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Problem+Set+1

# Problem+Set+1 - relevant features of the stocks and options...

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Problem Set 1, Chapter 2 #8, 9, 13, 16, 18, 20 1. Suppose investors can earn a return of 2% per 6 months on a treasury note with 6 months remaining until maturity. What price would you expect a 6 month maturity treasury bill to sell for? 9. Find after tax return to a corporation that buys a share of preferred stock at \$40, sells it at year-end at \$40, and receives a \$4 year-end dividend. The firm is in the 30% tax bracket. 13. An investor is in a 30% tax bracket. If corporate bonds offer 9% yields, what must municipals offer the investor to prefer them to corporate bonds? 16. Which security should sell at a higher price? a. A 10 year treasury bond with a 9% coupon rate versus a 10 year treasury bond with a 10% coupon rate? b. A 3-month expiration call option with an exercise price of \$40 versus a 3-month call on the same stock with an exercise price of \$35. c. A put option on a stock selling at \$50, or a put option on another stock selling at 60 (all other
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Unformatted text preview: relevant features of the stocks and options may be assumed to be identical.) 18. Turn back at figure 2.9 and look at the Intel Option. Suppose you buy a November expiration call option with exercise price \$21. a. Suppose the stock price in November is \$21.75. Will you exercise your call? What is the profit on your position? b. What if you had bought a November call with exercise price \$22? c. What if you had bought a November put with exercise price \$22? 20. Both a call and a put currently are traded on stock XYZ; both have strike prices of \$50 and expirations of 6 months. What will be the profit to an investor who buys the call for \$4 in the following scenarios for stock prices in 6 months? What will be the profit in each scenario to an investor who buys the put for \$6? a. \$40 b. \$45 c.\$50 d.\$55 e. \$60...
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