Bonds Stocks Questions BBA 2024 Solution PDF

Bonds & Stocks Homework Solutions PART A Macroeconomic Variables 50 POINTS If the first variable rises, will that cause the second variable to rise or fall? No explanations necessary. Just write UP or DOWN or show arrows next to the second variable....

Bonds & Stocks Homework Solutions PART A Macroeconomic Variables 50 POINTS If the first variable rises, will that cause the second variable to rise or fall? No explanations necessary. Just write UP or DOWN or show arrows next to the second variable. What happens to Rise this one ? Up or Down ? 1. Consumption GDP ↑ Up 2. Investment GDP ↑ Up 3. Inventory GDP ↑ Up 4. Government Spending GDP ↑ Up S. Exports GDP ↑ Up 6. Imports GDP ↓ Down 7. Money Supply GDP ↑ Up 8. Unemployment GDP ↓ Down ↑ Up Imports will rise as both production and disposable income rise causing businesses to make more investments in equipment and workers to consume more imports. Exports 9. GDP Trade Deficit are not affected as they depend on other countries’ GDP. 10. GDP Unemployment ↓ Down Expected 11. Prices Inflation ↑ Up Demand for 12. Prices Money ↑ Up 13. Demand for Money IR ↑ Up 14. Money Supply IR ↓ Down ↑ Up Government Spending drives Demand for Money up as 15. Government the Government needs funding for its spending. Therefore IRs Spending IR rise. 16. IR Investment ↓ Down 17. IR New Home Sales ↓ Down 18. IR Currency ↑ Up 19. IR Net Exports ↓ Down 20. IR Savings ↑ Up Demand for 21. IR Money ↓ Down 22. IR Bond Prices ↓ Down ↓ Down See the class PowerPoint for the reasons why IR negatively affect Net Income and therefore Stock Price. See the dramatic fall in all stock prices since the beginning of this 23. IR Stock Prices year when central banks started to increase IRs. 24. Money Supply Prices ↑ Up 25. Overcapacity Prices ↓ Down 26. Wages Prices ↑ Up ↓ Down Wages are the Price of Labor. As Wages rise, Demand falls (movement up the Demand curve so quantity Demanded falls). Companies stop hiring workers when the Demand for wage rates are too high which is why some companies are 27. Wages Labor firing this year in many sectors of the economy. 28. Unemployment Wages ↓ Down 29. Population Wages ↓ Down 30. Disposable Income Consumption ↑ Up 31. Unemployment Consumption ↓ Down 32. Home Prices Consumption ↓ Down 33. Stock Portfolio Value Consumption ↑ Up Disposable 34. Taxes Income ↓ Down 35. Taxes Consumption ↓ Down  Government 36. Taxes Deficit ↓ Down 37. Taxes Investment ↓ Down 38. Net Income Dividends ↑ Up 39. Net Income Hiring ↑ Up 40. Net Income Unemployment ↓ Down 41. Net Income Stock Price ↑ Up 42. Labor Costs Net Income ↓ Down ↓ Down The last workers are less productive as their skill level is lower than experienced workers. So productivity falls 43. Employment Productivity initially even if production is rising. 44. Productivity Costs ↓ Down 45. Expected Capital Prices Investment ↑ Up 46. Production Employment ↑ Up 47. Inventory Production ↓ Down 48. Income Imports ↑ Up Demand for ↑ Up The richer you are the more money you will have in 49. Income Money your wallet or checking account. 50. Government Securities Money Supply ↓ Down  PART B Bond & Stock Questions 150 POINTS 1. List 6 sources of funds for companies. Free Cash Flow Banks Commercial Paper Bonds Preferred Stock Common Stock Which sources are from Capital or Money markets? Money Markets: Commercial Paper Capital Markets: Bonds, Preferred Stock, Common Stock 2. Securities are stocks or bonds. Who issues securities and why? Securities are issued by governments and corporations to receive funding. Governments only issue bonds. Corporations can issue stocks and bonds. 3. What is the difference between the Primary and Secondary Securities Markets? The Primary Market is for new issues while the Secondary Market is where outstanding securities are bought and sold. 4. What does IPO stand for? What is the difference with Seasoned New Issues? Give details of the latest large IPO. Initial Public Offering represent companies selling their stock to the public for the first time versus Seasoned New Issues which represent new shares offered by firms that already have stock outstanding. On September 14, 2023, Arm Holdings (ARM), a British chip design company founded in 1990, controlled 90% by SoftBank, a large Japanese multinational investment holding company run by CEO Masayoshi Son, sold 95.5 million shares (10% of the total number of shares) on the American NASDAQ for $51 per share. At the end of the day, the stock was selling at $63.59, representing a 25% increase on the day of the IPO. The entire company was then valued at $61B. It was the largest technology IPO of 2023. 5. What is the name of the independent US government agency created after the Wall Street Crash of 1929 to protect investors from market manipulation? Which reports must be filed with this agency in a timely manner to avoid securities being withdrawn from the financial markets? SEC=Securities & Exchange Commission Public companies (companies with stocks issued in the stock markets) must submit quarterly and annual reports as well as periodic reports for exceptional events. 6. What is the name of the report filed for initial registration of new securities? What information does it contain? Prospectus=S-1 It provides information on the planned use of capital proceeds,  Details the current business model and competition Provides a brief prospectus of the planned security itself, offering price methodology and any dilution that will occur to other listed securities. 7. What is the difference between how shares are traded on the NYSE and the NASDAQ? The NYSE is an auction market whereas the NASDAQ us a dealer market. 8. In an auction market, assume you have buyers wishing to buy Apple stock at $175.01, $175.03, $174.05, and $174.08 while sellers would like to sell Apple stock at $175.05, $175.08, $175.09, and $175.03. Which orders would be executed immediately? Orders at $175.03 would be executed immediately. 9. What is market capitalization? What is the size of the US market capitalization compared to the rest of the world? Market capitalization=Equity Value of Companies=Number of Shares Outstanding x Price per Share US=59.9% of worldwide equity valuation 10. Name 5 stock market indices from 5 different countries from 5 different continents S&P 500-U.S.-North America CAC 40-France-Europe Nikkei 225-Japan-Asia Bovespa-Brazil-South America JSE All Share-South Africa-Africa 11. U.S. Treasury securities are issued by the US central bank called the Fed. 12. Name the 3 categories of US Treasury securities and their maturity. We have 3 categories of US Treasury securities : 1. T bills, their maturity is < of 1 year 2. T notes, their maturity is > 1 year and < 10 years 3. T bonds, their maturity is > 10 years 13. Who are the issuers of US municipal bonds? Give 2 examples. Municipal bonds are debt securities issued by state and local governments. These can be thought of as loans that investors make to local governments and are used to fund public works such as parks, libraries, bridges and roads, and other infrastructure. Examples bonds issued by the State of California or NYC. 14. Which is representative of a higher quality bond? BBB- or BB+ Which one would have a higher market interest rate? Why? The highest investment-grade bond rating is BBB- and the lowest rating below investment grade is BB+ BB+ would have the highest interest rate as it is lower quality which means higher risk. Therefore the market will demand a higher return and therefore a higher market interest rate. 15. Given equal coupon interest rates, which bond would have a higher price? CCC+ or B-? B- would have a higher price, as it is less risky and therefore more expensive as less risk is taken. 16. What is the price of money? Price of Money= Interest Rate 17. What is the interest on a $66,000 30-day note paying 6.8% interest? = 66000*1/12 or 30/365*6.8%=$374 18. If the interest rate on a US Tbill is currently 3.15%, what would be the new IR if the inflation rate decreased from 2.95% to 2.85%? 3.15%-0.10%=3.05% 19. What does bond default mean? Why is the US Tbill considered free of default? Bond default is when the issuer of the bond is unable to pay either the interest or principal payments when due. To avoid default, the Fed can print money and the US government can raise taxes which is why US Treasury securities are considered default free. 20. Why is the US Tbill considered free of liquidity risk? T bill are considered free of default risk because they are fully backed by the U.S. government. (the FED). These securities are seen as low risk and secure investment and are therefore sold more easily into the market. Liquidity risk concerns the risk you might not be able to sell the security quickly without significant decrease in the price. The higher the average trading volume for a security, the lower the liquidity risk. As the US Tbill is the most traded security in the world (since it is guaranteed by the US government and it is for less than one year), the liquidity risk is considered to be zero. 21. What has more Interest Rate risk, a 30 year or a 3 year bond? 30-year bond has more interest rate risk which means they are more sensitive to interest rate fluctuations. 30 year bond have more coupon payments over a longer period of time to be discounted back to today’s bond price. There is a greater probability that interest rates will rise within that longer time period than within a shorter period. 22. Why is the US Tbill considered free of interest rate risk? The US Tbill has a maturity of less than 1 year so risk of inflation moving quickly prior to maturity is low. Exceptionally, in 2022, even the US Tbill was not free of interest rate risk due to the accelerating rate of inflation. 23. What security does the world invest in when there is severe uncertainty or risk? In a time of high uncertainty and risk, it is better to invest in bonds and particularly government bonds, as the payback is certified and more secured. In times of severe crisis a huge amount of global investments flows into US T bills which drives the USD to appreciate against other currencies. 24. Who is the Chairman of the Fed? Who is the Chairman of the ECB? FED Chairman : Jerome Powell ECB Chairman : Christine Lagarde 25. What are the 4 goals of the Fed? Price stability (low inflation=2%) High employment (keep employment above a certain level or unemployment under a certain benchmark) Stable economic growth (GDP) Stability of financial markets and institutions (banks, stock, bond market prices..) 26. When does a Central Bank implement Restrictive Monetary Policy? When a country's GDP grows too rapidly, resulting in an increase in inflation above a desirable rate of 2%, central banks will implement a restrictive monetary policy. 27. What happens to Money Supply and Interest Rates under Restrictive Monetary Policy? Draw 2 diagrams illustrating your answer. Under a restrictive monetary policy, the money supply decreases, and the interest rate increases. 28. What are the 3 tools used for Expansionary Monetary Policy? Decreases of discount interest rate Buy Government Securities Lower reserve requirements 29. Fill In the following with arrows. If the Central Bank reduces Money Supply: IR Investment Production Employment Disposable Income Consumption Sales Net Income Stock market GDP IR: UP Investment : Down Production Employment: Down Disposable Income: Down Consumption: Down Net Income: Down Stock market: Down GDP: Down 30. What is a Bear Market? A bear market occurs when a market experiences prolonged price declines. "It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.” 31. Name 3 US stock market indices. What is the stock market index of your country? NASDAQ Composite Index, S&P 500 Index, Dow Jones Index. My country stock market index is CAC40. 32. What is a mortgage backed security? Mortgage-backed securities, called MBS, are bonds secured by home and other real estate loans. They are created when a number of these loans, usually with similar characteristics, are pooled together. 33. Who has the right to call back a callable bond? When would they call it back? A callable bond is a debt instrument in which the issuer reserves the right to return the investor's principal and stop interest payments before the bond's maturity date. 34. If an investor is uncertain a company could pay back the principal of a bond, it could buy a callable or putable bond. Circle the correct answer. in contrast to callable bonds (and not as common), putable bonds provide more control of the outcome for the bondholder. Owners of putable bonds have essentially purchased a put option built into the bond. Therefore “….it could buy a putable bond”. 35. What is the difference between a registered and a bearer bond? Which type of bonds cannot avoid taxation? Which of the two types of bonds are issued in the US? A registered bond has its owner's name and contact information recorded with the issuing entity, ensuring coupon payments are correctly distributed. Bearer bonds, which don't record the owner's info, are the opposite of registered bonds. In the US, bearer bonds can’t be issued anymore since they allowed avoiding taxation. Nowadays, companies can only issue registered bonds. 36. What is the biggest enemy of a currency? What monetary policy (Expansionary or Restrictive) ensures that this enemy is kept at bay? The biggest enemy of a currency is inflation. To fight against inflation, the central bank has to set up the restrictive policy. 37. What is the difference between M1 and M2? What is the targeted inflation rate of the Fed? M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks. More globally, it is what individual people have in their pocket. M2 money supply is less liquid in nature and includes M1 plus savings and time deposits, certificates of deposits, and money market funds. FED Targeted inflation: 2%. 38. Who determines Monetary Policy? The Central bank. FED in the US, ECB in Europe, and Bank of England in the UK 39. Buy bonds for bad times. 40. The interest rate charged by banks to other banks for overnight funds is called the Euribor rate in Europe and Federal Funds rate in the US. 41. The security used by companies to borrow money from another company short term is called Commercial Paper 42. List 4 differences between stocks and bonds. - Equity shareholders have an ownership in the company decision making (voting right) / Bondholders don’t have influence in the company decision making. - a stock's income is a dividend / a bond's income is a coupon interest - By investing in shares, equity shareholders may not receive dividends depending on the company financial performance / Bondholders are certain to receive a coupon, even if the return may not be as high as taken risk is not high. -Bond issuers must pay back the principal amount at maturity / Companies never give the cash back to the original shareholders, eventually they can pay the market price for each share to retire their shares. 43. Name 2 reasons that stocks are riskier for an investor than bonds. For an investor, stocks are riskier because if the company has to stop operations, the shareholders will be last in line and it’s more likely that they won’t get any money back whereas the bondholders are more likely to get their money back because they had a contract that clearly states that the company needs to pay them back at the maturity of the bond and therefore will receive the money that is left before any of the shareholders is paid. Secondly, the company has to pay the bond back after maturity and has to pay the bondholders the interest so the bondholders are sure that they will get their money back and they will also get their interest since the bondholders could otherwise sue the company. Shareholders will never get their cash back and the companies can decide whether or not to pay dividends. Therefore, the shareholders will not receive any dividends if the company generates a loss whereas the bondholders will still get paid the interest rate or in case of maturity, they will get the original bond value back. To sum it up, the shareholders depend much more on the economic situation of the company than the bondholders do, yet most shareholders hold only minorities and therefore, don’t have enough voting rights to have a proper influence in the company. 44. Why does a company prefer to issue stock instead of bonds? A company prefers to issue shares because it allows it to finance itself, to develop its projects, to increase its capital and to distribute the decision-making power. Whereas a bond is a debt that must be repaid, unlike a share which is an external investment. Moreover, there is no interest rate on a stock but only dividends that the company chooses to distribute. Also shares can accomplish certain financial targets such as keeping debt/equity ratio lower. 45. High returns are prima facie evidence that there is high risk. 46. The more risk assumed, the more return is demanded 47. If you bought a share of stock for $660, received a $50 dividend and sold it one year later for $630, your return on investment would be (630+50-660)/660= 3.03% 48. If you bought a $10,000 US T note at a price of 96.50 with a 2.5% coupon interest rate, what would be your return on investment when the bond matures one year later?  US T NOTES INVESTMENT Price CIR Investment Buy $10000 96,5 (9650) Receive 2.5% coupon interest 2,50% 250 Bond matures one year later 100 10000 Return 600 The return on investment is therefore expected to be 6.22%=600/9650 49. If the interest rate on a 10 year AA bond is currently 4.25% and the 10 year T bond is yielding 3.70%, what is the difference in the 2 rates called and how much is it? The difference between the 2 rates is 0.55%, and this is also called 55 bpts for basis points. The difference is called the Credit Default Premium. 50. If Money Supply is rising by 3 % and GDP is rising by 3.5%, is this an example of Restrictive or Expansionary Monetary Policy? This is an example of Restrictive Monetary policy as the Money Supply is not growing as fast as GDP. 51. Which group carries the most risk of any company? Employees, bankers, suppliers, executive board, bondholders, or shareholders Shareholders, because if the company has bad results they might not get their money back, and the bondholders have priority over shareholders in a company. 52. Name 5 types of Financial Intermediaries. Commercial banks, savings banks, pension funds, money market funds, life insurance companies 53. Watch the following on Initial Public Offering and discuss the pros and cons of a company going public and therefore issuing shares. http://www.investopedia.com/video/play/pros-and-cons- company-going-public/?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186 A company going public has pros, the most important is the growth in capital, letting the company pay loans, fund R&D, or simply pay expenses. There is also the publicity, leading to growth in market shares. An IPO could also be an exit strategy for the owners of the company, being some sort of reward for their hard work by cashing in. There are also cons to going public, such as the new rules the company needs to follow. This can lead to huge costs in order to keep up to standard with the SEC. New fees also appear for the company, with financial reporting documents and investors relations department. The investors want results and could be less focused on the company’s activity than the results, making it short term focused. It oftentimes led to poor management condition. 54. Looking at https://markets.ft.com/data/league-tables/tables-and-trends for the year 2021: 1. Name the top 3 Investment Banks in terms of Fees. Detail the amount of their fees and the percentage earned in M&A, Equity, Bonds and Loans. The top 3 investment banks in 2021 are : JP Morgan with $13,369.87M in fees, Goldman Sachs & Co with $11,715.04M in fees, Morgan Stanley with $9,316.04M in fees. JP Morgan: 33% of its fees in M&A, 24% in Equity, 22% in bonds and 21% in loans. Goldman Sachs: 42% in M&A, 33% in Equity, 16% in bonds and 21% in loans. Morgan Stanley: 37% in M&A, 37% in equity, 18% in bonds and 8% in loans 2. Name the top 3 investment banks in M&A in terms of Deal Values. Detail the amount of the deal values. Where are the largest percentage of those deals executed? The top 3 investment banks in M&A in term of deal values are Goldman Sachs & Co ($1.705,001.23M), JP Morgan ($1,258,012.58M) and Morgan Stanley ($1,203,799.85M). For Goldman Sachs, the largest number of deals are made in the Americas (58%). For Morgan Stanley the largest number of deals is also made in the Americas (64%). As for JP Morgan, the largest number of deals is also made in the Americas (55%) 3. Name the top 3 investment banks in Equity in terms of Deal Values. Detail the amount of the deal values and the percentage based on IPOs. The top 3 investment banks in equity in term of deal values are Goldman Sachs, with $134,469.22M in value and 28% of it in IPO. The 2nd bank is Morgan Stanley, with a deal value of $117,905.15M, 30% of it made with IPO. The 3rd bank is JP Morgan, with a deal value of $109,050.98M and 36% of it based on IPO 4. Name the top 3 investment banks in Bonds in terms of Deal Values. Detail the amount of the deal values and the percentage based on Investment Grade. The top 3 investment banks in bonds in term of deal values in 2021 are JP Morgan, with a $596,247.05M value, 39% of this value is based on investment grade. The 2nd investment bank in bonds is Citi, with a value of $454,370.14M, 39% of it is based on investment grade. The 3rd bank is Bofa Securities Inc, with a deal value of $453,518.47M, 45% of this value is based on investment grade. 5. Name the top 3 investment banks in Loans in terms of Fees. Detail the amount of the deal values and the percentage based on Highly Leveraged. The top 3 banks in Loans in term of fees are JP Morgan with fees of $2,811.72M, 37% of it is based of highly leveraged. The 2nd is Bofa Securities Inc, with fees of $2,146.45M, 29% is based on highly leveraged. The 3rd is Goldman Sachs, with fees of $1,121.31M, and 53% of it is based on highly leveraged. 55. Find Note 3 of Apple’s 2021 annual report. What are Apple’s 3 largest investments at the end of their fiscal year 2021 based on Fair Value? What was the company’s net unrealized gain or loss on their largest investment in 2021? How much did Apple’s total portfolio assets based on Fair Value rise or fall from 2020 to 2021? What was is the investment with the largest decrease from 2020 to 2021 by Fair Value? What is the investment with the largest increase from 2020 to 2021? What  percentage of the total Fair Value of their portfolio is STI (Current Marketable Securities)? Is Apple investing in or borrowing using Commercial Paper in this note? The largest investment in 2021 in fair Value is corporate debt securities ($84,858 M), the 2nd largest investment in 2021 is U.S Treasury securities ($22,903 M), the 3rd largest Apple’s investment is Mortgage and Asset Backed Securities ($20,576 M). The unrealized gains are $1,242M and the unrealized loss are ($267M). The net unrealized gain was therefore $975M. The total of Apple’s portfolio decreased$1,314M in 2021 compared to 2020, going from $191,830M in 2020 to $190,516M in 2021. The investment with the largest decrease from 2020 to 2021 is the certificates of deposit and time deposits with a decrease of $9,099M. The investment with the highest increase from 2020 to 2021 is the money market funds, with an increase of $7,437M. 14,53% of Apple’s portfolio is STI, Current Marketable Securities ($27,699 M/$190,516 M). In this note, Apple is investing in commercial paper. 56. Find Note 7 of Apple’s 2021 annual report. Is Apple investing in or borrowing using Commercial Paper in this note? What percentage of Apple’s total long-term debt in 2021 was fixed rate debt? Is the company assuming that interest rates will increase or decrease in the future? In the Note 7 Apple is Borrowing money from investors. 98.51% of Apple’s long term debt is at a fixed rate ($116,313M /$118,063M). Apple is assuming that the interests rates will decrease in the future. 57. Watch the following video on preferred stock and discuss 2 ways it resembles a bond and 2 ways it resembles common stock. http://www.investopedia.com/video/play/preferred-stock- vs-common-stock/ It looks like a bond in 2 ways: It provides a stable income stability with a set dividend, this means that there is no chance to have a large gain since it’s just like a loan. A preferred stock also has priority over common stocks, meaning that the company will pay the preferred stocks holders before the common stocks, just like a bond. It can also be close to common shares : It is still a company ownership and not just a loan. Both the preferred stocks and common stocks pay dividends, only that the preferred stocks pay set dividends. Nonetheless, preferred stock pays dividends, while bonds pay interest, meaning that preferred stocks have still more risk and depend on the company’s results. 58. On investing.com find (from menu, click on bonds, world government bonds, then find your country and click search) and copy paste the yield curves of the following countries: France, Argentina, Japan, Germany, India. Which country is facing high inflation? Which country looks like it is headed for recession. The country with the highest inflation in this list is Argentina with its interest rate of 78,5% and heading to 100%. The second highest inflation rate is India with a 7.5% interest rate. If we had to bet on the recession of a country, the safest would-be Argentina. Its very high inflation can be interpreted as a sign of coming recession, with a decrease of consumer spending, increased business spendings, stock markets declining and reduced lending. There is also an slightly inverted yield curve in one year in France which could suggest a mild recession next year. 59. On investing.com bonds, world government bonds, which country has the lowest and highest 10 year yields? Calculate the credit spread between the two. Which country’s currency is struggling for survival? Japan=0.646% Zambia=29.620% Credit spread=29.620%-0.646%=28.974%=2897.4 bpts 60. On Finra find the Standard & Poors credit ratings on the following companies, then rank them from the highest to the lowest quality. Which company would have the lowest cost of debt? https://finra-markets.morningstar.com/BondCenter/Default.jsp Apple, LVMH SE, Ralph Lauren, Airbus SE, Boeing Co, Renault, Ford Motor Co, Microsoft Microsoft: AAA, Apple : AA+; LVMH : A+, Airbus : A, RL : A-, Boeing : BBB-, Renault BB+, Ford Motor : BB+ Regarding the credit rating by S&P, Microsoft is likely to have the lowest cost of debt