1.Consider a portfolio of two securities: one share of Johnson and Johnson (JNJ) stock and a bond that pays $100 in one year. Suppose this portfolio is currently trading with a bid price of $141.65 and an ask price of $142.25, and the bond is trading with a bid price of $91.75 and an ask price of $91.95. In this case, what is the no-arbitrage price range for JNJ stock?
2.You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $5000. You plan to put down $1000 and borrow $4000. You will need to make annual payments of $1000 at the end of each year. Show the timeline of the loan from your perspective. How would the timeline differ if you created it from the bank’s perspective?
3.You currently have a four-year-old mortgage outstanding on your house. You make monthly payments of $1500. You have just made a payment. The mortgage has 26 years to go (i.e., it had an original term of 30 years). Show the timeline from your perspective. How would the timeline differ if you created it from the bank’s perspective?
4.Calculate the future value of $2000 in
a. Five years at an interest rate of 5% per year.
b. Ten years at an interest rate of 5% per year.
c. Five years at an interest rate of 10% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?