FIN 610 - Module 8 Assignment

Define the following:
a. Default risk
b. Liquidity risk
c.Reinvestment rate risk
d.Interest rate risk
e.Prepayment risk

Problem 2
List and explain the advantages of pooling investor’s monies in a money market mutual fund. Be specific.

Problem 3 The corporate treasurer is analyzing two potential investment opportunities. He has reduced his alternatives to two (2) investment alternatives as follows:

Investment A: Purchase a negotiable CD with a nominal rate of 8.0% which would be subject to the firm’s 39% marginal tax rate.

Investment B: Purchase a municipal security outside of the firm’s state which will pay a nominal rate of 6.0%. The treasurer also recognized that the “muni” is not subject to the firm’s marginal tax rate of 39%.

Calculate the after tax return for each investment and state which on the two alternative investments the treasurer should purchase. Why?

Problem 4
A small business is considering investing in high yield dividend stocks. After careful consideration, one stock stands out as being the most attractive investment that pays an 8% yield. The company has a marginal tax rate of 34% which must be taken into consideration and high yield dividend stocks must be held for a minimum of 46 days in order for 70% tax exemption to apply to the dividends earned.
a. Calculate the Dividend Capture Yield assuming the stock is held for 60 days.
b. How much would Commercial Paper after-tax yield have to be to earn the equivalent yield of the high yield dividend stock?
c. What type of risks should the business consider before making this investment? Are there any possibilities to increase the return to offset any potential risks?