paper for class
Chapter 2
19. Consider the three stocks in the following table. P t represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two-for-one in the last period. (LO 2-2)
P0 Q0 P1 Q1 P2 Q2
A 90 100 95 100 95 100
B 50 200 45 200 45 200
C 100 200 110 200 55 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period ( t 5 0 to t 5 1). b. What must happen to the divisor for the price-weighted index in year 2? c. Calculate the rate of return of the price-weighted index for the second period ( t 5 1 to t 5 2).
a. At t = 0, the value of the index is: ($90 + $50 + $100)/3 = 80 At t = 1, the value of the index is: ($95 + $45 + $110)/3 = 83.33 The rate of return is: － 1 = (83.33/80) – 1 = 0.0417 or 4.17%
b. In the absence of a split, stock C would sell for $110, and the value of the index would be the average price of the individual stocks included in the index: ($95 + $45 + $110)/3 = $83.33.
After the split, stock C sells at $55; however, the value of the index should not be affected by the split. We need to set the divisor (d) such that:
83.33 = ($95 + $45 + $55)/d d = 2.34
c. The rate of return is zero. The value of the index remains unchanged since the return on each stock separately equals zero.
23. A T-bill with face value $10,000 and 87 days to maturity is selling at a bank discount ask yield of 3.4%. What is the price of the bill? What is its bond equivalent yield? (LO 2-1)
Bank discount of 87 days: 0.034 x = 0.008217
Price: $10,000 x (1 – 0.008217) = $9,917.83
Bond equivalent yield =
= = 0.0348 or 3.48%
Chapter 3
15. Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. (LO 3-4) a. What is the margin in Dée’s account when she first purchases the stock? b. If the
19. Consider the three stocks in the following table. P t represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two-for-one in the last period. (LO 2-2)
P0 Q0 P1 Q1 P2 Q2
A 90 100 95 100 95 100
B 50 200 45 200 45 200
C 100 200 110 200 55 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period ( t 5 0 to t 5 1). b. What must happen to the divisor for the price-weighted index in year 2? c. Calculate the rate of return of the price-weighted index for the second period ( t 5 1 to t 5 2).
a. At t = 0, the value of the index is: ($90 + $50 + $100)/3 = 80 At t = 1, the value of the index is: ($95 + $45 + $110)/3 = 83.33 The rate of return is: － 1 = (83.33/80) – 1 = 0.0417 or 4.17%
b. In the absence of a split, stock C would sell for $110, and the value of the index would be the average price of the individual stocks included in the index: ($95 + $45 + $110)/3 = $83.33.
After the split, stock C sells at $55; however, the value of the index should not be affected by the split. We need to set the divisor (d) such that:
83.33 = ($95 + $45 + $55)/d d = 2.34
c. The rate of return is zero. The value of the index remains unchanged since the return on each stock separately equals zero.
23. A T-bill with face value $10,000 and 87 days to maturity is selling at a bank discount ask yield of 3.4%. What is the price of the bill? What is its bond equivalent yield? (LO 2-1)
Bank discount of 87 days: 0.034 x = 0.008217
Price: $10,000 x (1 – 0.008217) = $9,917.83
Bond equivalent yield =
= = 0.0348 or 3.48%
Chapter 3
15. Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. (LO 3-4) a. What is the margin in Dée’s account when she first purchases the stock? b. If the