Introduction to Finance HW#1

  1. (40 points) Complete “Homework #1: 40%” on MyFinanceLab under “Assignments.” You may try each question twice.

 

  1. (35 points) The yield on a bond depends on the risk characteristics of the bond when issued, taxation treatment, bonds’ liquidity, and other factors. All things being equal, which bond will pay a higher coupon rate in the following cases? Briefly explain why.

 

    1. Secured debt vs. a debenture
    2. Subordinated debenture vs. senior debt
    3. A callable bond vs. a non-callable bond
    4. Income bond vs. a conventional bond
    5. Convertible bonds vs. conventional bond
    6. A corporate bond rated AAA by S&P vs. a “junk bond”
    7. Municipal bonds (which are free from most taxes) vs. taxable bonds

 

  1. (10 points) You purchased a 90-day maturity, $100,000 par value Teasury bill for $98,000.
  • Calculate the annualized bank discount yield paid by the T-bill.
  • If you sell it for $99,000 after 30 days, what is your holding period yield?

 

  1. (Internet Activities; 15 points)

 

  1. We know that if a corporation is so maximize shareholder wealth, the interests of the managers and the shareholders must be aligned. The simplest way to align these interests is to structure executive compensation packages appropriately to encourage managers to act in the best interests of shareholders through stock and option awards. However, has executive compensation gotten out of control? Take a look at the Executive Pay Watch Web site at http://www.aflcio.org/corporate-watch/paywatch to see to whom top salaries have gone (click on “Corporate Watch”à”Executive Paywatch” on the right-hand side of the page and then “100 Highest-paid CEOs”). What are the most recent total compensation packages for the head of Oracle (ORCL), Wal-mart (WMT), Wells Fargo (WFC), and Yahoo! (YHOO)?

 

  1. Go to Yahoo! Finance (http://finance.yahoo.com) and enter the symbol for Google (GOOG) in the “Search for news, symbols, and companies” box at the top of the page. What price did it last trade at? What is the day’s price range for the stock? What is the closing change in the price of the stock, both in dollar and percentage terms? What is the stock’s 52-week price range? Now check out some of the links on the page. What kind of information listed there do you find interesting?