A mathematical calculation
Instructions
Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link.
Briefly explain the securitization process and include at least one reason why a bank would consider using this.
Briefly compare and contrast a collateralized mortgage obligation with a collateralized debt obligation.
Provide at least two reasons why the blame for the credit crisis is a challenge to assign to one particular group alone.
Provide at least one reason why the government felt compelled to pass the Troubled Asset Relief Program (TARP). What is your conclusion regarding the effectiveness of this?
Briefly identify one key component of the Financial Reform Act and why you think it may or may not be effective.
Identify two reasons why an investor would prefer common stock to preferred stock.
What is book building and does it benefit investors or the issuing corporation, in your opinion?
What benefit do investors realize as a result of an extended trading session? What might be a downside to using this session?
You are a fund manager and are dissatisfied with one of the companies in your portfolio. You have decided shareholder activism is an appropriate strategy. Select one approach from the material to use and briefly note why you selected it.
Chatter Corporation issued the following quarterly dividends last year: $0.15, $0.17, $0.20, and $0.25. The current stock price is $24.59. What is the dividend yield for this stock using this information?
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Sample Solution
Note:
- Please ensure you have a thorough understanding of the concepts before submitting your assignment.
- Use credible academic sources to support your answers.
- Follow APA formatting guidelines for citations and references.
Answers
1. Securitization Process
Securitization is a financial process involving the pooling of various assets, such as mortgages, auto loans, or credit card debts, into securities. These securities are then sold to investors in the secondary market.
- Reason for bank using securitization: Securitization allows banks to convert illiquid assets into liquid securities, improving their liquidity position and enabling them to create new loans.
2. CMO vs. CDO
- Collateralized Mortgage Obligation (CMO): A CMO is a type of mortgage-backed security (MBS) that divides mortgage payments into different classes or tranches based on maturity and risk.
- Collateralized Debt Obligation (CDO): A CDO is a structured financial product that pools various types of debt, including mortgages, corporate bonds, and credit card debt, and repackages them into tranches with different risk and return profiles.
3. Blame for Credit Crisis
Assigning blame for the credit crisis to a single group is challenging due to:
- Complex interplay of factors: The crisis resulted from a combination of factors, including lax lending standards, excessive risk-taking, regulatory failures, and systemic issues.
- Shared responsibility: Various parties, including banks, rating agencies, investors, and regulators, contributed to the crisis.
Full Answer Section
4. TARP and Effectiveness
The government implemented the Troubled Asset Relief Program (TARP) to stabilize the financial system by purchasing toxic assets from banks. This was intended to prevent a systemic collapse.
- Effectiveness: While TARP helped prevent a catastrophic financial meltdown, its effectiveness in long-term economic recovery is a subject of debate.
5. Financial Reform Act
- Dodd-Frank Wall Street Reform and Consumer Protection Act: One key component is the creation of the Consumer Financial Protection Bureau (CFPB) to protect consumers from predatory lending practices.
- Effectiveness: The CFPB has implemented regulations to enhance consumer protection, but its overall effectiveness in preventing future crises is still being evaluated.
6. Common Stock vs. Preferred Stock
Investors may prefer common stock over preferred stock due to:
- Potential for higher returns: Common stockholders have the potential for higher returns through capital appreciation and dividends.
- Voting rights: Common stockholders have voting rights, allowing them to participate in corporate governance.
7. Book Building
Book building is a process used by investment banks to determine the optimal offering price for a new security. It involves gathering investor demand information.
- Benefit: While book building can help investors obtain shares at the offering price, the primary benefit is to the issuing corporation, as it helps determine the optimal price to maximize proceeds.
8. Extended Trading Session
- Benefit: Extended trading sessions can provide investors with more flexibility to trade securities outside of regular market hours.
- Downside: Increased volatility and liquidity risks can arise during extended trading sessions due to lower trading volumes.
9. Shareholder Activism
- Approach: A proxy contest to replace the current board of directors with a new slate of directors who align with the investor's goals.
- Reason: This approach can be effective in exerting significant influence over the company's direction.
10. Dividend Yield
- Calculation: Dividend yield = Annual dividends / Stock price
- Annual dividends = $0.15 + $0.17 + $0.20 + $0.25 = $0.77
- Dividend yield = $0.77 / $24.59 = 0.0313 or 3.13%
Remember to provide detailed explanations, calculations, and citations where necessary to achieve a high score.
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