Question

8. Combining the prior two questions, what is your one-year holding period return to the bond?

a. - 3.57%

b. 3.57%

c. - 1.22%

d. 1.16%

9. What would be the profit or loss per share of stock to an investor who bought a January expirationStarbucks call option with an exercise price of $100 if Starbucks closed on the expiration date at $120? Assume the option premium was $3.00.

a. $3.00 loss

b. $20.00 gain

c. $23.00 gain

d. $17.00 gain

10. An investor purchases one municipal bond and one corporate bond that pay rates of return of 9% and 10.5%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

a. 9% and 10.5%

b. 9% and 8.40%

c. 7.20% and 10.5%

d. 10.80% and 8.40%

Answer 1

Q.8) This question cannot be answered because i don't have the prior two questions details.

Q.9) Answer: d.$17 gain
Investor has an option to buy stock at $100.
If closing price at the expiration date is $120, then the investor exercise the call option & buy the stock @ $100. The market value of the stock is $120. so gain is $20 but cost of call option is $3 so net gain is $17.

Q.10) Answer: b.9% and 8.4%
Corporate bond rate of return after tax = rate of return before tax*(1-tax rate) = 10.5%*(1-0.2) = 10.5%*0.8 = 8.4%
Municipal bond is exempt from tax so after tax rate of return is equal to pre-tax rate of return.