### Will c and d have the same price

Assignment Help Financial Management
##### Reference no: EM132012829

Suppose initially that two assets, A and B, will each make a single guaranteed payment of \$400 in one year. But asset A has a current price of \$300 while asset B has a current price of \$340.

a. What are the rates of return of assets A and B at their current prices? Return on asset A = percent. Return on asset B = percent. Given these rates of return, which asset should investors buy and which asset should they sell? Buy asset and sell asset .

b. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ends, will A and B have the same price? . Next, consider another pair of assets, C and D. Asset C will make a single payment of \$600 in one year, while D will make a single payment of \$800 in one year. Assume that the current price of C is \$460 and that the current price of D is \$700.

c. What are the rates of return of assets C and D at their current prices? Return on asset C = percent. Return on asset D = percent. Given these rates of return, which asset should investors buy and which asset should they sell? Buy asset and sell asset .

d. Assume that arbitrage continues until C and D have the same expected rate of return. When arbitrage ends, will C and D have the same price? . Compare your answers to questions a through d before answering question e.

e. We know that arbitrage will equalize rates of return. Does it also guarantee to equalize prices? . In what situations will it also equalize prices? .

### Write a Review

#### What is the breakeven dollar amount of revenue

what is XYZ’s operating breakeven level of sales in dollars? That is, what is the breakeven dollar amount of revenue?

#### Arbitrage transactions costs involving futures contract

Assume that the 3-month futures contract on SPX settled at 2070, r = 0.25%, q = 2.25%, arbitrage transactions costs (TC) involving these futures contract are 1.16 (index points). The TC band is [2060.84, 2058.52]. Therefore, the index (SPX) must have..

#### Compute the contribution margin for the program

The program director determines that his program has revenue for the year of \$1,210,000. Compute the contribution margin for the program.

#### Based on your analysis should the company open the mine

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. Construct a spreadsheet to calculate the payback period, internal rat..

#### Total bond value does the repayment of principal represent

If the percent yield to maturity is 10 percent, what percent of the total bond value does the repayment of principal represent?

#### What would be new cash conversion cycle in dollars

what would be the new cash conversion cycle in dollars and days? How much cash would you generate?

#### What is the default risk premium on keys bonds

What is the default risk premium (DRP) on Keys' bonds?

#### What is the internal growth rate of brandies candies

Brandies Candies has total assets of \$1,200, total equity of \$900, an ROA of 15%, and a dividend payout ratio of 40%. What is the internal growth rate of Brandies Candies?

#### What are monthly payments in the first two years

A mortgage broker is offering a \$191,900 20-year mortgage with a teaser rate. What are the monthly payments in the first two years?

#### What is the depreciation tax shield for this project in year

Your firm needs a machine which costs \$270,000, and requires \$42,000 in maintenance for each year of its 7 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 7-year class life category. Assume a tax rate of 40% ..

#### Mortem techniques should executor consider electing

Hazel, a widow, died. She had made no previous lifetime taxable gifts and she died with a gross estate of \$5,250,000, consisting solely of a diversified portfolio of publicly traded, income-producing stocks. Which of the following post-mortem techniq..

#### What is the intrinsic price of microsoft today

What is the intrinsic price of Microsoft today and is it more or less than market price? What will be the intrinsic price of Microsoft stock 10 years from now?