Week 5- solutions to homework

5th Seminar. Homework solutions- Financial system

Homework - solutions

1. A person owns 5000 shares, that bring him a yearly income of 100 $/ each. The
interest rate in the economy is 20% p. y. Find:
a) What would be the minimum price that he should ask / share?
b) How would the price of the share evolve if the interest rate grows to 25%?
c) What is the interest rate decreases to 12,5%?

Data given
NA=5000 shares
Div=100 $./share/year
ir=20%/an
a)C0=? b) ir=25%/year Δ%C=? c) ir =12,5%/year Δ%C=?
Solution:
a) the initial price of the share is going to be:
100 100
C 0= ¿ = = =500 $ /share
rd 20 % 0,2
b) we know that when the interest rate on the market changes, the price of the shares modifies in
the opposite direction:
100 100
C 1= ¿ = = =400 $ /share
rd 25 % 0,25
c 1−c 0 400−500
Δ%C= ∗100= ∗100=−20 %
c0 500
-the price will drop from 500 $ to 400$
-the increase in the interest rate determines a decrease in the price of the share by 20%
c) we know that when the interest rate on the market changes, the price of the shares modifies in
the opposite direction:
100 100
C 1= ¿ = = =800 $ /share
rd 12,5 % 0,125
c 1−c 0 800−500
Δ%C= ∗100= ∗100=60 %
c0 500
-the price increases from 500 $ to 800 $
-for the decrease in the interest rate, there will be an increase for the price of shares by 60%

2. In order to attract money from the population the Ministry of Finance released
treasury certificates with a nominal value of 1 million $ and with an interest rate of
16%.
a) If the average interest rate in the economy is 14%, a person who owns treasury
certificates is in loss or in gain? What would be the price of the certificates if they
were resold?
b) For what interest rate of the market would the price of these certificates be equal
with their nominal value?
Week 5- solutions to homework

Datele given:
The treasury certificates are released by the state
VN=1 mil. $ (VN=nominal value)
The interest that these certificates have is the rate of the coupon : r c=16%/year
a) ir=14% win or loss for the owner ?
P=? (price of certificates )
b) ir=? In order for P=VN
Solution
a)because the treasury certificates bring an income of 16% yearly(corresponding to the rate of
the coupon), and the interest rate on the market is 14%, we can assume that the owner of these
certificates will win (compared to a situation where he could deposit the money at a bank with an
interest rate of 14% yearly)
-price of certificates:
I fix I fix r c∗VN 0,16∗1000000
P= ,∧I fix =r c ∗VN , from where P= = = =1.142 .857,14 $
ir ir ir 0,14

I fix I fix
b) if P=VN, and P= , we assume that =VN but I fix =r c∗VN
ir ir
r ∗VN rc
out of these two we obtain : c =VN → =1→ r c =ir=16 %
ir ir