Evidence Based Practice 2
1. The evidence suggests that integrated physician practices use more evidenced-based care processes, provide more preventive health services, and offer more health promotion programs for the populations they serve than non-integrated practices. Medical groups involve physicians practicing exclusively as either salaried employees of the group or as partners. What are some reasons why these integrated practices may or may not be the most efficient ways to practice medicine considering the challenges facing health care organizations in the 21st century?
2. What is the purpose of a balanced scorecard? How is the balanced scorecard used to lead and manage an organization? How can the balanced scorecard be linked to organizational effectiveness as well as individual performance evaluation?
Chapter 2
Asset Classes and Financial Instruments
*
Describes the financial instruments traded in primary and secondary markets.
Discusses Market indexes. Discusses options and futures.
1. The Money Market- This is where the money stays money!
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*
These are the various major classes of financial assets or securities.
Debt- Fixed income securities
Common Stock- Ownership
Preferred-Hybrid of fixed income and ownership
Derivative-Value based on the price of another asset.
special purpose, hedge; arbitrage; defer gain, short term speculation, etc.
Money Market InstrumentsTreasury BillsCertificates of DepositCommercial PaperBankers’ AcceptancesEurodollarsRepos and ReversesBroker’s CallsFederal FundsLIBOR (London Interbank Offer Rate)
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Treasury BillsTreasury billsIssued byDenominationMaturityLiquidityDefault riskInterest typeTaxation
Federal Government
$100, commonly $10,000
4, 13, 26, or 52 weeks
Highly liquid
None
Discount
Federal taxes owed, exempt from state and local taxes
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*
Certificates of Deposit (CD)Certificates of DepositIssued byDenominationMaturityLiquidityDefault riskInterest typeTaxation
Depository Institutions
Any, $100,000 or more are marketable
Varies, typically 14 day minimum
3 months or less are liquid if marketable
First $100,000 ($250,000) is insured
Add on
Interest income is fully taxable
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Commercial PaperCommercial PaperIssued by
MaturityDenominationLiquidityDefault riskInterest typeTaxation
Large creditworthy corporations and financial institutions
Maximum 270 days, usually 1 to 2 months
Minimum $100,000
3 months or less are liquid if marketable
Unsecured, Rated, Mostly high quality
Discount
Interest income is fully taxable
New Innovation: Asset backed commercial paper is backed
by a loan or security. In summer 2007 asset backed CP
market collapsed when subprime collateral values fell.
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Bankers Acceptances & EurodollarsBankers AcceptancesOriginates when a purchaser of goods authorizes its bank to pay the seller for the goods at a date in the future (time draft). When the purchaser’s bank ‘accepts’ the draft it becomes a contingent liabili ...
Organic Name Reactions for the students and aspirants of Chemistry12th.pptx
Evidence Based Practice21. The evidence suggests that .docx
1. Evidence Based Practice 2
1. The evidence suggests that integrated physician practices use
more evidenced-based care processes, provide more preventive
health services, and offer more health promotion programs for
the populations they serve than non-integrated practices.
Medical groups involve physicians practicing exclusively as
either salaried employees of the group or as partners. What are
some reasons why these integrated practices may or may not be
the most efficient ways to practice medicine considering the
challenges facing health care organizations in the 21st century?
2. What is the purpose of a balanced scorecard? How is the
balanced scorecard used to lead and manage an organization?
How can the balanced scorecard be linked to organizational
effectiveness as well as individual performance evaluation?
2. Chapter 2
Asset Classes and Financial Instruments
*
Describes the financial instruments traded in primary and
secondary markets.
Discusses Market indexes. Discusses options and futures.
1. The Money Market- This is where the money stays money!
2-*
*
These are the various major classes of financial assets or
securities.
Debt- Fixed income securities
Common Stock- Ownership
Preferred-Hybrid of fixed income and ownership
Derivative-Value based on the price of another asset.
special purpose, hedge; arbitrage; defer gain, short term
speculation, etc.
3. Money Market InstrumentsTreasury BillsCertificates of
DepositCommercial PaperBankers’
AcceptancesEurodollarsRepos and ReversesBroker’s
CallsFederal FundsLIBOR (London Interbank Offer Rate)
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Treasury BillsTreasury billsIssued
byDenominationMaturityLiquidityDefault riskInterest
typeTaxation
Federal Government
$100, commonly $10,000
4, 13, 26, or 52 weeks
Highly liquid
None
Discount
Federal taxes owed, exempt from state and local taxes
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*
Certificates of Deposit (CD)Certificates of DepositIssued
byDenominationMaturityLiquidityDefault riskInterest
typeTaxation
Depository Institutions
Any, $100,000 or more are marketable
Varies, typically 14 day minimum
3 months or less are liquid if marketable
First $100,000 ($250,000) is insured
4. Add on
Interest income is fully taxable
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*
Commercial PaperCommercial PaperIssued by
MaturityDenominationLiquidityDefault riskInterest
typeTaxation
Large creditworthy corporations and financial institutions
Maximum 270 days, usually 1 to 2 months
Minimum $100,000
3 months or less are liquid if marketable
Unsecured, Rated, Mostly high quality
Discount
Interest income is fully taxable
New Innovation: Asset backed commercial paper is backed
by a loan or security. In summer 2007 asset backed CP
market collapsed when subprime collateral values fell.
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*
Bankers Acceptances & EurodollarsBankers
AcceptancesOriginates when a purchaser of goods authorizes its
bank to pay the seller for the goods at a date in the future (time
draft). When the purchaser’s bank ‘accepts’ the draft it becomes
5. a contingent liability of the bank and becomes a marketable
security.EurodollarsDollar denominated (time) deposits held
outside the U.S.Pay a higher interest rate than U.S. deposits.
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More on BA’sFirst owner is the exporter. Choice: hold till
maturity or sell beforeExporter receives the “notional” amount
less bank feesIf wants to receive funds early, sell it to bank and
or other investors at a rate that is current in the market.
Example, use a discount rate of 5%, but for six months; also
subtract bank fees
Federal Funds and LIBORFederal FundsDepository institutions
must maintain deposits with the Federal Reserve Bank. Federal
funds represents trading in reserves held on deposit at the
Federal Reserve.Key interest rate for the economy
LIBOR (London Interbank Offer Rate)Rate at which large banks
in London (and elsewhere) lend to each other. Base rate for
many loans and derivatives.
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*
6. Repurchase Agreements and ReversesRepurchase Agreements
(RPs or repos)
and Reverse RPsShort term sales of securities arranged with an
agreement to repurchase the securities a set higher price.A RP is
a collateralized loan, many are overnight, although “Term” RPs
may have a one month maturity.A Reverse Repo is lending
money and obtaining security title as collateral.“Haircuts” may
be required depending on collateral quality
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*
Money Market InstrumentsCall Money RateInvestors who buy
stock on margin borrow money from their brokers to purchase
stock. The borrowing rate is the call money rate.The loan may
be ‘called in’ by the broker.
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*
Figure 2.1 Money Rates
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*
7. Table 2.2 Major Components of the Money Market
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*
Figure 2.2 Treasury Bills (T-bills)
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*
Spreads on CDs and Treasury Bills
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MMMF and the Credit Crisis of 2008Between 2005 and 2008
money market mutual funds (MMMFs) grew by 88%.
Why?MMMFs had their own crisis in 2008 when Lehman
Brothers filed for bankruptcy on September 15.Some funds had
invested heavily in Lehman’s commercial paper. On Sept. 16,
Reserve Primary fund “broke the buck.” What does this mean?A
run on money market funds ensued.The U.S. Treasury
8. temporarily offered to insure all money funds to stop the run
- (up to $3.4 trillion in these funds.)
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Money Market Instrument YieldsYields on money market
instruments are not always directly comparable
Factors influencing “quoted” yields Par value vs. investment
value360 vs. 365 days assumed in a year (366 leap year)Simple
vs. Compound Interest
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*
Par Value is the face value of the instrument. Investment value
is what you paid for it.
Some rate methods use 360 days instead of 365 days
BEY uses simple instead of compound interest.
Three popular yield measurements used in quotations:
Bank Discount Rate
Bond Equivalent Yield
Effective Annual Yield
Bank Discount Rate (T-Bill quotes)
rBD = bank discount rate
P = market price of the T-bill
n = number of days to maturity
9. Price paid= (1-{1.190%*(161/360)}*$10000 =$9946
Yield= (10K/9946)-1}(365/161) = 1.213%
$10,000 = Par
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r
BD
$10,000
-
P
=
$10,000
x
360
n
*
10,000-P is the money you will earn in N days.
BAD because uses the par value in the denominator, and uses
simple interest.
10. Bond Equivalent YieldCan’t compare T-bill directly to bond360
vs 365 days Return is figured on par vs. price paid
Adjust the bank discount rate to make it comparable
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*
Somewhat better because it uses 365 days and now uses the
market price in the denominator. But it is still using simple
interest.
Money Market InstrumentsTreasury bills Certificates
of deposit Commercial Paper Bankers Acceptances
Eurodollars Federal Funds
Repurchase Agreements (RPs)
and Reverse RPs
Discount
BEY*
Discount
Discount
BEY*
BEY*
Discount
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*
* NOTE: CD, Euro$ and FF all use add on which is not quite
the same as BEY, since the add on uses a 360 day year. Add on
is not covered in the text. To convert from add on to BEY:
11. BEY = Add on * (365/360)
2. The Bond Market
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*
Capital Market - Fixed Income Instruments
Government IssuesUS Treasury Bonds and NotesBonds versus
NotesDenominationInterest typeRisk?
____________________Taxation?
Variation: Treasury Inflation Protected Securities (TIPS)
Tips have principal adjusted for increases in the Consumer Price
Index
Marked with a trailing ‘i’ in the quote sheet (See Figure 2.4)
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*
Fixed income have a defined stream of payments or coupons.
Notes have a maturity up to and including 10 years, bonds
beyond 10 years
Minimum denomination is $100, but most have $1,000
denomination although many T-bonds are packaged and sold in
multiples of $1,000.
Pay interest semiannually with principal repaid at maturity
(non-amortizing)
Investors are federally taxed on capital gains and interest
income, but interest income is exempt from state and local
12. taxes.
Municipal bonds are from local governments. Interest on
municipal bonds is not taxed, so must use the taxable equivalent
yield.
Privately Issued instruments come from corporations, or are
items like mortgage backed securities, where they pool a group
of mortgages together and sell them to investors.
Capital Market - Fixed Income Instruments
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*
Fixed income have a defined stream of payments or coupons.
Publicly Issued come from the government. Municipal bonds are
from local governments. Interest on municipal bonds is not
taxed, so must use the taxable equivalent yield.
Privately Issued instruments come from corporations, or are
items like mortgage backed securities, where they pool a group
of mortgages together and sell them to investors.
Capital Market - Fixed Income Instruments
Government IssuesAgency Issues (Fed Gov)Most are home
mortgage relatedIssuers: FNMA, FHLMC, GNMA, Federal
Home Loan BanksRisk of these securities?Implied backing by
the governmentIn September 2008, Federal government took
over FNMA and FHLMC.
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13. *
FNMA and FHLMC together financed or backed about $5
trillion in home mortgages, that is about 50% of the U.S.
market.
Capital Market - Fixed Income Instruments
Government IssuesMunicipal BondsIssuer?Differ from
Treasuries and Agencies?Risk?
G.O. vs Revenue
Industrial development Taxation?
r = interest rate
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*
Fixed income have a defined stream of payments or coupons.
Publicly Issued come from the government. Municipal bonds are
from local governments. Interest on municipal bonds is not
taxed, so must use the taxable equivalent yield.
Privately Issued instruments come from corporations, or are
items like mortgage backed securities, where they pool a group
of mortgages together and sell them to investors.
Table 2.3 Equivalent Taxable Yields
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*
14. Figure 2.5 Outstanding Tax Exempt Debt
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*
Figure 2.6 Ratio of yields on tax exempt to taxable bonds
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*
Capital Market - Fixed Income Instruments
Private IssuesCorporate BondsInvestment grade vs speculative
grade
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*
Fixed income have a defined stream of payments or coupons.
Publicly Issued come from the government. Municipal bonds are
from local governments. Interest on municipal bonds is not
taxed, so must use the taxable equivalent yield.
Privately Issued instruments come from corporations, or are
items like mortgage backed securities, where they pool a group
of mortgages together and sell them to investors.
15. Capital Market - Fixed Income InstrumentsMortgage-Backed
SecuritiesPass-throughA security backed by a pool of
mortgages. The pool backer ‘passes through’ monthly mortgage
payments made by homeowners and covers payments from any
homeowners that default. Collateral: Traditionally all mortgages
were conforming mortgages but since 2006, Alt-A and subprime
mortgages were included in pools
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*
Conforming mortgages met traditional creditworthiness
standards. Until about 2006, Fannie and Freddie only
underwrote or guaranteed conforming mortgages. Under
political pressure to make housing available to low income
families, Fannie and Freddie began securitizing and backing
subprime mortgages (mortgages to households with insufficient
income to qualify for a standard mortgage) and so called “Alt-
A” mortgages which lie between conforming and subprime.
Capital Market - Fixed Income InstrumentsMortgage-Backed
SecuritiesPolitical encouragement to spur affordable housing
led to increase in subprime lending
Private banks began to purchase and sell pools of subprime
mortgages
Pool issuers assumed housing prices would continue to rise, but
they began to fall as far back as 2006 with disastrous results for
the markets.
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*
16. Conforming mortgages met traditional creditworthiness
standards. Until about 2006, Fannie and Freddie only
underwrote or guaranteed conforming mortgages. Under
political pressure to make housing available to low income
families, Fannie and Freddie began securitizing and backing
subprime mortgages (mortgages to households with insufficient
income to qualify for a standard mortgage) and so called “Alt-
A” mortgages which lie between conforming and subprime.
Figure 2.7 Mortgage Backed Securities Outstanding
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*
The U.S. Bond Market
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*
3. Equity Securities
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Capital Market - EquityCommon stockResidual claimCash flows
to common stock?In the event of bankruptcy, what will
17. stockholders receive?
Limited liabilityWhat is the maximum loss on a stock purchase?
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*
Residual Claim- Lowest priority in case of bankruptcy. First
Debtholders, then preferred, then common.
Limited Liability- Can only lose your initial investment
Preferred- Have a fixed dividend stream that generally must be
paid before common stock dividends
Tax-Important to know that when one company owns stock in
another, the dividends have a partial tax exemption.
Capital Market - EquityPreferred stockFixed dividends: limited
gains, non-voting
Priority over common
Tax treatmentPreferred & common dividends are not tax
deductible to the issuing firmCorporate tax exclusion on 70%
dividends earned
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*
Residual Claim- Lowest priority in case of bankruptcy. First
Debtholders, then preferred, then common.
Limited Liability- Can only lose your initial investment
(Exclusion is for holdings of domestic preferred only)
Preferred- Have a fixed dividend stream that generally must be
paid before common stock dividends
Tax-Important to know that when one company owns stock in
another, the dividends have a partial tax exemption.
18. Capital Market - EquityDepository ReceiptsAmerican
Depository Receipts (ADRs) also called American Depository
Shares (ADSs) are certificates traded in the U.S. that represent
ownership in a foreign security.
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*
Capital Market - Equity
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*
a-Extra dividend or extras in addition to the regular dividend. b-
Indicates annual rate of the cash dividend and that a stock
dividend was paid.dd-Loss in the most recent four quarters.e-
Indicates a dividend was declared in the preceding 12 months,
but that there isn't a regular dividend rate. Amount shown may
have been adjusted to reflect stock split, spinoff or other
distribution.f-Annual rate, increased on latest declaration.g-
Indicates the dividend and earnings are expressed in Canadian
currency. The stock trades in U.S. dollars. No yield or P/E ratio
is shown.i-Indicates amount declared or paid after a stock
dividend or split.j-Indicates dividend was paid this year, and
that at the last dividend meeting a dividend was omitted or
deferred.m-Annual rate, reduced on latest declaration.p-Initial
dividend; no yield calculated.r-Indicates a cash dividend
declared in the preceding 12 months, plus a stock dividend.stk-
Paid in stock in the last 12 months. Company doesn't pay cash
dividend.x-Ex-dividend, ex-distribution, ex-rights or without
warrants.
19. Capital Market - EquityCapital Gains and Dividend YieldsYou
buy a share of stock for $50, hold it for one year, collect a
$1.00 dividend and sell the stock for $54. What were your
dividend yield, capital gain yield and total return? (Ignore
taxes)Dividend yield: = Dividend / Pbuy
$1.00 / $50 = 2%Capital gain yield: = (Psell – Pbuy)/ Pbuy
($54 - $50) / $50 = 8%Total return: = Dividend yield + Capital
gain yield
2% + 8% = 10%
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UsesTrack average returnsComparing performance of
managersBase of derivatives
Factors in constructing or using an index Representative? Broad
or narrow? How is it constructed?
4. Stock and Bond Indexes
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*
Can anyone name some well know indexes. S&P, Dow,etc?
Can use as a benchmark or as a passive portfolio. Often used as
the base asset for derivatives.
Is it based on the market value or price?
20. Construction of IndexesHow are stocks weighted?Price
weighted (DJIA)
Market-value weighted (S&P500, NASDAQ)
Equally weighted (Value Line Index)
How much money do you put in each stock in the index?
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*
Price Weighted- Add up the prices of the stock and divide by a
given divisor. Higher priced shares get more weight. (Bad, High
price doesn’t always mean it is big)
Market-Value- Based on the market cap of the firm.
Equally weighted-Each company’s returns are weighted equally.
Constructing market indices
a) What stocks to include
b) Weighting schemes Price weighted average assumes
buy 1 share each stock and invest cash and stock dividends
proportionately. Value weighted: considers not only price but
also # shares o/s:$ invested in each stock are proportional to
market value of each stockEqual weighted: considers not only
price but also # shares:invest same amount of $ in each stock
regardless of market value of stock
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VW and EW are often considered “True Indexes” because they
measure value today with value at a prior point in time.
21. a) price weighted series
Time 0 index value is
Time 1 index value = 190/3 = 63.33 Problem?
Refigure denominator (10+25+140) / Denom = 66.67
Denominator = 2.624869
Time 1 index value = (15+25+150) / 2.624869 = 72.38
Other problemssimilar % change movements in higher
price stocks cause proportionately larger changes in the index
splits arbitrarily reduce weights of stocks that split in index
(10+50+140)/3 = 200/3 = 66.67
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*
Dow divisor in 2005 was 0.130
DJIA startedin 1896, thats why still used. Been around so long,
part of tradition.
Stock
PriceB
QuantityB
P1
Q1
A
$ 10
40
$ 15
40
B
50
80
25
160
22. C
140
50
150
50
b) Value weighted series
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*
50% change in price of A and about 7% change in price of C
Stock
PriceB
QuantityB
P1
Q1
A
$ 10
40
$ 15
40
B
50
80
25
23. 160
C
140
50
150
50
Examples of Indexes - DomesticDow Jones Industrial Average
(30 Stocks)
Standard & Poor’s 500 CompositeNASDAQ Composite (> 3000
firms)NYSE CompositeWilshire 5000 (> 6000 stocks)
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*
Dow is based on a price-weighted average. Narrow group.
S&P 500- Much more broad market-value weighted index. Often
used as the benchmark for the market.
NASDAQ Composite-Very broad index of firms using the over-
the-counter Nasdaq system.
NYSE composite-Market value weighted of all NYSE stocks
Wilshire 5000- largest index approx. 7000 stocks
Companies in the Dow Then & Now
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*
Price Weighted- Add up the prices of the stock and divide by a
given divisor. Higher priced shares get more weight. (Bad, High
price doesn’t always mean it is big)
24. Market-Value- Based on the market cap of the firm.
Equally weighted-Each company’s returns are weighted equally.
Comparative Performance of Several Stock Market Indices,
2001-2008
Why has performance differed for the indices?
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*
Dow is based on a price-weighted average. Narrow group.
S&P 500- Much more broad market-value weighted index. Often
used as the benchmark for the market.
NASDAQ Composite-Very broad index of firms using the over-
the-counter Nasdaq system.
NYSE composite-Market value weighted of all NYSE stocks
Wilshire 5000- largest index approx. 7000 stocks
Examples of International Indices
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*
Nikkei 225 price weighted, Nikkei 300 value weighted- Both for
the Tokyo stock exchange
FTSE- Value weighted 100 largest London stock exchange
companies
DAX- For German stocks.
Morgan Stanley Capital International is also creating many
regional and country indexes
Examples include: EAFE- Europe, Australia, Far East
25. Far East- Just the far east developed markets
United Kingdom-Just the UK
3. An investor has a 30% tax rate and corporate bonds are
paying 9%. What must munis pay to offer an equivalent after
tax yield?
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6. What would you expect to happen to the spread between
yields on commercial paper and T-bills if the economy were to
enter a steep recession?
The spread will widen. Deterioration of the economy
increases credit risk, that is, the likelihood of default. Investors
will demand a greater premium on debt securities subject to
default risk.
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t=0 t=1 t=1, with split
90 95 95
50 45 45
26. 100 110 55
Average 80 83.33 65??
What is the divisor? 195/D = 83.33, D = 2.34
Previous divisor was 3. Why the decline?
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T-Bill has a yield ask yield of 3.4%. Has 87 day maturity.
Compute its Bond-Equivalent Yield
Price = 1-(3.4%)*(87/360)*10K = $9917.83
BEY = (10K/9917.83 – 1)*(365/87)= 3.476%
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Rate)
Tax
(1
r
r
Taxable
Exempt
Tax
-
´
=
Rate)
Tax