Asset Markets and Arbitrage

Returns and their adjustments

The no-arbitrage principle

Pricing bonds and perpetuities

Adjustments in practice

An asset bought at 100 pays a dividend of 4 and sells at year end for 105. What is its return?

Two riskless one-period bonds quote returns of 6 and 4 percent. What does no-arbitrage predict?

A perpetuity pays an annual coupon of 5 forever and the riskless rate is 4 percent. What is it worth?

Corporate bonds yield 4 percent taxable, municipals 3 percent tax-free. For an investor in the 25 percent bracket, which is better?

The perpetuity with coupon 5 when the rate falls to 3 percent, compute its new price, rounded to one decimal, and write the number.

A taxable bond yields 8 percent and the tax rate is 25 percent, compute the after-tax yield in percent, and write the number.

An asset bought at 100 pays a dividend of 4 and sells at year end for 95. What is the return?

A perpetuity with coupon 5 trades while the riskless rate is 5 percent. What is its price?

The coupon-5 perpetuity sits at 125 when the rate is 4 percent. What happens if the rate rises to 5 percent?

Two riskless one-year bonds quote 6 and 4 percent. What does the arbitrageur actually do?

A perpetuity pays an annual coupon of 6 with the riskless rate at 4 percent. Compute its price, and write the number.

A bond is bought for 90, pays a coupon of 5, and sells at year end for 100. Compute the return in percent, rounded to one decimal, and write the number.