Question 1:
a) In order for you to be indifferent between the after tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be?
b. What is the bond equivalent yield of a T-Bill that is selling for $9,453 and has 173 days remaining until maturity?
Question 2) You purchased 100 shares of ABC common stock on margin at $70 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.
Question 3) Discuss the consistency of mutual fund performance results, as studied by Goetzmann and lbbotson (1994) and Malkiel (1995).
Question 4) You have been given this probability distribution for the holding period return for XYZ stock:
State of the Economy Probability HPR
Boom .30 18%
Normal growth .50 12%
Recession .20 -5%
Requirement: Calculate the expected returns and standard deviation for XYZ stock.
Prob HPR(%) Prob×HPR HPR-Exp.Ret (HPR-Exp.Ret)2 Prob×(HPR-Exp.Ret)2
0.30 18 5.4 7.6 57.76 17.328
0.50 12 6.0 1.6 2.56 1.28
0.20 -5 -1.0 .-15.4 237.16 47.432
Exp. Ret. = 10.4% Variance = 66.04
Std. Dev.= 8.13