QUESTION 2 • The following two investment options are viewed under an annual effective interest rate of i. Investment A is a 10-year zero coupon bond which redeems at par-value 250. Investment B is a perpetuity-immediate paying an annual payment starting with 4 and having each successive payment increase by K% from the previous payment. • If the volatility of each investment is 8, then find the value of K. Give your answer as a decimal rounded to two places (i.e. X.XX)...i.e. if your answer was K% = 2.54%, you would answer 2.54. ||

QUESTION 2 • The following two investment options are viewed under an annual effective interest rate of i. Investment A is a 10-year zero coupon bond which redeems at par-value 250. Investment B is a perpetuity-immediate paying an annual payment starting with 4 and having each successive payment increase by K% from the previous payment. • If the volatility of each investment is 8, then find the value of K. Give your answer as a decimal rounded to two places (i.e. X.XX)...i.e. if your answer was K% = 2.54%, you would answer 2.54. ||

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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Question 2 You are considering investing in two different investment options. The first option offers no return for the first three years, but afterward it offers to pay you $20,000 per year for four years. The second option offers to pay you $20,000 per year for three years and $30,000 in the fourth year. All payments are made at year-end. If a discount rate of 8% per annum is assumed, determine by using the present value the option that offers you a higher return.
Question 8 You owe $40,000 in 2 years' time. Annualised yields are 7% at all horizons. There is a 1-year zero-coupon bond, and a 5-year annuity paying $4 per year. To the nearest cent, how much should you invest in the 1-year bond and 5-year annuity to immunise yourself against interest rate risk?
Q. 16 Consider a security with a duration of 7 years. The current interest rate level is 10% p.a. How does the price of the security change if interest rates increase by 1.5% (round your answer to two decimals) ? Choose the correct option The price of the security will decrease by 1.5%. The price of the security will increase by 1.5%. The price of the security will decrease by 8.5%. The price of the security will increase by 9.55%. The price of the security will decrease by 9.55%.
With a 10 percent interest rate on dollar deposits, a 7 percent interest rate on euro deposits, and an expected dollar appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is ___________ % Question 18 options:
Question 2 Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon paying bonds and purchasing qs and ql coupon paying bonds with maturities 3 and 15 years respectively. More information on the bonds to be used in the strategy is given Note that we are assuming all bonds pay interest semi-annually. (a) Explain how to interpret the modified duration of -8.86 corresponding to the 15-year maturity bond. (b) Write down the system of equations that needs to be solved in order to find qs and ql and verify that the solution to this system is qs = 679.32 and ql =366.23. (c) Find the profit from this strategy if yield curve moves: (i) up to 8% pa and (ii) down to 5% pa. (d) Explain why in practice it may be difficult to profit from the cash and $duration neutral butterfly. (e) Explain the major differences between the 50-50 butterfly strategy and the cash and $duration neutral butterfly.
QUESTION 15 Suppose that all investors expect that the interest rates for the 4 years will be as follows. What is the price of a 3-year zero coupon bond with par-$1,000? Year 1-Year Forward rate 4.6% 2 4.9% 3 5.2% 4 5.5% O a. $1,000.00 Ob. $866.32 Oc. $858.92 Od. $821.15
6f
Question 1 Help = 1. Find the expected profit for a holder of a European call option with K = 94 to be exercised in six months if the stock price at maturity is ST (90, 96, 98) with probabilities p = (1, 1, 1), given that the option is bought for Co= 10 financed by a loan at the interest rate of 10% (per annum).

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