...Exam 2 Key SECTION 1 3PM VERSION 2 SECTION 2 4:30PM VERSION 3 1. The 7 percent semiannual coupon bonds of the Garden Supplies Co. are selling for $976, have a face value of $1,000, and have a yield to maturity of 8.079 percent. How many years will it be until these bonds mature? A. 2.50 years b. 3.15 years c. 5.00 years d. 7.85 years e. 10.00 years N = ? = 5/2=2.5; I=8.079;PV=-976;PMT=70/2=35;FV=1000 BLOOMS TAXONOMY QUESTION TYPE: APPLICATION LEARNING OBJECTIVE NUMBER: 2 LEVEL OF DIFFICULTY: BASIC Ross - Chapter 006 #83 SECTION: 6.1 TOPIC: TIME TO MATURITY TYPE: PROBLEMS 2. You own two bonds. Both bonds pay annual interest, have 8 percent coupons, $1,000 face values, and currently have 8 percent yields to maturity. Bond 1 has 9 years to maturity and Bond 2 has 6 years to maturity. If the market rate of interest rises unexpectedly to 9 percent, Bond _____ will be the most volatile with a price decrease of _____ percent. a. 1; 7.26 B. 1; 6.00 c. 1; 4.49 d. 2; 1.61 e. 2; 3.57 Both bonds have a starting price of $1,000 since their coupon rates are equal to their yields to maturity. All else equal, with longer maturity bond will have the most interest rate risk (Bond 1). Price after interest rate change for Bond 1: N=9;I=9;PV=?=940.05;PMT=80;FV=1000. Percent change in price = (940.05 1000)/1000 = -.05995 = -6% BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS LEARNING OBJECTIVE NUMBER: 2 LEVEL OF DIFFICULTY: INTERMEDIATE Ross - Chapter 006...
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...Defining Financial Terms 1. Finance: Finance is the science of the management of money and other assets. This is essential for businesses with importance to capital and holdings. (Titman, Keown, & Martin, 2011) 2. Efficient Market: Efficient market is defined as a price where the holdings show both current as well as relevant figures; the assets fundamentally have their actual prices. The affiliation to finance is that the statement of information efficiency is operating in asset management with respect to their assessments. 3. Primary Market: Primary market is defined as a market relating to new securities where the securities are sold first (Titman, Keown, & Martin, 2011) . The securities are directly purchased from the issuer. This is important in finance ability as an importance of the fact that the growth of long-term capital through the issuance of securities is a necessary issue in finance. 4. Secondary Market: Secondary market is defined as where securities are traded that has earlier been issued within the primary market (Titman, Keown, & Martin, 2011). Usually, the securities are issued in either public offering or private. This is necessary within finance because these markets provide liquidity to stake holders. 5. Risk: Risk is defined as a possibility when the investment might potentially be unsuccessful to receive the expected returns, which may result in the loss of the original investment. It is very important within finance to assess...
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...What do you think is unethical? The countrywide approved everyone to get their loans, no matter they have jobs or not, no matter they have income or not, no matter they have assets or not. The criteria they use may be unethical. They don’t care whether the documents are valid, whether they can verify the income, whether the appraisal is any good. They just care about getting the loan closed, in order to do another loan. The underwriters/ contractors looked through the loan as quick as they can. The loans are not looked at like they should have been looked at. They won’t think through with the common sense which is reasonable or not. ( teacher 10,000, waitress 12,000). On the instruction of their supervisor and lead. In the world of due diligence, they don’t use the word “fraud”. Even if it is suspected, they will say it seems like incorrect. 60% to more than 80% of the loans did not meet their policy. Clinton Holdings perform due diligence to two dozen banks, who were buying the mortgage from the Countrywide, Ameriquests, the New Centurys, packaging those loans, selling them to other investors. In each of these banks, The Clinton Holdings find a substantial portion of the loans did not meet the standards of the bank buying those loans. The banks did not tell the investors that the loans were defective. Blankfein was unapologetic. Do you think they know that you think something is a piece of crap when you sell it to them and then bet against it? When the supervisor go to the...
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...The Financial Project Clifford Brown Course: Math 104 Professor: Bonnie Kegan Strayer University November 13, 2012 The purpose of this assignment is to explain what financial adjustments would need to be made in order to achieve a shorter amortization on the loan in question. The loan that we will discuss is based on the following information: Current balance is $112,242.47 The principle payment is $706.12 The Escrow payment is $211.13 The total payment 917.25 To address the subject we will use a series of questions. The first question is: How much money will need to be added to the current monthly payment in order to pay the loan of in 20 years instead of 25 years? The current payment on the loan is $706.12, and the new payment would be $788.03, therefore the answer to this question is $81.91. The next concern would be whether or not it would be reasonable to make such a change in ones existing mortgage if you had less than $100.00 left with the mortgage as it currently is now. This question requires us to evaluate whether or not we could carry out our daily routines with a modest $18.09 left over every month. Under these circumstances I find that it would be a poor choice to become committed to any such arrangement. However, one could sacrifice and make additional payments on less frequent intervals. This would mean that we should evaluate another approach to solve the issue of paying the loan off early. Often time’s people refinance their mortgages at lower...
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...Activities of SEC regarding secondary market: Mutual Fund: Bangladesh security and exchange commission is concern about activities of Mutual fund. According to the Securities and Exchange Commission (Mutual Fund) Rules, 2001 SEC can registers mutual fund. Later on 16 March 2009 SCE established Mutual Fund and SPV department. At present one mutual fund is listed in the private sector. There are two types of mutual funds 1. Open- Ended Mutual fund 2. Closed-Ended Mutual Fund The list of mutual funds in Bangladesh is given below Closed end mutual fund SL Name of the Mutual Fund Year of Floatation Face Value Fund Size (TK in Crore) 01 1st ICB 1980 100 Tk 0.75 02 2nd ICB 1984 100 Tk 0.50 03 3rd ICB 1985 100 Tk 1.00 04 4th ICB 1986 100 Tk 1.00 05 5th ICB 1987 100 Tk 1.50 06 6th ICB 1988 100 Tk 5.00 07 7th ICB 1995 100 Tk 3.00 08 8th ICB 1996 100 Tk 5.00 09 1st BSRS 1997 100 Tk 5.00 10 ICB AMCL 1st 2003 100 Tk 10.00 11 ICB AMCL Islamic 2005 100 Tk 10.00 12 ICB AMCL 1st NRB 2007 100 Tk 10.00 SL Name of the Mutual Fund Year of Floatation Face Value Fund Size (TK in Crore) 13 ICB AMCL 2nd NRB 2008 100 Tk 100.00 14 AIMS 1st Guaranteed 2000 1 Tk 16.80 15 Grameen Mutual Fund One 2005 10 Tk 17.00 16 Grameen Mutual Fund Two 2008 10 Tk 125.00 17 Prime Finance 1st 2009 10 Tk 20.00 18 EBL 1st 2009 10 Tk 100.00 19 ICB AMCL 2nd 2009 100 Tk 50.00 20 ICB Employees Mutual Fund One:Scheme One 2010 10 TK.75.00 21 Trust Bank...
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...1-1 If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met? When a stock is bought, the basic expectation is to get dividends and capital gains. Dividends are given by the company while holding the stock whereas capital gains are received when the stock is sold. Stock involves great degree of risk so whatever you expect is uncertain whereas in case you have bought US treasury, then the risk would have been negligible as it guarantees payment after every 6 months. 1-3 What is a firm’s intrinsic value? Its current stock price? Is the stock’s “ true long-run value” more closely related to its intrinsic value or to its current price? Intrinsic value of a stick is the actual value of the security as opposed to it market price or book value. It can be estimated as true value, which is based on accurate risk and return but cannot be measured. A stock’s current price is its current market price a value, which is seen by marginal investor. 1-4 When is a stock said to be in equilibrium? At any given time, would you guess that most stocks are in equilibrium as you defined it? Explain. When there are no buyers or sellers of a stock, that is when the intrinsic value equals the actual market price of a stock, then such stock is said to be in equilibrium. Most stocks are either close to their intrinsic value or close to the equilibrium, such a condition of a stock is...
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...millions| Investment in bonds (face amount)|80|| Discount on bond investment||14| Cash price of bonds||66| Cash at .04 x $80 million|3.2|| Discount on bond investment|0.1|| Interest revenue at .05 x $66||3.3| Cash at .04 x $80 million|3.2|| Discount on bond investment|0.11|| Interest revenue at .05 x ($66 + .1)||3.31| Fuzzy Monkey| Book Value| December 31, 2011| Investment in bonds|$80.00M|| Less: Discount on bond investment ($14 - .1 - .11M)|13.79M|| Amortized cost||$66.21M| If Fuzzy Monkey had the “positive intent and ability” to hold their securities until they matured, they will be classified as held to maturity and reported at the amortized cost on the balance sheet versus fair value. Operating cash flows: Cash inflow from interest - $3.2 + $3.2 = $6.4 Interest revenue using indirect method statement of cash flows- $3.3 + $3.31 = $6.61 net income Adjustment using above method - ($.21) Investing cash flows – cash outflow from buying investments of $66 3P. |$ in millions| Investment in bonds (face amount)|80|| Discount on bond investment||14| Cash price of bonds||66| Cash at .04 x $80 million|3.2|| Discount on bond investment|0.1|| Interest revenue at .05 x $66||3.3| Cash at .04 x $80 million|3.2|| Discount on bond investment|0.11|| Interest revenue at .05 x ($66 + .1)||3.31| Fuzzy Monkey| Book Value| December 31, 2011| Investment in bonds|$80.00M| Less: Discount on bond investment ($14 - .1 -...
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...Main details about the Currency Hedge Case: * John will buy 8,000 cases for € 1,030,000 * John will sell all 8,000 cases for $199 for each case ($ 1,592,000) * Spot Exchange Rate is $1.32/ € * The Forward rate for November is $1.37/ € * The Forward rate for December is $1.39/ € * Forward contracts can be bank forward rate of the month * Future contract can be multiple of $ 62,500, expiring 3rd Friday of each month. * November option can be multiple of $62,500 buying the $ 1.37/€ costing 3 cents per Euro. * December option can be multiple of $62,500 buying the $ 1.39/€ costing 3 cents per Euro. * Euro Interest per three months in annual rate 6% * Dollar Interest per three months in annual rate 6.5% PART I FORWARD HEDGE € 1,030,000 ($ 1.37) = 1,411,100 November € 1,030,000 ($ 1.39) = 1,431,700 December Differences in the Forward rates for November Spot Ex Rate | Unhedget Position | Forward Hedge | Gain or losses | 1.22 | 1,256,600 | 1,411,100 | 154,500 | 1.32 | 1,359,600 | 1,411,100 | 51,500 | 1.37 | 1,411,100 | 1,411,100 | 0 | 1.42 | 1,462,600 | 1,411,100 | -51500 | 1.52 | 1,565,600 | 1,411,100 | -154,500 | Differences in the Forward rates for December Spot Ex Rate | Unhedget Position | Forward Hedge | Gain or losses | 1.24 | 1,277,200 | 1,431,700 | 154,500 | 1.34 | 1,380,200 | 1,431,700 | 51,500 | 1.39 | 1,431,700 | 1,431,700 | 0 | 1.44 | 1,483,200 | 1,431,700 | -51,500 | 1.55 | 1,586,200 | 1,431...
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...As the chairman of the Finance Committees of the House and Senate, he made a significant contribution to rescue the Subprime Crises effort in United States. I have some recommendations to him for this terrible events. In the first place, I think that the investment banks need to be combined with the commercial banks. There are several reasons why I suggest him. During the Subprime Crises from 2007 to 2009, the leverage of the investment banks were so high. The investment banks with the high leverage went to bankrupt in this events. That means the management and operation of the investment banks had some problems. This problem could be solved by regressing the investment banks back to the commercial banks. Secondly, the Federal Reserve need to take charge of the investment banks and commercial banks after they are combined. The benefit is the supervisors from Federal Reserve could better understand the high leverage investment banks’ operation and management process and protect the depositors’ profit. At the same time, if the investment banks stayed in trouble due to the volatile market, the Federal Reserve can rescue them easily. Furthermore, the reserve in the investment banks are not enough to support them to pay off the high interest rate to the investors if the uncertainty effort of the market increase like the Subprime Crises. So, commercial banks could help them with the stable money supply. The second recommendation is Federal Reserve and government need to figure...
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...Chapter 6 Bonds and their Valuation OVERVIEW This chapter presents a discussion of the key characteristics of bonds, and then uses time value of money concepts to determine bond values. Bonds are one of the most important types of securities to investors, and are a major source of financing for corporations and governments. The value of any financial asset is the present value of the cash flows expected from that asset. Therefore, once the cash flows have been estimated, and a discount rate determined, the value of the financial asset can be calculated. A bond is valued as the present value of the stream of interest payments (an annuity) plus the present value of the par value, which is the principal amount for the bond, and is received by the investor on the bond’s maturity date. Depending on the relationship between the current interest rate and the bond’s coupon rate, a bond can sell at its par value, at a discount, or at a premium. The total rate of return on a bond is comprised of two components: interest yield and capital gains yield. The bond valuation concepts developed earlier in the chapter are used to illustrate interest rate and reinvestment rate risk. In addition, default risk, various types of corporate bonds, bond ratings, and bond markets are discussed. Outline A bond is a long-term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the holders of the bond. There are four...
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...Impairment of Securities Securties are classified into one of three categories: available for sale, held to maturity, or trading. The concept of impairment does not really apply to trading securities as they are only held for short periods. The impairment of securities that are deemed available for sale or held to maturity is a three step process. The first step is to determine if the security is impaired by comparing the fair value to the cost of the security. The cost includes any amortization and any previous impairments. The second step is to determine if the loss is temporary or “other than temporary”. This is the step that can cause the most controversy in the impairment process. The process of determining if the loss is temporary or not is highly subjective and is based on the opinion of the holder of the security. It is supposed to be based on the time and extent of the loss, the issuers financial standing, and the intent and ability of the holder. These criteria are very loosely defined parameters and lead to most impairments being classified as temporary. Many accountants have complained about how ambiguous the guidelines for this classification can be. The classification of an impairment of a security as temporary is highly advantageous for a company as it is recorded in OCI and can be recovered. This means that the loss is excluded from operations and does not affect some of the financial statements. However, if the loss is determined to be “other than temporary”...
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...1. Describe Linear Technologies payout Being very successful and having positive cash flows, Linear Technology announced its first dividend payment to its shareholders in October 1992. This is for giving the credibility to investors. Linear set dividend at $0.05 per share and this amounted to $8.3 million, or 15% of 1994 earnings. Linear continued their policy to increase dividend in 2002 when company's drop in sales and earnings so their payout ratio increased to 25%~30%. Considering the general trend that the number of dividend payers decreased, Linear is out of the trend and distinguished from other companies. It could be some signals. Also, as another rewarding methods to shareholders they spent more on repurchasing shares than on paying dividends to reduce the dilution. 2. -What are Linear's financing needs? Since the technology industry has suffered from recession, Linear Technology's sales and earnings decreased compared to 2001. Also, they wanted to expand their company abroad especially in Asia. These factors show Linear need some cash. On the other hand, even in recession, Linear kept a positive net income and net cash flow. This is because Linear had established variable cost structure early in its existence and used profit sharing, employee stock option compensation. Also, they managed their cash conservatively in short-therm debt securities and it meant high cash liquidity. Linear's stable and modest research and development costs contributed to their positive...
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...Capital Property: - Amount by which PoD > ACB - PUP: owned by taxpayer for personal use or enjoyment of the taxpayer (ex: furniture, sports equipment). CL can never offset CG b/c it’s consumed but CG from disposition in income. Upon disposal cost is greater of $1000 or ACB. Similarly, PoD are greater actual proceeds and $1000. - LPP: segregates collectibles (works of art, rare books, coins, jewelry and stamps). Losses claimed agst other LPP gains - Other capital property: stocks, bonds, real estate, partnership interest, machinery, etc 100% 50% Capital Gain Taxable Capital Gains Capital Loss Allowable Capital Losses Capital gains exemption Capital gains deduction PoD – value of consideration received or receivable ACB – amts in respect to value of the property, which have been included in income. Most common method “floating weighted average method”. Stock Div paid up capital. Example: Transaction # of shares Cost ACB Purchase 1000 35700 35.70 Purchase 200 7550 1200 43250 36.04 Stock Div 120 3600 1320 46850 35.49 Stock Split 1320 - 2640 46850 17.75 Sale (100) (1775) 2540 45075 17.75 Purchase 200 2725 Superficial L (350) 2740 48150 17.57 Sale: PoD 1500 – ACB (1775) = (275) capital loss Superficial loss: denied loss at time of disposition but permitted to add it to ACB of substitute property . Goes with shares that triggers loss Principal Residence (Format): Home Cottage Proceeds (sell) ACB (cost) Gain Gain/year Max Attribution...
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...MODULE 8 – CAPITAL GAINS/LOSSES – FUNDAMENTALS & INTEGRATION CAPITAL GAINS/LOSSES – FUNDAMENTALS Text Coverage – Chapters 7 & 8 You are NOT responsible for the following paragraphs: 7,240 – 7,260.20 7,306 7,370 7,380 7,500 7,600 7,720 8,000 – 8,300 Change in use of a principal residence Special relief for tax-deferred elections made prior to March 4, 2010 Capital gains deferral Certain shares deemed to be capital property Death of a taxpayer Leaving and entering Canada Allowable business investment losses All of Chapter 8 Income for the year = (a) + (b) – (c) – (d) (a) Income from: + + + + Plus: (b) Net TCG for the year (cannot be negative) Taxable net gain from listed personal property (cannot be negative) Less: (c) Other deductions (except if deducted in (a) above) Less: (d) Losses for the year from an office, employment, business or property or ABIL Income for the year cannot be less than zero office, employment business property other income such other deductions as are deducted against this income. Net TCG Revenue Expenses Income Division C Deductions Taxable income Proceeds of disposition (actual or deemed) Cost of disposition Cannot be negative for the year; apply inclusion rate of 50%; can be deferred (s.85, replacement property) CGD, Net CL carryover Taxable Net Gain from LPP – the only place in the Act where losses of other years are deducted in the calculation of income as opposed to taxable income Module 8 – Capital Gains/Losses Personal – Division C and Tax Payable...
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...Bond market is a financial market where bond market participants can issue new debt securities, known as the primary market, or buy and sell the bonds among investors, known as the secondary market. The Securities Industry and Financial Market Associations (SIFMA) classifies the bond market into following types : Types of bond markets * Government and Agency Government-sponsored enterprises (GSEs) issues the government and agency securities to fund their daily operations. These government bonds generally promising to pay a certain amount (face value ) on a certain date. The offering of these bonds are usually backed by the government but not all guaranteed by the government since some agencies are private entities. * Corporate It is a bond that a corporation issues to raise money in order to fund and expand their business. These bonds are usually long term debt instrument with a maturity date falling at least a year after the issued date. These corporation range from industrial field, financial companies to service-related corporations. * Municipal Municipal debt securities are usually issued by municipal council in a state and other government entities to raise fund to build/maintain local infrastructure such as recreational park, highways, hospitals, schools and so on. Municipal bond are considered as separately from other types of bonds is their tax-exempted ability which provide tax exempt income. * Mortgage backed securities and Asset-backed...
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