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

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?

Step by Step Solution

★★★★★

3.28 Rating (157 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a Whether the last digit in the Dow is odd or even has no corre... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

317-B-C-F-G-F (241).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

A group of alumni are considering creating a new Tigers gear business. The business will be owned by three individuals. They would like to know whether they should go with an S corporation structure...

If A2 = A, what can you say about det A?

Assume that John, James, and Jane are considering creating a legal business entity to develop and market their idea for a web application. Recommend the most appropriate type of business activity...

You work for Innovation Partners and are considering creating a new security. This security would pay out $1,000 in one year if the last digit in the closing value of the Dow Jones Industrial index...

*22. 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...

You work for Innovation Partners and are considering creating a new security. This security would pay out $2,000 in one year if the last digit in the closing value of the Dow Jones Industrial index...

You work for Innovation Partners and are considering creating a new security. This security would pay out $ 2 0 0 0 in one year if the last digit in the closing value of the Dow Jones Industrial...

You work for Innovation Partners and are considering creating a new security. This security would pay out $ 3 comma 0 0 0 $ 3 , 0 0 0 in one year if the last digit in the closing value of the Dow...

A satellite is in an orbit with an eccentricity of 1.2 has its closest approach to earth at an altitude of 700km. Find the following. A) what is it's maximum speed? B) find the true anomaly of the...

A manufacturing company has the following average times (in days): Transporting product. . . . . . . . . 3 Manufacturing product . . . . . . .5 Inspecting product . . . . . . . . . . 2 Storing...

Land for a Materials Recovery Facility ( MRF ) was purchased for $ 1 2 5 , 0 0 0 with a 3 0 year loan at 4 . 2 5 % annual interest. Operation and maintenance costs are $ 2 0 0 / month . Revenue from...

Explain how an interest rate is just a price.

What are the four primary disadvantages of the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the...

NBC company is expected to pay a $ 2 . 5 0 per share dividend at the end of this year ( i . e . , D 1 = $ 2 . 5 0 ) . The dividend is expected to grow at a constant rate of 5 % a year from the...

Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which...

Which investment below would be most appropriate for investors who need income? A. International stocks B. DOW Index Funf (DIA) C. Disney and Exxom Moble stocks D. Dividend Paying ETFs E. A, B, D are...