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 360day 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 60day 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%
21
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1 + r = (10,000/9,539)
2
=
1.0990
r = 9.90%
The threemonth 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. 90day 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 onehalf year, and an annualized discount of 9.18%.
Therefore, its actual percentage discount from par value is 9.18%
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 Spring '08
 Lazrak
 b. c. d., discount yield, Pask

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