Finance Questions Assignment Solution
Question # 00071808
Posted By:
Updated on: 05/20/2015 04:13 AM Due on: 05/20/2015
1.
What is the name of the interest rate the Fed changes through open market
operations (OMOs)?
2.
The current target for this interest rate is a band between 0 and 25 basis
points. Suppose on a given day, the rate looks like it might go above the
upper limit of the band. Describe what OMO the Fed would conduct in order
to lower the rate so that it stays within the band?
3.
Suppose the size of the OMO you describe in the above question was $100
million, the reserve requirement is 10% banks are holding 10 % in excess
reserves, and there is no change in cash held by the public in response to the
Fed action. By how much will the money supply change as a result of this
OMO? Show your calculations.
4.
Below is a balance sheet for Pacific Northwest Bank. Assume the items
listed are banks only assets and liabilities, the reserve requirement is 10%
and that Pacific Northwest is holding $1.5 Billion in excess reserve.
Pacific Northwest Bank Balance Sheet
Assets
Liabilities
Vault Cash $200 Million
Checking Deposits ?
Deposits with the Fed $1.8 Million
Saving Deposits 8 Billion
Loans $ 8 Billion
T-Bonds $ 4 Billion
Bank Capital ?
5. What must be the total amount of checking deposits?
6. What is the amount of the banks capital?
7. Suppose a local resident, Bill Gates, withdraws $1 Billion from his checking account at
Pacific Northwest to his next operating system, Windows FU. He holds the money in
cash in the safe of his Richmond mansion. By how much will the money supply change
as a result of Gates withdrawal? Show your calculations.
8. Find the price of the following bond below: Show your work including any equation (s)
you use.
F = $1,000
c = 8%
T=2
I = 10%
9. What is the yield of bond which has a face value of $5,000, a coupon rate of 5%, matures
in five years, and sells for $5,000?
10. What is the face value of a zero coupon bond, which matures in exactly four years, has a
price of $6,000 and a yield of 4%? Show your calculations.
11. For parts A and B below: assume the following.
E (rM) = 7%
rF = 2%
Expected risk premium on Boeing stock = 7%
12. What is the expected return on Boeing stock? Show your work.
13. What is the value of ? for Boeing stock? Show your work.
14. What is the difference between European and American options?
15. The following is a table showing the prices of options on XYZ stock at the close of
tradingon Wednesday. May 13, 2015. XYZ closed that day at $30.86 per share. (I have to
attach the table for the next few questions).
16. What was the intrinsic value of THEJune 29 call (i.e, the call which expires in June and
has a strike price of $29.00)?
17. Is theJuly 30 call in or out of the money?
18. What is the time value of theJuly 31 call?
19. What is the intrinsic value of the June 32.50 put (i.e. the put which expires in June and
has a strike price of $32.50)?
20. What is the time value of theJuly 31 put?
21. Draw hockey stick diagram for a long position (i.e. from the perspective of a buyer) in
the July 32 put. Clearly state and show on the graph. The maximum possible loss; the
maximum possible gain; the strike price; and the break-even point.
22. Assume the stock of Dismal Seepage Waste Disposal Co. can be at any of the following
prices onJune 1, with the associated probabilities as shown:
Price
$10
$15
$20
$25
Prob.
4
3
2
1
23. What is the expected value (EV) of Dismal Seepage stock? Show your calculations.
24. What will be the price of a put with a strike price of $20 which expires onJune 1? Show
your calculations.
25. Explain why increased volatility in the price of the underlying stock increases the price of
an option on that stock.
What is the name of the interest rate the Fed changes through open market
operations (OMOs)?
2.
The current target for this interest rate is a band between 0 and 25 basis
points. Suppose on a given day, the rate looks like it might go above the
upper limit of the band. Describe what OMO the Fed would conduct in order
to lower the rate so that it stays within the band?
3.
Suppose the size of the OMO you describe in the above question was $100
million, the reserve requirement is 10% banks are holding 10 % in excess
reserves, and there is no change in cash held by the public in response to the
Fed action. By how much will the money supply change as a result of this
OMO? Show your calculations.
4.
Below is a balance sheet for Pacific Northwest Bank. Assume the items
listed are banks only assets and liabilities, the reserve requirement is 10%
and that Pacific Northwest is holding $1.5 Billion in excess reserve.
Pacific Northwest Bank Balance Sheet
Assets
Liabilities
Vault Cash $200 Million
Checking Deposits ?
Deposits with the Fed $1.8 Million
Saving Deposits 8 Billion
Loans $ 8 Billion
T-Bonds $ 4 Billion
Bank Capital ?
5. What must be the total amount of checking deposits?
6. What is the amount of the banks capital?
7. Suppose a local resident, Bill Gates, withdraws $1 Billion from his checking account at
Pacific Northwest to his next operating system, Windows FU. He holds the money in
cash in the safe of his Richmond mansion. By how much will the money supply change
as a result of Gates withdrawal? Show your calculations.
8. Find the price of the following bond below: Show your work including any equation (s)
you use.
F = $1,000
c = 8%
T=2
I = 10%
9. What is the yield of bond which has a face value of $5,000, a coupon rate of 5%, matures
in five years, and sells for $5,000?
10. What is the face value of a zero coupon bond, which matures in exactly four years, has a
price of $6,000 and a yield of 4%? Show your calculations.
11. For parts A and B below: assume the following.
E (rM) = 7%
rF = 2%
Expected risk premium on Boeing stock = 7%
12. What is the expected return on Boeing stock? Show your work.
13. What is the value of ? for Boeing stock? Show your work.
14. What is the difference between European and American options?
15. The following is a table showing the prices of options on XYZ stock at the close of
tradingon Wednesday. May 13, 2015. XYZ closed that day at $30.86 per share. (I have to
attach the table for the next few questions).
16. What was the intrinsic value of THEJune 29 call (i.e, the call which expires in June and
has a strike price of $29.00)?
17. Is theJuly 30 call in or out of the money?
18. What is the time value of theJuly 31 call?
19. What is the intrinsic value of the June 32.50 put (i.e. the put which expires in June and
has a strike price of $32.50)?
20. What is the time value of theJuly 31 put?
21. Draw hockey stick diagram for a long position (i.e. from the perspective of a buyer) in
the July 32 put. Clearly state and show on the graph. The maximum possible loss; the
maximum possible gain; the strike price; and the break-even point.
22. Assume the stock of Dismal Seepage Waste Disposal Co. can be at any of the following
prices onJune 1, with the associated probabilities as shown:
Price
$10
$15
$20
$25
Prob.
4
3
2
1
23. What is the expected value (EV) of Dismal Seepage stock? Show your calculations.
24. What will be the price of a put with a strike price of $20 which expires onJune 1? Show
your calculations.
25. Explain why increased volatility in the price of the underlying stock increases the price of
an option on that stock.
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Solution: Finance Questions Assignment Solution