# Question

You work for Innovation Partners and are considering creating a new security. This security would pay out $1000 in one year if the last digit in the closing value of the Dow Jones Industrial index in one year is an even number and zero if it is odd. The one-year risk-free interest rate is 5%. Assume that all investors are averse to risk.

a. What can you say about the price of this security if it were traded today?

b. Say the security paid out $1000 if the last digit of the Dow is odd and zero otherwise.

Would your answer to part (a) change?

c. Assume both securities (the one that paid out on even digits and the one that paid out on odd digits) trade in the market today. Would that affect your answers?

a. What can you say about the price of this security if it were traded today?

b. Say the security paid out $1000 if the last digit of the Dow is odd and zero otherwise.

Would your answer to part (a) change?

c. Assume both securities (the one that paid out on even digits and the one that paid out on odd digits) trade in the market today. Would that affect your answers?

## Answer to relevant Questions

Suppose a risky security pays an expected cash flow of $80 in one year. The risk-free rate is 4%, and the expected return on the market index is 10%.a. If the returns of this security are high when the economy is strong and ...You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 five years after the date of your retirement. Which alternative should you choose if the interest rate ...You are running a hot Internet company. Analysts predict that its earnings will grow at 30% per year for the next five years. After that, as competition increases, earnings growth is expected to slow to 2% per year and ...You are 35 years old, and decide to save $5000 each year (with the first deposit one year from now), in an account paying 8% interest per year. You will make your last deposit 30 years from now when you retire at age 65. ...Many academic institutions offer a sabbatical policy. Every seven years a professor is given a year free of teaching and other administrative responsibilities at full pay. For a professor earning $70,000 per year who works ...Post your question

0