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erastova [34]
3 years ago
8

Suppose that you enter into a three-month forward contract on a non-dividend-paying stock when the stock price is $60 and the ri

sk-free interest rate (with quarterly compounding) is 8% per annum.
What is equivalent continuously compounding rate?
Business
1 answer:
mamaluj [8]3 years ago
7 0

Answer:

The equivalent continuously compounding rate is 0.02%

Explanation:

Forward price of the contract in 3 months:

F = S x e^(r*t)

Expected equity market return of the stock in 3 months:

E(r) = F/S -1 = e^(r*t) -1 = e^(8%*1/4) - 1 = 0.0202 or 2.02%

Annual market rate or Annual market rate premium with rf as the risk-free interest rate per annum with quarterly compounding.

r = E(r) - rf = 2.02% - 8%/4 = 0.02%

The quarterly compounded rate (rq) is given by:

rq= 4 x [(r/2 + 1)^(1/2) - 1]

where r as the annual market risk rate.

Apply the above formula to the question:

rq=4 x [(0.02%/2 + 1)^(1/2) -1] = 0.0002 or 0.02%

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The $1,000 face value ABC bond has a coupon rate of 10%, with interest paid annually, and matures in 3 years. If the bond is pri
dybincka [34]

Answer:

Bond Price  = $951.9633746 rounded off to $951.96

Explanation:

To calculate the quote/price of the bond today, which is the present value of the bond, we will use the formula for the price of the bond. As the bond is an annual bond, we will use the annual coupon payment,  annual number of periods and annual YTM. The formula to calculate the price of the bonds today is attached.  

Coupon Payment (C) = 1000 * 10% = $100

Total periods remaining (n) = 3

r or YTM = 12%  

 Bond Price = 100 * [( 1 - (1+0.12)^-3) / 0.12]  + 1000 / (1+0.12)^3

Bond Price  = $951.9633746 rounded off to $951.96

7 0
3 years ago
A(n) ____________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.
Anastaziya [24]

An efficient portfolio maximizes return for a given level of risk or minimizes risk for a given level of return.

Having an efficient portfolio when preparing a financial planning is undeniably important as this helps you in your decision-making; whether you engage in something while knowing the specific risk of doing that certain action.

8 0
2 years ago
What was this product's net operating income (loss) last year? last year minden company introduced a new product and sold 15,000
mafiozo [28]

Answer:

1. What was the product's operating income(loss) last year = $90,000 loss

2. What is the product's Break even point in unit sales and dollars

• Break even sales in units 18,000

• Break even i n sale dollars $1,260,000

3. Maximum annual profit given an increment of 5,000 units and reduction of sales price per unit by $2.

• Net profit of $20,000

4. What would be the break even point in unit sales and dollars using the selling price that you determined in requirement 3.

• Break even sales units 19,285.7

• Break even in sales dollars $1,311,427.6

Explanation:

Please see attached detailed solution to the above questions and answers.

3 0
3 years ago
Zack developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectivenes
Reil [10]

Answer:

$60,000 or $12,000

Explanation:

1. Since Zack expects Sparky to use the developed software for a period of five years, we could assume that the revenue for the first year of the contract would be $60,000.

2. Or if we Spread out the average revenue for a period of five years from the licensing fee, 60,000 / 5 (years) would give us 12,000 dollars per year.

5 0
2 years ago
A firm has $76,000,000 in debt, which accounts for 43% of their total funds raised; the after-tax cost of these funds is 6.10%.
Digiron [165]

11.55% is the weighted average cost of capital for these funds

Explanation:

Firm has 76000000 in debt and 100000000 in equity. Thus the proportion of debt =

             = 76000000/(76000000 + 100000000)

             = 43.18%

and proportion of equity =  1 - 43.18%  = 56.82%

Therefore, WACC =  0.4318 * 6.1 + 0.5682 * 15.7

                               = 11.55%

7 0
3 years ago
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