Final Exam FIN 366 Chapter 8 Questions and Problems – Financial Institutions, Markets and Money Page 227 1. Calculate the gross profit that an underwriter would make if it sold $10 million worth of bonds at par (face value) and paid the firm that sold the bonds 99.25 percent of par. 2. If a bond dealer bought a $100,000 municipal bond at 90 percent of par and sold it at 93 percent of par, how much money did the dealer make on the bid–ask spread? 3. If a corporate bond paid 9 percent interest, and you are in the 28 percent income tax bracket, what rate would you have to earn on a general obligation municipal bond of equivalent risk and maturity in order to be equally well off? Given that municipal bonds are often not easily marketable, would you want to earn a higher or lower rate than the rate you just calculated? 4. If a trust is established to securitize $100 million in auto loans that paid 13 percent interest and the average rate paid on the tranches issued was 10 percent, whereas financial guarantees to protect against default on the loans cost 1.5 percent, how much money would the creator of the trust have available to pay for loan servicing and profits if the financial guarantee was purchased? 5. Why are private placements of securities often popular with both the buyer and seller of the securities? 6. Give a concise definition of the following types of municipal bonds: (a) general obligation, (b) revenue, (c) industrial development, and (d) mortgage-backed . 7. What features make municipal bonds attractive to certain groups of investors? Why do other groups not want to hold municipal securities? 8. Define the following terms: (a) private placement,(b) asset-backed security, (c) callable securities, (d) sinking fund provisions, and (e) convertible features of securities. 9. Explain how securities are brought to market under (a) a competitive sale and (b) a negotiated sale. How do the two methods of sale differ? 10. Describe the different forms of financial guarantees seen in the bond markets.