solutions_ch_02 - CHAPTER 2 MARKETS AND INSTRUMENTS 1 a(iv...

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CHAPTER 2: MARKETS AND INSTRUMENTS 1. a. (iv) b. (ii) [6.75/(1 - .34) = 10.2] c. (i) Writing a call entails unlimited potential losses as the stock price rises. 2. a. r BEY = × = × = .0845, or 8.45% b. One reason is that the discount yield is computed by dividing the dollar discount from par by the par value, $10,000, rather than by the bill's price, $9,600. A second reason is that the discount yield is annualized by a 360-day year rather than 365. 3. P = 10,000 [1 – r BD (n/360)] where r BD is the discount yield. P ask = 10,000 [1 – .0681 (60/360)] = $9,886.50 P bid = 10,000 [1 – .0690 (60/360)] = $9,885.00 4 . r BEY = × = × = 6.98%, which exceeds the discount yield, r BD = 6.81%. To obtain the effective annual yield, r EAY , note that the 60-day growth factor for invested funds is = 1.01148. Annualizing this growth rate results in 1+ r EAY = ( ) 365/60 = 1.0719 which implies that r EAY = 7.19% 5. a. i. 1 + r = (10,000/9,764) 4 = 1.1002 r = 10.02% 2-1
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ii. 1 + r = (10,000/9,539) 2 = 1.0990 r = 9.90% The three-month bill offers a higher effective annual yield. b. i. r BD = × = .0934 = 9.34% ii. r BD = × = .0912 = 9.12% 6. a. Price = $10,000 × [1 .03 × ] = $9,925 b. 90-day return = = .007557 = .7557% c. r BEY = .7557% × = 3.065% d. Effective annual yield = (1.007557) 365/90 – 1 = .0310 = 3.10% 7. The bill has a maturity of one-half year, and an annualized discount of 9.18%. Therefore, its actual percentage discount from par value is 9.18% × 1/2 = 4.59%. The bill will sell for $100,000 × (1– .0459) = $95,410.
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  • Spring '08
  • Lazrak
  • b. c. d., discount yield, Pask

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