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ADMS4504_Assignment 1_Winter 2011

ADMS4504_Assignment 1_Winter 2011 - AP/ADMS4504...

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AP/ADMS4504 Assignment #1 Winter 2011 Instructions: (1) This assignment is to be done individually. You must sign and submit the standard cover page supplied as the last page of this assignment . (2) This assignment is due at the start of class in the week starting February 8, 2011 . (3) This assignment is to be either handwritten or printed out. Work that is too difficult to read due to messiness and poor handwriting will receive zero credit. You must show your work to receive full credit. (4) This assignment has five questions and carries a total mark of 100 points. (5) Late assignments will not be accepted whether for technical or any other reason. (6) Decimal places: please keep at least 4 in your calculations and 2 in your final answers. All interest rates are annual unless otherwise stated. Question 1 (21 marks) This question has three independent parts, (a), (b), and (c). (a) You are given the following information: a 0.5-year zero-coupon bond, face value of $10,000, currently priced at $9,750; a 1-year zero-coupon bond, par value of $10,000, currently valued at $9,325. Assume both zero-coupon bonds are priced correctly. (8 marks) a1) What is the fair price of a 1-year Treasury note, face value $1,000, coupon rate of 4% payable semiannually? (6 marks) a2) If the Treasury note is currently trading at a YTM of 5% semiannually compounded, is it underpriced or overpriced? (2 marks) (b) A mutual fund uses 90-day Treasury bill (face value of $100 million), currently trading at a discount rate of 5%, to enter into a 14-day repurchase agreement with an investment bank, who charges a repo rate of 3% and a hair-cut of 4%. Please compute the following quantities: (6 marks) b1) The current value of the 90-day Treasury bill. (2 marks) b2) How much does the mutual fund receive from the investment bank today? (2 marks) b3) How much does the mutual fund needs to pay the investment bank, 14
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AP/ADMS4504 Assignment #1 Winter 2011 days later, to buy back the Treasury bill?
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