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HW_6_Solutions_Chapters_9_10_11[1]

# HW_6_Solutions_Chapters_9_10_11[1] - Chapter 9 The Money...

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Chapter 9 The Money Markets square6 Answers to End-of-Chapter Questions 1. The money markets can be characterized as having securities that trade in one year or less, are of large denomination, and are very liquid. 2. Money market securities have an original maturity of less than one year, so the bond would not be considered a money market security. 3. Banks have higher costs than the money market owing to the need to maintain reserve requirements. The lower cost structure of the money markets, coupled with the economies of scale resulting from high volume and large-denomination securities, allows for higher interest rates. 7. Businesses both invest and borrow in the money markets. They borrow to meet short-term cash flow needs, often by issuing commercial paper. They invest in all types of money market securities as an alternative to holding idle cash balances. 8. Merrill Lynch initially felt that it could better service it’s regular customers by making it easier to buy and sell securities from an account held at the brokerage house. The brokerage could offer a market interest rate on these funds by investing them in the money markets. square6 Quantitative Problems 2. What is the annualized discount rate % and your annualized investment rate % on a Treasury bill that you purchase for \$9,940 that will mature in 91 days for \$10,000? Solution: Discount Rate = \$10,000 \$9,940 360 0.02374 2.374% \$10,000 91 × = = Investment Rate = \$10,000 \$9,940 365 0.02421 2.421% \$9,940 91 × = =

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Chapter 9 The Money Markets 47 6. How much would you pay for a Treasury bill that matures in 182 days and pays \$10,000 if you require a 1.8% discount rate? Solution: Let C = What you would pay [(\$10,000 )/(\$10,000)] (360 /182) 0.018 [(\$10,000 )/(\$10,000)] 1.978 0.018 [(\$10,000 )] 0.018 \$10,000 1.978 \$10,000 91 \$9,909 C C C C C × = × = = × ÷ = = Chapter 10 The Bond Market square6 Quantitative Problems 3. Consider the two bonds described below: Bond A Bond B Maturity 15 yrs 20 yrs Coupon Rate (Paid semiannually)
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