Question

1. Cindy wants to purchase a T-Bill. She sees a security with the Bid= 0.185, ASK = 0.15, and CHG= 0.003 on a T- Bill that has a $10000 face value and 60 days to maturity. How much could she sell this bill to a dealer?

2. Tim constructs a price weighted index of Target, Walgreens, and Apple. The time zero prices of these shares are $90, $60, and $125. At time 1, the prices for these three firms (in order) are: $80, $80, $190. Target immediately has a two for one split, bringing its price to $40. What is the divisor for this index after the split?

Answer 1

1. Cindy wants to purchase a T-Bill. She sees a security with the Bid= 0.185, ASK = 0.15, and CHG= 0.003 on a T- Bill that has a $10000 face value and 60 days to maturity. How much could she sell this bill to a dealer?

Price at which cindy sells the bond to the dealer is at Ask Rate  

Thus Price = face Value - Ask rate charge

Price = 10000 - 15 * 60 / 360

Price = $9997.50

2.

Computation of Divisor

Average price at year 0 = average price at year 1

(90+60+125)/3 = (40+80+190) / Divisor

91.67 = 310 / Divisor

Divisor = 3.3818

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