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Solution Manual Essentials of Investments 12th edition BY Bodie Kane Marcus - Updated 2024
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Solution Manual Essentials of Investments 12th edition BY Bodie Kane Marcus - Updated 2024
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Chapter 02 - Asset Classes and Financial InstrumentsCHAPTER 2
ASSET CLASSES AND FINANCIAL INSTRUMENTS
1. Common stock is an ownership share in a publicly held corporation. Common
shareholders have voting rights and may receive dividends (but are not contractually
obligated to do so). Preferred stock represents nonvoting shares in a corporation,
usually paying a fixed stream of dividends (but are not contractually obligated to do
so). While corporate bonds are long-term debt issued by corporations, the bonds
typically pay semi-annual coupons (and are contractually obligated to pay them) and
return the face value of the bond at maturity.
2. While the DJIA has 30 large corporations in the index, it does not represent the
overall market nearly as well as the approximate 3,500 stocks contained in The
Wilshire 5000 index. The DJIA is simply too small.
3. Money market securities are short-term, relatively low risk, and highly liquid. Also,
their unit value almost never changes.
4. The major components of the money market are Treasury bills, certificates of deposit,
commercial paper, bankers’ acceptances, Eurodollars, repos and reverses, federal
funds, and brokers’ calls.
5. American Depositary Receipts, or ADRs, are certificates traded in U.S. markets that
represent ownership in shares of a foreign company. Investors may also purchase
shares of foreign companies on foreign exchanges. Lastly, investors may use
international mutual funds to own shares indirectly.
6. The coupons paid by municipal bonds are exempt from federal income tax and from
state tax in many states. Therefore, the higher the tax bracket that the investor is in,
the more valuable the tax-exempt feature to the investor.
7. The London Interbank Offer Rate (LIBOR)—a key reference rate in the money
market—is the rate at which large banks in London are willing to lend money among
them. The Federal funds rate is the rate of interest on very short-term loans among
financial institutions in the U.S.A.
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
, Chapter 02 - Asset Classes and Financial Instruments
8. General obligation bonds are backed by the taxing power of the local governments,
while revenue bonds have proceeds attached to specific projects. A revenue bond has
fewer guarantees, it is riskier in terms of default, and, therefore, you expect it to have
a higher yield.
9. Corporations may exclude 50% of dividends received from domestic corporations in
the computation of their taxable income.
10. Limited liability means that the most shareholders can lose in event of the failure of
the corporation is their original investment (which differs from owners of
unincorporated businesses).
11. (a) A repurchase agreement is the sale of a security with a commitment to repurchase
the same security at a specified future date and a designated price.
12. Money market securities are referred to as “cash equivalents” because of their great
liquidity. The prices of money market securities are very stable, and they can be
converted to cash (i.e., sold) on very short notice and with very low transaction costs.
Rate on municipal bond rm .0225
13. Equivalent taxable yield = = = = .0346 or
1－ Tax rate 1－ t 1 － 0.35
3.46%
14. After-tax yield = Rate on the taxable bond x (1 － Tax rate)
a. The taxable bond. With a zero tax bracket, the after-tax yield for the taxable
bond is the same as the before-tax yield (5%), which is greater than the 4%
yield on the municipal bond.
b. The taxable bond. The after-tax yield for the taxable bond is: 0.05 x (1 – 0.10)
= 0.045 or 4.50%.
c. Neither. The after-tax yield for the taxable bond is: 0.05 x (1 – 0.20) = 0.04 or
4%. The after-tax yield of taxable bond is the same as that of the municipal
bond.
d. The municipal bond. The after-tax yield for the taxable bond is: 0.05 x (1 –
0.30) = 0.035 or 3.5%. The municipal bond offers the higher after-tax yield
for investors in tax brackets above 20%.
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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