CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

A security is currently trading at $97. It will pay a coupon of $5 in two months. No other payouts are expected in the next six months. Assume monthly compoudning at 12%. What should the forward price be on the security for delivery in six months?
Correct Answer: 94.7368

We have that S0 = 97, and the PV of holding benefits is 5 / (1 + 0.12 * (2/12))2/12 = 4.9835. Thus, the forward price should be (97 - 4.9835) * (1 + 0.12 * (6/12))6/12 = 94.7368.

User Contributed Comments 8

User Comment
maryprz14 No idea!!!!!!!!!!! :(
dbedford F = (S - PVben)[(1+rf)x(compound freq)]^compound freq

PVben = ben/[(1+rf)freq]^freq
khalifa92 very nice !!!
khalifa92 you have to discount the dividend to the same period of S0
subtract dividend from S0 because its lost benefits
then monthly compound the value to the future
khalifa92 for clarification:
the solution can be solved in two ways:

1- u can discount the divided to reach at time 0 subtract it from S0 then compound to the future 6/12
2- u can compound S0 6/12 and then subtract dividend compounded with 4/12
umesh2802 why we r adjusting for frequency
jzty The way to compound is not right, and everything else is ok.
chris21Feb if compounded monthly, then why is the PV of Dividend not 5 / (1.01)^2 ?
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