(a) Company A has been offered the rates shown in Table 7.3. It can borrow for three years at 6.45%. What floating rate can it swap this fixed rate into?
(b) Company B has been offered the rates shown in Table 7.3. It can borrow for 5 years at LIBOR..
(a) Company X has been offered the rates shown in Table 7.3. It can invest for four years at 5.5%. What floating rate can it swap this fixed rate into?
(b) Company Y has been offered the rates shown in Table 7.3. It can invest for 10 years at LIBOR ..
A $1,000 par value bond was issued 20 years ago at a 9 percent coupon rate. It currently has five years remaining to maturity. Interest rates on similar debt obligations are now 10 percent.
a. Compute the current price of the bond using an assumption..
A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 8 percent.
a. What is the current price of the bond? (Look up the answer in Ta..
A 10-year, 8% coupon bond currently sells for $90. A 10-year, 4% coupon bond currently sells for $80. What is the 10-year zero rate? (Hint: Consider taking a long position in two of the 4% coupon bonds and a short position in one of the 8% coupon bon..
A 17-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent.
a. What should be the initial price of the bond? (Take the present value of $1,000 for 17 years at 7 percent, using Appendix B.)
b. If immediately upon issue, inter..
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..
A bank can borrow or lend at LIBOR. The two-month LIBOR rate is 0.28% per annum with continuous compounding. Assuming that interest rates cannot be negative, what is the arbitrage opportunity if the three-month LIBOR rate is 0.1% per year with contin..
A bank has written a call option on one stock and a put option on another stock. For the first option the stock price is 50, the strike price is 51, the volatility is 28% per annum, and the time to maturity is nine months. For the second option the s..
A bank offers a corporate client a choice between borrowing cash at 11% per annum and borrowing gold at 2% per annum. (If gold is borrowed, interest must be repaid in gold. Thus, 100 ounces borrowed today would require 102 ounces to be repaid in one ..
A bank uses Black’s model to price European bond options. Suppose that an implied price volatility for a 5-year option on a bond maturing in 10 years is used to price a 9-year option on the bond. Would you expect the resultant price to be too high or..
A bank’s position in options on the dollar–euro exchange rate has a delta of 30,000 and a gamma of – 80,000. Explain how these numbers can be interpreted. The exchange rate (dollars per euro) is 0.90. What position would you take to make the position..
A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $240,000 a year for the next 50 years. The attorney for the plaintiff’s estate argues that the lost income should be discounted back to the present at..
A call option on a non-dividend-paying stock has a market price of $2.50. The stock price is $15, the exercise price is $13, the time to maturity is three months, and the risk-free interest rate is 5% per annum. What is the implied volatility?..