Are the following statements true or false? Provide a short justification for your answer. (You are...

Are the following statements true or false? Provide a short justification for your answer. (You are evaluated on your justification.) Remember that a statement is false if any part of the statement is false.

e) A 10-year coupon bond always has lower duration than a 10-year zero-coupon bond, regardless of the size of the coupons.

f) The stocks of Merck and Google are traded at the same price of $37 a share. The historical returns of Merck are more volatile than those of Google and exhibit higher systematic risk. In addition, given the coming health reform proposal, it is generally believed that Merck may have a negative alpha in the future. It is known that neither Merck nor Google will pay dividends in a month. Consider now forward contracts on these two stocks with one month to maturity. The forward price of 100 shares of Merck should be lower than the forward price of 100 shares of Google.

g) Consider two European call options for stock A, with the same expiration date. The strike price on the first option, K1, is lower than the strike price on the second, K2. The price of the K1-strike option should be at least as high as the price of the K2-strike option.

Expert Solution

e) True

Duration is a measure of interest rate risk. Higher the interest rate risk, the higher is the duration. In a zero-coupon bond, there are no intermediate cash-flows. However, in a coupon bond, the intermediate cash-flows can be invested at the market yield thus reducing the market interest rate risk. Hence, a 10-year coupon bond always has lower duration than a 10-year zero-coupon bond, regardless of the size of the coupons.

f) False

The forward price mainly depends on the risk-free rate, the time to maturity and the stock price. All 3 are same in case of both the stocks. Hence, we cannot say that the forward price of 100 shares of Merck should be lower than the forward price of 100 shares of Google.

g) True

A call option pays off when the stock price at maturity is higher than the strike price If the stock price at maturity is above K2, then it should be above K1 and the payoff should be higher in case the strike price is K1. Hence, in order to prevent an arbitrage situation, the price of the K1-strike option should be at least as high as the price of the K2-strike option.

jeff jeffy answered 1 year ago

a) Indicate whether the following statements are true or false. Provide an explanation for your answer:...

a) Indicate whether the following statements are true or false. Provide an explanation for your answer: i. The most important role of money is to serve as a store of value. ii. An increase in the money supply will shift the AD curve upwards and to the left. iii. Rising output coupled with falling prices is called stagflation. iv. A cut in taxes will shift the aggregate demand curve upwards and to the right. v. Free trade is based on...

Answer True or False for each of the following. If your answer is FALSE, provide an...

Answer True or False for each of the following. If your answer is FALSE, provide an example that proves your point. If your answer is true, explain. Given a typical set of numerical data with an ODD number of values. 1. The mean is always one of the data values. 2. The median is always one of the data values 3. The mode is always one of the data values. 4. The range measures the variability of the given data...

Indicate whether the following statements are true or false. Provide an explanation for your answer: i....

Indicate whether the following statements are true or false. Provide an explanation for your answer: i. In a perfectly competitive market an increase in demand for a product may increase prices in the short run but not in the long run. ii. The "invisible hand" is a metaphor for how societies create laws to regulate what and how things are produced in an economy. iii. The opportunity cost of an item or an action is always equal to the amount...

State whether the following statements are true or false, and explain your answer if you judge...

State whether the following statements are true or false, and explain your answer if you judge the statement to be false (a statement must always be true to be considered true). i) In an efficient market all investments should have the same long-run average return ii) In an efficient market all investors should have the same long-run average return iii) Stocks exhibiting positive or negative abnormal returns indicates market inefficiency iv) Evidence of irrational behavior on the...

Are the following statements true or false? In each case, prove your answer. There is a...

Are the following statements true or false? In each case, prove your answer. There is a strictly decreasing function f from N to N with f(0) = 100. Let f(x) and g(x) be strictly increasing functions from R to R. Then (f + g)(x) is also strictly increasing. Once again, let f(x) and g(x) be strictly increasing functions from R to R. Then (f×g)(x) is also strictly increasing.

State whether the following statements are true of false. If they are true, give a short...

State whether the following statements are true of false. If they are true, give a short justification. If they are false, give a counterexample. For each of the following, P(x) is a polynomial. (a) If P(x) has only even powers, and P(a) = 0 then x^2 ? a^2 divides P(x). (b) If P(x) has only odd powers, and P(a) = 0 then x^2 ? a^2 divides P(x). (c) If P(x) has only even powers, then P(x) has at least one...

Indicate whether the following statements are TRUE or FALSE and explain your answer fully with an...

Indicate whether the following statements are TRUE or FALSE and explain your answer fully with an adequate explanation a)An efficient outcome is desirable because it allows us to make Pareto improvements. b)Unlike a consumer, a firm does not face a budget constraint. c)If the wage rate increases, then those who work have a stronger incentive to supply labor.

Answer each of the following statements True/False/Uncertain. Give a full explanation of your answer. A) If...

Answer each of the following statements True/False/Uncertain. Give a full explanation of your answer. A) If consumers have negatively correlated reservation prices, bundling is a profitmaximizing strategy. B) Vertical arrangements (integration, exclusive dealing, etc.) can be used to reinforce cartel participation. C) Market-based recoupment is necessary for predatory pricing to be successful. D) Ownership (or procurement) of intellectual property (patents, copyrights, etc.) is a direct observation of market power. E) It is always in the best interest of society to...

10. Determine whether the following statements are true or false. You must briefly explain your answer....

10. Determine whether the following statements are true or false. You must briefly explain your answer. (a) If Yn is a binomial rv with parameters n and p = 1/n, then limn→∞ Yn is a exponential random variable. (b) If (X, Y ) is uniformly distributed on the unit disk, then X is uniformly distributed on [−1, 1]. (c) If X1, ..Xn, .. are i.i.d. with common mean µ and variance σ 2 , then for any > 0 P(|X1...

Assess whether the following statements are true or false. motivate your answer (your argument should in...

Assess whether the following statements are true or false. motivate your answer (your argument should in principle prove the claim or prove it wrong). (1)Claim: As a firm output goal Q increases, a cost-minimizing firm will always use more labor and more capital to achieve the output goal. (2)Claim: If a production function has diminishing marginal product of labor and diminishing marginal product of capital, then that production function cannot have increasing returns to scale.

Question