Problem Sets

bankers' acceptance, 28 call option, 48 capital markets, 26 certificate of deposit, 27 commercial paper, 28 common stocks, 39 corporate bonds, 35 derivative asset/contingent claim, 48

equally weighted index, 46 Eurodollars, 28 Federal funds, 29 futures contract, 51 LIBOR, 29

market value-weighted index, 45 money markets, 26 municipal bonds, 33

preferred stock, 41 price-weighted average, 42 put option, 49 repurchase agreements, 29 Treasury bills, 27 Treasury bonds, 31 Treasury notes, 31

1. Preferred stock a. Is actually a form of equity.

b. Pays dividends not fully taxable to U.S. corporations.

c. Is normally considered a fixed-income security.

d. All of the above.

2. Straight preferred stock yields often are lower than yields on straight bonds of the same quality because of a. Marketability b. Risk c. Taxation d. Call protection

3. Turn back to Figure 2.3 and look at the Treasury bond maturing in May 2008.

a. How much would you have to pay to purchase one of these bonds?

b. What is its coupon rate?

c. What is the current yield of the bond?

In what ways is preferred stock like long-term debt? In what ways is it like equity? Why are money market securities sometimes referred to as "cash equivalents?" Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket.

Turn to Figure 2.9 and look at the listing for General Dynamics (GenDynam).

a. What was the firm's closing price yesterday?

b. How many shares could you buy for $5,000?

c. What would be your annual dividend income from those shares?

d. What must be its earnings per share?

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period.

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