1. What is the value to you of a 9 percent coupon bond with a par value of $ 10,000 that matures in 10 years if you require a 7 percent return? Use semiannual compounding.

2. What would be the value of the bond in Problem 1 if you required an 11 percent rate of return?

3. The preferred stock of the Clarence Radiology Company has a par value of $ 100 and a $ 9 dividend rate. You require an 11 percent rate of return on this stock. What is the maxi-mum price you would pay for it? Would you buy it at a market price of $ 96?

4. The Baron Basketball Company ( BBC) earned $ 10 a share last year and paid a dividend of $ 6 a share. Next year, you expect BBC to earn $ 11 and continue its payout ratio. As-sume that you expect to sell the stock for $ 132 a year from now. If you require 12 per-cent on this stock, how much would you be willing to pay for it?

1. An investor in the 28 percent tax bracket is trying to decide which of two bonds to pur-chase. One is a corporate bond carrying an 8 percent coupon and selling at par. The other is a municipal bond with a 5 ½ percent coupon, and it, too, sells at par. Assuming all other relevant factors are equal, which bond should the investor select?

2. What would be the initial offering price for the following bonds ( assume semiannual compounding)? a. A 15- year zero- coupon bond with a yield to maturity ( YTM) of 12 percent b. A 20- year zero- coupon bond with a YTM of 10

Four years ago, your firm issued $ 1,000 par, 25- year bonds, with a 7 percent coupon rate and a 10 percent call premium. a. If these bonds are now called, what is the approximate yield to call for the investors who originally purchased them? b. If these bonds are now called, what is the actual yield to call for the investors who originally purchased them at par? c. If the current interest rate on the bond is 5 percent and the bonds were not callable, at what price would each bond sell?

2. Assume that you purchased an 8 percent, 20- year, $ 1,000 par, semiannual payment bond priced at $ 1,012.50 when it has 12 years remaining until maturity. Compute: a. Its promised yield to maturity b. Its yield to call if the bond is callable in three years with an 8 percent premium

1. The common stock of Sophia Enterprises serves as the underlying asset for the following derivative securities: ( 1) forward contracts, ( 2) European- style call options, and ( 3) European-style put options. a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions: ( 1) A long position in a forward with a contract price of $ 50 ( 2) A long position in a call option with an exercise price of $ 50 and a front- end pre-mium expense of $ 5.20 Expiration Date Sophia Stock Price Expiration Date Derivative Payoff Initial Derivative Premium Net Profit 25 _____________ _____________ _____________ 30 _____________ _____________ _____________ 35 _____________ _____________ _____________ 40 _____________ _____________ _____________ 45 _____________ _____________ _____________ 50 _____________ _____________ _____________ 55 _____________ _____________ _____________ 60 _____________ _____________ _____________ 65 _____________ _____________ _____________ 70 _____________ _____________ _____________ 75 _____________ _____________ _____________ ( 3) A short position in a call option with an exercise price of $ 50 and a front- end premium receipt of $ 5.20 In calculating net profit, ignore the time differential between the initial derivative ex-pense or receipt and the terminal payoff. b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia’s expiration date stock price on the horizontal axis. Label the breakeven ( i. e., zero profit) point( s) on each graph.

c. Briefly describe the belief about the expiration date price of Sophia stock that an in-vestor using each of these three positions implicitly holds.

2. Refer once again to the derivative securities using Sophia common stock as an underlying asset discussed in Problem 1. a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions: ( 1) A short position in a forward with a contract price of $ 50 ( 2) A long position in a put option with an exercise price of $ 50 and a front- end pre-mium expense of $ 3.23 ( 3) A short position in a put option with an exercise price of $ 50 and a front- end pre-mium receipt of $ 3.23 Expiration Date Sophia Stock Price Expiration Date Derivative Payoff Ini t ial Derivative Premium Net Prof it 25 ______________ ______________ ______________ 30 ______________ ______________ ______________ 35 ______________ ______________ ______________ 40 ______________ ______________ ______________ 45 ______________ ______________ ______________ 50 ______________ ______________ ______________ 55 ______________ ______________ ______________ 60 ______________ ______________ ______________ 65 ______________ ______________ ______________ 70 ______________ ______________ ______________ 75 ______________ ______________ ______________ In calculating net profit, ignore the time differential between the initial derivative ex-pense

1. The common stock of Sophia Enterprises serves as the underlying asset for the following derivative securities: ( 1) forward contracts, ( 2) European- style call options, and ( 3) European-style put options. a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions: ( 1) A long position in a forward with a contract price of $ 50 ( 2) A long position in a call option with an exercise price of $ 50 and a front- end pre-mium expense of $ 5.20 Expiration Date Sophia Stock Price Expiration Date Derivative Payoff Initial Derivative Premium Net Profit 25 _____________ _____________ _____________ 30 _____________ _____________ _____________ 35 _____________ _____________ _____________ 40 _____________ _____________ _____________ 45 _____________ _____________ _____________ 50 _____________ _____________ _____________ 55 _____________ _____________ _____________ 60 _____________ _____________ _____________ 65 _____________ _____________ _____________ 70 _____________ _____________ _____________ 75 _____________ _____________ _____________ ( 3) A short position in a call option with an exercise price of $ 50 and a front- end premium receipt of $ 5.20 In calculating net profit, ignore the time differential between the initial derivative ex-pense or receipt and the terminal payoff. b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia’s expiration date stock price on the horizontal axis. Label the breakeven ( i. e., zero profit) point( s) on each graph.

or receipt and the terminal payoff. b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia’s expiration date stock price on the horizontal axis. Label the breakeven ( i. e., zero profit) point( s) on each graph. c. Briefly describe the belief about the expiration date price of Sophia stock that an in-vestor using each of these three positions implicitly holds.

4. You strongly believe that the price of Breener Inc. stock will rise substantially from its current level of $ 137, and you are considering buying shares in the company. You cur-rently have $ 13,700 to invest. As an alternative to purchasing the stock itself, you are also considering buying call options on Breener stock that expire in three months and have an exercise price of $ 140. These call options cost $ 10 each. a. Compare and contrast the size of the potential payoff and the risk involved in each of these alternatives. b. Calculate the three- month rate of return on both strategies assuming that at the op-tion

Draw a graph of these payoff relationships, using net profit on the vertical axis and po-tential expiration date stock price on the horizontal axis. Be sure to specify the prices at which these respective positions will break even ( i. e., produce a net profit of zero). b. Using the same potential stock prices as in Part a, calculate the expiration date payoffs and profits ( net of the initial purchase price) for the following positions: ( 1) buy one XYZ put option, and ( 2) short one XYZ put option. Draw a graph of these relation-ships, labeling the prices at which these investments will break even. c. Determine whether the $ 2.45 difference in the market prices between the call and put options is consistent with the put- call parity relationship for European- style contracts.

5. The common stock of Company XYZ is currently trading at a price of $ 42. Both a put and a call option are available for XYZ stock, each having an exercise price of $ 40 and an expiration date in exactly six months. The current market prices for the put and call are $ 1.45 and $ 3.90, respectively. The risk- free holding period return for the next six months is 4 percent, which corresponds to an 8 percent annual rate. a. For each possible stock price in the following sequence, calculate the expiration date payoffs ( net of the initial purchase price) for the following positions: ( 1) buy one XYZ call option, and ( 2) short one XYZ call option: 20, 25, 30, 35, 40, 45, 50, 55, 60 Draw a graph of these payoff relationships, using net profit on the vertical axis and po-tential expiration date stock price on the horizontal axis. Be sure to specify the prices at which these respective positions will break even ( i. e., produce a net profit of zero). b. Using the same potential stock prices as in Part a, calculate the expiration date payoffs and profits ( net of the initial purchase price) for the following positions: ( 1) buy one XYZ put option, and ( 2) short one XYZ put option. Draw a graph of these relation-ships, labeling the prices at which these investments will break even. c. Determine whether the $ 2.45 difference in the market prices between the call and put options is consistent with the put- call parity relationship for European- style contracts.

Subject | Business |

Due By (Pacific Time) | 08/05/2014 12:00 am |

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