Q:
A:
You
expect to sell your only stock in 2 years time at a
price of $42.50, just after it pays a dividend of $1.75.
(Assume no other dividends were paid during this time).
This stock is currently worth $34.80. What would the
minimum APR (or stated annual interest rate) have to
be on a mortgage backed security so that you would
rather hold the MBS as opposed to the stock?
a) 12.38%
b) 12.76%
c) 1.00%
d) 12.07%
a) 12.38%
b) 12.76%
c) 1.00%
d) 12.07%
The correct answer is: d)
Step 1: Find the equivalent monthly return from the stock investment
FV = (42.50 + 1.75) = 44.25
n = 24
i = ? = 1.006
PV = 34.80
Step 2: Compute the APR
APR = 1.006 x 12 = 12.07
Therefore, the APR on the MBS must be at least equal to 12.07%
2006 CFA Level 1 LOS: 2.6.e
Step 1: Find the equivalent monthly return from the stock investment
FV = (42.50 + 1.75) = 44.25
n = 24
i = ? = 1.006
PV = 34.80
Step 2: Compute the APR
APR = 1.006 x 12 = 12.07
Therefore, the APR on the MBS must be at least equal to 12.07%
2006 CFA Level 1 LOS: 2.6.e
MORE FAQS

What is the difference between an interest rate and an annual percentage rate (APR)?

A 10year, 8% coupon bond is currently trading at 98.5 of par ...

Do lenders offer floating APRs?

Stock A has a standard deviation of 16% and a beta of 1.1 ...

What is the difference between APR and APY?

What is the difference between present value and net present value?

How do I adjust the rule of 72 for higher accuracy?

In a Corporation's financials, surplus earnings are accounted for as ...

You invest $1,000 in a mutual fund for two years. The mutual fund earned 25% in the first year and lost ...

A registered representative has been following PDQ stock in the market over the past year ...

John purchased 100 shares of XYZ stock for $50 per share. He held the stock for one year then sold the ...

If an investor has a required rate of return of 10% on a 20year zero ...

What is securitization?

How many attempts at each CFA exam is a candidate permitted?

Do financial advisors need to pass the Series 7 exam?

Do financial advisors need to be approved by FINRA?

How does a broker decide which customers are eligible to open a margin account?

Why is the Nasdaq more heavily weighted to tech stocks than other stock exchanges?
RELATED FAQS

What is the difference between an interest rate and an annual percentage rate (APR)?
Comparing the annual percentage rate (APR) on competing loans help you understand the true cost of the loans and make a wise ... 
A 10year, 8% coupon bond is currently trading at 98.5 of par ...
The correct answer is: a) In your approved calculator, key the following amounts and solve for i: FV = 97.5 PMT = 4 n = 8 ... 
Do lenders offer floating APRs?
Learn about credit cards with floating, variable and fixed APRs. Explore introductory rates offered by two leading credit ... 
Stock A has a standard deviation of 16% and a beta of 1.1 ...
The correct answer is: C) Step 1: Calculate the expected return on Stock A E(R) = (.10)(12%) + (.25)(15%) + (.40)(8%) + (.25)(9%) ... 
What is the difference between APR and APY?
Learn about the difference between the calculations for APR and APY. APY takes into account the number of times that the ...
RELATED TERMS

Guarantee Fees
Fees charged by mortgagebacked securities (MBS) providers, such ... 
Compounding
The ability of an asset to generate earnings, which are then ... 
Vintage
A slang term used by mortgagebacked securities (MBS) traders ... 
SEC Form D
A filing with the Securities and Exchange Commission (SEC) required ... 
Aggregator
A party involved within the secondary mortgage market that purchases ... 
Annual Equivalent Rate  AER
Interest that is calculated under the assumption that any interest ...