Chapter 02 – Asset Classes and Financial Instruments
CHAPTER 2
ASSET CLASSES AND FINANCIAL INSTRUMENTS
1. Common stock is an ownership share in a publicly held corporation. Common
2. While the DJIA has 30 large corporations in the index, it does not represent the
3. Money market securities are short-term, relatively low risk, and highly liquid. Also,
their unit value almost never changes.
4. The major components of the money market are Treasury bills, certificates of deposit,
5. American Depositary Receipts, or ADRs, are certificates traded in U.S. markets that
6. The coupons paid by municipal bonds are exempt from federal income tax and from
7. The London Interbank Offer Rate (LIBOR)—a key reference rate in the money
8. General obligation bonds are backed by the taxing power of the local governments,
9. Corporations may exclude 70% of dividends received from domestic corporations in
the computation of their taxable income.
10. Limited liability means that the most shareholders can lose in event of the failure of
the corporation is their original investment.
Chapter 02 – Asset Classes and Financial Instruments
17. a. You would have to pay the asked price of:
105.48 = 105.48% of par = $1,054.84
18. a. The closing price today is $194.55, which is $0.37 above yesterday’s price.
b. You would buy 25 shares: $5,000/$194.55 = 25.70.
19. a. At t = 0, the value of the index is: ($90 + $50 + $100)/3 = 80
At t = 1, the value of the index is: ($95 + $45 + $110)/3 = 83.33
Chapter 02 – Asset Classes and Financial Instruments
25. The December maturity futures price is $3.8575 per bushel. If the contract closes at
26. a. Yes. As long as the stock price at expiration exceeds the exercise price, it
makes sense to exercise the call.
Gross profit is: ($144 – $140) x 100 shares = $400
27. a. Long call
28. There is always a chance that the option will expire in the money. Investors will pay
something for this chance of a positive payoff.
29. Long call for $4:
Value of call
at expiration
Initial Cost
Profit
a.
0
4
-4
b.
0
4
-4
c.
0
4
-4
d.
5
4
1
e.
10
4
6
Chapter 02 – Asset Classes and Financial Instruments
Chapter 02 – Asset Classes and Financial Instruments
CFA 1