Bus 405 Week 3 Chapter 9 Interest Rates

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This work of BUS 405 Week 3 Chapter 9 Interest Rates includes: 1. Which one of the following is the interest rate that the largest commercial banks charge their most creditworthy corporate customers for short-term loans? 2. Which one of the following terms applies to a rate that serves as an indicator of future trends? 3. Which one of the following rates is the rate that banks charge each other for overnight loans of $1 million or more? 4. Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight? 5. Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates? 6. Which one of the following is unsecured debt issued by corporations on a short-term basis? 7. A $100,000 or more term deposit at a bank is called which one of the following? 8. Which one of the following describes a banker's acceptance? 9. Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank? 10. Which one of the following abbreviations is the interest rate that international banks charge one another for overnight Eurodollar loans? 11. Which one of the following is a short-term debt instrument issued by the U.S. Treasury? 12. A pure discount security is an interest-bearing asset that pays: 13. Which one of the following is a basis point? 14. Which one of the following is the method used to quote interest rates on money market instruments? 15. The Treasury yield curve is a graph which plots Treasury yields against which one of the following? 16. Which one of the following is defined as the relationship between the interest rate on default-free, pure discount bonds and the time to maturity? 17. Pure discount bonds which are created by separating the interest and principal payments from U.S. Treasury bonds are called U.S. Treasury: 18. Which one of the following rates is the normally quoted rate? 19. Which one of the following best describes a real interest rate? 20. Which one of the following best describes the Fisher hypothesis? 21. Which one of the following theories states that the term structure of interest rates reveals the financial market's projections of future interest rates? 22. Which one of the following is defined as a forward rate? 23. Which one of the following proposes that lenders must be financially rewarded for loaning funds on a long-term versus a short-term basis? 24. The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following? 25. U.S. Treasury bill rates were the highest during which one of the following time periods? 26. Which one of the following statements is correct concerning U.S. Treasury bill rates for the period 1800 - 2007? 27. Banks are most apt to quote short-term loan rates as: 28. Which one of the following rates is generally considered the bellwether rate for bank loans to business firms? 29. City Bank needs a one-day reserve loan of $2.6 million from Country Bank. Which one of the following interest rates will be charged on this loan? 30. First Bank needs to borrow money overnight from the Federal Reserve in order to meet its reserve requirements. Which one of the following interest rates will be charged on this loan? 31. Which one of the following actions is the Federal Reserve most likely to take if it is concerned about a slowing economy? 32. The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates? 33. Assume that a large corporation, such as General Electric, needs money in the short-term. Which one of the following securities is that corporation most likely to issue to meet this need? 34. Which one of the following statements is correct concerning large-denomination certificates of deposit? 35. Which one of the following facilitates international trade? 36. You notice that the interest rate on your credit card is set at LIBOR plus 8.9 percent. Given this, the rate you will pay is primarily influenced by the money market rates in which one of the following? 37. Which one of the following is the largest market in the world for new debt securities with maturities of one year or less? 38. The overnight repurchase rate is the rate charged on overnight loans which are collateralized by which one of the following securities? 39. Which one of the following features applies to a U.S. Treasury bill? 40. The market rate on a bond fell from 8.76 percent to 8.73 percent. This is a decline of how many fbasis points? 41. Which one of the following is correct when computing the price of a debt security when using a discount yield? 42. Which of the following will increase the price of a money market instrument computed using a discount yield? I. increase in discount yield II. decrease in discount yield III. increase in days to maturity IV. decrease in days to maturity 43. Which one of the following is used by Treasury dealers to indicate the price they are willing to pay to purchase a Treasury bill? 44. Which one of the following statements is correct concerning a Treasury bill? 45. The bond equivalent yield adjusts for leap years by using 366 days starting with: 46. Money market rates are generally one or the other of which two rates? 47. Consider a money market instrument with 48 days to maturity and a quoted ask price of 99. Which two of the following statements are correct as they relate to this instrument? I. The bond equivalent yield is an effective annual rate. II. The bank discount rate is lower than the bond equivalent yield. III. The bank discount rate is an effective annual rate. IV. The bond equivalent yield is lower than the effective annual rate. 48. Which two of the following are the largest categories of fixed-income securities in the U.S.? 49. Which one of the following borrowers will pay the rates depicted on a Treasury yield curve? 50. Which of the following statements are true as applied to U.S. agency debt? I. It is equally as risky as Treasury debt. II. It is frequently subject to state taxes. III. It has the same credit guarantee as U.S. Treasury debt. IV. It generally has a lower yield than U.S. Treasury debt with the same maturity. 51. Which one of the following applies to "Yankee bonds"? 52. Which one of the following statements is correct? 53. Treasury STRIPS are: 54. The approximate nominal interest rate is computed as the real rate: 55. Which one of the following statements is correct? 56. Which one of the following debt instruments guarantees investors a positive real rate of return? 57. Inflation-indexed Treasury securities: I. adjust the principal amount on an annual basis. II. are default-free. III. offer a positive real rate of return. IV. have a variable coupon rate. 58. Based on expectations theory, the term structure of interest rates will be _____ anytime investors believe that interest rates will be higher in the future than they are today. 59. The variable f1,1 as used in the expectations theory is interpreted as the forward rate for one year: 60. According to the expectations theory and the Fisher hypothesis, a downward-sloping term structure is indicative of which of the following based on market expectations? I. nominal interest rates are expected to increase II. nominal interest rates are expected to decline III. inflation rates are expected to increase IV. inflation rates are expected to decrease 61. Which of the following statements are true? I. Lenders have a preference for shorter maturities. II. Lenders have a preference for longer maturities. III. Borrowers have a preference for shorter maturities. IV. Borrowers have a preference for longer maturities. 62. Based solely on the maturity preference theory, long-term interest rates: 63. Which one of the following statements concerning the modern fixed-income market is correct? 64. Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates? I. liquidity premium II. real rate III. interest rate risk premium IV. inflation premium 65. Modern term structure theory supports the contention that the term structure of interest rates will: 66. You want to purchase a security that will pay you $1,000 six years from now. If you want to earn an annual nominal rate of 7.5 percent, how much should you pay for this investment today? 67. You invest $3,600 today at a nominal annual rate of 5.5 percent. This investment will pay one payment five years from now. What will be the amount of that payment? 68. An investment will make one payment of $24,000 eleven years from now. What is the current value of this investment if the nominal rate of return is 5.8 percent? 69. A $1,000 face value, 120-day bond is quoted at a bank discount yield of 3.38 percent. What is the current bond price? 70. A bond has a face value of $20,000 and matures in 62 days. What is the bank discount yield if the bond is currently selling for $19,792.30? 71. A $5,000 face value bond is quoted at a bank discount yield of 2.8 percent. What is the current value of the bond if it matures in 36 days? 72. A $50,000 face value bond matures in 68 days and has a bank discount yield of 4.5 percent. What is the current value of the bond? 73. A Treasury bill has 21 days to maturity and a bank discount yield of 1.89 percent. What is the bond equivalent yield? 74. A Treasury bill is quoted at a bank discount yield of 1.08 percent and has 12 days to maturity. What is the bond equivalent yield given that this is a leap year? 75. What is the bond equivalent yield on a 30-day Treasury bill that has a bank discount yield of 2.01 percent? 76. A Treasury bill has a face value of $200,000, an asked yield of 2.12 percent, and matures in 28 days. What is the price of this bill? 77. A Treasury bill has a face value of $100,000, a price of $99,797.12, and matures in 35 days. What is the asked yield? 78. A Treasury bill has a face value of $50,000, an asked yield of 2.87 percent, and matures in 31 days. What is the price of this bill? 79. Your credit card has an annual percentage rate of 18.9 percent and compounds interest daily. What is the effective annual rate? 80. A Treasury bill matures in 73 days and has a bond equivalent yield of 4.18 percent. What is the effective annual rate? 81. A Treasury bill matures in 81 days and has a bond equivalent yield of 2.79 percent. What is the effective annual rate?

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Business - General Business Week One Week 1 – DQ1 - Blume’s Formula, Allocation, and Selection From Chapter 1, answer Concept Question 5: What is Blume’s formula? When would you want to use it in practice? Also, from Chapter 2, answer Concept Question 4: What is the difference between asset allocation and security selection? Remember to complete all parts of the questions and support your answers with examples from the text and other resources. Week 1 – DQ2 - Money Market Funds From Chapter 4, complete Problem 4: The Aqua Liquid Assets Money Market Mutual Fund has a NAV of $1 per share. During the year, the assets held by this fund appreciated by 2.5 percent. If you had invested $50,000 in this fund at the start of the year, how many shares would you own at the end of the year? What will the NAV of this fund be at the end of the year? Why? Remember to complete all parts of the question, show your work, and report the results of your analysis. Assignment Week 1- Assignment - Annualized Returns – Chapter 3 problem 18 Complete problem 18 in Chapter 3 (shown below) and submit to the instructor. Show your work to find the annualized return for each of the listed share prices. Write a 100 word analysis of the process to calculate these annualized returns. Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available. The premium is $4.00. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share? Week Two Readings Chapter 5: The Stock Market Chapter 6: Common Stock Valuation Chapter 7: Stock Price Behavior and Market Efficiency Chapter 8: Behavioral Finance and the Psychology of Investing Discussions Week 2 – DQ1 - Primary and Secondary Markets Complete Concept Question 1 from Chapter 5: If you were to visit your local Chevrolet retailer, there is both a primary and a secondary market in action. Explain. Is the Chevy retailer a dealer or a broker? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 2 – DQ2 - Contrarian Investing Complete Concept Question 9 from Chapter 8: What does it mean to be a contrarian investor? How would a contrarian investor use technical analysis? Post your answers to the discussion board. Remember to complete all parts of the question and support your answers with examples from the text and other resources. Assignment Week 2 – Assignment - Abbott Laboratories Problem After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit to your instructor. Show your calculations and in your response to problem 31 write a 100 to 200 word defense of your position as to the value of Abbott Laboratories stock at its current price of $50 per share. 27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. 28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios. 29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Abbott Laboratories with the residual income model. 30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in the previous problem? Why or why not? 31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50? At what price do you feel the stock should sell? Week Three Discussions Week 3 – DQ1 - Forward Interest Rates Complete Problem 16 from the Questions and Problems section of Chapter 9: According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on February 15, 2011? What is the corresponding implied forward rate? How does your answer compare to the current yield on a one-year STRIPS? What does this tell you about the relationship between implied forward rates, the shape of the zero coupon yield curve, and market expectations about future spot interest rates? Remember to complete all parts of the questions, and report the results of your analysis. Week 3 – DQ2 - Bond Prices versus Yields Complete Concept Question 9 of Chapter 10: (a) What is the relationship between the price of a bond and its YTM? (b) Explain why some bonds sell at a premium to par value, and other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about discount bonds? For bonds selling at par value? (c) What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value? Remember to complete all parts of the questions, and report the results of your analysis. Assignment Week 3 – Assignment – Bootstrapping Chapter 10 Problem 31 Complete problem 31 of Chapter 10 (shown below), and submit to your instructor. Show your calculations and the algebraic manipulation of the price equation for the bond. In addition to solving the problem, write a 100 to 200 word essay on the term structure of fixed income securities. One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To bootstrap the two-year rate, you can set up the following equation for the price (P) of the coupon bond: /(1+r_1 )+(C_2+Par value)/(1+r_2 )^2 Because you can observe all of the variables except r2, the spot rate for two years, you can solve for this interest rate. Suppose there is a zero coupon bond with one year to maturity that sells for $949 and a two-year bond with a 7.5 percent coupon paid annually that sells for $1,020. What is the interest rate for two years? Suppose a bond with three years until maturity and an 8.5 percent annual coupon sells for $1,029. What is the interest rate for three years? Week Four Discussions Week 4 – DQ1 – Expected Returns and Deviation Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter 11 (shown below). Remember to complete all parts of the questions, and report the results of your analysis. a. Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone. State of Economy Probability of State of the Economy Security Return if State Occurs Recession .30 -8% Normal .40 13 Boom .30 23 b. Using the information in the previous question, calculate the standard deviation of returns. c. Repeat Questions 1 2 assuming that all three states are equally likely. Week 4 – DQ2 – Portfolio Weights Complete Problem 10 from the Questions and Problems section of Chapter 12: A stock has a beta of .9 and an expected return of 9 percent. A risk-free asset currently earns 4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .5, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta? d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain. Assignment Week 4 – Assignment – Performance Metrics Chapter 13 Problem 22 Complete Problem 22 in the Questions and Problems section of Chapter 13 (shown below). When you pick the best choice for your portfolio, defend your decision in a 100 - 200 word essay. You have been given the following return information for two mutual funds (Papa and Mama), the market index, and the risk-free rate. Year Papa Fund Mama Fund Market Risk-Free 2008 -12.6% -22.6 -24.5% 1% 2009 25.4 18.5 19.5 3 2010 8.5 9.2 9.4 2 2011 15.5 8.5 7.6 4 2012 2.6 -1.2 -2.2 2 Calculate the Sharpe ratio, Treynor ratio, Jensen’s alpha, information ratio, and R-squared for both funds and determine which is the best choice for your portfolio. Week Five Discussions Week 5 – DQ1 – Hedging with Futures Complete Concept Question 7 from Chapter 14: The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 5 – DQ2 – Option Strategies Complete Concept Question 12 from Chapter 15: Recall the options strategies of a protective put and covered call discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how you would implement them. (Hint: They’re called protective calls and covered puts.) Remember to complete all parts of the question and support your answers with examples from the text and other resources. Final Project Week 5 – Final Project – Construct a well-diversified portfolio The student will construct a well-diversified portfolio using an initial investment stake of $50,000 (the portfolio should use 95% of the fund, but they may not use more than $50,000). The student may include stocks, common or preferred; bonds, corporate or U.S. Treasury bonds; mutual funds; and futures contract or options. The student will use the closing prices from the first day of the class to determine the price of each issue. Only whole lots of any issues may be acquired, that is no less than 100 shares of common or preferred stock; no less than 5 corporate bonds or $10,000 for U.S. Treasury Bonds; no fewer than the minimum required investment for any mutual fund; and no fewer than 5 contracts for any option or futures position. The settlement date will be the first day of Week 3. The student does not have to use all of the above mentioned securities, but they must use more than one class. Transaction costs are ignored in the creation of the portfolio.

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