Factors used in producing goods or providing services
Answer:
(a) The arbitrage strategy is to buy zeros with face values of $140 and $1,140 and respective maturities of one and two years, and simultaneously sell the coupon bond.
(b) The profit on the activity equals $0.72 on each bond.
Explanation:
The price of the coupon bond = 140 × PV(7.9%, 2) + 1000 × PV(7.9%, 2)
= 140 × (1-(1/1.079)^2)/0.079 + 1,000/1.079^2
= $1,108.93
If the coupons were withdrawn and sold as zeros individually, then the coupon payments could be sold separately on the basis of the zero maturity yield for maturities of one and two years.
[140/1.07] + [1,140/1.08^2] = $1,108.21.
The arbitrage strategy is to buy zeros with face values of $140 and $1,140 and respective maturities of one and two years, and simultaneously sell the coupon bond.
The profit on the activity equals $0.72 on each bond.
Answer:
True
Explanation:
According to MM, without taxes, the market value of the company is not affected by capital structure. As a result, the WACC is unaffected by capital structure. Here, the value of a company is determined by cash flows.
In the case where there is tax, the value of a company with debt is greater than that of the same company without debt for the same level of income.
Answer:
The price of the bond is 2143,67
Explanation:
A zero coupon bond is a bond that does not pay coupon payments and instead pays one lump sum at maturity.
Zero coupon bond value= F/(1+r)^t
F = face value or a par value
r= rate of yield per period
t= time to maturity ( in periods)
Replacing
F = $10,000
We assume semiannual compounding periods
r= 5.2/2=2.6
t= 30 x 2=60
Zero coupon bond value= $10,000/(1+0.026)^60
Value = 2143,67
Answer:
2 cents
Explanation:
The spot price = $0.7000 = 70 cents, The forward rate = $0.6950 = 69.5 cents and the call option with striking price = $0.6800 = 68.00 cents
The annualized six month rate = 3 1/2 % = 3.5 %, therefore the rate = r/n, where n is the number of period per year = 2. Therefore r/n = 3.5% / 2 = 0.035 / 2 = 0.0175
The minimum price = Maximum (spot price - striking price, (forward rate - striking price) / (1 + 0.0175), 0) = Maximum(70 - 68, (69.5 - 68)/ 0.0175, 0)
Minimum price = Maximum (2 , 1.47, 0) = 2 cents
