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GF540 Unit 1 Assignment




Question;Chapter 1Question 9Examine the balance sheet of commercial banks in Table 1.3. What is the ratio of real assets tototal assets? What is that ratio for nonfinancial firms (Table 1.4)? Why should this difference beexpected?Question 11Discuss the advantages and disadvantages of the following forms of managerial compensationin terms of mitigating agency problems, that is, potential conflicts of interest between mangersand shareholders.a. A fixed salary.b. Stock in the firm that must be held for five yearsc. A salary linked to the firm?s profits.Chapter 2Question 7Turn back to Figure 2.3 and look at the Treasury bond maturing in February 2039.a. How much would you have to pay to purchase one of these notes?b. What is its coupon rate?c. What is the current yield of the note?Question 17Look at the futures listings for the corn contract in Figure 2.10.a. Suppose you buy one contract for March delivery. If the contract closes in March at alevel of 3.875, what will your profit be?b. How many March maturity contracts are outstanding?Solutions to Concept Checks5. The market-value-weighted index return is calculated by computing the increase in the valueof the stock portfolio. The portfolio of the two stocks starts with an initial value of $100 million +$500 million = $600 million and falls in value to $110 million + $400 million = $510 million, a lossof 90/600 =.15%. The index portfolio return is a weighted average of the returns on each stockwith weights of 1/6 on XYZ and 5/6 on ABC is -20%, the index portfolio return is 1/6 X 10% + 5/6X (-20%) = -15%, equal to the return of the market-value-weighted index.Chapter 3Questions 9You are bullish on Telecom stock. The current market price is $50 per share, and you have$5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interestrate of 8% per year and invest $10,000 in the stock?Questions 14Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealermarket.Bid]55.25Asked55.50a. Suppose you have submitted an order to your broker to buy at market. At what price will youtrade be executed?b. Suppose you have submitted an order to sell at market. At what price will your trade beexecuted?c. Suppose you have submitted a limit order to sell at $55.62. What will happen?d. Suppose you have submitted a limit order to buy at $55.37. What will happen?CFA Problems1. FBN, Inc., has just sold 100,000 shares in an initial public offering. The underwriter?sexplicit fees were $70,000. The offering price for the shares was $50, but immediatelyupon issue, the share price jumped to $53.a. What is your best guess as to the total cost to FBN of the equity issue?b. Is the entire cost of the underwriting a source of profit to the underwriters?Chapter 4Question 9The composition of the Fingroup Fund Portfolio is as follows:StockAShares200,000Price$35BCD300,000400,000600,000402025The fund has not borrowed any funds, but its accrued management fee with the portfoliomanager currently totals $30,000. There are 4 million shares outstanding. What is the netasset value of the fund?Question 13A closed-end fund starts the year with a net asset value of $12.00. By year-end, its NAVequaled $12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. Bythe end of the year, the year, the fund is selling at a 7% discount to NAV. The fund paid yearend distributions of income and capital gains of $1.50.a. What is the rate of return to an investor in the fund during the year?b. What would have been the rate of return to an investor who held the same securities asthe fund manager during the year?


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