#1) Consider the following investment options: Option 1: invest $100 now and get

Question

#1) Consider the following investment options:
Option 1: invest $100 now and get back $125 in one year
Option 2: invest $75 now and get back $100 in two years
a) What is the internal rate of return (yield) for each option?
b) For what interest rates is the net present value of Option 1 at least as great as the net present value for Option 2?

#2) Consider the market for a two year zero-coupon bonds with face value of $1000. The supply curve for these bonds is given by EMBED Equation.3 . The demand curve for these bonds is given by EMBED Equation.3 .
Calculate the equilibrium price and quantity in this bonds market.
Calculate the annual yield of this bond if it is selling at the equilibrium price.

#3) Consider an asset that provides a cash flow given by (X, Y, Z) where X is received at the end of the first period so that it must be discounted.
a) If the per period interest rate is r, write an expression for the net present value of the cash flow.
b) If the current market price of this cash flow is P, explain how one could make a profit if P differs from the net present value of the cash flow (consider both cases).

#4) Consider a stock with a current share price of $150.
If the price increases to $175 tomorrow, what is the daily rate of return on the stock’s capital gain between today and tomorrow?
If you also receive your yearly dividend of $5 tomorrow, then along with the $25 share price increase, what is the daily rate of return on holding the stock between yesterday and today?
If analysts predict that the dividends being paid out yearly will grow with the profitability of the company at a rate of 2% annually and the current annual rate of interest is 5%, does the Gordon DDM model predict that the stock is currently overvalued at $175 or undervalued? Explain.
What if the growth projection was 4% annually?

Explanation / Answer

#1) let interest rate be = R % per annum we know final amount = initial_amount * (1+ (R/100)*t) then for option 1, 25 = 100*(R/100)*1 gives R = 25% for option 2 , 50 = 75*(R/100)*2 R= 100/3 % = 33.33% #4) today $150 and tommorow $175 so rate of return per day is (25/150)*100 = 50/3 = 18.66 % if i get dividend of $5 total earning on that day is ($175-$150)+$5 = $30 so rate of return per day is (30/150)*100 = 20%

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