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business
understanding management

Questions and Answers of Understanding Management

Using the market segmentation theory, explain the impacts on the term structure of interest rates in the following cases:a. Economic recessionb. Economic expansionc. Expansionary open market
Short-Answer Questions:a. What impact would an economic expansion have on default risk premiums?b. What would the discount rate on risky bonds be if the market were risk neutral?c. Explain how the
Given a fully taxable two-year, 8% annual coupon bond with a face value of$1,000 and with annual coupon payments and an identical bond except that it is tax free, what would the yield and price on
In Question 5 the risky bond paid a certain return of $1,000 and was priced to yield a return of 5% and the risky bond had a .75 probability of paying $1,000 and .25 probability of paying $100, for
Given two identical bonds that are priced with the same yields in their markets, explain using supply and demand analysis the adjustments that would take place if events were to occur that would make
Given an economy with two bonds, (1) a one-year, risk-free zero-coupon bond paying a principal of $1,000 and priced at $952.38 to yield 5% and (2) a oneyear risky zero-coupon bond with a .75
Define risk-neutral, risk-averse, and risk-loving markets.
Given two identical bonds that are priced at the same yields in their markets, explain using supply and demand analysis the adjustments that would take place if events were to occur that would make
Using the bond demand and supply model presented in this chapter, explain the impacts of the following cases on the level of interest rates.a. Expansionary open market operationb. Economic
Describe the bond demand and supply model presented in this chapter. Include in your description the definitions of the bond demand and supply curves, the important factors that shift the curves,
Given that current 182-day T-bills are trading at a YTM of 4% and 91-day bills are trading at YTM of 3.75%, what is the implied forward rate on a 91-day T-bill 91 days from now? Explain how you would
Explain how you would lock in the following implied forward rates: f 11, f 21, and f 23.
Bond X is a one-year zero with face value of $1,000 trading at $945 and Bond Y is a two-year zero with a face value of $1,000 trading at $870:a. Determine algebraically the implied forward rate f
Using the geometric mean, show four expressions for the yield to maturity on a four-year bond, YTM4.
Given a one-year zero-coupon bond trading at $100 and promising to pay $106 at maturity and a two-year 6% coupon bond with face value of $100, annual payments, and trading at $96.54:a. Determine the
Given the following spot rates on one-year to four-year zero-coupon bonds:a. What is the equilibrium price of a four-year, 9% coupon bond paying a principal of $100 at maturity and coupons
Given a 10-year, 10% coupon bond with semiannual payments, $1,000 face value, and currently trading at par, calculate the total return for an investor with a five-year horizon date, given the
Suppose A-rated bonds were trading in the market at YTM of 10% on all maturities, and you bought an A-rated, 10-year, 9% coupon bond with face value of $1,000 and annual coupon payments. Suppose that
Bond A is a 10-year, 10% coupon bond with a face value of $1,000 and annual coupon payments. The bond is currently priced at $1,064.18 to yield 9%.a. Define the bond-equivalent yield.b. Explain how
ABC Trust has the following bond portfolio:The coupon bonds in the portfolio all pay coupons annually and all the bond prices are quoted per $100 face value to yield 8%.a. Explain how the bond
A zero-coupon Treasury bill maturing in 150 days is trading at $98 per $100 face value. Determine the following rates for the T-bill:a. Dealer’s annual discount yieldb. YTM (use an actual/365 day
Suppose the 20-year, 7% annual coupon bond in question 14 had a call option giving the issuer the right to buy the bond back after five years at a call price of$1,000. Given the bond is priced at
Using the average rate to maturity (yield approximation formula) approach, estimate the YTM on a 20-year, 7% annual coupon bond, with a face value of$1,000, annual coupon payments, and currently
Define the following rates of return measures:a. Discount yieldb. Interest ratec. Coupon rated. Current yielde. Rate on perpetuityf. Yield to maturity g. Average rate to maturity (yield approximation
Suppose the AIF Company sold a bond with a 10-year maturity, $1,000 principal and an annual 10% coupon paid semiannually. What would be the price of the bond if two years after the bond were issued
Suppose you have an A-rated bond with an 8% annual coupon, face value of$1,000, and due to mature in five years. Presently, the YTM on such bonds is 10%. You expect the Federal Reserve will tighten
Determine the actual prices a dealer would pay (bid) or sell (ask) on the following bonds:a. A Treasury bond with $1,000 face value quoted by a dealer at a bid price of 95-4 per $100 face value and
What would an investor pay for a four-year, 9% annual coupon bond (face value of $1,000 and paying coupons annually) if the bond were trading to yield 10%? What would the investor receive (full
Suppose an investor bought a 10-year, 10% annual coupon bond at par (face value of $1,000 and paying coupons annually) and then sold it 3.5 years later at a yield of 8%. Determine the full price,
Given a 10-year, 8% coupon bond with a face value of $100 and semiannual coupon payments:a. Generate the bond’s price-yield curve using annual yields ranging from 5%to 10% and differing by .5%.b.
Generate the price-yield curve for a zero-coupon bond with a face value of $100 and 260 actual days to maturity using the following annual yields: 4%, 4.25%, 4.5%, 4.75%, 5%, 5.25%, 5.5%, 5.75%, 6%,
Given a two-year, zero-coupon bond with a face value of $100 and trading at a simple annual rate of 10%, determine the bond values given following compounding frequencies:a. Monthlyb. Weeklyc.
Given a five-year, 8% coupon bond with a face value of $1,000 and trading at a simple annual rate of 9%, determine the values and effective annualized rates given the bond has the following payment
Determine the value of a five-year, zero-coupon bond with a face value of $1,000 given it is trading at the following yields: 8%, 6%, and 10%. What are the percentage changes in value when the yield
Given a 10-year, 8% coupon bond with a face value of $1,000 and coupon payments made annually, determine its value for the following yields: 8%, 6%, and 10%. What are the percentage changes in value
Given a five-year, 8% coupon bond with a face value of $1,000 and coupon payments made annually, determine its values given it is trading at the following yields: 8%, 6%, and 10%. Comment on the
Start monitoring several stocks, interest rates, and other market information by downloading MarketBrowser: www.marketbrowser.com.
Explore some of the useful financial information from the following sites:a. www.Finance.Yahoo.comb. www.hoovers.comc. www.bloomberg.comd. www.businessweek.come. www.ici.orgf. http://seekingalpha.com
There are a number of Web sites that provide information on current and historical stock prices of companies, as well as fundamental information.a. The NASDAQ site is a good source for stock
Two important securities laws are the Securities Act of 1933 and the Securities Exchange Act of 1934. Learn more about these acts and others (e.g., Sarbanes-Oxley Act of 2002), as well as the
Brokerage firms provide a number of services. Identify some of those services by going to the Merrill Lynch site: www.ml.com.
Find some current prices of OTC securities by going to www.pinksheets.com.
Learn about the NYSE Euronext by going to www.nyse.com and clicking on“About Us.” At the site, check a stock by going to “Quick Quote” and entering a company’s ticker symbol.
What is the difference between liquidity and marketability?
Define the characteristics of assets.
What is an efficient market? What is an inefficient market?
List some of the major provisions in the securities acts of 1933 and 1934.
Define a swap contract and list the major types.
Define a forward contract and an option contract. What is the main difference between the contracts?
Define the following international bonds and markets:a. Eurobond marketb. Foreign bondc. Internal market or national marketd. External market or offshore markete. Interbank Foreign Exchange Market
What are securitized assets? How are they created?
Define the following financial institutions and explain their function in the intermediary financial market:a. Depository institutionsb. Contractual institutionsc. Investment companies
Describe the following aspects of the over-the-counter market:a. How the market tradesb. Types of securitiesc. Number of securitiesd. National Association of Securities Dealerse. FINRAf. National
Define and explain the role of the specialist or market maker in ensuring a continuous market.
Define the following:a. NYSE Euronextb. NYSE Arcoc. ArcaEdge
Describe the organizational structure of the New York Stock Exchange.
Explain the difference between a broker and dealer.
Define the following types of primary market sales and participants:a. Negotiated market and private placementb. Open market salesc. Investment bankerd. Best efforte. Underwritef. Underwriting
Describe the following markets and their features:a. Primary and secondary marketsb. Direct and intermediary marketsc. Money and capital markets
Comment on what is meant by the statement, “The financial markets are markets for loanable funds.”
Explain how real and financial assets are created through the capital formation process in both the private and public sectors.
22. M.C. Company is evaluating an investment proposal that has uncertainty associated with the three important aspects: the original cost, the useful life and the annual net cash flows. The three
21. The management of ABC company is considering the question of marketing a new product. The fixed cost required in the project is Rs 4,000. Three factors are uncertain, viz. the selling price,
20. (a) A businessman is considering taking over a certain new business. Based on past information and his own knowledge of the business, he works out the probability distributions of the monthly
19. A company has been having problems with stockouts for one of its components and is contemplating making alterations either to the reorder quantity or to the reorder level, or to both.Before
18. A book store wishes to carry Systems Analysis and Design in stock. Demand is probabilistic and replenishment of stock takes 2 days (i.e. if an order is placed on March 1, it will be delivered at
17. A company has planned to introduce a new product in the market, for which it is not certain about the selling price, the first year sales off-take, the variable cost, and the fixed cost on new
16. For a washing powder manufacturing factory, frequency distribution of contribution(= sales price -variable cost) per unit, annual demand, and requirement of investment were found as
15. An investment company wants to study the investment projects based on market demand, profit and the investment required, which are independent of each other. Following probability distributions
14. For a project comprising activities A, B, ... , H, the following information is available:Precedence Relationships:A and B are the first activities of the project. C succeeds A while B precede D.
13. A retailer deals in a perishable commodity. The daily demand and supply are variable. The data for the past 500 days show the following demand and supply:The retailer buys the commodity at Rs 20
12. (a) Patients arriving at a village dispensary are treated by a doctor on a first-come first-served basis.The inter-arrival time of the patients is known to be uniformly distributed between 0 and
11. The output of a production line is checked by an inspector for one or more of the three different types of defects called defects A, B and C. If defect A occurs, the item is scrapped. If defect B
10. Inter-arrival and service durations studied over past few years for a single channel queuing system revealed the following patterns:Using the random number table given below, simulate the queue
9. In a simple queuing situation, the following formulae may be used to some of the system parameters:You have observed a queuing system for several days and one sequence of observations had the
7. A small retailer has studied the weekly receipts and payments over the past 200 weeks and has developed the following set of information:Using the following sequence ofrandom numbers, simulate the
6. The Good Grain Cooperative Society is attempting to evaluate the risk associated with growing wheat in a new piece of land it has recently acquired. The data on estimated price per quintal, the
4. The manager of a book has to decide the number of copies of a particular tax law book to order. A book costs Rs 60 and is sold for Rs 80. Since some of the tax laws change year after year, any
3. A confectioner sells confectionery items. Past data of demand per week in hundred kilograms with frequency is given below:Using the following sequence ofrandom numbers, generate the demand for
2. A bakery keeps stock of a popular brand of cakes. Previous experience shows the daily demand pattern for the item with associated probabilities, as given:Use the following sequence of random
A plant has a large number of similar machines. The machines breakdown randomly and the breakdowns are independent of each other. Once a machine breaksdown, it has to be taken out of production till
A project consists of 7 activities. The time for performance of each of the activities is a random variable with the respective probability distribution given here.Now, (a) draw the network diagram
The occurrence of rain in a city on a day is dependent upon whether it rained on the previous day. If it rained on the previous day, the rain distribution is given by:it did not rain the previous
The materials manager of a firm wishes to determine the expected mean demand for a particular item in stock during the reorder lead time. This information is needed to determine how far in advance to
Dr Strong is a dentist who schedules all her patients for 30-minutes appointments. Some of the patients take more or less than 30 minutes depending on the type of dental work to be done. The
A company manufactures 30 units per day. The sale of these items depends upon demand which has the following distribution:The production cost and sale price of each unit are Rs 40 and Rs 50,
Haggins Plumbing and Heating maintains a stock of 30-gallon hot water heaters that it sells to home-owners and installs for them. The owner likes the idea of having large supply on hand so as to meet
The Tit-Fit Scientific Laboratories is engaged in producing different types of high class equipment for use in science laboratories. The company has two different assembly lines to produce its most
In a large workshop undertaking servicing jobs, the mechanics obtain their tools and requirements from a central store. The manager, perturbed about the waiting time of mechanics, is in the process
Consider the case of a dealer of a certain product for which the probability distribution of daily demand and the probability distribution of the lead time, both developed empirically by observations
18. Use dynamic programming to solve the following travelling salesman problem: Inter-city Distance Profile B C D 1297 1522 772 1297 1306 1360 1522 1306 884 772 1360 884 City A ABCD
15. Four types of items, 11, 12, 13 and 14 are available in unlimited supply. These are to be loaded on planes and a plane can take a maximum load of 14 tons. The weight and value (in appropriate
14. Three contractors have submitted bids to build six sub-stations for power supply to NDMC as indicated in the following table:Use dynamic programming to determine the best allocation of six
13. The management of a company is considering allocation of Rs 80 lakh among its three plants. It has been decided that the allocation to a plant would be either Rs 0, Rs 20, Rs 40, Rs 60 or Rs 80
12. A company is planning to spend Rs 7 lakh on advertising next year to promote four of its products. It plans to spend to multiples of Rs 1 lakh only on the products and also to spend at least Rs 1
11. A transport company delivers four types of containers between New Delhi and Mumbai. The company wishes to load a minimum of 15 tons on each truck. The weight and handling cost paid to porters for
10. The chairman of certain political party is making plans for the parliament. He has the services of six volunteers (party workers) and wishes to assign them to four districts in such a way as to
9. A political campaign for election to the parliament is entering its final stage and pre-poll surveys are indicating a very close contest in a certain constituency. One of the candidates in the
8. A company has recently trained six salespersons whom it wants to assign to four different parts of the country. The following table gives the estimated increase in sales (in lakhs of rupees) over
7. The owner ofa chain of grocery stores in New Delhi has received five loads of mangoes which he wants to send to the three stores. Since the stores are located in different parts of the city, the

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