1.

       Joe Bob is issuing a 20 year, 8% coupon bond. The market yield on this type of bond is 6%. Find a fair price. (1229.40)
($1,229.40) pmt = FVx Coupon rate

2.       If Joe Bob’s bond immediately falls to a price 980, what is the yield? (8.2%)
8.2%

3.       Last year Timco paid a 5 per share dividend. The beta is 1.7, the market is expected to earn 11%, and the risk free rate is
First CAPM 0.173 or 0.173
Then Perpetuity 28.901734104046
4.       What if Timco’s dividends grow at 6% per year forever? (46.90)
Growing perpetuity 46.902654867257

5.       Find the dividend yield and capital gains yield for the stock in number 4. (.113 and .06)
DY DIV(1+g)/PV 0.113006
CGY g 0.06
6.       What if Timco’s dividends grow at 6% for one year, than at 10% forever after that? (72.60)
5.3 D1
5.83 D2
79.8630136986302 P1
4.51832907075874 PVDI
68.0843989769821 PVP1
72.6027280477408
7.       Stevie Ray can generate 3 in Eps per year forever. The fair return is 14%. They can retain 30% of earnings and invest in a
21.4285714285714 AIP 1 Retain 30% dividen decreases 7
2.1
3 value of the stock is the decreased dividen
20.19231
4 -1.236264
8.       The spot price is 100. The exercise price on a one year call is 95. The standard deviation of the spot is 20%. The risk free
5 intrinsic value
7.76 Time value = Intrinsic-premium
12.76 Premium = Black Sholes
9.       The spot price is 100. The exercise price on a one year call is 102. The risk free rate is 4%. Find the price of the call if ther
The current price of a 5% coupon, 20 year treasury bond is 983.33. These bonds are earning 5.14%. The risk free rate is 2%. Fin

•Let’s say we are looking at a one year call on Timco stock, which is currently valued at $80. We believe that the stock will be
either $85 or $77 at maturity of the option. The exercise price is $79 and the risk free rate is 2%.

•To find a fair option price, we first need to imagine forming a risk free portfolio that consists of buying one share and writing
H calls. H is the risk free hedge ratio and can be found by dividing the stock price range by the call value range. If S goes up to
$85, the call will be worth 85-79=6. If S falls to 77, c will be 0. So H is (85-77)/(6-0) = 1.333. We will write 1.33 calls for each
share we own.
 6 1.3333333333333 7
-2 -1
pemdas 11.6020519524 0.753517

•18*.8554-15*e^(-.03*1.5)*.7882=15.3972-11.303=4.0944

15.3972 -0.045 0.955997 0.753517

0.3972 15.3972
BSPM -0.014088 11.60206
First find D1 and D2
D1 D2
1.0511501503021 0.8060521110864
(LN(S/X)+(rf+var(x)/2)*T)/(var*sqt T) (LN(S/X)+(rf-var(x)/2)*T)/(var*sqt T
(LN(18/15)+(0.03+0.04/2)*1.5)/(0.2*1.224) (LN(18/15)+(0.03-0.04/2)*1.5)/(0.2*1.224)

Find the values on the probability table

0.8554 0.7882

Plug values into BSPM

•C = S N(d1) – X*e^(-rt)*N(d2)
15.3972 0.7535172151809
11.302758227713
4.0944417722873
minus intrinsic value 18-15
time value 1.0944417722873
6%. Find a fair price. (1229.40)

earn 11%, and the risk free rate is 2%. If dividends remain at 5 per year forever, what is a fair price? (28.90)

n 30% of earnings and invest in a project that will earn 12%. Find the value of assets in place. Find the value of the growth opportunity. Sh
% dividen decreases 7 2 growth is the % of retained earings * the % investment will earn
0.036
he stock is the decreased dividend/(fair return-the growth)

of the spot is 20%. The risk free rate is 4%. Find the intrinsic value, time value and premium for this call. (5, 7.76, 12.76)

Time value is c - (s-x)

%. Find the price of the call if there is equal probability that stock price will grow to 110 or fall to 95. (4.615)
5.14%. The risk free rate is 2%. Find the futures price for a one year Tbond futures. (952.45)

We believe that the stock will be 38.857 36.27382

2%. 36.275
38.857 -3.725 3.258968
of buying one share and writing
e call value range. If S goes up to
e will write 1.33 calls for each
-31.73666
972-11.303=4.0944
growth opportunity. Should Stevie Ray buy it? (21.43, -1.24, No)
If you retain 30% the dividend falls to .7*3=2.1
the growth is .3*.12=.036
so the value of the stock with investment is 2.1/(.14-.036)
The PVGO is the difference
© Corporate Finance Institute®. All rights reserved.

Black Scholes Calculator

Type of Option Call Option

Stock Price (S0) $ 18.00
Exercise (Strike) Price (K) $ 15.00
Time to Maturity (in years) (t) 1.50
Annual Risk Free Rate (r) 3.00%
Annualized Volatility (σ) 20.00%
Option Price $ 4.03

Additional Calculation Parameters

ln(S0/K) 0.182
(r+σ2/2)t 0.075
σ√t 0.245
d1 1.051
d2 0.806
N(d1) 0.853
N(d2) 0.790
N(-d1) 0.147
N(-d2) 0.210
e-rt 0.95600

This file is for educational purposes only. E&OE

Corporate Finance Institute®

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