A stock which is sold at its face value of $3,000 is expected to pay a dividend of $120 for the next three years. It isexpected that the price of this stock will increase by 7% of its initial face value each year. The nominal interest rate is4% per year.What is the risk premium payable on this stock to induce investors to hold the stock for another two years?Risk premium (x) ·= (Round your answer to two decimal places.)

Risk premium refers to the extra return an investor demands for taking on additional risk when…

Answered: A stock which is sold at its face value…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A company stock whose current price is $192 is expected to either increase to $242 or decrease to $185 over the next nine months with equal probability. Compute the price of a nine-month at-the-money European put option. Use the fact that the riskless rate is 3.3% per year with continuous compounding. Express your answer with two decimals.
A stock is selling today for $110. The stock has an annual volatility of 64 percent and the annual risk-free rate is 7 percent. Calculate the fair price for a 1 year European call option with an exercise price of $95. Calculate how much the current stock price would need to change for the purchaser of the call option to break even in one year. Calculate the fair price for a 1 year European put option with an exercise price of $95. Calculate how much the current stock price would need to change for the purchaser of the put option to break even in one year. Calculate the level of volatility that would make a $95 call option sell for $30. (Use Goal Seek or Solver). Calculate the level of volatility that would make a $95 put option sell for $8. (Use Goal Seek or Solver). Please show work in excel and functions/equations used.
The current price of a non-dividend paying stock is $100. Every three months, it is expected to go up or down by 9% or 5%, respectively. The risk-free rate is 4% per year with continuous compounding. Compute the price of a European call option with strike price $98 and maturity six months written on the stock.
17. A stock which is sold at its face value of $4,000 is expected to pay a dividend of $120 for the next three years. It is expected that the price of this stock will increase by 6% of its initial face value each year. The nominal interest rate is 3% per year. What is the risk premium payable on this stock to induce investors to hold the stock for another two years? Risk premium (x) = (Round your answer to two decimal places.) In the second year, the rating of the company issuing this stock falls and the policy rate is increased. This leads to a change in both the risk premium and the nominal interest rate by 15%. Assume that the other variables determining stock prices remain unchanged. What will be the price of the stock in the second year? The price of stock in the second year(Q+1)= $[ (Round your answer to two decimal places.) Suppose that instead of a contractionary monetary policy, a contractionary fiscal policy was brought into effect, to reduce the budgetary deficit of the…
A stock is expected to pay the following dividends: S1.1 in 1 year, $1.6 in 2 years, and $1.8 in 3 years, followed by growth in the dividend of 5% per year forever after that point. The stock's required return is 11%. The stack's current price (Price at year 0) should be $
The investor decides to hold the stock for 5 years. Using the Generalized Dividend valuation Model, calculate the current price per share if the stock pays a constant dividend of $2.3, the required return as a decimal is 0.14, and the expected price at the end of the 5 years is $110. (use 1 decimal place)
The current price of a non-dividend paying stock is $50. Use a two-step tree to value a European put option on the stock with a strike price of $50 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility is 50%. What is the value of the option according to the two-step binomial model. Please enter your answer rounded to two decimal places (and no dollar sign).
Suppose the stock price is currently $75. For the next six months there is 7.5% probability that the stock will appreciate 8% with 4% annualized drift. The risk-free rate is 1.53% per year with continuous compounding. The dividend yield is 1 p.a.%. Value the following option using binomial tress and 12-time steps. a.) What is the value of a six-month European put option with a strike price of $86. b.) What is the value of a six-month American put option with a strike price of $70. c.) What is the value of a six-month European call option with a strike price of $86. d.) What is the value of a six-month European put option with a strike price of $70. e.) Estimate how high the minimum strike price must be for it to be optimal to exercise the put option immediately.
A stock is selling today for $110. The stock has an annual volatility of 64 percent and theannual risk-free rate is 7 percent.a. Calculate the fair price for a 1-year European call option with an exercise price of $95.b. Calculate how much the current stock price would need to change for the purchaser ofthe call option to break even in one year.c. Calculate the fair price for a 1 year European put option with an exercise price of $95
Consider a forward contract which allows you to buy/sell a non-dividend paying stock in three months. Assume the current stock price is $99.41 and the three-month risk free interest is 5.4 percent per year. What should be the forward price? Keep your answer to two decimal places.
The current price of a stock is $21. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $22 and that expires in 1 year. (Hint: Use daily compounding.) Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.
Consider a stock in two periods (two years). The stock price goes up by 30% or down by 10%in each period. Current stock price is $100. There is a European put option on the stock withexercise price $110 and time to maturity of two years. The interest rate in each period is 6%. Inthe template, Date 0 denotes today, Date 1 denotes the end of year 1 and Date 2 denotes the endof year 2. Use the two-period binomial tree model and discrete discounting to find the put optionprice on Date 0.

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