problem_set_2(answers)

problem_set_2(answers) - Problem Set 2 Chapter 06

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Problem Set 2 Chapter 06 1. Which of the following best expresses the formula for determining the price of a U.S. Treasury bill that matures n periods from now per $100 of face value when the interest rate is i? A . $100/(1 + i)n b. $100(1 + i) c. $100/(1 + i) d. 1 + $100/(1 + i)n 2. A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has: A . A current yield equal to 6.22% b. A current yield equal to 6.00% c. A coupon rate equal to 6.22% d. A yield to maturity and current yield equal to 6.00% 3. If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices: A . Would rise and yields would fall b. Would fall and yields would increase c. Will rise and yields will remain constant d. Will rise and yields would increase 4. As general business conditions deteriorate, all other factors constant: A . The bond supply curve will shift left b. There will be a movement down the existing bond supply curve c. The bond demand curve shifts left d. The price of bonds will decrease 5. A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 1
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years to maturity has: A . A current yield equal to 6.22% b. A current yield equal to 6.00% c. A coupon rate equal to 6.22% d. A yield to maturity and current yield equal to 6.00% 6. Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night bonds are selling for $92.00, what is the risk premium for these bonds? a. 8.7% b. 1.5% C . 5.2% d. 8.0% 7. A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true? a. The real interest rate decreased B . The student is made worse off because her real cost of borrowing is higher c. The lender is made worst off because his real return on the car loan is lower d. Both the student and the lender benefit 8. Suppose a family member approaches you to borrow $2,000 for the down payment on an automobile. You have the cash available in a savings account that currently earns 5% annual interest. You and the family member consider the following repayment options: (i) Borrower repays you $100 each year indefinitely. (ii) Borrower repays $259 each year over the next ten years (iii) Borrower repays $300 each year over the next five years, plus a lump-sum payment of $895 in the fifth year. (iv) Borrower repays you $2,100 at the end of one year. For each of the options above, show that the present values of each option are 2
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approximately equal. Then, relate each of the options above to the four types of bonds, indicating which option is equivalent to which type of bond. Explain why. The present values are calculated as follows:
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This note was uploaded on 09/10/2008 for the course ECON 135` taught by Professor Rafiqulbhuyan during the Summer '08 term at UC Davis.

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problem_set_2(answers) - Problem Set 2 Chapter 06

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