Problem Set #1

Chapter 1:

1. Financial engineering has been disparaged as nothing more than paper shuffling. Critics argue that resources used for rearranging wealth (that is, bundling and unbundling financial assets) might be better spent on creating wealth (that is, creating real assets). Evaluate this criticism. Are any benefits realized by creating an array of derivative securities from various primary securities?

2. Give an example of three financial intermediaries and explain how they act as a bridge between small investors and large capital markets or corporations.

3. Why do financial assets show up as a component of household wealth, but not of national wealth? Why do financial assets still matter for the material well-being of an economy?

Chapter 2:

1. The investment manager of a corporate pension fund has purchased a treasury bill with 182 days to maturity at a price of $9600 per $10000 face value. The manager has computed the bank discount yield at 8%.

a. Calculate the bond equivalent yield for the treasury bill. Show your calculations.

b. Briefly state two reasons that a treasury bill’s bond equivalent yield is always different from the discount yield.

2.Consider the following data for the three stocks that make up the market:

Consider the following data for the three stocks that make

a. What is the single-period return on the price-weighted index constructed from the three stocks?

b. What is the single-period return on the value-weighted index constructed from the three stocks using a divisor of 100?

c. What is the single-period return on the price-weighted index constructed from the three stocks if stocks A and B were to split 2 for 1 and 4 for 1, respectively, after period 0?

d. What is the single-period return on the value-weighted index constructed from the three stocks if stocks

 A and B were to split 2 for 1 and 4 for 1, respectively, after period 0?

3. In what ways is preferred stock like long-term debt? In what ways is it like equity?

Non Textbook Question:

a. What is the closing price of the S&P TSX today?

b. What is the % return on the index for the last day? the last month? the last year? the last five years?

C.Answer the same questions for Nutrien (NTR.TO). Based on what you know now, would you have bought Nutrien stock five years ago (if you had the funds do so)? Why or why not? How about an index-fund tied to the S&P TSX index? Why or why not?