Q3. Suppose that the market default rate for bonds is given by 0.01, i.e., the probabilitythe market believes that the company may not be able to pay the owner of the bonds is 0.01.Now a credit default swap (CDS) is sold at fair price $ 0.01 per unit. Ackman expects thatthe true default rate is 0.05, not 0.01. Ackman bought 67 billion units of CDS at the price$ 0.01 per unit.a. Suppose that Ackeman's expectation about the default rate is not correct. I.e., thetrue default rate for bonds is given by 0.01. Find the cost of the purchase. Find the expectedpayoff. Find the profit.b. Suppose that Ackeman's expectation is correct. Find the cost of the purchase. Findthe expected payoff. Find the profit.

The provided information is as follows:The number of units Ackman bought is billion.The price per…

Answered: Q3. Suppose that the market default…

A First Course in Probability (10th Edition)

10th Edition

ISBN:9780134753119

Author:Sheldon Ross

Publisher:Sheldon Ross

Chapter1: Combinatorial Analysis

Section: Chapter Questions

Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...

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Example 5: ABC Ltd. has a capital of 710 lacs in equity shares of 7100 each. The shares are currently quoted at par. The company proposes declaration of a dividend of 710 per share at the end of the current financial year. The capitalisation rate for the risk class to which the company belongs is 12%. What will be the market price of the share at the end of the if: year, 1 A dividend is declared? Assuming that the company pays the dividend and has net profits of 75,00,000 and makes new investment of *10 lacs during the period, how many new shares must be issued. Usc the MM Model.
The following table lists several corporate bonds issued during a particular quarter. Company AT&T Bank ofAmerica GeneralElectric GoldmanSachs Verizon WellsFargo Time toMaturity(years) 10 10 2 3 8 7 AnnualRate (%) 2.40 3.00 5.25 7.15 6.15 2.50 If the General Electric bonds you purchased had paid you a total of $6,630 at maturity, how much did you originally invest? (Round your answer to the nearest dollar.) $
For a fully-discrete 10-year term insurance on (40) with face amount of 1000 You are given the following: A40.5 = 0.695; A. = 0.045; *40:5] A45:5 = 0.725; A! *45:5] A45.5 0.050; d = 0.08 %3D Calculate 5V, the net premium reserve at time 5.
A life insurance company sells annuities to men aged exactly 60. Each policyholder pays a single net premium, P, and then receives anannuity of $30 000 a year in arrear (so that the first annuity payment is on the 61st birthday). Assume that mortality follows the Standard Select Life Table,and that the interest rate is 5% per year. Now suppose that the office sells 1 000 such annuities simultaneously toindependent lives. Calculate the value of P such that the probability thatthe present value of the profit to the insurance company is positive is 95%.
4
Suppose that the advance estimate for fourth quarter GDP growth is 2%. Which of the following is true? 1.It is likely that the final estimate will be higher than 2% because there are omissions in the initial numbers. 2.We will not know the final estimate until the end of the calendar year. 3.It is likely that the final estimate will be lower than 2% due to errors in the initial numbers. 4.We do not know whether the final estimate will be higher or lower than 2%.
Example 3: The company needs 760 lac in cash for meeting the transaction requirement during the next three month of cash planning period. The firm has marketable security of same amount. The annual rate of return on the market securities is 40%. The fixed cost of 76,000 per transaction is required for the conversion of the securities. By the help of Baumol model, calculate the amount of marketable security which can be converted into the cash order.
Consider the following. My recent marketing idea, the Miracle Algae Growing Kit, has been remarkably successful, with monthly sales growing by 7% every 6 months over the past 4 years. Assuming that I sold 100 kits the first month, how many kits did I sell in the first month of this year? Determine the following values given that FV = PV(1 + i)", where FV and PV are measured in kits and time is measured in 6 month periods. PV = i = n = Solve for FV. (Round your answer to the nearest whole number.) FV = How many kits did I sell in the first month of this year? kits
The APR for loans can also be approximated (however, not within the 1 4 of 1% accuracy required by Regulation Z†) by using the following formula: APR = 2mI P(n + 1) where m = the number of payment periods per year I = the interest (or finance charge) P = the principal (amount financed) n = the number of periodic payments to be made. Thus, if m = 12, I = $264, P = $1200 and n = 30, APR = 2mI P(n + 1) = 2 × 12 × 264 1200 × 31 = 17%. Use the APR formula to find the APR to one decimal place. (Assume m = 12.) AmountFinanced FinanceCharge Number ofPayments $4000 $332 12 %State the difference between the answer obtained by the formula and the answer obtained using the True Annual Interest Rate (APR) table. (Round your answer to one decimal place.) %
40. By the condition of a will, the sum of P 1.500 is left to a boy to be held in trust by her guardian until it amounts to P 24,000, when will the boy receive the money if the fund is invested at 7% compounded semi-annually? A. 42.298 years B. 41.298 years C. 40.298 years D. 39.298 years
2. An annuity provides a payment of n at the end of each year for n years. What is the present value of the annuity if the annual effective rate of interest is 1/n?
7. Find the future value (A = P + Prt) of a simple interest investment of $1600 invested for 5 years at 14%.

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