INVESTMENTS HW

1) Which of the following transaction costs could impact the profitability of a trade?

a) Broker fee

b) Bid-ask spread

c) Depth

d) Price Impact e) A, B, and D

2) You have the opportunity to invest in two different bonds: one is a municipal bond that pays 6.00% and the other is a corporate bond that pays 8.25%. You are in the 30% marginal tax bracket. Assuming everything else is equal, in which bond should you invest? Which bond should you invest in if your marginal tax bracket is 15%?

3) You have decided to place a market order to buy 8,000 shares of stock ABC at and ask price of $30.00 per share. Your broker offers you a financing fee of 0% annual, your initial margin is 45% and your maintenance margin is 30%.

a) What is the minimum amount of equity required to place the order?

b) Suppose that you hold the 8,000 shares over a year. If the share price one year from now can be

either $33.00 or $27.00, compute the return (over equity) one year from now (both scenarios).

c) If the price is $27.00, do you have a margin call?

d) Compute the share price that triggers a margin call.

e) If the share price is $23.57, compute the additional amount of equity required to restore the

margin account to the maintenance margin

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