By implementing any hedge Solect one: O a you shouid try to make money on both sides of the transaction: that way you moke money coming and going. O b you should spend at least as much time working the hedge as working the underlying deal itseif. O G you should agree to anything your banker puts in front of your face. O d your losses on one side should about equal your gains on the other side. Which of the following is NOT one of the key factors that have motivated Honda to make investments in America?
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- Suppose that in a given bond market, there is currentlyno information that can help potential bond buyers todistinguish between bonds. Which bond issuers havean incentive to disclose information about their companies? Explain whyAs and example of a possible investment restriction, an insurer mah only be allowed to invest up to 20 percent of its assets in common stock. What penalty is imposed upon the insurer that invests 30 percent of available assets in common stock?A. The additional 10 percent must be disposed of by year endB. The state regulators would impose a 10 percent fine on the insurer.C. The additional 10 percent would be a nonadmitted asset.D. The additional 10 percent would only be listed at cost.3. You are in the market for a used car and decide to visit a used car dealership. Youknow that the Blue Book value of the car you are looking at is between $14,000 and$18,000.a. If you believe the dealer knows as much about the car as you do, how much areyou willing to pay? Why? Assume that you care only about the expected value ofthe car you will buy and that the car values are symmetrically distributed.b. Now you believe the dealer knows more about the car than you do. How much areyou willing to pay? Why? How can this asymmetric information problem beresolved in a competitive market?
- (1) Why would a company’s financial managers wantto pay attention to the federal funds rate? (2) Ratherthan promising to support any too-big-to-fail banks,could the federal government instead simply warneveryone that doing business with one of these firmsis risky? Why or why not?Economists John Maynard Keynes and John Hicks argued that, if hedgers tend to holdshort positions and speculators tend to hold long positions, the futures price of an assetwill be below the expected spot price. This is because speculators require compensationfor the risks they are bearing. They will trade only if they can expect to make money onaverage. Hedgers will lose money on average, but they are likely to be prepared toaccept this because the futures contract reduces their risks This is from John Maynard Keynes. My question is i dont understand this statement. Why is the future price of an asset to be below the expected spot price if speculators are the main determinant of the future price, they have a long contract which means they will earn money if the spot price is above the expected spot price6. An investor purchases a 30-year U.S. government bond for $840. The bond’s couponrate is 10 percent and, it still had twelve years remaining until maturity. If the investorholds the bond until it matures and collects the $1000 par value from the Treasuryand his marginal tax rate is 25 percent (we assume that the bond is taxable), what willbe his after-tax (effective) yield to maturity? Make sure to show your work.
- Bond A pays $8,000 in 20 years. Bond B pays $8,000in 40 years. (To keep things simple, assume that theseare zero-coupon bonds, meaning the $8,000 is theonly payment the bondholder receives.)a. If the interest rate is 3.5 percent, what is the valueof each bond today? Which bond is worth more?Why? (Hint: You can use a calculator, but the ruleof 70 should make the calculation easy.)b. If the interest rate increases to 7 percent, what isthe value of each bond? Which bond has a largerpercentage change in value?c. Based on the example above, complete the twoblanks in this sentence: “The value of a bond[rises/falls] when the interest rate increases,and bonds with a longer time to maturity are[more/less] sensitive to changes in the interestrate.”Now suppose agent C can produce private information about the true realization x at t=1 at the cost γ=4. Suppose lA=lB=φA=φB=1 and x is either 40 or 100 with equal probability and w=70. - At t=1, agent B owns the bond. What is the maximum amount LB that agent B can borrow with probability 1?- At t=0, what amount LA can agent A borrow from agent B in a repo trade at t=0 and what is the haircut in equilibrium?4. Does the I in C+I+ G Nx include purchases of stocks and bonds? Why or why not? Lo2 t nnmnonent of I in
- 4. Ted Baxter runs a small, very stable newspaper company insouthern Oregon. The paper has been in business for 25 years.The total value of the firm’s capital stock is $1 million, which Tedowns outright. This year the firm earned a total of $250,000after out-of-pocket expenses. Without taking the opportunitycost of capital into account, this means that Ted is earning a25 percent return on his capital. Suppose that risk-free bondsare currently paying a rate of 10 percent to those who buy them.a. What is meant by the “opportunity cost of capital”?b. Explain why opportunity costs are “real” costs even thoughthey do not necessarily involve out-of-pocket expenses. c. What is the opportunity cost of Ted’s capital?d. How much excess profit is Ted earning?Which relationship would you expect to exist betweenmeasures of corruption and living standards at thecountry level? Explain by which channel corruptionmight affect living standards.. Wood, the receiver of Stanton Oil Company, suedStanton’s shareholders to recover dividends paid to themfor three years, claiming that at the time these dividendswere declared, Stanton was in fact insolvent. Wood didnot allege that the present creditors were also creditorswhen the dividends were paid. Were the dividendswrongfully paid? Explain