Question

2
Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average? ( LO 2- 2)

7. What is meant by the LIBOR rate? The Federal funds rate? ( LO 2- 1)

9. Why are corporations more apt to hold preferred stock than are other potential investors? (LO 2-1)

13. A municipal bond carries a coupon rate of 6 ¾ % and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket? ( LO 2- 1)

14. Suppose that short- term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after- tax yield if your tax bracket is: ( LO 2- 1)

a. Zero

b. 10%

c. 20%

d. 30%

19. Consider the three stocks in the following table. P_t represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two- for- one in the last period. ( LO 2- 2)

	P0	Q0	P1	Q1	P2	Q2
A	90	100	95	100	95	100
B	50	200	45	200	45	200
C	100	200	110	200	55	400

a. Calculate the rate of return on a price- weighted index of the three stocks for the first period ( t = 0 to t = 1).

b. What must happen to the divisor for the price- weighted index in year 2?

c. Calculate the rate of return of the price- weighted index for the second period ( t= 1 to t=2)

20. Using the data in the previous problem, calculate the first- period rates of return on the following indexes of the three stocks: ( LO 2- 2)

a. A market value– weighted index

b. An equally weighted index

32. Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. (LO 2-1)

CFA Problems
1. Preferred stock yields often are lower than yields on bonds of the same quality because of: ( LO 2- 1)

a. Marketability

b. Risk

c. Taxation

d. Call protection

Answer 1

2) Wilshire is better because it has 5000 stocks which covers more than 95% of the amrket where as DJIA has only 30 stock which also covers major market but not as much as Wilshire 5000

7) LIBOR is the rate that banks charge to lend to each other. Since the risk is less, it can be used as risk free rate too. The federal funds rate is the rate at which Fed lends to other banks. It can also be used as proxy for risk free rate

9) Corporations may need steady cash flow and therefore need to hold preferred stock. Investors on the other may or may not need so. Corporateions can also dictate terms if they have a high share holding.

13) Yield on muni bond= Yield /(1-tax rate)
=6.75/0.65=10.38%