90.2K

Verified Solution

Link Copied!

a) Assume there are only two stocks traded in the stock market, and you are trying to construct an index to show what has happened to stock prices. Let us say that in the base year the prices were $18 per share for stock 1 with 100 million shares outstanding and $27 for stock 2 with 50 million shares outstanding. A year later, the prices are $25 per share for stock 1 and $22 per share for stock 2. Using the Dow Jones index and the S&P 500 index, compute stock indexes showing what has happened to the overall stock market. Which of the two methods do you prefer and why? b) You plan to buy a house that cost $5000 000 and you need to save the down payment of 15%. You decided to save 25000 a year. Your savings account pays 6% interest. How long will you have to wait to be able to pay the down payment? i. Calculate Duration on a $1,000 Ten-Year 8 % Coupon Bond When the market Interest Rate (discount rate) is 5 %. ii. Use the discounted cash method to calculate the correct price of the bond. iii. Calculate the expected price change if interest rates rise to 6 % using the duration approximation. a) Assume there are only two stocks traded in the stock market, and you are trying to construct an index to show what has happened to stock prices. Let us say that in the base year the prices were $18 per share for stock 1 with 100 million shares outstanding and $27 for stock 2 with 50 million shares outstanding. A year later, the prices are $25 per share for stock 1 and $22 per share for stock 2. Using the Dow Jones index and the S&P 500 index, compute stock indexes showing what has happened to the overall stock market. Which of the two methods do you prefer and why? b) You plan to buy a house that cost $5000 000 and you need to save the down payment of 15%. You decided to save 25000 a year. Your savings account pays 6% interest. How long will you have to wait to be able to pay the down payment? i. Calculate Duration on a $1,000 Ten-Year 8 % Coupon Bond When the market Interest Rate (discount rate) is 5 %. ii. Use the discounted cash method to calculate the correct price of the bond. iii. Calculate the expected price change if interest rates rise to 6 % using the duration approximation

Answer & Explanation Solved by verified expert

See Answer