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Unformatted text preview: wn in the financial pages is an APR calculated by doubling the semiannual yield.
Difficulty: Easy
49. Bond market indexes can be difficult to construct because
A . they cannot be based on firms' market values.
B. bonds tend to trade infrequently, making price information difficult to obtain.
C. there are so many different kinds of bonds.
D. prices cannot be obtained for companies that operate in emerging markets.
E. corporations are not required to disclose the details of their bond issues.
Bond trading is often "thin" making prices stale (or not current). Difficulty: Moderate
Short Answer Questions 51. Based on the information given, for a priceweighted index of the three stocks calculate:
a. the rate of return for the first period (t=0 to t=1).
b. the value of the divisor in the second period (t=2). Assume that Stock A had a 21 split during this period.
c. the rate of return for the second period (t=1 to t=2).
A. T he priceweighted index at time 0 is (70 + 85 + 105)/3 = 86.67. T he priceweighted index at time 1 is (72 + 81 + 98)/3 = 83.67. T he return on the index is 83.67/86.67  1 = 3.46%.
B. T he divisor must change to reflect the stock split. Because nothing else fundamentally changed, the value of the index should remain 83.67. So the new divisor is (36 + 81 + 98)/83.67 = 2.57. T he index value is (36 + 81 + 98)/2.57 = 83.67.
C. T he rate of return for the second period is 83.67/83.67  1 = 0.00%
Difficulty: Difficult
52. Based on the information given for the three stocks, calculate the firstperiod rates of return (from t=0 to t=1) on
a. a marketvalueweighted index.
b. an equallyweighted index.
A. T he total market value at time 0 is $70 * 200 + $85 * 500 + $105 * 300 = $88,000. T he total market value at time 1 is $72 * 200 + $81 * 500 + $98 * 300 = $84,300. T he return is $84,300/$88,000  1 = 4.20%.
B. T he return on Stock A for the first period is $72/$70  1 = 2.86%. T he return on Stock B for the first period is $81/$85  1 = 4.71%. T he return on Stock C for the first period is $98/$105  1 = 6.67%. T he return on an equally weighted index of the three stocks is (2.86%  4.71%  6.67%)/3 = 2.84%. Difficulty: Difficult Multiple Choice Questions Difficulty: Moderate
54. In order for you to be indifferent between the after tax returns on a corporate bond paying 7% and a taxexempt municipal bond paying 5.5%, what would your tax bracket need to be?
A . 22.6%
B. 21.4%
C. 26.2%
D. 19.8%
E. Cannot tell from the information given
.055 = .07(1t); (1t) = 0.786; t = .214
Difficulty: Moderate
55. An investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 25% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
A . 6% and 8%
B. 4.5% and 6%
C. 4.5% and 8%
D. 6% and 6%
E. None of the above
rc = 0.08(1  0.25) = 0.06, or 6%; rm = 0.06(1  0) = 6%.
Difficulty: Moderate
56. An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
A . 7.2% and 9.1%
B. 7.2% and 7.735%
C. 6.12% and 7.735%
D. 8.471% and 9.1%
E. None of the above
rc = 0.091(1  0.15) = 0.07735, or 7.735%; rm = 0.072(1  0) = 7.2%. Difficulty: Moderate
_x000C_57. For a taxpayer in the 25% marginal tax bracket, a 20year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of:
A . 7.33%.
B. 10.75%.
C. 5.5%.
D. 4.125%.
E. none of the above.
0.055 = rm(1t); rm = 0.0733
Difficulty: Moderate
60. A call option allows the buyer t...
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This document was uploaded on 02/06/2014.
 Spring '14

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