Bodie Essentials of Investments 11e Ch02...
Bodie_Essentials_of_Investments_11e_Ch02_SM.docx-Chapter 02 - Asset Classes and
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Bodie Essentials of Investments 11e...
Bodie_Essentials_of_Investments_11e_Ch02_SM.docx-Chapter 02 - Asset Classes and
##### Page 4
Chapter 02 - Asset Classes and Financial Instruments
20.
a.
Total market value at
t
= 0 is:
(\$90 x 100) + (\$50 x 200) + (\$100 x 200) = \$39,000
Total market value at
t
= 1 is:
(\$95 x 100) + (\$45 x 200) + (\$110 x 200) = \$40,500
Rate of return =
V1
V0
1 = (\$40,500/\$39,000) – 1 = 0.0385 or 3.85%
b.
The return on each stock is as follows:
R
A
=
V1
V0
1 = (\$95/\$90) – 1 = 0.0556 or 5.56%
R
B
=
V1
V0
1 = (\$45/\$50) – 1 = –0.10 or –10.00%
R
C
=
V1
V0
1 = (\$110/\$100) – 1 = 0.10 or 10.00%
The equally-weighted average is: [5.56% + (–10.00%) + 10.00%]/3 = 1.85%
21. The fund would require constant readjustment since every change in the price of a
stock would bring the fund asset allocation out of balance.
22. In this case, the value of the divisor will increase by an amount necessary to maintain
the index value on the day of the change. For example, if the index was comprised of
only one stock, it would increase by 2.02 points: (\$210 – \$40) / \$40 = 4.25.
23. Bank discount of 87 days: 0.034 x
87 days
360 days
= 0.008217
a.
Price: \$10,000 x (1 – 0.008217) = \$9,917.83
b.
Bond equivalent yield =
Face value
Purchase price
Purchase price x T
=
\$10,000
\$ 9,917.83
\$9,917.83 x
87 days
365 days
= 0.0348 or 3.48%
24.
a.
The higher coupon bond: The 10-year T-bond with a 6% coupon
b.
The call with the lower exercise price: The call with the exercise price of \$35
c.
The put option on the lower priced stock: The put on the stock selling at \$50
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##### Page 5
Chapter 02 - Asset Classes and Financial Instruments
25. The December maturity futures price is \$3.8575 per bushel.
If the contract closes at
\$3.95 per bushel in December, your profit / loss on each contract (for delivery of
5,000 bushels of corn) will8 be: (\$3.95 – \$3.8575) x 5000 = \$ 462.50 gain.
26.
a.
Yes.
As long as the stock price at expiration exceeds the exercise price, it
makes sense to exercise the call.
Gross profit is: (\$144
\$140) x 100 shares = \$400
Net profit = (\$4 – \$4.80) x 100 shares = \$80 loss
Rate of return = –\$.80/\$4.80 = –0.1667 or 16.67% loss
b.
Yes, exercise.
Gross profit is: (\$144
\$135) x 100 shares = \$900
Net profit = (\$9 – \$8.05) x 100 shares = \$95 gain
Rate of return = \$.95/\$8.05 = 0.1108 or 11.08 % gain
c.
A put with an exercise price of \$140 would expire worthless for any stock
price equal to or greater than \$140 (in this case \$144).
An investment in such
a put would have a rate of return over the holding period of –100%.
27.
a.
Long call
b.
Long put
c.
Short put
d.
Short call
28. There is always a chance that the option will expire in the money.
Investors will pay
something for this chance of a positive payoff.
29. Long call for \$4:
Value of call
at expiration
Initial Cost
Proﬁt
a.
0
4
-4
b.
0
4
-4
c.
0
4
-4
d.
5
4
1
e.
10
4
6
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