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Assessing Financial Markets

1. The U.S. Treasury issues bills, notes, and bonds. How do these three securities differ?

2. A call provision on a bond allows the issuer to redeem the bond at will. Investors do not like call provisions and so require higher interest on callable bonds. Why do issuers continue to issue callable bonds anyway?

EBay went public 09/98; IPO, EBay issued 3,500,000 new shares; initial price to public was $18 per share, final first day closing $44.88.

3. If the investment bankers retained $1.26 per share as fees, what were the net proceeds to EBay? What was the market capitalization of the new shares of ebay?

4. A company paid annual dividend of $0.32 per share; its dividend is expected to double next 4 years (D1-D4) after which it will grow at more modest pace of 1% per year. If the required return is 13%, what is the current price?

5. Lenders tend not to be as flexible about the qualifications required of mortgage customers as they can be for other types of bank loans. Why is this so?

6. Compute the required monthly payment of an $80,000 30-year fixed-rate mortgage with a nominal interest rate of 5.80%. How much of the payment goes toward principal and interest during the first year?

7. Consider a 30-year fixed-rate mortgage for $100,000 at a nominal rate of 9%. An S&L issues this mortgage on April 1 and retains the mortgage in its portfolio. However, by April 2 mortgage rates have increased to a 9.5% nominal rate. By how much has the value of the mortgage fallen?

Briefly Answer following questions:

1. Why do governments never issue stock?

2. What are STRIPS?

3. What is the real and perceived risk of default of Agency-issued bonds? What is the perceived return?

Solution Summary

This solution answer various questions regarding financial markets.

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