Bio 321

Questions

1. Calculate the expected rate of return for each of the financial assets listed in Table 1, and complete the expected return row for Table 1. Based solely on the expected returns, which of the investments appears the best and worst? Discuss the impact on returns for general changes in the economy for CPC, Morely, and EAT.

It looks like CPC would be the best investment with a 9.70% expected return. CPC and EAT will have a greater expected return when the economy becomes stronger whereas MORLEY will have a greater expected return when the economy weakens.

2. Considering U.S. Treasuries are guaranteed by the U.S. government, answer the following questions.

a. Is the T-bill return independent of the state of the economy? Briefly explain. Do T-bills promise completely risk-free returns? Explain.

The T-Bills are independent because the Treasury must redeem the T-Bills at par regardless so of the state of the economy. This, however, does not mean the T-Bills promise a completely risk-free return. If inflation were to rise at a greater percentage rate than the T-Bill’s expected return, you would lose money.

b. Why do T-bond returns vary? Why are T-bond returns high when the market returns are low?

T-Bond returns vary because of basic supply and demand. When the economy is booming, investors tend to put their money into riskier securities rather than T-Bonds so the return rate drops and the price of the bond rises. T-Bond rates are high when market returns are low because bond prices falls during a recession. If you were to buy a bond at a discount price and collect the fixed coupon payments you would earn a higher return rate than a bond with no discount or a bond at a premium price.

c. How would returns on corporate bonds that Filmore Enterprises might issue compare with those for T-bonds? Would your answer be dependent on the potential bond rating of Filmore Enterprises?

The bonds that Filmore...