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1. A bank can borrow or lend at LIBOR. Suppose that the six-month rate is 5% and the nine-month rate is 6%. The rate that can be locked in for the period between six months and nine months using an FRA is 7%. What arbitrage opportunities are open to the bank? All rates are continuously compounded.
2. An interest rate is quoted as 5% per annum with semiannual compounding. What is the equivalent rate with (a) annual compounding, (b) monthly compounding, and (c) con-tinuous compounding.
3. Consider an 8-month European put option on a Treasury bond that currently has 14.25 years to maturity. The current cash bond price is $910, the exercise price is $900, and the volatility for the bond price is 10% per annum. A coupon of $35 will be paid by the bond in 3 months. The risk-free interest rate is 8% for all maturities up to 1 year. Use Black's model to determine the price of the option. Consider both the case where the strike price corresponds to the cash price of the bond and the case where it corresponds to the quoted price.
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The Green Balloon issued 20-year zero coupon bonds 4 years ago. Currently, these bonds are selling at 32.8 percent of face value of $1,000. The tax rate is 35 percent.
Using the proper interest table, answer each of following questions. Find out the future value of $7,000 at the end of 5 periods at 8% compounded interest? What is present value of $7,000 due 8 periods hence, discounted at 11%?
Describe the operating leverage this company possesses?
Provide some example of the role of economics in decision making. Please relate concepts to your personal experience and/or professional experience.
Divido Corp. Is an all-equity financed firm with the total market value of $100 million. The company holds $10 million is cash equivalents and has $90 million in other assets.
The company has a steady profit margin of 10 percent with a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing..
Furthermore, if we had enough after 2 years, how much do we need to give the lender to amortize? If we gave the lender $4,000 in addition to our regular amount after 3 years, How many more payments would we need to give?
Sherman's Sherbet currently takes about 10 days to collect and deposit checks from customers. A lock-box system could reduce this time to 6 days. Collections average $35,000 daily. The interest rate is .02% per day.
If the capital structures in parts a, b, and c above are the only alternatives available, which blend is optimal for Dick & Jane's Children's Books?
Why is the buyer's operating cycle considered to be appropriate upper limit for credit period? Illustrate what is the operating cycle. Wouldn't the buyer's inventory period be better target?
Both the best case scenario and the worst case scenario have a 20% probability of occurrence. Find the project's coefficient of variation.
Question are the total market value of the firms stock and the firms total market value ? What is the firms weighted average cost of capital?
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