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Chapter 2 Financial Markets and Instruments Essay

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CHAPTER 2 FINANCIAL MARKETS AND INSTRUMENTS 1. Money market securities are called “cash equivalents” because of their great liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice with very low transaction costs. P = 1,000 [1 – rBD (n/360)] where rBD is the discount yield. Pask = 1,000 [1 – .0681 (60/360)] = $988.65 Pbid = 1,000 [1 – .0690 (60/360)] = $988.50 According to equation (2.2): P = 10,000/[1+rBEY x (n/365)] P = 10,000/[1+.05 x (91/365)] = $ 9,876.885. 90 a. Price = $1,000 x [1 – .03 x 360 ] = $992.5 b. 90-day return =
1,000  992.5 = .007557 = .7557% 992.5

3.

5.

7.

365 c. rBEY = .7557% x 90 = 3.065% d. Effective annual yield = (1.007557)365/90 – 1 = .0310 = 3.10% 9. The total before-tax income is $4. Since the dividend income is fully excluded from taxable income, the after-tax income is also $4, for a rate of return of 10%.

11. a. The index at t = 0 is (90 + 50 + 100)/3 = 80. At t = 1, it is 250/3 = 83.333, for a rate of return of 4.17%. b. In the absence of a split, stock C would sell for 110, and the index would be 250/3 = 83.333. After the split, stock C sells at 55. Therefore, we need to set the divisor d such that 83.333 = (95 + 45 + 55)/d, meaning that d = 2.34. c. The return is zero. The index remains unchanged, as it should, since the return on each stock separately equals zero. 13. a. b. c. d. 15. The higher coupon bond. The call with the lower exercise price. The put on the lower priced stock. The bill with the lower yield. Value of call at expiration – Initial Cost 2-1 = Profit

a. b. c. d. e.

0 0 0 5 10 Value of put at expiration 10 5 0 0 0 –

4 4 4 4 4 Initial Cost 6 6 6 6 6 =

–4 –4 –4 1 6 Profit 4 –1 –6 –6 –6

a. b. c. d. e. 17.

A call option conveys the right to buy the underlying asset at the exercise price. A long position in a futures contract carries an obligation to buy the underlying asset at the futures price. Individual...

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"Chapter 2 Financial Markets and Instruments". Anti Essays. 12 Dec. 2018

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Chapter 2 Financial Markets and Instruments. Anti Essays. Retrieved December 12, 2018, from the World Wide Web: http://parimatchstavki7.com/free-essays/Chapter-2-Financial-Markets-And-Instruments-600318.html