Econ 104 HW 4 With Answers - Homework 4 1 Consider a U.S...

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Homework 4 1. Consider a U.S. Treasury Bill with a one year maturity and a face value of $1,000. If you purchased one, it would be an asset for you and a liability of the U.S. Treasury ; currently, some $1.4 trillion are outstanding, which indicates that they're pretty important. As the purchaser of this security, do you receive anything back from the U.S. Treasury besides the face value at maturity? A) yes B) no Correct Answer(s): As the purchaser of a U.S. Treasury Bill, ALL you receive when you purchase it is the promise of a single payment at maturity. As above, this is an asset for you and a liability for the U.S. Treasury. Put another way, you're lending to the U.S. government. Also, this is a "security" since it is an asset that can be bought and sold in a financial market (the daily amount bought and sold in this market is many billions). Note that many financial assets are not securities since they cannot be bought and sold. An example would be a certificate of deposit you or I might have at a bank. They cannot be sold between investors. Correct Answer(s): B 2. For this same T-Bill, with a face value of $1,000, say that it had a market value of $960. What would be the percentage return as a fraction of your investment? Note that this is basically the interest rate on this T-Bill. A) $40 B) $40/$960 C) $40/$1,000 D) $960 E) $1,000 Correct Answer(s): You will earn the difference between the purchase price ($960) and the face value ($1,000), or $40 on an investment of $960 (the purchase price). Correct Answer(s): B 3. Now say that same U.S. Treasury Bill rises in price to $980. What would be its percentage return now? (While
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