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Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1).

What must happen to the divisor for the price-weighted index in year 2? Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).

9. Using the data in problem 8, calculate the first period rates of return on the following indexes of the three stocks:

a. a market value-weighted index.

b. an equally weighted index.

10. An investor is in a 28% tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds?

11. Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after-tax yield if your tax bracket is:

12. Find the equivalent taxable yield of the municipal bond in the previous question for tax brackets of zero, 10%, 20%, and 30%.

13. Which security should sell at a greater price?

a. A 10-year Treasury bond with a 9% coupon rate or a 10-year T-bond with a 10% coupon.

b. A three-month maturity call option with an exercise price of $40 or a three-month call on the same stock with an exercise price of $35.

c. A put option on a stock selling at $50 or a put option on another stock selling at $60. (All other relevant features of the stocks and options are assumed to be identical.)

14. Look at the futures listings for gold in Figure 2.12.

a. Suppose you buy one gold contract for December 2001 delivery. If the contract closes in December at a price of $283 per ounce, what will your profit be?

b. How many December 2001 maturity contracts are outstanding? How many ounces of gold do they represent?

15. Turn back to Figure 2.11 and look at the IBM options. Suppose you buy a November maturity call option with exercise price 105.

a. If the stock price in November is 107, will you exercise your call? What are the profit and rate of return on your position?

b. What if you had bought the call with exercise price 100?

c. What if you had bought a put with exercise price 105?

16. Why do call options with exercise prices higher than the price of the underlying stock sell for positive prices?

17. Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and maturities of six months. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in six months? (a) $40; (b) $45; (c) $50; (d) $55; (e) $60. What will be the profit in each scenario to an investor who buys the put for $6?

18. Explain the difference between a put option and a short position in a futures contract.

19. Explain the difference between a call option and a long position in a futures contract.

20. What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?

21. Examine the first 25 stocks listed in Figure 2.9. For how many of these stocks is the 52-week high price at least 50% greater than the 52-week low price? What do you conclude about the volatility of prices on individual stocks?

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Responses

  • maisy
    What must happen to the divisor for the price weighted index in year 2?
    7 years ago

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