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Suppose you are asked to assist in the design of an equity-linked security. The instrument is a five-year zero coupon bond with a guaranteed return of 1 percent, compounded annually. At the end of five years the bond will pay an additional return based on any appreciation of the Nikkei 300 stock index, a measure of the performance of 300 Japanese stocks. The risk-free rate is 5.5 percent, compounded annually, and the volatility of the index is 15 percent.
In addition the index pays a dividend of 1.7 percent continuously compounded. Presently the index is at 315.55 and the additional return is based on appreciation above the current level of the index. You expect to sell these bonds in minimum increments of $100. Overall you expect to sell $10 million of these securities. Your firm has determined that it needs a margin of $175,000 in cash today to cover costs and earn a reasonable profit.
Determine the percentage of the Nikkei return that your firm should offer to cover its costs.
Your firm would then set the percentage offered at less than this. If your firm sells this security, comment on the risk it creates for itself and suggest how it might deal with that risk.
The annual provision for bad debt is recorded as 5% of ending A/R (317,420). Use the allowance method. Round to the nearest $1. Interest has accrued at 6.5% on the long-term notes payable (1,200,000) since July 1 of this year.
Loanable funds theory practice: show a graph how events a b and will affect supply and demand for Loans and equilibrium interest rate. consumer and investors confidences increases. signs of economic growth cause an increase in the public’s expectatio..
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Fresno Corp. is a fast-growing company that expects to grow at a rate of 25 percent over the next two years and then to slow to a growth rate of 17 percent for the following three years. If the last dividend paid by the company was $2.15. What is the..
Which of the following types of employer plans are exempt from most or all ERISA provisions?
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83 and Kr 5.98, respectively. The annual risk-free rate in the United States is 3.63 percent, and the annual risk-free rate in Norway is 5.33 percent.
First, consider Michele's savings. She began working at age 20 and began making an annual contribution of $2,000 at the first of the year beginning with her first year. She makes 13 contributions. What is the difference in planning between the two in..
Suppose you have $10,000 and wish to purchase an annuity that pays you a fixed dollar amount every month. How much would you receive each month if the annuity rate is 1% and you intend to receive payments for 36 months?
At the beginning of 2012, Annie, Inc. has a deferred tax asset of $7,500 and deferred tax liability of $10,500. In 2012, pretax financial income was $826,000 and the tax rate was 35%.
If the newspaper reported that the interest rates on 10-year Treasury securities was 5 percent and the interest rate on three-month Treasury securities was 6 percent, would it be a good time to invest in the stock market? Explain your reasoning?
What is the present value of the following annuity $4323 every year at the end of each year for the next 6 years, discounted back to the present at 18.05 percent per year compounded annually
A project has a 0.78 chance of doubling your investment in a year and a 0.22 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment?
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