Question

The promised cash flows of three securities are listed below. If the cash flows are risk-free, and the risk-free interest rate is 6.0%, determine the no-arbitrage price of each security before the first cash flow is paid.

Security		Cash Flow Today ($)		Cash Flow in One Year ($)
A		700		700
B		0		1,400
C		1,400		0

The no-arbitrage price of Security A is $ Answer. (Round to the nearest cent.)

The no-arbitrage price of Security B is $ Answer. (Round to the nearest cent.)

The no-arbitrage price of Security C is $ Answer. (Round to the nearest cent.)

Answer 1

The no-arbitrage price of Security A is computed as shown below:

= $ 700 + $ 700 / 1.06

= $ 1,360.38 Approximately

The no-arbitrage price of Security B is computed as shown below:

= $ 0 + $ 1,400 / 1.06

= $ 1,320.75 Approximately

The no-arbitrage price of Security C is computed as shown below:

= $ 1,400 + $ 0

= $ 1,400

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