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

Joe just bought a house for $750,000, of which 65% was financed with a 20 year ...

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

What are the differences between APR in Europe and the U.S.?

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 ...

Which of the following is not a reason why a company might issue a stock dividend ...

Are balance transfers worth it?

At the beginning of the year, OPQ Corp. began to lease a building using the capitalized method ...

A brokerage customer has $10,000 in securities and a credit balance of $4,000 ...

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

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

What is the difference between APR and APY?

A 6.4% coupon bond that is expected to mature inÂ five years is currently trading at 96.825 ...

Why do MBS (mortgagebacked securities) still exist if they created so much trouble in 2008?

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

Are hedge funds regulated by FINRA?

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?
RELATED FAQS

Joe just bought a house for $750,000, of which 65% was financed with a 20 year ... ...
The correct answer is: c) Step 1: Compute the amount of the mortgage 65% of 750,000 = 487,500 Step 2: Compute the annual ... 
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 ... 
What are the differences between APR in Europe and the U.S.?
Learn how the regulatory authorities in the U.S., the European Union and the U.K. treat the calculation and disclosure of ... 
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%) ...
RELATED TERMS

Annual Percentage Rate  APR
The annual rate that is charged for borrowing (or made by investing), ... 
Purchase APR
The annual percentage rate that applies to outstanding balances ... 
Bullet Bond
A debt instrument whose entire face value is paid at once on ... 
Guarantee Fees
Fees charged by mortgagebacked securities (MBS) providers, such ... 
Compounding
The ability of an asset to generate earnings, which are then ... 
Mortgage Excess Servicing
The percentage of the monthly cash flow that remains after the ...