Question
The table below shows the no-arbitrage prices of securities A and B. The economy is equally likely to strengthen or weaken in one year. Cash
The table below shows the no-arbitrage prices of securities A and B. The economy is equally likely to strengthen or weaken in one year.
|
|
| Cash Flow in One Year | |
| Security | Market Price Today | Weak economy | Strong Economy |
| A | 231 | 0 | 600 |
| B | 346 | 600 | 0 |
- What are the payoffs of a portfolio of one share of security A and one share of security B?
- What is the market price of this portfolio? What expected return will you earn from holding this portfolio?
- What is the risk-free interest rate?
2You are the beneficiary of a trust fund that will start paying you cash flows in five years. The cash flows will be $25,000 per year and will continue for 40 years. If the interest rate is 4% per year, what is the value needed in the trust fund now to fund these cash flows?
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Fiduciary Finance Investment Funds And The Crisis In Financial Markets
Authors: Martin Gold
1st Edition
1848448953, 9781848448957
