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Taya2010 [7]
3 years ago
8

A stock sells for $6.99 on December 31, providing the seller with a 6% annual return. What was the price of the stock at the beg

inning of the year? $6.59 $1.16 $7.42 $5.84
Business
1 answer:
Dimas [21]3 years ago
6 0

Answer:

Correct option is 6.59

Explanation:

Selling price of stock at the end of the year is $6.99. Annual return rate is 6%. Price of stock at the beginning will be present value of stock valued at the end discounted at 6%. Computation is as shown below:

Present\ value\ or\ price\ of\ stock = Selling\ price\left ( \frac{1}{1+i} \right )^{n}

= 6.99\left ( \frac{1}{1+0.06} \right )^{1}

= \frac{6.99}{1.06}

= $6.59

Therefore, Stock's price in the beginning of the year is $6.59.

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Answer:

3.05%

Explanation:

According to Pure Expectation Theory, the future short term interest rates are actually the forward rates.

Mathematically,

(1 + r2,0)^2 = (1 + r1,0)^1 * (1 + r1,1)^1

Here,

r2,0 is the rate of interest for 2 year treasury security from today

r1,0 is the rate of the interest for 1 year treasury security from today

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By Putting Values, we have:

(1 + r2,0)^2 = (1 + 0.04)^1 * (1 + 0.021)^1

(1 + r2,0)^2 = 1.06184

By taking square-root on both sides, we have:

(1 + r2,0) = 1.0305

r2,0 = 3.05%

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