Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 3, Problem 17P
Consider two securities that pay risk-
- a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years?
- b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years?
- c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?
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Students have asked these similar questions
17. Consider two securities that pay risk-free cash flows over the next two years and that have the
current market prices shown here:
Security Price Today ($) Cash Flow in One Year ($) Cash Flow in Two Years ($)
B1
94
0
100
0
B2
85
100
a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100
in two years?
b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500
in two years?
c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a
price of $130. What arbitrage opportunity is available?
Assume that the Pure Expectations Theory of the term structure is correct. Also
assume that the interest rate today on a 9-year security is 6.40%, while the
interest rate today on a 15-year security is 8.00%. Finally assume that the
interest rate on a 3-year security to be bought at Year 9 and held over Years 10,
11, and 12 is 6.80%. Given this information, determine the average annual return
that investors today must expect that they will receive from investing in a 3-year
security in 12 Years (that is, buying the security at Year 12 and holding it over
Years 13, 14, and 15).
O 13.00%
O 12.50%
13.50%
O 12.00%
O 14.00%
The promised cash flows of three securities are listed below. If the cash flows are risk-free, and the risk-free interest rate is 5.0%, determine the no-arbitrage price of each security before the first cash flow is paid.
Security
Cash Flow Today ($)
Cash Flow in One Year ($)
A
800
800
B
0
1600
C
1,600
0
The no-arbitrage price of security A is how much? ? (Round to the nearest cent.)
The no-arbitrage price of security B is how much? ? (Round to the nearest cent.)
The no-arbitrage price of security C is how much? ? (Round to the nearest cent.)
Chapter 3 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 3.1 - Prob. 1CCCh. 3.1 - If crude oil trades in a competitive market, would...Ch. 3.2 - How do you compare costs at different points in...Ch. 3.2 - Prob. 2CCCh. 3.3 - What is the NPV decision rule?Ch. 3.3 - Why doesnt the NPV decision rule depend on the...Ch. 3.4 - Prob. 1CCCh. 3.4 - Prob. 2CCCh. 3.5 - If a firm makes an investment that has a positive...Ch. 3.5 - Prob. 2CC
Ch. 3.5 - Prob. 3CCCh. 3.A - The table here shows the no-arbitrage prices of...Ch. 3.A - Suppose security Chas a payoff of 600 when the...Ch. 3.A - Prob. A.3PCh. 3.A - Prob. A.4PCh. 3.A - Prob. A.5PCh. 3.A - Consider a portfolio of two securities: one share...Ch. 3.A2 - Why does the expected return of a risky security...Ch. 3.A2 - Prob. 2CCCh. 3.A3 - Prob. 1CCCh. 3.A3 - Prob. 2CCCh. 3 - Honda Motor Company is considering offering a 2000...Ch. 3 - You are an international shrimp trader. A food...Ch. 3 - Prob. 3PCh. 3 - Prob. 4PCh. 3 - You have decided to take your daughter skiing in...Ch. 3 - Suppose the risk-free interest rate is 4%. a....Ch. 3 - You have an investment opportunity in Japan. It...Ch. 3 - Your firm has a risk-free investment opportunity...Ch. 3 - You run a construction firm. You have just won a...Ch. 3 - Your firm has identified three potential...Ch. 3 - Your computer manufacturing firm must purchase...Ch. 3 - Prob. 12PCh. 3 - Prob. 13PCh. 3 - An American Depositary Receipt (ADR) is security...Ch. 3 - Prob. 15PCh. 3 - An Exchange-Traded Fund (ETF) is a security that...Ch. 3 - Consider two securities that pay risk-free cash...Ch. 3 - Prob. 18P
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