ch_02_sol - CHAPTER 2 FINANCIAL MARKETS AND INSTRUMENTS 1...

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CHAPTER 2 : FINANCIAL MARKETS AND INSTRUMENTS 1. a. (4) b. (3) 2. a. r BEY = × = × = .08449, or 8.45% b. One reason is that the discount yield is computed by dividing the dollar discount from par by the par value, $10,000, rather than by the bill's price, $9,600. A second reason is that the discount yield is annualized by a 360-day year rather than 365. 3. P = 10,000 [1 – r BD (n/360)] where r BD is the discount yield. P ask = 10,000 [1 – .0681 (60/360)] = $9,886.50 P bid = 10,000 [1 – .0690 (60/360)] = $9,885.00 4 . r BEY = × = × = 6.98%, which exceeds the discount yield, r BD = 6.81%. To obtain the effective annual yield, r EAY , note that the 60-day growth factor for invested funds is = 1.01148. Annualizing this growth rate results in 1+ r EAY = ( ) 365/60 = 1.0719 which implies that r EAY = 7.19% 5. a. i. 1 + r = (10,000/9,764) 4 = 1.100 r = 10.0% 2-1
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ii. 1 + r = (10,000/9,539) 2 = 1.099 r = 9.9% The three-month bill offers a higher effective annual yield. b. i. r BD = × = .0934 ii. r BD = × = .0912 6. The total before-tax income is $4, of which .30 × $4 = $1.20 is taxable income (after the 70% exclusion). Taxes therefore are .30 × $1.20 = $.36, for an after-tax income of $3.64, and an after-tax rate of return of 9.1%. 7. a. The closing price is listed as 61 3/8, which is 3/16 higher than yesterday’s price.
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