The average rate of return on investments in large stocks has outpaced that on investments in Treasury bills by about 8% since 1926. Why, then, does anyone invest in Treasury bills?
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The average rate of
Treasury bills by about 8% since 1926. Why, then, does anyone invest in Treasury bills?
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- About a year ago, Eric Robertson bought some shares in the Diamond Mountain Mutual Fund. He bought the fund at $25.50 a share, and it now trades at $26.30. Last year, the fund paid dividends of $0.72 a share and had capital gains distributions of $2.50 a share. Assume that the mutual fund distributed the dividends and capital gains at the end of the year. Using the approximate yield formula, what rate of return did Eric earn on his investment? Round the answer to two decimal places. % Repeat the calculation using a handheld financial calculator. Round the answer to two decimal places. % What rate of return would he have earned if the stock had risen to $30 a share? Round the answer to two decimal places. %A stock is selling today for $50 per share. At the end of the year, it pays a dividend of $3 per share and sells for $59. Required: a. What is the total rate of return on the stock? b. What are the dividend yield and percentage capital gain? c. Now suppose the year-end stock price after the dividend is paid is $44. What are the dividend yield and percentage capital gain in this case?What innovations account for the rapid growth in the variety of fixed-income instruments over the last 50 years?
- Which of the following is not considered part of M2? a. money market mutual fund shares b. large time deposits of more than $100,000 c. small time deposits of less than $100,000 d. savings depositsYou work for a public company that has relied heavily ondebt financing in the past and is now considering a preferredstock issuance to reduce its debt-to-assets ratio. Debt-to-assetsis one of the key ratios in your company’s loan covenants.Should the preferred stock have a fixed annual dividend rateor a dividend that is determined yearly? In what way mightthis decision be affected by IFRS?Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $48. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Portfolio Treasury bills Treasury bonds. Common stocks Discount rate Average Annual Rate of Return (8) 3.8 5.3 11.5 Stock price a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Average Premium (Extra return versus Treasury bills) (8) % 1.5 7.7 b. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
- Solve the problem with complete solution. 8. You invested 20,000 in a financial institution for a trust fund in NAV of 65 per share. How many shares have you invested?You are the CFO of a company and the CEO wants you to tell him which evolution we will see in interest rates in the near future (say this year and next year). What do you tell him and why? Should your company issue bonds now?Use the data in the tables below to answer the following questions: Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017. Average Premium Portfolio Treasury bills Treasury bonds Common stocks Average Annual Rate of Return (%) (Extra return versus Treasury bills) (%) 3.8 5.3 11.5 1.5 7.7 Standard deviation of returns, 1900-2017. Standard Portfolio Deviation (%) Treasury bills 2.9 Long-term government bonds 9.0 Common stocks 19.7 a. What was the average rate of return on large U.S. common stocks from 1900 to 2017? b. What was the average risk premium on large stocks? c. What was the standard deviation of returns on common stocks? (Enter your answer as a percent rounded to 1 decimal place.) a. Average rate of return 11.5 % b. Average risk premium 7.7 % C. Standard deviation of returns 19.7 %
- Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $47. The stock will pay a dividend at year-end of $2.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.3%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2017 (figures in percent per year) are as Follows. Average Premium (Extra return versus Treasury bills) (%) Average Annual Rate of Return (%) Portfolio Treasury bills Treasury bonds 3.8 5.3 1.5 Common stocks 11.5 7.7 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate % 6. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock priceTop hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $50. The stock will pay a dividend at year-end of $2. Assume that risk-free Treasury securities currently offer an interest rate of 2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Average Premium (Extra return versus Treasury bills) ($) Average Annual Rate of Return ipped Portfolio ($) 3.8 Treasury bills Treasury bonds 5.3 1.5 Common stocks 11.5 7.7 Book Ask a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Print eferences Discount rate 9.70 % b. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer decimal places.) Stock priceSuppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest rates in Europe. What effect would this have on the price of an average company's common stock? (Hint: in your explanation consider alternative investment to common stocks; a relatively riskless investment)
