Ahmed Khalil Benlahcen

Modern investment theory

Homework #1
ID: 59796

Problem1:

Preferred stock vs Long term debt ===> Similarities: Both preferred stocks and
long term debt have a fixed income paid monthly, quarterly, and semiannually. In
addition to that preferred stocks doesn't give you the right to vote as it is the
case for the long term debt.

Preferred stocks vs equity ===> Similarities: Holding preferred stocks in a firm

give you the priority in term of the assets of the firm in case of bankruptcy.

Problem2:

Money market securities are sometimes called cash equivalent because they are
highly liquid and can be transformed easily into cash.

Problem3:

Repurchase agreement is the sale of a security with a commitment to repurchase

the same security at a specified future date and designated price. answer (a)

Problem4:

The spread between the yield of commercial papers and treasury bills will be
greater. If the economy enters in a steep recession, investors will expect higher
default risk.

Problem6:

High -tax bracket investors more inclined to invest in municipal bonds than low-
tax-bracket investors because they bear much more taxes that is why they prefer
municipal bonds because they are tax-exempt.

Problem 7:

a) I have to pay to get the bond: $ 1,611,875

b) The coupon rate is : 6.25% ===> $ 62.5 ==> $31.25 semiannually

c) The yield to maturity of the bond: 2.113%

Problem 8:

10,000
PV= ---------- = $9,569.38 is the price the 6-months maturity Treasury bill.
1.045

Problem 12:
a) Market value weighted index:
{(55*325+100*250+550*45)-(50*325+105*250+85*550)}/
(50*325+105*250+85*550) = 3.5%
b) Equally weighted index:
{(55*Q1+100*Q2+90*Q3) - (50*Q1+105*Q2+85*Q3)}/ (50*Q1+105*Q2+85*Q3)
{(55-50) Q1 + (100-105) Q2+ (90-85) Q3}/(50*Q1+105*Q2+85*Q3)
Q1= Q2= Q3=1/3
1/3{{(55-50)/50 + (100-105)/105 + (90-85)/85} = 3.7%

Problem 13:

5*(1-0.3)= 3.5
The municipal bond should offer to the investor a return higher than 3.5%.

Problem 14:

For 0% tax bracket: 10/1-0 = 10%

For 10% tax bracket: 10/1-0.1 = 11.11%
For 20% tax bracket: 10/1-0.2= 12.5%
For 30% tax bracket: 10/1-0.3= 14.29%