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Each of the following potentially alters the rate sensitivity of the underlying instrument. Presumably there is an embedded option associated with each.
Indicate when the option is typically exercised and how it affects rate sensitivity.
(The current prime rate is 3.50 percent)
a) Fixed-rate mortgage loan with a yield of 5.0 percent and 30-year final maturity.
b) Time deposit with five years remaining to maturity; carries a fixed rate of 3 percent.
c) Commercial loan with a two-year maturity and a floating rate set at prime plus 2.5 percent. There is a cap of 8 percent representing the maximum rate that the bank can charge on the loan.
d) Commercial loan with a two-year maturity and a floating rate set at prime plus 2.5 percent. There is a floor of 4.0 percent representing the minimum rate that the bank will charge on the loan.
The current price of a non-dividend paying stock is $50. Use a two-step tree to value a European call option on the stock with a strike price of $48 that expires in 6 months. Each step is 3 months, the risk free rate is 5% per annum, and the volatili..
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Which one of the following is NOT a way to improve the P/Q rating of a company's brand of multi-featured cameras?
A financial adviser claims that a particular stock earned a total return of 10% last year. During the year the stock price rose from $30 to $32.50. What dividend did the stock pay?
A 15-year maturity bond with face value of $1,000 makes semiannual coupon payments and has a coupon rate of 6%. What is the bond’s yield to maturity if the bond is selling for $1,110?
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