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The value of ABT Corp stock has a value of R100. The stock is expected to...

The value of ABT Corp stock has a value of R100. The stock is expected to pay dividend of R2 per share with an exercise price of R98. If the annual interest rate is 2.5 %, what must be the price of a zero coupon bond?

The European option has a 1 year maturity on the stock.

Solutions

Expert Solution

Given Details (Amounts in R)

Current market value =100 ,Expected Dividend=2,Exercise price (i.e maturity amount)=98,Annaual Interest rate(r)=2.5%,n=number of years to maturity

Present value of current stock=Maturity amount/(1+r)^n+Dividend amount/1+r)^n

   =98/1+0.025)^1++2/1+0.025)^1

=95.61+1.95

=97.56

Conclusion:Based on above calculation  the price of Zero Coupon bond wil be 97.56 if it is trading above this amount then it is over priced and it is not advisable to make purchase of such bond

jeff jeffy answered 2 years ago
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