Examine the balance sheet of commercial banks in Table 1.3.

Chapter 1
Question 9
Examine the balance sheet of commercial banks in Table 1.3. What is the ratio of real assets to
total assets? What is that ratio for nonfinancial firms (Table 1.4)? Why should this difference be
expected?
Question 11
Discuss the advantages and disadvantages of the following forms of managerial compensation
in terms of mitigating agency problems, that is, potential conflicts of interest between mangers
and shareholders.
a. A fixed salary.
b. Stock in the firm that must be held for five years
c. A salary linked to the firm’s profits.

Chapter 2
Question 7
Turn back to Figure 2.3 and look at the Treasury bond maturing in February 2039.
a. How much would you have to pay to purchase one of these notes?
b. What is its coupon rate?
c. What is the current yield of the note?
Question 17
Look at the futures listings for the corn contract in Figure 2.10.
a. Suppose you buy one contract for March delivery. If the contract closes in March at a
level of 3.875, what will your profit be?
b. How many March maturity contracts are outstanding?
Solutions to Concept Checks
5. The market-value-weighted index return is calculated by computing the increase in the value
of the stock portfolio. The portfolio of the two stocks starts with an initial value of $100 million +
$500 million = $600 million and falls in value to $110 million + $400 million = $510 million, a loss
of 90/600 = .15%. The index portfolio return is a weighted average of the returns on each stock
with weights of 1/6 on XYZ and 5/6 on ABC is -20%, the index portfolio return is 1/6 X 10% + 5/6
X (-20%) = -15%, equal to the return of the market-value-weighted index.

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Chapter 3
Questions 9
You are bullish on Telecom stock. The current market price is $50 per share, and you have
$5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest
rate of 8% per year and invest $10,000 in the stock?
Questions 14
Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer
market.
Bid

]

55.25

Asked
55.50

a. Suppose you have submitted an order to your broker to buy at market. At what price will you
trade be executed?
b. Suppose you have submitted an order to sell at market. At what price will your trade be
executed?
c. Suppose you have submitted a limit order to sell at $55.62. What will happen?
d. Suppose you have submitted a limit order to buy at $55.37. What will happen?

CFA Problems
1. FBN, Inc., has just sold 100,000 shares in an initial public offering. The underwriter’s
explicit fees were $70,000. The offering price for the shares was $50, but immediately
upon issue, the share price jumped to $53.
a. What is your best guess as to the total cost to FBN of the equity issue?
b. Is the entire cost of the underwriting a source of profit to the underwriters?

Chapter 4
Question 9
The composition of the Fingroup Fund Portfolio is as follows:
Stock
A

Shares
200,000

Price
$35

B
C
D

300,000
400,000
600,000

40
20
25

The fund has not borrowed any funds, but its accrued management fee with the portfolio
manager currently totals $30,000. There are 4 million shares outstanding. What is the net
asset value of the fund?

Question 13
A closed-end fund starts the year with a net asset value of $12.00. By year-end, its NAV
equaled $12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. By
the end of the year, the year, the fund is selling at a 7% discount to NAV. The fund paid yearend distributions of income and capital gains of $1.50.
a. What is the rate of return to an investor in the fund during the year?
b. What would have been the rate of return to an investor who held the same securities as
the fund manager during the year?