Spring 2009 Midterm_I_Key

Spring 2009 Midterm_I_Key - Department ofEcononfics...

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Unformatted text preview: Department ofEcononfics Professor O’Bn‘en Lehigh University Spring 2009 Eco 29 Miéterm I A Name: K QY‘ ' - H I - Reciiation (Time and TA): ' . ‘ ' _ I. Take time to think before answering. Make sure your answers to the short-answer questions are clear and Iegible. In order to receivefifl credit: you must skew your work. 5 2. To ensure that everyone has the same ammmt 0f infonmtion available to answer the A problems, we won’t be able to respond to requests for clarification or elaboration. f‘ ; if 3 § 1 E s ! L E J E | E i ,E g f s i l : E i .1— i v 3 a a ; I i i E i I 1 g ‘- 5 3. 2 5 C . , .. s I 2 i 1 1, * 2' § i ! s 4' 1. (4 pts) Suppose that on January 1, 2009 you purchased a coupon bond with the following characteristics: Par Value = $1,000 Coupon Rate 2 8 1/8 Current Yield = 6 1/2 Suppose the bond is selling for $850 on January 1, 2010. Suppose that you expected the price level to increase by 2 percent during 2009, but that the price level actually fell by 5 percent. What is your nominal rate of return on this bond during the holding period of calendar year 2009, and what is your ex post, real rate of return? Be sure to Show your. work; 3/059 0 __ ,5 Carafe-Cocos“: (e-AMO Pe I’fifo—‘Aam flat/wad vale O‘i WE+WM 1' 0 Gay Jr ”(a—r0 - 3 2. a. (4 pts) Suppose a Treasury hill with a $1,000 face value has a prica of $987.82. Ifits yield in maturity is 5%, how many days remain until the bill matures? Be sure to Show your work. fiflaaov- 3&2? ii 3 (o r - " sc ‘2‘" ‘2‘ 05- 315212; him I bTm,=— {ii} 'b. The following is a listing for a Treasaéy bond: . s Asked E Mann-11y Coupon Bid Asked Chg yield E E 2009 Sep 15 3.375 101:28 101:29 -1 0.3425 5 What was its suntan? yield, using the asked mice? I at! 4 3. (4 pie} Your company is evaiuaiing whether to purchase new MacBook iaptOps. The Iapmps are expected to reduce your compaaay’s costs by $37,000 per year for two years. At the end of two years, the laptops are expected to have a zero value. Ifyou decide to purchase the laptops, you have the choice of leasing them for $31,009 per year or buying them for $68,000. You can borrow money at 10% per year and your firm has a required rate ofretum on investment of20%. Should you purchase flze laptops? Ifso, should you lease them or buy $116111? Show your work. g E I) \ 3r 1' s: [gash/dc w» we do 005 Saw m3} 87'0"” 57‘0“) egsgfl’z’fla ___.....—«—-- ~1' {+10 U47”? Pram WM ’6 “9“” PWWS: 7931.001: $3Leuo fl ’5'3,89£(of W‘l-W“ H10 ((1-39? 7h pv’esm Valuing m 005+ Saum3$ 25 (e5: Wu. up. {Mr mm “We m WM iiif 1w”, ' ”6' m m Payms. WWW; 7"“ WM ail/WE - ”Pa! Valet}. {fake milapi-oes. . _....._...........I-u...._.u"um...“m.“ 5 4. (4 pts) Suppose that, holding yield constant, investors axe indifi‘erent as to whether they hold hands issued by the federal government or bonds issued by corporations (that is, they consider them to have the same degree of default risk and liquidity). Suppose that General Electric (GB) has issued peipetzfities {consuls} with $160 coupons and the federal government has also issued perpetuities with $100 coupons. [Assume for purposes of this problem that the relevant federal tax rate is 35%, the relevant state income tax rate is 5%, and there is no local tax.)- _a. Ifthe GE and fefieral government perp etuities both have after-tax yields of 6%, then what is the price of the GE perpetuity and what is the price of the federal govemment perpetuity? G— E Tweets WY see we 3’ Asia-Meta; WWW-'5 ' i (9‘70 (92: flhfi,’ {—ccy wet/U“ : fée ser " a . : ‘—""' '3- Jé rm 1) M s f") 3/ 5100 P '2‘. gflfl8333 I . b. What is the pres-tax yield for the GE perpetuity and What is the pre-tax yield fer the federal _ ' E _ government perpetuity? i :7; es fig :- c? 13 . W *— f0 2; - 34523.33 ' Pewter $9153 2,4090 Eu. 5 _ 1}. Multiple Choice. Select the best answer. 1/2 point each. 1 The value for Ml" is currently about a. $1.55 billion. E b. $355 billion. . @3155 trillion. . d. $8.3 trillion. . . E L 2. Last Friday, the Nasdaq closed at about I a. 826, E E @ 1475. E c. 8900. E E d. 4150. E 3. Suppose you Sell $10,000 in stock mutual fund shares and use the funds to bury $10,000 of E US. Treasm'y bills. The immediate result ofthis transaction will be to E a. increase M1 and reduce ME. E E 13. increase Ml sad leave M2 unaffected. E E 6. reduce M1 and increase M2. E leave M1 and M2 unaffected. 4. What is the price of a coupon bond that has annual coupon payments of $60, a par value of E E $1,000, a yield to matmity of 10%, and a maturity oftwo years? a. $880.99 E $930.58 E 9.3: 31310413 " fl .1 -:- '. ‘ 7-1.5". -_ "‘ . _‘ . E E d. $1,128.90 ‘ ‘ E ‘5 9’ 5. Anewly-issmd gilt=edgedw heed will have @ low default risk, but high interest rate risk , V _ 13. high default risk, but low interest rate risk. e. low default risk and low interest rate risk {1. high default risk and high interest rate risk. ' . 6. Which of the following Would cause the denimd-eurve for bonds to shift to the left? “ a. A decline in ermafion costs . (E An' merease in the expected inflatien rate e. An' increase in liquidity d. A decrease in default risk _ é 7. A bond that at one time had an hivesunent grade rating, but no longer (1065' IS refenred to as a a. failed bond. fallen angel. 3. upside-down bond.- d. insida—out bond. 8. Which countzy recently issued a 100 triflicn dofla: currency note? _ ' a, The United States ‘ i i i ...
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