Financial engineering

by | Jan 24, 2023 | engineering

 

 

1-

1. Financial engineering has been disparaged as nothing more than paper shuffling. Critics argue that resources used for rearranging wealth ( that is, bundling and unbundling financial assets) might be better spent on creating wealth ( that is, creating real assets). Evaluate this criticism. Are any benefits realized by creating an array of derivative securities from various primary securities?

2. What are the differences between equity and fixed- income securities? ( LO 1- 5)

3. What is the difference between a primary asset and a derivative asset? ( LO 1- 1)

4. What is the difference between asset allocation and security selection? ( LO 1- 4)

5. What are the differences between real and financial assets? ( LO 1- 2)

6. How does investment banking differ from commercial banking? ( LO 1- 5)

7. For each transaction, identify the real and/ or financial assets that trade hands. Are any financial assets created or destroyed in the transaction? ( LO 1- 2)
a. Toyota takes out a bank loan to finance the construction of a new factory.
b. Toyota pays off its loan.
c. Toyota uses $ 10 million of cash on hand to purchase additional inventory of spare auto parts.

8. Suppose that in a wave of pessimism, housing prices fall by 10% across the entire economy. (LO 1-2)
a. Has the stock of real assets of the economy changed?
b. Are individuals less wealthy?
c. Can you reconcile your answers to ( a ) and ( b )?

9. The average rate of return on investments in large stocks has outpaced that on investments in
Treasury bills by about 7% since 1926. Why, then, does anyone invest in Treasury bills?

 

2-

1. A municipal bond carries a coupon of 6 ¾ % and is trading at par. What is the equivalent taxable yield to a taxpayer in a combined federal plus state 34% tax bracket?

2. The coupon rate on a tax- exempt bond is 5.6%, and the rate on a taxable bond is 8%. Both bonds sell at par. At what tax bracket marginal tax rate) would an investor be indifferent between the two bonds?

3
Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average? ( LO 2- 2)

4. What is meant by the LIBOR rate? The Federal funds rate? TED Spread? ( LO 2- 1)

5. Why are corporations more apt to hold preferred stock than are other potential investors? (LO 2-1)

6. A municipal bond carries a coupon rate of 6 ¾ % and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket? ( LO 2- 1)

7. Suppose that short- term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after- tax yield if your tax bracket is: ( LO 2- 1)
a. Zero
b. 10%
c. 20%
d. 30%

8. Consider the three stocks in the following table. Pt represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two- for- one in the last period. ( LO 2- 2)

P0 Q0 P1 Q1 P2 Q2
A 90 100 95 100 95 100
B 50 200 45 200 45 200
C 100 200 110 200 55 400

a. Calculate the rate of return on a price- weighted index of the three stocks for the first period ( t = 0 to t = 1).
b. What must happen to the divisor for the price- weighted index in year 2?
c. Calculate the rate of return of the price- weighted index for the second period ( t= 1 to t=2)

9. Using the data in the previous problem, calculate the first- period rates of return on the following indexes of the three stocks: ( LO 2- 2)
a. A market value– weighted index
b. An equally weighted index

10. Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. (for the purpose of exercise, assume 70% exclusion in dividend for tax purpose)

11. Preferred stock yields often are lower than yields on bonds of the same quality because of: ( LO 2- 1)
a. Marketability
b. Risk
c. Taxation
d. Call protection

Part C
• What are overall investment process and some key elements involved in the investment process
• What are the differences in financial and real assets and the major components of the investment process
• Explain various financial instruments available to the potential investor
• How to perform after tax yields calculation
• What are the various market indexes and price weighted index divisor

 

Sample solution

Dante Alighieri played a critical role in the literature world through his poem Divine Comedy that was written in the 14th century. The poem contains Inferno, Purgatorio, and Paradiso. The Inferno is a description of the nine circles of torment that are found on the earth. It depicts the realms of the people that have gone against the spiritual values and who, instead, have chosen bestial appetite, violence, or fraud and malice. The nine circles of hell are limbo, lust, gluttony, greed and wrath. Others are heresy, violence, fraud, and treachery. The purpose of this paper is to examine the Dante’s Inferno in the perspective of its portrayal of God’s image and the justification of hell. 

In this epic poem, God is portrayed as a super being guilty of multiple weaknesses including being egotistic, unjust, and hypocritical. Dante, in this poem, depicts God as being more human than divine by challenging God’s omnipotence. Additionally, the manner in which Dante describes Hell is in full contradiction to the morals of God as written in the Bible. When god arranges Hell to flatter Himself, He commits egotism, a sin that is common among human beings (Cheney, 2016). The weakness is depicted in Limbo and on the Gate of Hell where, for instance, God sends those who do not worship Him to Hell. This implies that failure to worship Him is a sin.


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God is also depicted as lacking justice in His actions thus removing the godly image. The injustice is portrayed by the manner in which the sodomites and opportunists are treated. The opportunists are subjected to banner chasing in their lives after death followed by being stung by insects and maggots. They are known to having done neither good nor bad during their lifetimes and, therefore, justice could have demanded that they be granted a neutral punishment having lived a neutral life. The sodomites are also punished unfairly by God when Brunetto Lattini is condemned to hell despite being a good leader (Babor, T. F., McGovern, T., & Robaina, K. (2017). While he commited sodomy, God chooses to ignore all the other good deeds that Brunetto did.

Finally, God is also portrayed as being hypocritical in His actions, a sin that further diminishes His godliness and makes Him more human. A case in point is when God condemns the sin of egotism and goes ahead to commit it repeatedly. Proverbs 29:23 states that “arrogance will bring your downfall, but if you are humble, you will be respected.” When Slattery condemns Dante’s human state as being weak, doubtful, and limited, he is proving God’s hypocrisy because He is also human (Verdicchio, 2015). The actions of God in Hell as portrayed by Dante are inconsistent with the Biblical literature. Both Dante and God are prone to making mistakes, something common among human beings thus making God more human.

To wrap it up, Dante portrays God is more human since He commits the same sins that humans commit: egotism, hypocrisy, and injustice. Hell is justified as being a destination for victims of the mistakes committed by God. The Hell is presented as being a totally different place as compared to what is written about it in the Bible. As a result, reading through the text gives an image of God who is prone to the very mistakes common to humans thus ripping Him off His lofty status of divine and, instead, making Him a mere human. Whether or not Dante did it intentionally is subject to debate but one thing is clear in the poem: the misconstrued notion of God is revealed to future generations.

 

References

Babor, T. F., McGovern, T., & Robaina, K. (2017). Dante’s inferno: Seven deadly sins in scientific publishing and how to avoid them. Addiction Science: A Guide for the Perplexed, 267.

Cheney, L. D. G. (2016). Illustrations for Dante’s Inferno: A Comparative Study of Sandro Botticelli, Giovanni Stradano, and Federico Zuccaro. Cultural and Religious Studies, 4(8), 487.

Verdicchio, M. (2015). Irony and Desire in Dante’s” Inferno” 27. Italica, 285-297.

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