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financial markets institutions

Questions and Answers of Financial Markets Institutions

Consider a firm with a 9.5 percent growth rate of dividends expected in the future. The current year’s dividend was $1.32. What is the fair present value of the stock if the required return is 13
Paychex Inc. (PAYX) recently paid a $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what return are shareholders expecting? ( LG 3-3 )
Ecolap Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what return are shareholders expecting? ( LG 3-3 )
A stock you are evaluating is expected to experience supernormal growth in dividends of 8 percent over the next six years. Following this period, dividends are expected to grow at a constant rate of
You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.50 in dividends next year. ( LG 3-3 )a. If dividends are expected to grow at a
A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 1.5 percent over the last 15 years and you expect this to continue. ( LG 3-3 )a. If the
Financial analysts forecast Limited Brands (LTD) growth for the future to be 12.5 percent. LTD’s most recent dividend was $0.60. What is the value of Limited Brands’s stock when the required
Financial analysts forecast Safeco Corp. (SAF) growth for the future to be 10 percent. Safeco’s recent dividend was $1.20. What is the value of Safeco stock if the required return is 12 percent? (
A preferred stock from Hecla Mining Co. (HLPRB) pays $3.50 in annual dividends. If the required return on the preferred stock is 6.8 percent, what is the value of the stock? ( LG 3-3 )
A preferred stock from Duquesne Light Company (DQUPRA) pays $2.10 in annual dividends. If the required return on the preferred stock is 5.4 percent, what is the value of the stock? ( LG 3-3 )
Calculate the present value on a stock that pays $5 in dividends per year (with no growth) and has a required rate of return of 10 percent. ( LG 3-3 )
A $1,000 par value bond with seven years left to maturity has a 9 percent coupon rate (paid semiannually) and is selling for $945.80. What is its yield to maturity? ( LG 3-2 )
A $1,000 par value bond with five years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5 percent yield to maturity. If interest rates
Repeat parts (a) through (c) of Problem 13 using a required rate of return on the bond of 11 percent. What do your calculations imply about the relation between time to maturity and bond price
Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of $1,000, and a required rate of return of 8 percent. ( LG 3-5
Repeat parts (a) through (c) of Problem 11 using a required rate of return on the bond of 8 percent. What do your calculations imply about the relation between the coupon rates and bond price
Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return
Calculate the yield to maturity on the following bonds. ( LG 3-2 )a. A 9 percent coupon (paid semiannually) bond, with a $1,000 face value and 15 years remaining to maturity. The bond is selling at
A bond you are evaluating has a 10 percent coupon rate (compounded semiannually), a $1,000 face value, and is 10 years from maturity. ( LG 3-4 )a. If the required rate of return on the bond is 6
You have just been offered a bond for $863.73. The coupon rate is 8 percent payable annually, and interest rates on new issues with the same degree of risk are 10 percent. You want to know how many
BSW Corporation has a bond issue outstanding with an annual coupon rate of 7 percent paid quarterly and four years remaining until maturity. The par value of the bond is $1,000. Determine the fair
e cel x Using a Spreadsheet to Calculate Yield to Maturity. What is the yield to maturity on the following bonds; all have a maturity of 10 years, a face value of $1,000, and a coupon rate of 9
A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000 sells for $1,100. What is the bond’s yield to maturity? ( LG 3-2 )
e cel x Using a Spreadsheet to Calculate Bond Values. What is the value of a $1,000 bond with a 12-year maturity and an 8 percent coupon rate (paid semiannually) if the required return is 5
Johnson Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9
You expect to hold the bond for three more years, then sell it for $990. If the bond is expected to continue paying $75 per year over the next three years, what is the expected rate of return on the
Refer again to the bond information in Problem
You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return
How is duration related to the interest elasticity of a fixedincome security? What is the relationship between duration and the price of a fixed-income security?
What is the economic meaning of duration? ( LG 3-8 )
For each of the following situations, identify whether a bond would be considered a premium bond, a discount bond, or a par bond. ( LG 3-2 )a. A bond’s current market price is greater than its face
Note that the last annuity payment occurs on the last day of the investment horizon.Thus, it earns no interest (i.e., the future value interest factor takes a power of zero).Similarly, the first
The ultimate of compounding periods is instantaneous, or continuous, compounding over the investment horizon (period). In this case the present value formula becomes:PV = FVt [1/(1 + r/∞)]n∞ =
The time value of money concept is a topic that finance students probably studied in introductory financial management courses. However, an understanding of its use in the valuation of financial
This formula focuses on solving for one-year rates only. However, practitioners construct the entire implied future yield curve. The general formula that allows solving for forward rates beyond the
In general, the price and yield on a bond are inversely related. Thus, as the price of a bond falls (becomes cheaper), the demand for the bond will rise. This is the same as saying that as the yield
That is, E(4r1) > E(3r1) > E(2r1) > 1R1.
As we discuss in Chapter 3, only debt securities have an identifiable maturity date; equity securities do not.
As will be discussed in Chapter 3, the yield to maturity is the return the bond holder will earn on the bond if he or she buys the bond at its current market price, receives all coupon and principal
Calculate the percentage change in the U.S. national debt since May 4, 2016.
If an ounce of gold, valued at $1,200, increases at a rate of 7.5 percent per year, how long will it take to be valued at $2,000? (LG 2-9)
Compute the present values of the following first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period: (LG 2-9)
Compute the future values of the following first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period: (LG 2-9)page 57
Calculate the future value of the following annuity streams: (LG 2-9)a. $5,000 received each year for five years on the last day of each year if your investments pay 6 percent compounded annually.b.
Calculate the present value of the following annuity streams: (LG 2-9)a. $5,000 received each year for five years on the last day of each year if your investments pay 6 percent compounded annually.b.
Calculate the future value in five years of $5,000 received today if your investments paya. 6 percent compounded annuallyb. 8 percent compounded annuallyc. 10 percent compounded annuallyd. 10 percent
Calculate the present value of $5,000 received five years from today if your investments paya. 6 percent compounded annuallyb. 8 percent compounded annuallyc. 10 percent compounded annuallyd. 10
A recent edition of The Wall Street Journal reported interest rates of 6 percent, 6.35 percent, 6.65 percent, and 6.75 percent for three-year, four-year, five-year, and six-year Treasury notes,
You note the following yield curve in The Wall Street Journal.According to the unbiased expectations theory, what is the one-year forward rate for the period beginning two years from today, 3f1? (LG
If you note the following yield curve in The Wall Street Journal, what is the one-year forward rate for the period beginning one year from today, 2f1 according to the unbiased expectations theory?
The Wall Street Journal reports that the rate on three-year Treasury securities is 5.25 percent and the rate on four-year Treasury securities is 5.50 percent. The one-year interest rate expected in
Suppose we observe the following rates: 1R1 = 10%, 1R2 = 14%, and E(2r1) = 18%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year
Based on economists’ forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:page 56 1R1 = 5.65%E(2R1) = 6.75% L2 =
A recent edition of The Wall Street Journal reported interest rates of 2.25 percent, 2.60 percent, 2.98 percent, and 3.25 percent for threeyear, four-year, five-year, and six-year Treasury notes,
The Wall Street Journal reports that the rate on four-year Treasury securities is 5.60 percent and the rate on five-year Treasury securities is 6.15 percent. According to the unbiased expectations
Suppose we observe the three-year Treasury security rate to be 12 percent, the expected one-year rate next year—E(2r1)—to be 8 percent, and the expected one-year rate the following
One-year Treasury bills currently earn 3.45 percent. You expect that one year from now, one-year Treasury bill rates will increase to 3.65 percent. If the unbiased expectations theory is correct,
Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:1R1 = 6%, E(2r1) =
Nikki G’s Corporation’s 10-year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10
Tom and Sue’s Flowers Inc.’s 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation premium is 2.25 percent annually and the real risk-free rate is expected to be
A two-year Treasury security currently earns 1.94 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.50
Dakota Corporation 15-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation premium is 1.75 percent and the real risk-free rate is 3.50 percent. The
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.25
A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real riskfree rate is 3.5 percent. The security’s liquidity
What is the relationship between present values and interest rates as interest rates increase? (LG 2-9)
What is a forward interest rate? (LG 2-8)
Discuss and compare the three explanations for the shape of the yield curve. (LG 2-7)
What should happen to a security’s nominal interest rate as the security’s liquidity risk increases? (LG 2-6)
What are six factors that determine the nominal interest rate on a security? (LG 2-6)
What factors cause the supply of funds curve to shift? (LG 2-4)page 55
Who are the lead arrangers of secondary loan market trading, and what percentage of the total market does each one possess?
What is the percentage of distressed versus par secondary loan market volume?
How has the dollar volume of secondary market loan market trading changed since 2010, as reported in Figure 24-1?
Calculate the value of (a) the mortgage pool and (b) the GNMA pass-through security in Problem 8 if market inter- est rates increase 50 basis points. Assume no prepayments. (LG 24-4)
Consider a GNMA mortgage pool with principal of $20 million. The maturity is 30 years with a monthly mortgage payment of 10 percent per year. Assume no prepayments. (LG 24-4)a. What is the monthly
What is the impact on GNMA pricing if a pass-through is not fully amortized? What is the present value of a $10 million pool of 15-year mortgages with an 8.5 percent per year monthly mortgage coupon
Assume an FI originates a pool of short-term real estate loans worth $20 million with maturities of five years and paying interest rates of 9 percent (paid annually). (LG 24-4)a. What is the average
Consider $200 million of 30-year mortgages with a coupon of 10 percent paid quarterly. (LG 24-4)a. What is the quarterly mortgage payment?b. What are the interest repayments over the first year of
An FI is planning to issue $100 million in BB-rated com- mercial loans. It will finance all of it by issuing demand deposits. (LG 24-2)a. What is the minimum capital required if there are no reserve
An FI is planning the purchase of a $5 million loan to raise the existing average duration of its assets from 3.5 years to 5 years. It currently has total assets worth $20 million, $5 million in cash
City Bank has made a 10-year, $2 million loan that pays annual interest of 10 percent per year. The principal is expected at maturity. (LG 24-2)a. What should it expect to receive from the sale of
A bank has made a three-year, $10 million dollar loan that pays annual interest of 8 percent. The principal is due at the end of the third year. (LG 24-2)a. The bank is willing to sell this loan with
Why do buyers of class C tranches of collateralized mort- gage obligations (CMOS) demand a lower return than pur- chasers of class A tranches? (LG 24-4)
How do Fls use securitization to manage their interest rate, credit, and liquidity risks? (LG 24-4)
What are the differences between CMOs and MBBS? (LG 24-4)
How do loan sales and securitization help an FI manage its interest rate and liquidity risk exposures? (LG 24-4)
How will a move toward market value accounting affect the market for loan sales? (LG 24-3)
What role do reserve requirements play in the decision to sell a loan with or without recourse? (LG 24-3)
What are the three levels of regulatory taxes faced by Fis when making loans? How does securitization reduce the levels of taxation? (LG 24-3)
Who are the buyers and sellers of U.S. loans? Why do they participate in this activity? (LG 24-2)
What is the difference between loan participations and loan assignments? (LG 24-2)
Why are yields higher on loan sales than they are for similar maturity and issue size commercial paper issues? (LG 24-2)
What are some of the key features of short-term loan sales? (LG 24-2)
What is the difference between loans sold with recourse and without recourse from the perspective of both sellers and buyers? (LG 24-1)
Why have Fls been very active in loan securitization issuance of pass-through securities while they have reduced their volume of loan sales? Under what circumstances would you expect loan sales to
Calculate the spread between the prime rate and CD rate since early 2010. How has the spread changed over the last several years?
How have prime rates and CD rates changed since early 2010, as reported in Figure 22-1?
Use the following balance sheet information to answer this question. (LG 22-3) T-bills T-notes T-bonds Loans Deposits Federal funds Equity Balance Sheet ($ thousands) and Duration (in years) Duration
An insurance company issued a $90 million one-year, zero- coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year) and used the proceeds plus $10 million in equity
Use the data provided for Gotbucks Bank, Inc., to answer this question. (LG 22-3) Gotbucks Bank, Inc. (in $ millions) Assets Liabilities and Equity Cash $ 30 Core deposits $ 20 Federal funds 20

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