Assignment: Accounting Management
Part A
o Indicate whether the following instruments are examples of money market or capital market securities. i. U.S. Treasury bills ii. Long-term corporate bonds iii. Common stocks iv. Preferred stocks v. Dealer commercial paper
o What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions? Explain.
Part B
o The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is that statement true or false? Explain. (Hint: Make up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.)
o Discuss the following statement: A bond's yield to maturity is the bond's promised rate of return, which equals its expected rate of return.
Part C
o Suppose you owned a portfolio consisting of $250,000 of long-term U.S. government bonds.
- Would your portfolio be riskless? Explain.
- Now suppose the portfolio consists of $250,000 of 30-day Treasury bills. Every 30 days your bills mature, and you will reinvest the principal ($250,000) in a new batch of bills. You plan to live on the investment income from your portfolio, and you want to maintain a constant standard of living. Is the T-bill portfolio truly riskless? Explain.
- What is the least risky security you can think of? Explain.
o Is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate? Explain.
o If investors' aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.
Part D
o A bond that pays interest forever and has no maturity is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that are evaluated similarly to perpetual bonds and other preferred issues that are more like bonds with finite lives? Explain.
o Discuss the similarities and differences between the discounted dividend and corporate valuation models.
o This chapter discusses the discounted dividend and corporate valuation models for valuing common stocks. Three alternative approaches, the P/E multiple, Enterprise Values, and EVA approaches, were presented. Explain each approach and how you might use each one to value a common stock.
Format your assignment according to the following formatting requirements:
o The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
o The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
o Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.