Question
1. The current price of a stock is $80, and at the end of one year, its price will be either $88 or $72. The
1. The current price of a stock is $80, and at the end of one year, its price will be either $88 or $72. The annual risk-free rate is 3.0% based on daily compounding. Based on the binominal model, what is the present value for a 1-year call option on this stock with an exercise price of $86.
2. Warren Corporation's stock sells for $40 per share. The company wants to sell some 10-year, semi annual coupon payment bond, at $1,000 par value. Each bond would have 40 warrants attached to it, each exercisable into one share of stock at an exercise price of $45. The firm's straight bonds yield to maturity is 10%. Each warrant is expected to have a market value of $5 that the stock sells for $42. What annual coupon rate must be set on the bonds in order to sell the bonds-with-warrants at par value?
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