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1、Chapter2AssetClassesFinancialInstruments21CHAPTER2:ASSETCLASSESFINANCIALINSTRUMENTSPROBLEMSETS1.Preferredstockislikelongtermdebtinthatittypicallypromisesafixedpaymenteachyear.Inthiswayitisaperpetuity.Preferredstockisalso

2、likelongtermdebtinthatitdoesnotgivetheholdervotingrightsinthefirm.Preferredstockislikeequityinthatthefirmisundernocontractualobligationtomakethepreferredstockdividendpayments.Failuretomakepaymentsdoesnotsetoffcpatebankru

3、ptcy.Withrespecttothepriityofclaimstotheassetsofthefirmintheeventofcpatebankruptcypreferredstockhasahigherpriitythancommonequitybutalowerpriitythanbonds.2.Moneymarketsecuritiesarecalled“cashequivalents”becauseoftheirgrea

4、tliquidity.Thepricesofmoneymarketsecuritiesareverystabletheycanbeconvertedtocash(i.e.sold)onveryshtnoticewithverylowtransactioncosts.3.(a)Arepurchaseagreementisanagreementwherebythesellerofasecurityagreesto“repurchase”it

5、fromthebuyeronanagreedupondateatanagreeduponprice.Reposaretypicallyusedbysecuritiesdealersasameansfobtainingfundstopurchasesecurities.4.Thespreadwillwiden.Deteriationoftheeconomyincreasescreditriskthatisthelikelihoodofde

6、fault.Investswilldemagreaterpremiumondebtsecuritiessubjecttodefaultrisk.5.Cp.BondsPreferredStockCommonStockVotingRights(Typically)YesContractualObligationYesPerpetualPaymentsYesYesAccumulatedDividendsYesFixedPayments(Typ

7、ically)YesYesPaymentPreferenceFirstSecondThird6.MunicipalBondinterestistaxexempt.Whenfacinghighermarginaltaxratesahighincomeinvestwouldbemeinclinedtopicktaxexemptsecurities.Chapter2AssetClassesFinancialInstruments23c.The

8、returniszero.Theindexremainsunchangedbecausethereturnfeachstockseparatelyequalszero.12.a.Totalmarketvalueatt=0is:($9000$10000$20000)=$39000Totalmarketvalueatt=1is:($9500$9000$22000)=$40500Rateofreturn=($40500$39000)–1=3.

9、85%b.Thereturnoneachstockisasfollows:rA=(9590)–1=0.0556rB=(4550)–1=–0.10rC=(110100)–1=0.10Theequallyweightedaverageis:[0.0556(0.10)0.10]3=0.0185=1.85%13.Theaftertaxyieldonthecpatebondsis:0.09?(1–0.30)=0.0630=6.30%Therefe

10、municipalsmustofferatleast6.30%yields.14.Equation(2.2)showsthattheequivalenttaxableyieldis:r=rm(1–t)a.4.00%b.4.44%c.5.00%d.5.71%15.Inanequallyweightedindexfundeachstockisgivenequalweightregardlessofitsmarketcapitalizatio

11、n.Smallercapstockswillhavethesameweightaslargercapstocks.Thechallengesareasfollows:?Givenequalweightsplacedtosmallercaplargercapequalweightedindices(EWI)willtendtobemevolatilethantheirmarketcapitalizationcounterparts?Itf

12、ollowsthatEWIsarenotgoodreflectsofthebroadmarketwhichtheyrepresentEWIsunderplaytheeconomicimptanceoflargercompanies?TurnoverrateswilltendtobehigherasanEWImustberebalancedbacktoitsiginaltarget.Bydesignmanyofthetransaction

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