Reference no: EM131027096
We try to model an asset with price St at time t = 0,1,2,3,4. Today, S0 = 10. For each case A, B, C below, answer the following questions:
i) What are the possible values of S4 within this model?
ii) What is the expected mean and variance of S4?
A) Random Walk model: Suppose that prices can go either up $1 or down $1 each period. Assume that the probability of an up-move is 0.55 at each step, independently of everything else.
B) Trinomial Tree model: suppose that prices can evolve in one of the following 3 ways: { go up $1 with prob.0.4, stay ?at with prob.0.3, go down $1 with prob.0.3}
C) Binomial Tree: suppose that each period prices either go up by 10% with probability 0.55, or down by 10% with prob. 0.45.
|
Firm recently purchased a new facility costing
: A firm recently purchased a new facility costing $984 thousand. The firm financed this purchase with an amortized loan at an interest rate of 8.8 percent APR, with monthly payments of $23.9 thousand. How long will it take to pay off this loan?
|
|
How much do you need to deposit into this trust fund today
: You would like to establish a trust fund that would pay annual payments to your heirs of $104 thousand a year forever. You expect the trust fund to earn an average return of 7.57 percent. How much do you need to deposit into this trust fund today to ..
|
|
What would be your total real return on investment
: You bought one of Rocky Mountain Manufacturing Co.’s 8.75 percent coupon bonds one year ago for $1,049.30. These bonds make annual payments and mature eight years from now. Suppose that you decide to sell your bonds today, when the required return on..
|
|
Change in the bonds price in dollars and percentage terms
: A $1,700 face value corporate bond with a 5.6 percent coupon (paid semiannually) has 12 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.9 percent. The firm has recently gotten into some trouble and the rating ag..
|
|
Trinomial tree model
: We try to model an asset with price St at time t = 0,1,2,3,4. Today, S0 = 10. For each case A, B, C below, answer the following questions: What are the possible values of S4 within this model? What is the expected mean and variance of S4? Trinomial T..
|
|
About spending your entire life working
: You are not thrilled about spending your entire life working. So, you have decided that you will save $5 thousand a year, starting at the end of this year, and retire as soon as you can accumulate $1 million. If you can earn an average of 7.89 percen..
|
|
Started making annual deposits
: 5 years ago you started making annual deposits of $362 into an account paying 7% annual return. You continue to make these deposits every year without fail. If you keep doing this every year for the next 5 years, how much money will you have in 5 yea..
|
|
Calculate what you would be willing to pay for the bond
: A $10,000 ten-year bond was issued at an interest rate of 6%. It is now year 9 and you are thinking about buying the bond from its owner. Interest rates are now 9%. (Taylor & Greenlaw, 2014, p. 403). Would you now expect to pay more or less than $10,..
|
|
Calculate the appropriate transfer price per pound
: Sugarland, Inc., has a division in Indonesia that makes dyestuff in a variety of colors used to dye denim for jeans, and another division in the United States that manufactures denim clothing. The Dyestuff Division incurs manufacturing costs of $2.68..
|