsol_ch02 - CHAPTER 2: FINANCIAL INSTRUMENTS 1. 2. 3. 4....

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