A four year bond has a face value of $100, a yield of 6% and a fixed coupon rate of 12%, paid semi-annually. What is its price?
A firm wishes to raise $10 million now. They will issue 6% pa semi-annual coupon bonds that will mature in 8 years and have a face value of $1,000 each. Bond yields are 10% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue? All numbers are rounded up.
Question 432 option, option intrinsic value, no explanation
An American style call option with a strike price of ##K## dollars will mature in ##T## years. The underlying asset has a price of ##S## dollars.
What is an expression for the current intrinsic value in dollars from owning (being long) the American style call option? Note that the intrinsic value of an option does not subtract the premium paid to buy the option.
Question 455 income and capital returns, payout policy, DDM, market efficiency
A fairly priced unlevered firm plans to pay a dividend of $1 next year (t=1) which is expected to grow by 3% pa every year after that. The firm's required return on equity is 8% pa.
The firm is thinking about reducing its future dividend payments by 10% so that it can use the extra cash to invest in more projects which are expected to return 8% pa, and have the same risk as the existing projects. Therefore, next year's dividend will be $0.90. No new equity or debt will be issued to fund the new projects, they'll all be funded by the cut in dividends.
What will be the stock's new annual capital return (proportional increase in price per year) if the change in payout policy goes ahead?
Assume that payout policy is irrelevant to firm value (so there's no signalling effects) and that all rates are effective annual rates.
A company conducts a 4 for 3 stock split. What is the percentage change in the stock price and the number of shares outstanding? The answers are given in the same order.
Question 708 continuously compounding rate, continuously compounding rate conversion
Convert a 10% continuously compounded annual rate ##(r_\text{cc annual})## into an effective annual rate ##(r_\text{eff annual})##. The equivalent effective annual rate is:
Question 776 market efficiency, systematic and idiosyncratic risk, beta, income and capital returns
Which of the following statements about returns is NOT correct? A stock's:
Question 797 option, Black-Scholes-Merton option pricing, option delta, no explanation
Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the risk-neutral probability that a European put option will be exercised?
Question 875 omitted variable bias, systematic and idiosyncratic risk, CAPM, single factor model, two factor model
The Capital Asset Pricing Model (CAPM) and the Single Index Model (SIM) are single factor models whose only risk factor is the market portfolio’s return. Say a Solar electricity generator company and a Beach bathing chair renting company are influenced by two factors, the market portfolio return and cloud cover in the sky. When it's sunny and not cloudy, both the Solar and Beach companies’ stock prices do well. When there’s dense cloud cover and no sun, both do poorly. Assume that cloud coverage risk is a systematic risk that cannot be diversified and that cloud cover has zero correlation with the market portfolio’s returns.
Which of the following statements about these two stocks is NOT correct?
The CAPM and SIM: