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##### Investment management

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"1. Assume a $1,000 Treasury bill is quoted to pay 4.5 percent interest over a six-month period. a. How much interest would the investor receive? b. What will be the price of the Treasury bill? c. What will be the effective yield? 2. Assume as alternative A you are considering a $10,000 par value Treasury strip that matures in 20 years. The discount rate is 6.5 percent. You also are considering alternative B, which represents a $10,000 par value Treasury strip that matures in 16 years. The discount rate is 7.5 percent. Which has the lower price (present value)? 3. You buy a 10-year, $1,000 inflation-indexed Treasury security that pays 3 percent annual interest. Assume inflation is 2 percent for the first five years and 4 percent for the last five years. What will be the value of the bond after 10 years? Disregard the 3 percent annual interest. 4. Milton Simon owns 200 shares of preferred stock of the Global Travel Corp. The shares were intended to pay $5.00 annually, but have not paid a dividend in five years. Because the dividends are cumulative, the company cannot pay dividends to common stockholders until it eliminates its obligation to preferred stockholders. a. Can the preferred stockholders force Global Travel Corp. to pay dividends for the last five years with a threat of forcing the firm into bankruptcy? Answer ""Yes: or ""No:. b. Assume Global Travel Corp. does not have the cash to pay the five years of past preferred stock dividends, but will offer new common stock shares to make up for the deficiency. The firm will offer a common stock payout that equals the five-year deficiency, plus provide an additional 20 percent premium in common stock shares to keep the preferred stockholders satisfied. What is the value of the common stock payout for each preferred stock share? Note that the preferred stockholders will still retain ownership of their original shares

only the deficiency in past dividends will be eliminated. c. Assume Milton Simon receives the proceeds from his 200 shares and reinvests them in either a U.S. government security paying 5.6 percent or a municipal bond paying 4.5 percent. Milton is in a 35 percent tax bracket. How much will he have in cash on an after-tax return basis from each investment? (Disregard a tax on the common stock payout, only consider a potential tax on the returns from his investment.) 5. Assume you bought a semiannual bond with a 10 percent coupon rate with 20 years to maturity at a yield to maturity of 12 percent. Further assume 10 years later the yield to maturity is 8 percent. a. Determine the price of the bond that you initially paid b. Determine the bond price with 10 years remaining to maturity. c. Compute the dollar and percentage profit related to the bond over the 10-year holding period. 6. a. What is the yield to maturity of a 12 percent coupon rate, $1,000 par value bond priced at $1,160 if it has 15 years to maturity? Interest is paid semi annually b. Using the facts given above, what would be the yield to call if the call can be made in four years at a price of $1,080? c.. Given a call value of $1,080 in four years, is it likely that the bond price would actually get to $1,160? Yes or No. 7. a. Using the facts given in problem 6, what would be the anticipated realized yield if the forecast is that the bond can be sold in three years for $1,280? Continue to assume the bond has a 12 percent coupon rate ($120) and a current price of $1,160. b. Now break down the anticipated realized yield between current yield and capital appreciation. 8. a. Assume an investor purchases a 10-year, $1,000 bond with a coupon rate of 12 percent for $1,000. The market rate almost immediately falls to 9 percent. What would be the percentage return on the investment if the buyer borrowed part of the funds with a 20 percent margin requirement? Assume the interest payments on the bond cover the interest expense on the borrowed funds. b. Assume the same bond in part a is purchased with 20 percent margin, but market rates go up to 14 percent from 12 percent instead of going down to 9 percent. What is the percentage loss on the cash investment? 9. Layne Resources, Inc. has a $1,000 face value convertible bond outstanding that has a market value of $1,020. It has a coupon rate of 5 percent and matures in 12 years. The conversion price is $20. The common stock currently is selling for $16. a. What is the conversion premium (in percent)? b. At what price does the common stock need to sell for the conversion value to be equal to the current bond price? c. Assume the common stock price goes up to $26 and the conversion premium goes down to $15, what will be the price of the bond? d. What was the percentage gain in the price of the common stock? What was the percentage gain in the price of the bond? 10. A firm has warrants outstanding that allow the holder to buy one share of stock at $25 per share. Also, assume the stock is selling for $30 per share, and the warrants are now selling for $7 per warrant (this, of course, is above intrinsic value). You can invest $1,000 in the stock or the warrants (for purposes of the computation, round to two places to the right of the decimal point). Assume the stock goes to $40, and the warrants trade at their intrinsic value when the stock goes to $40. What is total dollar profit by initially investing in a) the stock or b) the warrants? Jan 07 2014 02:53 AM"

Solution ID:609085 | This paper was updated on 26-Nov-2015

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