EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
Question
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Chapter 3, Problem 15P
Summary Introduction

To determine: No-arbitrage price of securities before the first cash flow is paid.

Introduction:

Arbitrage pricing theory is an asset-pricing model. No arbitrage is under arbitrage-free condition. Under this situation, all the assets are priced appropriately and there are no chances of one’s gain to overcome the market gains without facing any risks.

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The promised cash flows of three securities are listed below. If the cash flows are​ risk-free, and the​ risk-free interest rate is 5.0%​, determine the​ no-arbitrage price of each security before the first cash flow is paid.   Security Cash Flow Today​ ($) Cash Flow in One Year​ ($) A 800 800     B 0 1600     C 1,600 0     The​ no-arbitrage price of security A is how much? ? ​(Round to the nearest​ cent.) The​ no-arbitrage price of security B is how much? ? ​(Round to the nearest​ cent.) The​ no-arbitrage price of security C is how much? ? ​(Round to the nearest​ cent.)
The promised cash flows of three securities are listed below. If the cash flows are risk-free, and the risk-free interest rate is 4.5%, determine the no-arbitrage price of each security before the first cash flow is paid. (Click on the following icon in order to copy its contents into a spreadsheet.) Security A B C Cash Flow Today (S) 700 0 1,400 The no-arbitrage price of security A is S Cash Flow in One Year ($) 700 1,400 0 (Round to the nearest cent.)
Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here: Security       Price Today      Cash Flow in One Year            Cash Flow in Two Years B1                   $192                        $200                                             0 B2                   $176                         0                                                   $200 What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $200 in two years? What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $1600 in two years? Suppose a security with cash flows of $100 in one year and $200 in two years is trading for a price of $260. What arbitrage opportunity is available?

Chapter 3 Solutions

EBK CORPORATE FINANCE

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