Ch. 2.
Problem-Solving
2.1 A T-bill with face value $10,000 and 87 days to maturity and
selling at a bank discount ask yield of 3.4%.
a. What is the price of the bill?
b. What is its bond equivalent yield?
c. What is its effective annual yield?
2.2. What are the bid price, asked price, and yield to maturity of
3.625% February 2020 Treasury bond with face value of
$1,000 in Figure 2.3 (ppt. 21)?
What was its asked price the previous day?
MATURITY COUPON BID ASKED CHG ASKED YTM
15-Feb-15 4.000 101.6250 101.6328 -0.0078 0.046
15-Feb-17 4.500 109.3516 109.3750 0.0234 0.927
15-Feb-20 3.625 108.8906 108.9375 0.0938 1.880
2.3. Suppose your tax bracket is 28%. Would you prefer to earn a
6% taxable return or a 4% tax-free yield? What is the equivalent
taxable yield of the 4% tax-free yield?
2.4.
a. If you buy 100 shares of IBM common stock, to what are you
entitled?
b. What is the most money you can make over the next year?
c. If you pay $190 per share, what is the most money you could lose
over the year?
2.5. From Figure 2.10, what would be the profit or loss per share of
stock to an investor who bought the Oct 2014 expiration Apple
call option with exercise price $100, if the stock price at the
expiration of the option is $110?
What about a purchaser of the put option with the same
exercise price and expiration?
2.6. From Figure 2.11, suppose you buy two contracts for Dec. 2015
delivery. If the contract closes at maturity at a price of $3.95 per
bushel, what will be your profit or loss? (Each contract calls for
delivery of 5,000 bushels.)
How many Dec. 2015 maturity contracts are outstanding?
2.1 A T-bill with face value $10,000 and 87 days to maturity, selling at a bank discount
ask yield of 3.4%
a. Price of the bill
Using the formula:
Price = Face Value × [1 - (Discount Rate × (Days to Maturity / 360))]
= 10,000 × [1 - (0.034 × 87 / 360)]
= 10,000 × [1 - 0.008225]
= $9,917.75
b. Bond Equivalent Yield (BEY)
BEY = [(Face Value - Price) / Price] × (365 / Days to Maturity)
= [(10,000 - 9,917.75) / 9,917.75] × (365 / 87)
≈ 0.00829 × 4.195
= 3.48%
c. Effective Annual Yield (EAY)
EAY = (1 + BEY / (365 / Days))^(365 / Days) - 1
= (1 + 0.0348 / 4.195)^(4.195) - 1
≈ (1.00829)^4.195 - 1
= 3.53%
2.2 Treasury bond 3.625% Feb 2020
Bid Price: $108.8906
Asked Price: $108.9375
Yield to Maturity (Asked YTM): 1.880%
Previous Day’s Asked Price: 108.9375 - 0.0938 = $108.8437
2.3 Taxable vs. Tax-Free Yield
Tax-free yield: 4%
Equivalent taxable yield = Tax-free yield / (1 - Tax Rate)
= 0.04 / (1 - 0.28)
= 0.04 / 0.72
= 5.56%
So, prefer the 4% tax-free yield if taxable yield is less than 5.56%.
2.4 IBM Stock
a. You are entitled to:
Voting rights (depending on stock class)
Dividends (if declared)
Capital gains or losses
A share of residual assets if the company is liquidated
b. Most money you can make:
Unlimited potential profit if stock price rises
c. Most you could lose:
= $190 × 100 = $19,000 (your entire investment)
2.5 From Figure 2.10
Question:
What would be the profit or loss per share of stock to an investor who bought the October
2014 Apple call option with exercise price $100, if the stock price at the expiration of the
option is $110?
What about a purchaser of the put option with the same exercise price and expiration?
Call Option (October, Strike $100)
Call premium (cost) = $2.62
Stock price at expiration = $110
Strike price = $100
Intrinsic value = $110 - $100 = $10
Profit = $10 - $2.62 = $7.38 per share
✅ Call option profit = $7.38
Put Option (October, Strike $100)
Put premium (cost) = $1.55
Stock price at expiration = $110
Strike price = $100
Since the stock price is higher than strike, the put expires worthless
Loss = Premium paid = -$1.55 per share
❌ Put option loss = $1.55
✅ Final Answer:
Call buyer profit: $7.38 per share
Put buyer loss: $1.55 per share