A default-free zero-coupon bond costs $91 and will pay $100 at maturity in 1 year. What is the effective annual interest rate? What is the payoff diagram for the bond? The profit diagram? Suppose XYZ...

A default-free zero-coupon bond costs $91 and will pay $100 at maturity in 1 year. What is the effective annual interest rate? What is the payoff diagram for the bond? The profit diagram?

Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year effective annual interest rate is 10%.

a. Graph the payoff and profit diagrams for a forward contract on XYZ stock with a forward price of $55.

b. Is there any advantage to investing in the stock or the forward contract? Why?

c. Suppose XYZ paid a dividend of $2 per year and everything else stayed the same. Now is there any advantage to investing in the stock or the forward contract? Why?