Introduction to Investments
Introduction to Investments FIN 340
Cal State Fullerton
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This 5 page Class Notes was uploaded by Mr. April Weber on Wednesday September 30, 2015. The Class Notes belongs to FIN 340 at California State University - Fullerton taught by Tsong Lai in Fall. Since its upload, it has received 30 views. For similar materials see /class/217012/fin-340-california-state-university-fullerton in Finance at California State University - Fullerton.
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Date Created: 09/30/15
Chapter 02 Asset Classes and Financial Instruments 1 4 V39 05 Chapter 2 Asset Classes and Financial Instruments Taxable equivalent yield 0675 135 1038 a You would have to pay the asked price of 118311189688 ofpar 1189688 Fquot The coupon rate is 11750 implying coupon payments of 11750 annually or more precisely 5875 semiannually Current yield Annual coupon incomeprice 11751189688 00988 988 0 Preferred stock is like longterm debt in that it typically promises a fixed payment each year In this way it is a perpetuity Preferred stock is also like longterm debt in that it does not give the holder voting rights in the rm Preferred stock is like equity in that the firm is under no contractual obligation to make the preferred stock dividend payments Failure to make payments does not set off corporate bankruptcy With respect to the priority of claims to the assets of the firm in the event of corporate bankruptcy preferred stock has a higher priority than common equity but a lower priority than bonds Money market securities are referred to as cash equivalents because of their great liquidity The prices of money market securities are very stable and they can be converted to cash ie sold on very short notice and with very low transaction costs The total beforetax income is 4 After the 70 exclusion taxable income is 030 x 4 120 Therefore Taxes 030 x 120 036 Aftertax income 4 7 036 364 Aftertax rate of return 364 40 910 Chapter 02 Asset Classes and Financial Instruments E Fquot 0 3 1 E Fquot O E Fquot The closing price today is 7459 which is 017 higher than yesterday s price Therefore yesterday s closing price was 7459 7 017 7442 You could buy 50007459 6703 shares Your annual dividend income would be 120 of 5000 or 60 Earnings per share can be derived from the priceearnings PE ratio PriceEarnings 16 and Price 7459 so that Earnings 745916 466 At t 0 the value ofthe index is 90 50 1003 80 Att 1 the value ofthe index is 95 45 1103 833333 The rate of return is 83333380 7 1 4167 In the absence of a split stock C would sell for 110 and the value of the index would be 95 45 1103 833333 After the split stock C sells at 55 Therefore we need to set the divisor d such that 833333 95 45 55dd 2340 The rate of return is zero The index remains unchanged as it should since the return on each stock separately equals zero Total market value at t 0 is 9000 10000 20000 39000 Total market value at t 1 is 9500 9000 22000 40500 Rate ofreturn 4050039000 7 1 385 The return on each stock is as follows Ra959071 00556 Rb 4550 71 7010 Rc 11010071 010 The equallyweighted average is 00556 010 0103 00185 185 10 The aftertax yield on the corporate bonds is 009 x 1 7 030 00630 630 Therefore the municipals must offer at least 630 yields Chapter 02 Asset Classes and Financial Instruments 11 E Fquot O The taxable bond With a zero tax bracket the aftertax yield for the taxable bond is the same as the beforetax yield 5 which is greater than the yield on the municipal bond The taxable bond The aftertax yield for the taxable bond is 005 x 1 7 010 45 You are indifferent The aftertax yield for the taxable bond is 005 x 1 7 020 40 The aftertax yield is the same as that of the municipal bond The municipal bond offers the higher aftertax yield for investors in tax brackets above 20 12 The equivalent taxable yield r is r rml 7 t a b c d 06 400 444 500 571 The higher coupon bond The call with the lower exercise price The put on the lower priced stock The December maturity futures price is 23375 per bushel If the contract closes at 215 per bushel in December your pro t loss on each contract for delivery of 5000 bushels of oats will be 215 23375 x 5000 93750 loss There are 3907 contracts outstanding representing 19535000 bushels of oats Chapter 02 Asset Classes and Financial Instruments 15 a Yes As long as the stock price at expiration exceeds the exercise price it makes sense to exercise the call Gross pro t is 101 95 6 Net pro t 6 7 650 050 loss Rate ofretum 050 650 0769 or 769 loss b Yes exercise Gross pro t is 101 90 11 Net pro t 117 650 450 gain Rate ofreturn 450 650 06923 or 6923 gain c A put with exercise price 95 would expire worthless for any stock price equal to or greater than 95 An investor in such a put would have a rate of return over the holding period of 7100 16 There is always a chance that the option will expire in the money Investors will pay something for this chance of a positive payoff rap96x rap96x talue Offall Initial Cost Pro t 0 4 4 0 4 4 0 4 4 5 4 1 10 4 6 valuepf Put Initial Cost Pro t at ex 1rat1on 10 6 4 5 6 1 0 6 6 0 6 6 0 6 6 Chapter 02 Asset Classes and Financial Instruments 18 A put option conveys the right to sell the underlying asset at the exercise price A short position in a futures contract carries an obligation to sell the underlying asset at the futures price O A call option conveys the right to buy the underlying asset at the exercise price A long position in a futures contract carries an obligation to buy the underlying asset at the futures price 20 The spread will widen Deterioration of the economy increases credit risk that is the likelihood of default Investors will demand a greater premium on debt securities subject to default risk 21 Ten stocks have a 52 week high at least 150 above the 52 week low Individual stocks are much more volatile than a group of stocks