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Problem Based On Chapter 26 – Modigliani & Miller Extension Models With Growth Assumptions

516 words - 3 pages


Problem No. 1 on Options based on Chapter 8
A Call Option on the stock of XYZ Company has a market price of $9.00. The price of the underlying stock is $36.00, and the strike price of the option is $30.00 per share. What is the Exercise Value of this Call Option? What is the Time Value of the Option?
Price of stock is 36 – Strike price 30 = 6 value of the call option.
9 market price of call option – 6 value of the call option = 3 time value of the option.

Problem No. 2 on Options based on Chapter 8
The Exercise (Strike) Price on ABC Company’s Option is $21.00, its Exercise Value is $23.00, and its Time Value is $7.00. What is the Market Value of the Option? ...view middle of the document...

5 = 20
60m -20m = 40million
Problem on Swaps based on Chapter 23
Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate debt at 9.4%.

Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A.

What are the resulting net payments of A and B?

Company A fixed payment 7.95%
The payment of LIBOR is made by company B
Company A still pays the +1%
Company A makes a net payment of 8.95%

Company B pays the LIBOR
Company A pays 7.95% of the 9.4%, this leaves company B with 1.45% left.
Company B is left with LIBOR + 1.45

Problem based on Chapter 23 – Futures Contract
What is the implied interest rate yield on a Treasury Bond ($100,000) futures contract that settled at 100’24 (or 100 24/32)? If interest rates increased by 0.75%, what would be the contract’s new value?

Assume that this is based on 20 Years, with an annual yield of 8%, with semi-annual payments.

$1,000 X (100+24/32)/100 = 1007.5
N = 40
I/Y = 8%
PV = 1007.5
FV = 1000
PMT = 40

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