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Financial Instruments, Securities Markets, and Benchmarks BM 410 Investments Homework 3 Homework 3: Understand Chapter 2 Problems: 4, 6, 10, 13 Chapter 3 Problems: 1, 5, 16 Chapter 2 1. In what ways is preferred stock like long-term debt? In what ways is it like equity? 6. 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. 10. An investor is in a 28% tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds? 13. Which security should sell at a greater price? a. A 10-year Treasury bond with a 9% coupon rate or a 10-year T-bond with a 10% coupon. b. A three-month maturity call option with an exercise price of $40 or a three-month call on the same stock with an exercise price of $35. c. A put option of a stock selling at $50 or a put option on another stock selling at $60. (All other relevant features of the stocks and options are assumed to be identical.) Chapter 3 1. FBN, Inc., has just sold 100,000 shares ok as initial public offering. The underwriter’s explicit fees were $70,000. The offering price for the shares was $50, but immediately upon issue, the share price jumped to $53. a. What is your best guess as to the total cost to FBN of the equity issue? b. Is the entire cost of the underwriting a source of profit to the underwriter? 5. Do you think it is possible to replace market-making specialists with a fully automated, computer trade-matching system? 16. Who sets the bid asked price for a stock traded over the counter? Would you expect the spread to be higher on actively or inactively traded stocks?