Question

- Suppose today a one year ZCB is priced at 0.97, a two year ZCB is priced at 0.95 and a three year ZCB is priced at 0.92. What is the implied forward rate for a one year loan starting one year from now? What is the implied forward rate for a one year loan starting two years from now?

Answer #1

Suppose that:
1) The interest rate on a one-year bond today is 3%;
2) The interest rate on a one-year bond starting one year from
now is expected to be 4% per year;
3) The interest rate on a one-year bond starting two years from
now is expected to be 5% per year;
4) The risk premium on a two-year bond is 0.5%; and
5) The risk premium on a three-year bond is 1%.
Use that information to answer the...

Suppose a stock is priced today at 40 and can go in one year to
either 50 or 30. Assume the one-year risk free rate is 0%.
What is the fair value of a one-year call option on the stock
with a strike of 42?
Assuming the expected rate of return on the stock is 10%, what is
the "real world" probability of an up move in the stock?
What is the expected return on the call option?

Suppose our underlying is a stock XYZ. Today (t=0), XYZ is
priced at $1,013. The storage and insurance cost is $19, paid in
advance. The forward contract uses XYZ as the underlying, which
will expire in one year from today. The interest rate is 0.042. The
forward price at today (t=0) is $1,481.
What is the arbitrage profit that you can make today based on
cost-of-carry model, if you are only allowed to either long or
short one forward contract...

Suppose you bought today one share of XYZ Company, a fairly
priced stock, that just paid $0.27 of dividend per share. Assume
the dividend is expected to grow at a constant rate of 5% starting
next year and the stock price is expected to be $52.50 at the end
of next year. What would be your rate of return on this
investment?

Suppose you bought today one share of XYZ Company, a fairly
priced stock, that just paid $0.27 of dividend per share. Assume
the dividend is expected to grow at a constant rate of 5% starting
next year and the stock price is expected to be $52.50 at the end
of next year. What would be your rate of return on this
investment?

The one-year forward rate 1 year from today is 5%; the one-year
forward rate 2 years from today is 5.5%; the one-year forward rate
3 years from today is 6%; the one-year forward rate 4 year from
today is 6.5%; and the one-year forward rate 5 years from today is
7%. What should the purchase price of a 2-year zero-coupon bond be
if it is purchased at the beginning of year 2 and has face value of
$1,000?

If the two- year forward rate one year from now is 2%. What does
that indicate
2% is the annual rate that can be locked in today for holding
investment for two years where the investment starts one year from
today
2% is the annual rate that can be locked in one year from today
for holding investment for two years
2% is the annual rate that can be locked in today for holding
investment for one year which starts two...

. If a bond expiring in one year, with face value of 100, is
trading today for $95, and a similar bond expiring in two years is
trading for $90, what should be the forward rate on a forward loan
for $100 (to be received in one year, and paid back in two)? If the
Forward rate is 5%, what arbitrage strategy has positive profits?
Make sure you are state exactly what happens in each period. 6. If
the interest...

Let’s say a firm will receive $500 today, $800 one year from
now, $1,000 two years from now, $1,200 three years from now, and
$1,500 four years. Assuming the interest/discount rate that applies
here is 14.8%, what is the present value of these cash inflows?

lets say that you have two securities, a 4.0% one year security,
and a 3.0% two year security.
1 - What is the interest rate on a one year security to be
issued a one year from today??
2 - What is the one year forward rate??
3 - Is there an increasing or a decreasing trend in interest
rate levels.
4 - Assume that you are serious about taking a loan and buying
an apartment. Would you do now...

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