major financial instruments

– What are the major financial instruments described in chapter 5?
– Chapter 5 presents evidence that the average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States, while returns on common stocks have also exhibited more volatility than returns on U.S. government bonds. Suppose that last year, the realized rate of return on government bonds exceeded the return on common stocks. Your colleague suggests that “last year shows us that investors are now willing to settle for lower returns on stocks than on bonds.” How would you interpret this result?
–
– Himmel Corp. wants to raise $100 million in a new stock issue. Its investment banker indicates that the sale of new stock will require 12 percent underpricing and a 7 percent spread. (Hint: The underpricing is 12 percent of the current stock price, and the spread is 7 percent of the issue price.)

a. Assuming Himmel’s stock price does not change from its current price of $50 per share, how many shares must the company sell and at what price to the public?
b. How much money will the investment banking syndicates earn on the sale?
c. Is the 12 percent underpricing a cash flow? Is it a cost? If so, to whom?
–
– If the stock market in the United States is efficient, how do you explain the fact that some people make very high returns? Would it be more difficult to reconcile very high returns with efficient markets if the same people made extraordinary returns year after year?

You believe interest rates will soon fall.

a. Would you rather own a three-year, 6 percent coupon, fixed-rate bond or an equivalent-risk, three-year, floating-rate bond currently paying 6 percent interest?
b. Would your answer to (a) change if you were contemplating issuing a bond rather than owning one? If so, how?
c. Would your answer to (a) change if, as an investor, you believed interest rates would soon rise? If so, why?