8 Questions... not 20. please see attached. must show work.
1. A municipal bond has a yield of 4% while the yield of a comparable corporate
bond is 5%. For each marginal tax bracket below, which bond (muni or
corporate) provides the higher after tax yield if your tax bracket is: (show work)
2. i) Which of the four options below is the riskiest investment in terms of exposing
the investor to the highest possible loss?
a. writing or short a call option
b. writing or short a put option
c. buying or long a call option
d. buying or long a put option
ii) Draw the payoff diagram of the option that corresponds to the correct answer
3. You place a stop-loss order to sell 1000 shares of stock at $60 when the current
price is $72. How much will you receive for each share if the price drops to $50?
c) less than $59.95 but more than 50
d) can?t tell from information given
4. Would a portfolio manager of an actively managed stock mutual fund believe
that markets are efficient? Why or why not?
5. Competing banks offer the same 7% annual yield on a 5-year CD. Bank A?s CD
offers annual compounding; while Bank B?s CD offers monthly compounding. If
you?re looking to invest $10,000, which bank?s CD do you select and why?
6. You are bullish on FaceBook (FB). The current price is $50/share and you have
$5,000 of your own money to invest. You borrow an additional $5,000 from your
broker at an interest rate of 8% per year and invest a total of $10,000 in the
stock. The stock does not pay a dividend.
a. What is your rate of return if the price of FB stock RISES by 10% during
the next year?
b. What is your rate of return if the price of FB stock FALLS by 10% during
the next year?
c. Discuss the impact margining has on your return.
7. You are to receive $500 at the end of one year; $250 at the end of two years;
$300 at the end of three years. If the interest rate is 5%, what is the present
value of these cash flows?
8. Assuming the cash flows above, what is the future value of these flows at the
end of year 4?
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