Solutions_Homework1

# Solutions_Homework1 - Ch 1 7 a The bank loan is a financial...

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Ch 1 7. a. The bank loan is a financial liability for Lanni. (Lanni's IOU is the bank's financial asset.) The cash Lanni receives is a financial asset. The new financial asset created is Lanni's promissory note (that is, Lanni’s IOU to the bank). b. Lanni transfers financial assets (cash) to the software developers. In return, Lanni gets a real asset, the completed software. No financial assets are created or destroyed; cash is simply transferred from one party to another. c. Lanni gives the real asset (the software) to Microsoft in exchange for a financial asset, 1,500 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new financial assets. d. Lanni exchanges one financial asset (1,500 shares of stock) for another (\$120,000). Lanni gives a financial asset (\$50,000 cash) to the bank and gets back another financial asset (its IOU). The loan is "destroyed" in the transaction, since it is retired when paid off and no longer exists. 9. For commercial banks, the ratio is: \$140.1/\$11,895.1 = 0.0118 For non-financial firms, the ratio is: \$12,538/\$26,572 = 0.4719 The difference should be expected primarily because the bulk of the business of financial institutions is to make loans; which are financial assets for financial institutions. Ch 2 11. 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 = 83.333 The rate of return is: (83.333/80) - 1 = 4.17% b. In the absence of a split, Stock C would sell for 110, so the value of the index would be: 250/3 = 83.333 After the split, Stock C sells for 55. Therefore, we need to find the divisor (d) such that: 83.333 = (95 + 45 + 55)/d d = 2.340 c. The return is zero. The index remains unchanged because the return for each stock separately equals zero. 12. 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 Rate of return = (\$40,500/\$39,000) – 1 = 3.85% b. The return on each stock is as follows:

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r A = (95/90) – 1 = 0.0556 r B = (45/50) – 1 = –0.10 r C = (110/100) – 1 = 0.10 The equally-weighted average is: [0.0556 + (-0.10) + 0.10]/3 = 0.0185 = 1.85% 13. The after-tax yield on the corporate bonds is: 0.09 × (1 – 0.30) = 0.0630 = 6.30% Therefore, municipals must offer at least 6.30% yields. 14. Equation (2.2) shows that the equivalent taxable yield is: r = r m /(1 – t) a. 4.00% b. 4.44% c. 5.00% d. 5.71% CFA PROBLEMS 1. (d) 2. The equivalent taxable yield is: 6.75%/(1 - 0.34) = 10.23% 3. (a) Writing a call entails unlimited potential losses as the stock price rises. 4. a. The taxable bond. With a zero tax bracket, the after-tax yield for the taxable bond is the same as the before-tax yield (5%), which is greater than the yield on the municipal bond.
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