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Options, Duration of bonds

1. A zero-cost forward on Intel stock with maturity in three months has a strike price of $26.86. The annual riskfree interest rate is 4%. Assuming no arbitrage opportunities, what is the current price of Intel stock?

2. A company pays quarterly dividends. The next dividend is due tomorrow, and it is expected to be $1. The dividends decrease by 1% every quarter. The annual cost of equity for the stock ( ) is 10%. What is the stock price?

3. If insiders with private information are able to obtain abnormally high returns, this represents a contradiction to the semi-strong version of the Efficient Market Theory. True or False? Please explain.

4. A bond has a face value of $1,000, coupon rate of 8% (annual payments), yield to maturity of 7%, and maturity in 100 years. What is this bond's duration?
Hint: Calculate the bond's price. If the yield changed to 7.1%, how would the price change?

5. The current price of Caterpillar stock is $68.5. The annual standard deviation of the stock returns is 18%. The annual risk-free interest rate is 5%. What is the value of a European Put option on Caterpillar stock with a strike price of $72 and maturity in 2.5 years?


Solution Summary

Answers questions on Forward Price, Stock price, Efficient Market Theory, bond's duration, European Put option.