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Mid Term Cheat Sheet

Mid Term Cheat Sheet - 1 Treasury Bill Quotation Market...

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1. Treasury Bill Quotation Market convention is to use rate rather than price for T-bill quote Bank Discount Rate (BD) r BD : bank discount rate F: face value (par) P: price n: days to maturity 2. Example A 90-day T-Bill of par $10,000 trades at $9,600. What’s the bank discount rate? n = 90, F = $10,000, P = $9,600 r bd =$10,000-$9,000 x 360 $10,000 90 Annualized return on the investment? r BEY : bond equivalent yield (APR) 3. Example What about price? 9/1/05, on WSJ you see 12/1/05 T-bill is quoted at 3.43% (ask). How much does it cost to buy $1,000 par of that T-bill? F = $1,000, r BD = 3.43%, n = 91, P = ? 4. . Equity indexes DJIA Quantitatively Divisor changes when stock splits or stock is replaced by another 5. Equity Indexes: DJIA Suppose DJIA has two stocks 6. What happens when a stock splits? At market close today, B has a 2-for-1 split Where does the new divisor come from? 7. When does the divisor change? (Market value weighted) NOT for stock split YES for stock replacement in the index E.g., C replaces B in the index 8. Margin Account Trading Un-leveraged Investment Invest no more than the capital you have Q : You open an account with $6,000. IBM stock price is $100. If you invest all your money in IBM What is your HPR if IBM appreciates to $130 in a year? What is your HPR if IBM depreciates to $80 in a year? A : Since this is a unleveraged position, your return is the same as the stock price appreciation/depreciation Appreciation HPR =Ending Equity – Beginning Equity+dividend Beginning Equity = 60x130-60x100+0 = 30% 60x100 Depreciation HPR=Ending Equity-Beginning Equity+dividend Beginning Equity = 60x80-60x100+0 = -20% 60x100 Q: Same condition as previous case, but you buy 100 shares What is your HPR if IBM appreciates to $130 in a year? What is your HPR if IBM depreciates to $80 in a year? A: 100 shares cost $10,000, you have to borrow $4,000 (at 9%) Initial Position Asset = stock value = $10,000 Liability = $4,000, Equity = Asset – Liability = $6,000 Initial Margin = Equity/Stock Value = 60% Final Position when P =$130 = 8460-6000 = 44% 6000 Asset = stock value = 100×130 = $13,000 Liability = 4,000×(1+9%) = $4,360, Equity = $8,640 Final Position when P = $80 = 3640-6000 = -39.33% 6000 Asset = $8,000, Liability = $4,360, Equity = $3,640 Margin Call (for Margin Account) If equity falls below maintenance margin (25%- 30% typical), a margin call for more fund or for liquidation is issued Assuming 30% maintenance margin What is the margin call price one year later? Margin = Equity = A – L = 100p -4360 =.3 Stock Val Stock Val 100p Solve the above equation: P c = $62.29 What is the margin call price today? Liability = $4,000 (instead of $4,360), so P c = $57.14 What happens to the investor receiving a margin call? either deposit more fund (increase the equity), or sell some stock (lowers the stock value) 9. Short Sale Profit/Loss (so called P/L in industry) Long position on one share of stock P/L = P 1 -P 0 +D 1 P 1 is the ending price P 0 is the beginning price D 1 dividend during the period paid in the end Short position on one share of stock short P/L=-(P 1 -P 0 +D 1 )=P 0 -P 1 -D 1 Q : What’s your profit if you short 200 share of a stock at $34, and cover it at $30, while it pays a $1 dividend?
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