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Midterm 2 Version A Sp 2009

# Midterm 2 Version A Sp 2009 - -01,5/l#urtlt rl I A ittrtJ A...

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-01,5 rl I A /l(.#urtlt ittrtJ E tA(n 7 - Vb Rstorl A I ) You own a four-month, 5l -miilion nee.otiable CD rvhich matures in tu'o hotrs. If the interest rrtes rise sharply on all detrt insruments, the price of J'our CD l) r'ses b.t falls .-.-.f do"r not chan_ee 2) You bought a bond three years a-qo for P0.Tl-te bond's nrarket price vesterdav r,r'as P3: 1,'ou also received 3 annual coupons. each for C. the third one paid yesterdav. The realized rate of returrr. r. on this investment can be calculated usins a) r: (P3-P0 +-1C) ,i P0 iul;o=_Po.#.#.## c) P3 = 11+rl3P0 +3C d) none ofthe above 3i. AboridsellsforP0.mafuresin5l,'ears.hasYT\4: i (annualbasis).}f,yourrequiredruteof return is RR. how much is this bond worth to you? ,./ al Jr{ore than P0 if RR< i '' i:) Less than P0 if l?i< t c) Same as P0 regardless of i since i is the market required (:equiiibrium) return d) Cannot be determined since the coupon rate is not given ,"; ,, I, 4I fhe rate of inflatjon is cunentll,running at arod{{d'+Joln. and the 1-vear spot interest rare is 3.59'n. Surveys indicate that people expect inflation to average to around -1..51!o over ihe nexf year. The real spot rate ofinterest rate is tberefore. a) 2.0% b) 3.5-olo c) 4.0'i/o "filr - ^.. . 'i d).! l.Ue'o "ej None of the above f) Carurot be detemined since lve don't kno'ui'what the rate of interest u,ill be in one vear 5) Using the Unbiased (.or Pure) Expectations Theon. \\'e can say the foilou.ing -il Lon*e-term interest rates are lrare r,olatiie llran shorl-term rates fl b)) Lone-terrn interest rates are /cs.s..olrtilc lhan slrclrt-term rat-es '' '/ c) Long-term interest rates are cs volatiJe than short-term rates d) This theory has nothing to say about relative volatility of long- r;s short-term rates

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6) \'ou want to invest for tr,r,o vears. and you are offered two investment altematires: .L On Apr-2- 2009, invest in a 1-year bond that -vields 7.10i)'0, tben on Apr-2-2010 reinvest a// the proceeds in another bond that is expected to f ield 5.509/o. Or lL On Apr-2-2009, invest in a.zero-coupon 2- )'ear bond that is expected to yield 6.3096 per ]'ear (compounded). a ) It is better to take alternative ,I since vou earn more in the first year b) lt is better to rake alternative / since the (average) conpound rate of renrrn is hi-sher i[ It is better to take alternative ll since vour compound rate of rcturn is higher d) Both alternatives are equall.v attractir.'e since the average of 7.l0 and -5.50 is 6.30. 1) 11'the one year spot interest rate is 2 o/o and the tu'o-vear spot rate if iq6. then x'e can say that the m-arket is forecasting that the 1-year rate next vear is approximately r{ii'}",+',; '-b1 ].5 % c) zoh d) All rve can say is that the forecast for the one--\'ear rate is someu'here benveen 2(% and 3ol, 8) A US bank holds some lr{exican currency (peso) in its ponfolio.
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Midterm 2 Version A Sp 2009 - -01,5/l#urtlt rl I A ittrtJ A...

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