Chapter02

Chapter02 - Chapter 02 Asset Classes and Financial...

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CHAPTER 2: ASSET CLASSES AND FINANCIAL INVESTMENTS PROBLEM SETS 1. 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. 2. 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. 3. The spread will widen. Deterioration of the economy increases credit risk, that is, the likelihood of default. Investors will demand a greater premium on debt securities subject to default risk. 4. On the day we tried this experiment, 36 of the 50 stocks met this criterion, leading us to conclude that returns on stock investments can be quite volatile. 5. a.You would have to pay the asked price of: 118:31 = 118.96875% of par = $1,189.6875 b. The coupon rate is 11.750% implying coupon payments of $117.50 annually or, more precisely, $58.75 semiannually. c.
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Chapter02 - Chapter 02 Asset Classes and Financial...

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