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Unformatted text preview: ANSWERS TO END-OF-CHAPTER QUESTIONS 2-1. Indirect investing involves the purchase and sale of investment company shares. Since investment companies hold portfolios of securities, an investor owning investment company shares indirectly owns a pro-rata share of a portfolio of securities. 2-2. Treasury bills are auctioned weekly in a bid process. Bills are sold at less than face value (a discount) and redeemed at maturity for the face value, with this spread constituting an investor’s return. The greater the discount (the smaller the price paid for the bills), the larger the return. 2-3. Negotiable certificates of deposit (CDs) are marketable deposit liabilities of the issuing bank that pay a stated interest rate and are redeemable from the issuer at maturity by the holder. The minimum deposit is $100,000. Because they are negotiable, they can be sold in the open market before maturity. Non-marketable certificates of deposit are sold by banks and other institutions. Penalties may exist for early withdrawal of funds remains in effect. Most importantly, these CDs are nonnegotiable. The owner (purchaser) must deal directly with the issuing institution. 2-4. Bonds are issued by the federal government, federal government agencies, municipalities, and corporations. The last two are the most risky. If one has to be chosen as the most risky, it presumably would be corporates since general obligation municipals (as opposed to revenue bonds) are backed by the taxing power of the issuer. 2-5. Fannie Maes are issued by the Federal National Mortgage Association, a government- sponsored agency which is actually a privately owned corporation traded on the NYSE. In September, 2008, the government seized control of Fannie Mae and Freddie Mac, placing them in a government conservatorship, somewhat similar to a bankruptcy reorganization. These securities are much more risky now than before the crisis of 2008. Ginnie Maes are issued by the Government National Mortgage Association, a wholly- owned government agency issuing fully-backed securities. Ginnie Mae is known for its pass-through certificates, where both principal and interest are passed through monthly to the certificate holders. 2-6. The two basic types of municipals are general obligation bonds , which are backed by the “full faith and credit” of the issuer, and revenue bonds , which are repaid from the revenues generated by the project they were sold to finance. 2-7. As a result of mortgage refinancings, investors in Ginnie Maes face the risk that...
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- Spring '11