An investor buying this security today and holding it until it matures will earn an annual return of 2. Students will learn in a later chapter how to compute both the price and the yield to maturity with a financial calculator. Since it is not possible to trade in fractions of shares, you could buy 77 shares of GD. The price-to-earnings ratio is 9. After the split, stock C sells for Therefore, we need to find the divisor d such that: The divisor fell, which is always the case after one of the firms in an index splits its shares.
The return is zero. The index remains unchanged because the return for each stock separately equals zero. The after-tax yield on the corporate bonds is: 0. Equation 2. In an equally weighted index fund, each stock is given equal weight regardless of its market capitalization. Smaller cap stocks will have the same weight as larger cap stocks. The challenges are as follows: Given equal weights placed to smaller cap and larger cap, equalweighted indices EWI will tend to be more volatile than their market-capitalization counterparts; It follows that EWIs are not good reflectors of the broad market that they represent; EWIs underplay the economic importance of larger companies.
Turnover rates will tend to be higher, as an EWI must be rebalanced back to its original target. By design, many of the transactions would be among the smaller, less-liquid stocks. The ten-year Treasury bond with the higher coupon rate will sell for a higher price because its bondholder receives higher interest payments. The call option with the lower exercise price has more value than one with a higher exercise price. The put option written on the lower priced stock has more value than one written on a higher priced stock.
The contract multiplier is Since the stock price exceeds the exercise price, you exercise the call. Since the stock price is greater than the exercise price, you will exercise the call. Since the stock price is greater than the exercise price, you will not exercise the put. There is always a possibility that the option will be in-the-money at some time prior to expiration. Investors will pay something for this possibility of a positive payoff.
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. Both positions, however, benefit if the price of the underlying asset falls.
In this way, it is a perpetuity. Preferred stock is also like long-term debt in that it does not give the holder voting rights in the firm. 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 called cash equivalents because of their high level of liquidity. The prices of money market securities are very stable, and they can be converted to cash i.
Repos are typically used by securities dealers as a means for obtaining funds to purchase securities. Spreads between risky commercial paper and risk-free government securities will widen. Deterioration of the economy increases the likelihood of default on commercial paper, making them more risky. Investors will demand a greater premium on all risky debt securities, not just commercial paper. Bonds Voting rights typically contractual obligation Perpetual payments Accumulated dividends Fixed payments typically Payment preference.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Municipal bond interest is tax-exempt at the federal level and possibly at the state level as well.
When facing higher marginal tax rates, a highincome investor would be more inclined to invest in tax-exempt securities. The coupon rate is 6. The yield to maturity on a fixed income security is also known as its required return and is reported by The Wall Street Journal and others in the financial press as the ask yield. In this case, the yield to maturity is 2. An investor buying this security today and holding it until it matures will earn an annual return of 2.
Students will learn in a later chapter how to compute both the price and the yield to maturity with a financial calculator.
Since it is not possible to trade in fractions of shares, you could buy 77 shares of GD. The price-to-earnings ratio is 9. After the split, stock C sells for Therefore, we need to find the divisor d such that: The divisor fell, which is always the case after one of the firms in an index splits its shares.
The return is zero. The index remains unchanged because the return for each stock separately equals zero. The after-tax yield on the corporate bonds is: 0.
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