# Financial markets and instruments

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Chapter 2 solutions to recommended questions
Bodie9 Chapter 2 questions, Bodie9 Chapter 2 questions, Chapter 2 solutions to recommended questions, Chapter 2 - LO4 Notes, 3900 A SU21 (1)

CHAPTER 2

FINANCIAL MARKETS AND INSTRUMENTS

2. a.

b. One reason is that the discount yield is computed by dividing the dollar discount from par by the par value, \$10,000, rather than by the bill’s price, \$9,600. A second reason is that the discount yield is annualized by a 360-day rather than a 365-day year.

6. a. i. 1 + r = (\$10,000/\$9,764)4 = 1.1002

r = 10.02%

ii. 1 + r = (\$10,000/\$9,539)2 = 1.0990

r = 9.90%
The three-month bill offers a higher effective annual yield.

b. i. rBD = = 0.0934 = 9.34%

ii. rBD = = 0.0912 = 9.12%

7. a. Price = \$1,000 × [1 – 0.03 × ] = \$992.5

b. 90-day return = = 0.007557 = 0.7557%

c. rBEY = 0.7557% × = 3.06%

d. Effective annual yield = (1.007557)365/90 – 1 = 0.0310 = 3.10%

10. a. The index at t = 0 is (60 + 80 + 20)/3 = 53.33. At t = 1, it is (70 + 70 + 25)/3 = 55, for a rate of return of 3.13%.

b.
 Stock Q P0 Market Value P1 Market Value A 200 60 12,000 70 14,000 B 500 80 40,000 70 35,000 C 600 20 12,000 25 15,000

The index at t = 0 is (12,000 + 40,000 + 12,000)/100 = 640. At t = 1, it is also 640, so the rate of return is zero.

c.
 Before Splits After Splits Stock P0 Q P0 Q P1 A 60 200 30 400 35 B 80 500 20 2,000 17.5 C 20 600 20 600 25

After the splits the index has to remain unchanged so the divisor (which initially was 3) has to be reset. The sum of the three prices after the split is 70, while the index value before splits was 53.33. Therefore 70/d = 53.33 and the new divisor must be 1.3125. The index at t = 1 is (35 + 17.5 + 25)/1.3125 = 59.05 for a return of 10.71%.

d. The total market value of A and B as well as that of the market remain unchanged after the two splits so that the return on the value-weighted index is not affected by the splits (and it is zero).

11. a. The index at t = 0 is (90 + 50 + 100)/3 = 80. At t = 1, it is 250/3 = 83.333, for a rate of return of 4.17%.

b. In the absence of a split, stock C would sell for 110, and the index would be 250/3 = 83.333. After the split, stock C sells at 55. Therefore, we need to set the divisor d such that 83.333 = (95 + 45 + 55)/d, meaning that d = 2.34.

c. The return is zero. The index remains unchanged, as it should, since the return on each stock separately equals zero.

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