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DEPARTMENT OF ECONOMICS
Econ 500 – Money and Banking
Fall 2011
Assignment 2
Assigned Sep. 14
th
, 2010
DUE
Sep 29
th
, 2010
Answer all of the following questions as best as you can.
TYPE
your answers to the short answer
problem questions (except for any equations or graphs).
Note: try to keep your answers to 100
words or less.
Covers chapters 4 and 5.
1.
Chapter 4, Q8 from textbook: To pay for college, you have just taken out a $1000
government loan that makes you pay $126 per year for 25 years.
However, you do not have
to start making payments until you graduate from college
TWO years from today
.
Why is
the yield to maturity (TODAY) necessarily LESS than 12%? (Hint: remember that the yield
to maturity (TODAY)
is exactly 12% on a normal (standard) $1000 fixed payment loan, in
which you pay $126 per year for 25years starting next year).
2.
Consider a coupon bond with face value of $1000, coupon payments of $100, 4 years to
maturity. The price today is $1000.
The yield to maturity i

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