Supplemental Questions and Problems Chapter 1 Role of Financial Markets and Institutions 1.

.1 Classify the following transactions as taking place in the primary or secondary markets: a. IBM issues $200 million of new common stock b. The New Company issues $50 million of common stock in an IPO. c. IBM sells $5 million of GM preferred stock out of its marketable securities portfolio. d. The Magellan Fund buys $100 million of previously issued IBM bonds. e. Prudential Insurance Co. sells $10 million of GM common stock. Classify the following financial instruments as money market securities or capital market securities: a. Bankers Acceptances b. Commercial Paper c. Common Stock d. Corporate Bonds e. Mortgages f. Negotiable Certificates of Deposit g. Repurchase Agreements h. U.S. Treasury Bills i. U.S. Treasury Notes j. Federal Funds What advantages can you see to banks affiliating with insurance companies? How might such an affiliation benefit a bank? An insurer? Can you identify any possible disadvantages to such an affiliation? Can you cite any real-world examples of bankinsurer affiliations? How well do they appear to have worked out in practice?

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Chapter 2 Determination of Interest Rates 2.1 What is the track record of professional interest rate forecasters? What do you think explains their performance?

Chapter 3 Structure of Interest Rates 3.1 The 1-year real rate of interest is currently estimated to be 4%. The market forecasts predict the annual rate of inflation to be 8%. What is the current 1-year nominal rate of interest? 3.2 An investor purchased a 1-year Treasury security with a promised yield of 10%. The investor expected the annual rate of inflation to be 6%; however, the actual rate turned out to be 10%. What were the expected and the realized real rates of return for the investor? Chapter 6 Money Markets

6.1 You paid 97,500 for a 100,000 European treasury security maturing in 180 days with the spot rate of the euro at $1.20. What is your yield if the spot rate after 180 days is $1.25? $1.14? 6.2 You paid 987,000 for a 1,000,000 British treasury security maturing in 90 days with the spot rate of the pound at $1.57. What is your yield if the spot rate after 90 days is $1.59? $1.49? Chapter 7 Bond Markets 7.1 Suppose you purchased a debt obligation 3 years ago at its par value of $100,000. The market price of this debt obligation today is $90,000. What are some of the reasons why the price of this debt obligation could have declined since you purchased it 3 years ago? 7.2 The Bureau of Public Debts Web page provides useful information about Treasury securities and the national debt. Go to the web page (www.publicdebt.treas.gov/opd/opd.htm) and answer the following questions: a. Determine to the penny the total U.S. Treasury debt. How much of the debt is held by the public? How much is in the form of intragovernmental holdings? b. Referring to the Monthly Statement of Public Debt, what is the total amount of marketable securities outstanding? How much is in Treasury bills? Notes? Bonds? Inflation-indexed Notes? Inflation-indexed bond? c. Click on the auction information link. Click on the Treasury bill auction results link. Can you identify any trends in the rates for 182-day Treasury bills? 7.3 A municipal bond you are considering as an investment currently pays a 6.75% annual rate of return. a. Calculate the tax equivalent rate of return if your marginal tax rate is 28%. b. Calculate the tax equivalent rate of return if your marginal tax rate is 21%. 7.4 Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $1,000, can be converted into common shares at a rate of 61.2983 shares of stock per $1,000 face value (the conversion rate), or $16.316 per share. Hiltons common stock is trading at $15.90 per share and the bonds are trading at $975.00. a. Calculate the conversion value of each bond. b. Determine if it is currently profitable for bond holders to convert their bonds into shares of Hilton Hotel common stock? 7.5 Olsen Electronics is issuing convertible bonds. Each bond has a face value (and market value) of $1,000 and can be converted at a rate of 50 shares of stock per $1,000 face value (the conversion rate). Olsens common stock is trading at $13 per share. a. Calculate the conversion value of each bond. b. Determine the price at which the conversion begins to make sense.