Fall 2008_Midterm_I_A_Answer_Key

Fall 2008_Midterm_I_A_Answer_Key - Department of Economics...

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Unformatted text preview: Department of Economics Professor O’Brien Lehigh University Fall 2008 Eco 129 Midterm I A Name: 6, &/ Recitation (Time and TA): 1. Take time to think before answering. Make sure your answers to the short-answer questions are clear and legible. In order to receive full credit, you must Show your work. 2. To ensure that everyone has the same amount of information available to answer the problems, we won’t be able to respond to requests for clarification or elaboration. 1. (4 pts) Most Active High Yield Bonds CCH? CHTRHM 11.000% 0512015 05151310001000 77.750 75.555 77.250 150015.555 SPRINTCAPITAL S.H.} 5.375% Mar2012 .Baa3'lBB/BB+ 101.500 101.000 101.250 0.250 7.959 LSBERTYMEDIA LGD 5.500% 9012029 052195055 75.000 77.000 77.000 1.540 11.409 TYSON FOODS TSNzGS 5.250%- 051-2011 952109—195 100.750 99.525 100.000 0.307 5.247 ECEéqEEPFiTAAlNr‘gETORS GMA.HF 5.000% N5v2031 BS/B-lB-l- 55.500 53.575 55.500 2.540 14.500 gala? CHANNEL CCU-.GY 5.250% -Mar20-11 012511000099— 51.000' 75.750 79.250 0.455 15.701 RH DONNELLEYCORP RHD.GN 5.575% Jan 2015 9315-15- 54.295 51.935 53.500 3.000 21.555 KINDER MORGAN KMIGO 5.500% 5552012 BaZIBB/BB+ 99.554 95.150 99.500 2.500 5.544 NXP BV NXPVGF 9.500% 0512015 Caa2/Bl-~ 55.250 57.750 55.250 0.750 17.471 giNEfipfirlxhthTORs GMAHEJ 5875% Sep 2011- 5318421334 54.875: 51.5000 54500 2.500 24.129 5. Briefly explain how if the yield on the General Motors Acceptance bond listed in the last row is so high, the firm was able to issue bonds with a coupon rate of only 6.875%. 7W3 band is (Lou/7wle 01 01411-71514 bamdwaJumf—fbM) WCW 0x [4531/1 v’LSiC 01E $050th flit/1:015 who; 3 Cum/w \{Hld 1‘7) matam'fl/ 1'5 80 “1'3 (4. TH Mafimfi/ '1‘ 0003+ Mare 121391“ 1910604141 M 1 {m CWT/QM wart mail Wch LOW-1973+ (Maul. b. What is the current yieid on the bond issued by RH Donnelley? CWM: 993.75" 7483.7? ‘ A ~— W590: CC- #53900 (a o 75 2. a. (4 pts) Use the following hypothetical information to calculate the asked yield on a discount basis for this Treasury bill: Asked Mat“??? . ..... _ Bid ASked yield 200800123 .......... i??? 2-50 3/(000 -—*P 555' X “7’: (0250 P i“ {7—, 7‘ WM}? 3?? 93 3a 54W ’ (0 fig _____‘9 c .oaw w gy’odd 0? Jfiébz) b. Suppose on January I, 2009 the price of a one-year Treasury bill is $943.40. Investors expect the inflation rate during 2009 to be 3 percent, but at the end of the year the inflation rate turns out to have been 5 percent. What is the nominal interest rate on the bill (measured as the yield to maturity), the ex ante real interest rate, and the eX post real interest rate? " Jet’s-to W!— 1.060762) wax/o I ’ ¢OC0 4 3. (4 pts) a. You have been offered the following investment opportunity: If you invest $1,000 today, you will receive $400 at the end of each of the next three years. If you could otherwise earn 15 percent per year on your money, should you undertake this investment opportunity? Be sure to Show your work. 7WD VYUD WW C WHEN” .11._____—--. (“Wis-)3 b. George makes the following investment: He pays $1,000,000 in exchange for $100,000 to be paid in one year, followed by payments that increase by 4 percent per year forever (that is, he wi1l receive $104,000 after two years, $108,160 after three years, and so on). What is the yield to maturity on George’s investment? Be sure to show your work. 3/00, 000 ~________—-—-——-—_'—'—_'—‘—- g/Kaoofooo -= a, O‘W 6:: {/VM 4. (4 pts) A few days ago, an article in the Wall Street Journal contained the following: Prices ofUS. Treasury securities advanced Thursday as reports pointed to ... easing price pressures. It “looks like inflation fear is being taken off the table,” said Ira Jersey, an interest—rates strategist at Credit Suisse in New York. a. Briefly explain why if investors expect inflation to be lower, the prices of Treasury bonds will flit (W M ewe/red MWle Witt? W [W W WW ("mam WCMW m Weak/My (omds, 7211 {WW YieKLF’m/ta 6mg; 4% WWW Wu bmd‘J [DI/IQ. b. Democratic presidential candidate Barack Obama is proposing that the top federal income tax rate be increased. If Obama’s proposal is enacted, briefly explain what the impact is likely to be on the gap between yields on Treasury bonds and yields on municipal bonds. 7/“? MIN/3M5 m7l/‘6d5ut/i/ bands are algebra VFW Feast/cot HAW W, white “(744 WM} ‘ _ W :EMWH/fia - I .1 54 tap-wag“ 441.5 51.12441. 1.1 11. Multiple Choice. Select the best answer. 1/2 point each. 1. The value for M2 is currently about $7.7 trillion. 13. $70 trillion. 0. $750 trillion. d. $7.6 billion. 2. Last Friday, the London FTSE 100 closed at about a. 100. 13. 12,322. @ 5,414. (1. 25,670. 3. Suppose you sell $10,000 in money market mutual fund shares and deposit the $10,000 into your checking account in a bank. The immediate result of this transaction will be to a. increase M1 and reduce M2. increase M1 and leave M2 unaffected. 0. reduce M1 and increase M2. (1. leave M1 and M2 unaffected. 4. What is the price of a coupon bond that has annual coupon payments of $90, a par value of $1,000, a yield to maturity of 10%, and a maturity of two years? a. $982.64 . $1,000.00 0. $1,072.73 (1. $1180.00. 5. If the yield to maturity on a bond is less than the bond’s coupon rate, we know that a. the price of the bond must be less than its par value. (5) the price of the bond must be greater than its par value. c. the bond’s coupon rate must be equal to its current yield. (‘1. the band's coupons must not be taxable. 6. The bundling of mortgage or auto loans into a marketable capital market instrument is known as ' a. “fastbacking.” b. arbitrage. @ securitization. . optioning the portfolio. 7 7. Rank the following bonds from least liquid to most liquid: U.S. Treasury bonds; municipal bonds issued by Tinytown, Montana; IBM corporate bonds. a. IBM, Tinytown, U.S. Treasury Tinytown, IBM, U.S. Treasury c. Tinytown, U.S. Treasury, [BM c1. IBM, U.S. Treasury, Tinytowu 8. During the early 19203, Germany suffered a severe economic recession because a. the German stOck market crashed. b. the German housing market crashed. @the country experienced hyperinflation. d. the country experienced a severe earthquake. ...
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Fall 2008_Midterm_I_A_Answer_Key - Department of Economics...

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