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 C = 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
8 1.875
-7 91.346153846154 100-1.875xc=91.346

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
952.453438 f=s*(1+r-d)*t

•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

D1 0.5564664719378
D2 0.3564664719378
N(d1) 0.7110539957048
N(d2) 0.6392543716522

bspm broken down

S*N(d1) - expected spot price, value of the stock 71.105399570477 value
e^(-rt)*N(d2) 0.6141888492154
e^(-rt)*N(d2) * X - present value of the exercise price 58.347940675463 discount
value of the call option (premium) 12.757458895015 option price
Intrinsic value 5
Time value 7.7574588950145
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)

-8.654
-4.615467

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 3.25896763
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

0.76
12.7358491
764.150943
972-11.303=4.0944
($792.09)

1.05115

S 100
X 95
var 0.2
var(x) 0.04
T 1
rf 0.04
sqt T 1

0.0625
ue of the 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

5, 7.76, 12.76)
 $1.06
0.24 $4.24
Module 2 Extra ExtraPractice
1.       ABC has a 5% coupon bond outstanding. The remaining maturity is 10 years. The market yield on this type of bond is 6%
($926.40)

2.       If the ABC bond has a price of 1050, what is the yield? (4.37%)
4.37%

3.       Last year Trumpco paid a 2.30 per share dividend. The beta is 2.1, the market is expected to earn 10%, and the risk free
0.177
12.9943502824859

4.       What if Trumpco’s dividends grow at 6% per year forever? (20.84)

20.8376068376068

5.       Find the dividend yield and capital gains yield for the stock in number 4. (.117 and .06)
0.117
0.06

6.       What if Trumpco’s dividends grow at 4% for one year, than at 8% forever after that? (24.66)
D1 2.3*(1+.04)
D2 2.392*(1+.08)
P1 2.58336/(.177-.08)
PVDI 2.392/1.177
PVP1 26.63258/1.177

7.       Drew Brees can generate 4 in Eps per year forever. The fair return is 12%. They can retain 50% of earnings and invest in
AIP EPS/Fair return 33.3333333333333
1 Retain 30% dividen decreases 70%
2.0
3 value of the stock is the decreased dividend/(fair return-the growth)
40
4 6.66666666666667

8.       The spot price is 50. The exercise price on a one year call is 48. The standard deviation of the spot is 25%. The risk free ra
2
4.7
6.7

0.658468867853414

•C = S N(d1) – X*e^(-rt)*N(d2)
9.       The spot price is 70. The exercise price on a one year call is 72. The risk free rate is 3%. Find the price of the call if there i
 3
-4

10.   The current price of a bushel of No. 1 Hard Red Winter Wheat is 5. The risk free rate is 2%. Storage costs are 4%. Find the
f=s*(1+r-d)*t

1.0295630140987
5.1478150704935
maturity is 10 years. The market yield on this type of bond is 6%. Find a fair price. (926.40)

eta is 2.1, the market is expected to earn 10%, and the risk free rate is 3%. If dividends remain at 2.30 per year forever, what is a fair price?

ck in number 4. (.117 and .06)

DIV(1+g)/PV

an at 8% forever after that? (24.66)

2.392
2.58336
26.6325773195876
2.03228547153781
22.6275106202209
24.6597960917587
air return is 12%. They can retain 50% of earnings and invest in a project that will earn 14%. Find the value of assets in place. Find the valu

2 growth is the % of retained earings * the % investmen

0.07
idend/(fair return-the growth)

is 48. The standard deviation of the spot is 25%. The risk free rate is 3%. Find the intrinsic value, time value and premium for this call. (2, 4
D1 D2
1.0511501503021 0.806052
(LN(S/X)+(rf+var(x)/2)*T)/(var*sqt T) (LN(S/X)+(rf-var(x)/2)*T)/(var*sqt T
(LN(50/48)+(0.03+0.0625/2))/(0.25) (LN(50/48)+(0.03-0.0625/2))/(0.25)
0.408287978081021 0.158288
0.658468868 0.562885
32.9234434 0.546249 26.21996 6.70348
is 72. The risk free rate is 3%. Find the price of the call if there is equal probability that stock price will grow to 75 or fall to 68. (1.71)
 2.33333333333333
66.0194174757281 70-2.33xc=66.01942 -3.98058
-1.708403
heat is 5. The risk free rate is 2%. Storage costs are 4%. Find the six month futures price. (5.1478)
year forever, what is a fair price? (12.99)

5.3 D1
5.83 D2
79.86301 P1
4.518329 PVDI
68.0844 PVP1
72.60273
e of assets in place. Find the value of the growth opportunity. Should Drew buy it? (33.33, 6.67, yes)

tained earings * the % investment will earn

ue and premium for this call. (2, 4.52, 6.52)

0.0625

ow to 75 or fall to 68. (1.71)

Bonds, Stocks, Options, and Futures - the underlying theory in each is to find the risk adjusted present value of all the expecte

Bonds - issued by governments and corps. Used to finance projects and operations. Is a debt contract
Maturity- is the date the last pament is made to the bondholder
Coupon Rate - the amount of interest the borrower pays
par/face value - the amount of money lent
discount rate - yeild to maturity, fair return in the market for similar bonds
coupon rate higher than yeild = premium bond
yield higher than coupon rate = discount bond
multivariate model to find rate of return - r= rf+DRP+MRP+LP
RF - real rate + expected infaltion. Rate depends on the consumers desire to save or spend and also com
DRP - default rish premium, how likely the borrower will be able to make payments
MRP - Maturity rate premium, depends on the bonds sensitivity to changes in the yeild. Longer maturitie
LP - liquidity premium, depends on how well the bonds do in the secondary market NYSE
esent value of all the expected future cash flows

to save or spend and also compensates for inflation.

s in the yeild. Longer maturities are more sensitive to rate changes

y market NYSE
© Corporate Finance Institute®. All rights reserved.

Black Scholes Calculator

Type of Option Call Option

Stock Price (S0) $ 100.00
Exercise (Strike) Price (K) $ 95.00
Time to Maturity (in years) (t) 1.00
Annual Risk Free Rate (r) 4.00%
Annualized Volatility (σ) 20.00%
c Option Price $ 12.75746

Additional Calculation Parameters

ln(S0/K) 0.051
(r+σ2/2)t 0.060
σ√t 0.200
d1 0.5565
d2 0.356
N(d1) 0.711
N(d2) 0.639
N(-d1) 0.289
N(-d2) 0.361
e-rt 0.96079

This file is for educational purposes only. E&OE

Corporate Finance Institute®

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