Archives: Solution Manual

b. To benefit from the mispricing, we sell gold short $1,200 today, lend the money at risk-free rate, and long gold future of $1,141. One year from today we’ll have cash inflows from the loan of $1,224 and the proceeds […]

The futures price is the price that is agreed-upon for delivery at maturity. Long positions are contracts in which the owner agrees to purchase the asset at maturity but the purchase price is determined by the futures price at the […]

Futures price Bond par value New futures price Margin requirement You purchase a Treasury-bond futures contract with an initial margin requirement of 15% and a futures price of $115,098. The contract is traded on a $100,000 underlying par value bond. […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 16 – Option Valuation CHAPTER 16 OPTION VALUATION 1. Intrinsic value = S0 – X = $55 – $50 […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 16 – Option Valuation CHAPTER SIXTEEN OPTION VALUATION CHAPTER OVERVIEW This chapter discusses factors affecting the value of an […]

Strike $ Interest rate Time to X (% of yr) Call Option Price = Put Option Price = Solution A call option on Jupiter Motors stock with an exercise price of $75 and one-year expiration is selling at $3. A […]

will have the highest volume. A common phrase used by traders is “avoid the cheaps and the deeps.” Cheap options are those with very little time premium. Deep options are those that are way out of or in the money. […]

of the expiration month. Friday is the last day you can exercise. Contracts may be sold prior to maturity. This is an important point. You don’t have to exercise to realize the value of the option. In fact in most […]

Strike Premium Call Put –$ Stock price You establish a straddle on Walmart using September call and put options with a strike price of $80. The call premium is $7.00 and the put premium is $8.50. a. What is the […]

= Cost of Goods Sold Average Inventories = $2,850 ($490 + $480)/2 = 5.876 = Debt Equity = $3,340 $960 = 3.479 Chapter 14 – Financial Statement Analysis CHAPTER 14 FINANCIAL STATEMENT ANALYSIS 1. a. Inventory turnover ratio in 2015 […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Accounting earnings are earnings reported on the income statement that follow a set of generally accepted, but widely divergent, accounting […]

ROE Debt/Equity ratio Tax rate Interest rate on debt Solution A firm has an ROE of 3%, a debt/equity ratio of .5, a tax rate of 35%, and pays an interest rate of 6% on its debt. What is its […]

in the early phases of their life cycles, when they have numerous opportunities for reinvestment, resulting in relatively rapid growth and relatively low dividends (or, in many cases, no dividends at all). As these firms mature, attractive investment opportunities are […]

is thought to be a measure of market valuation over the book value, presumably due to future growth opportunities of the firm. Some believe that if the market to book is less than one it indicates an undervalued security that […]

Current annual dividend Div growth (yrs 1, 2) Div growth (terminal) Required ROR Solution D1 –$ D2 –$ Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 20% for two years and then at […]

2. The yield curve, by definition, incorporates future interest rates. As such, it reflects future expectations and is a leading indicator. 4. It would be considered a supply shock which affects production capacity and costs. Companies would thus become more […]

of firms. When investing in foreign markets, analysts must consider the effect that changes in exchange rates will have on returns The extent to which exchange rates and other variables will impact a firm depend upon its particular product market, […]

Nominal inerest rate Inflation rate If the nominal interest rate is 5% and the inflation rate is 3%, then what is the real interest rate? Solution Real interest rate 0.00% ATech ZTech Fixed costs mil Fixed costs mil Profits mil […]

b. An intermarket spread swap should work. The trade would be to long the corporate bonds and short the treasuries. A relative gain will be realized when the rate spreads return to normal. 6. The increase will be larger than […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. bonds that are mispriced due to other factors. For example, finding a bond that has a credit-risk premium too large […]

Tuition Interest rate New rate ( c 1 ) New rate ( c 2 ) Solution Year Tuition PV (CF) % CF Yr x %(CF) 1 –$ $0.00 #DIV/0! #DIV/0! You will be paying $10,000 a year in tuition expenses […]

b. Eurobond: They are bonds issued in the currency of one country but sold in other national markets. c. Zero-coupon bond: Zero-coupon bonds are bonds that pay no coupons but do pay a par value at maturity. d. Samurai bond: […]

features and insurance. Interest income on municipal bonds is not taxed at the federal level and often if an investor buys a bond issued by an entity in their home state the interest income is exempt from state taxes as […]

Bond life (years) Current yield Coupon rate New yield (1 yr later) Solution You buy an eight-year bond that has a 6% current yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to […]

1. Find three points on the efficient frontier corresponding to three different expected returns. First select the correct tab, and scroll down to the Portfolio Efficient Frontier [Select Tab “International Port”] In the chart “Porfolio Efficient Frontier,” search for the […]

Chapter 18 Excel Application: Performance Measures 1. Examine the performance measures of the funds included in the spreadsheet. a. Rank the funds by the five performance measures. Using the Excel sort function: i. [Sort by Column F] Sharpe Ratio: Millennium, […]

Chapter 18 Excel Application: Performance Attribution 1. What would happen to the contribution of asset allocation to overall performance if the actual weights had been 70/17/13 in the three markets rather than 75/12/13? [Change cells: 15 .7; 16 .17; 17 […]

Chapter 17 Excel Application: Parity and Spreads 1. Experiment with different values for both income yield and interest rate. What happens to the size of the time spread (the difference in futures prices for the long versus short maturity contracts) […]

Chapter 15 Excel Application: Spreads and Straddles 1. Use the data in this spreadsheet to plot out the profit on a bullish spread (see Figure 15.10) with X1 = 120 and X2 = 130. Answers can vary slightly. [Select Cells: […]

Chapter 3: Short Sales 1. Suppose you sell short 100 shares share of stock initially selling for $100 a share. Your initial margin requirement is 50% of the value of the stock sold. You receive no interest on the funds […]

Chapter 3: Buying on Margin 1. Suppose you buy 100 shares of stock initially selling for $50, borrowing 25% of the necessary funds from your broker, i.e. the initial margin on your purchase is 25%. You pay an interest rate […]

Chapter 15 Excel Application: Options, Stock, and Lending 1. Plot the rate of return to the call-plus-bills strategy (using a diagram like that in Figure 15.5), but now assuming the investor uses an in-the-money call option with a strike price […]

[Cell B12 = $B$3 + .02] Cell B14 automatically calculates the sales price after the rate increase. The sales price drops from $1,000 to $981.82 (an $18.18 decrease). Cell F13 automatically calculates the value of reinvested coupons after the rate […]

Chapter 11 Excel Application: Convexity 1. Calculate the convexity of a “bullet” fixed income portfolio, that is, a portfolio with a single cash flow. Suppose a single $1,000 cash flow is paid in year 5. [Change cells: 6 0; 8 […]

1. What were the betas of Ford, Toyota, and Honda? Step 1: Calculate the risk premium (excess return) for each firm for every month. [Change cells: 5 5 $ 5] [Select cells: G5:J5; In Home Tab select Fill – Right] […]

finance may cite examples of market inefficiencies, but they give no insight into how to exploit such phenomenon. The strength of their argument relies upon observed market inefficiencies and unexplained market behavior. There are many anomalies, yet many can be […]

Chapter 09 – Behavioral Finance and Technical Analysis CHAPTER NINE BEHAVIORAL FINANCE AND TECHNICAL ANALYSIS CHAPTER OVERVIEW The chapter describes the developing area of behavioral finance and describes some types of behavior that may lead to price movements being predictable. […]

Baa yield Aa yield Yield change Suppose Baa-rated bonds currently yield 7%, while Aa-rated bonds yield 5%. Now suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. What would happen […]

12% per year is only about 0.03% per day), so that on any day the price is virtually equally likely to rise or fall. However, over longer periods, the small expected daily returns cumulate, and upward moves are indeed more […]

competition, it should be interpreted as an ideal that markets move toward but will probably never completely and consistently achieve. Nevertheless the financial markets are highly competitive and it is likely that markets will closely approach efficiency, the occasional bubbles […]

specific risk is low enough, the stock of Kaskin, Inc. could still have less total risk than that of Quinn, Inc. Statement c is incorrect. Lower beta means the stock carries less systematic risk. Copyright © 2017 McGraw-Hill Education. All […]

Market price of security Security expected rate of return Risk free rate of return Market risk premium Change in beta (x) Solution Current security beta #DIV/0! The market price of a security is $40. Its expected rate of return is […]

2. The covariance with the other assets is more important. Diversification is accomplished via correlation with other assets. Covariance helps determine that number. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent […]

Building upon these concepts and upon the material in Chapter 5 (adding a risk-free asset to the portfolio and the reward-to-variability ratio), the student should be able to construct the optimal portfolio consisting of both risky and risk-free assets. Investors […]

Market index portfolio standard deviation Stock A beta Stock A standard deviation Change in beta Change in standard deviation The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 1.5 and a residual standard deviation […]

is to calculate the expected return and risk of an individual security and to determine the return and risk of combinations of risky assets and risk-free investments. The chapter also presents historical return and risk data for some asset classes. […]

Probability Year end cash flow T-bill return Solution a. Required risk premium = Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or $150,000, with equal probabilities of .5. The alternative riskless investment […]

2. Close-end funds trade on the open market and are thus subject to market pricing. Open- end funds are sold by the mutual fund and must reflect the NAV of the investments. change due to asset trades, as does a […]

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. and identify the major types of investment policies of mutual funds. They should be able to understand the implications of […]

Loaded up fund 12b-1 fee Expense ratio Front end load Economy fund 12b-1 fee Expense ratio Front end load Rate of return $$ Invested 100.00$ Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of .75%. […]