3. A security is currently trading at $96. The six-month forward price of this security is $100. It will pay a coupon of $6 in three months. The relevant interest rate is 10% p.a. (continuously compounding). No other payouts are expected in the next six months. Show the exact strategy you will use to make an arbitrage profit. State the profit and show all cash flows arising from the strategy.

Consider the following semiannual bonds:           

            Bond               Coupon           Years to maturity        Yield

               1                      4%                          5                        6.0%

               2                      6.5%                       6                        4.5%

a. Calculate the price per $100 par value for each bond.

b. If bond 2 is callable at 104.5 after 3 years, what is the yield to call?

c. What would have to happen for you to actually earn the yield to maturity on these bonds?

Please show work. The following are three-month call option prices: the call at strike 100 is trading at $ 5 and the call at strike 102 is trading at $ 2.5. The rate of interest (continuously compounded) is 3%.

1) Is there an arbitrage strategy is this market and how would you implement it?

2) Draw a cash flow table showing the outcome of your strategy at maturity for every possible stock price level.

The following table lists the discount factors implied by the government spot curve for the next 4 years:

What would be the price of a 4 year 3.98% coupon bond with a Z spread of 89 bps, per $100 of par value?

Enter answer in percents.

Correct answer: 82.1536

Let someone have a utility function defined by u(x, y) = 5lnx + 4lny with an income of 100. Suppose the current price of the two goods are p1= 2 and p2=1.

a) What is their demand function for both goods? Note: This demand function is known as the Walarasian demand or Mashallian demand).

b) What can you say about the proportion of income spent on the two goods.

You are looking to purchase your first home and have picked one out. The house costs $287,000.00, and you saved up 8% in cash and you will need to get a loan/mortgage for the remainder of the purchase price. You also need to get private mortgage insurance, which will cover 25% of your loan amount in the event of default. The PMI involves a 3.5% of loan premium due at closing, which will be added to the loan balance. The loan is an Adjustable Rate mortgage with a fixed interest rate for the first 5 years, and then the rate then changes one time every 2 years thereafter on the anniversary of the loan, with a maximum interest rate increase of up to 2% per change. The underlying index for the loan is Wall Street Journal Prime and the rate is the index plus ½%. The loan 30 years amortization and a 30-year term. Under these circumstances, answer the following questions.

1. Assume that the loan rate is 3.75% for the first 5 years. What is the mortgage payment due for first month. Use Excel to make it easier and the show your work.

2. What will be the loan’s principle balance after the first 5 years?

3. If you were to default on your loan after the ninth month payment, what is the net loss of the bank if the house sold for $265,000 a month later and had closing costs of 9% of the sales price? (remember to calculate the principle balance due, the sale proceeds net closing cost and any PMI proceeds). Use Excel to make it easier and the show your work.

Merebut and Ichiban provide private-hire services. The strategic choices and payoffs for Merebut and Ichiban are as follows:

If Merebut and Ichiban choose simultaneously and with full knowledge of the payoff structure, what is the Nash Equilibrium/Equilibria, if any?

Explain your answer.

2. (ii) Consider the game given in Question 3(a)(i). Suppose Merebut chooses its strategy first, followed by Ichiban. Draw the extensive form, or game

   tree, of this sequential game.

3. (iii) Analyse and solve for the extensive form Nash Equilibrium in the

   sequential game where Merebut goes first.

(iv) Suppose that the right to move first is auctioned to the highest bidder. The highest bidder can move first; the lower bidder must move second.

Which firm would bid more in the auction, and what price would they be willing to bid up to? Why?

Note: If you are not confident of your earlier answers, describe the general principle determining the value of moving first, for partial mark.

(b) Is the private-hire market best modelled using the Bertrand (price) competition model, or the Cournot (quantity) competition model? What are the implications of the model you chose on prices and profits? Do not use Question 3(a) to answer this. You must provide a real-life argument to answer this question.

ABC Company limited produces coat racks. The projected sales for the first quarter of the coming year and the beginning and ending inventory data are as follows:

The coat racks are molded and then painted. Each rack requires four pounds of metal, which cost SAR 2.50 per pound. The beginning inventory of materials is 4,000 pounds. ABC Company Limited wants to have 6,000 pounds of metal in inventory at the end of the quarter. Each rack produced requires 30 minutes of direct labor time, which is billed at SAR 9 per hour.

Required:

1. Prepare a sales budget for the first quarter.

2. Prepare a production budget for the first quarter.

3. Prepare a direct materials purchases budget for the first quarter.

4. Prepare a direct labor budget for the first quarter.

The patient's health insurance plan has a $750 deductible for hospital visits, and then it covers 100 percent of hospital charges. The patient's first hospital visit this year had charges of $612. The patient was subsequently admitted to the hospital a second time this year, and the charges totaled $358.

How much will the patient be billed for each visit?

Visit 1

Visit 2

How much will the health insurance plan reimburse for each visit?

Visit 1

Visit 2

A pool of mortgages contains 3%, 15-year loans with the total beginning balance of $100 million. The pool backs 116 principal-only (PO) shares and 99 interest-only (IO) shares. Monthly expenses and fees amount to 0.04% of the beginning-of-the-month balance (they are subtracted from the interest portion). In the first month, the total payments from the pool were $713.3 thousand. What was the cash flow per PO share (to the nearest dollar)? Assume no defaults.