302fall11pp3ans UD - UNIVERSITY OF DELAWARE DEPARTMENT OF...

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UNIVERSITY OF DELAWARE PROFESSOR DAVE WHARTON DEPARTMENT OF ECONOMICS FALL 2011 ECON 302 BANKING AND MONETARY POLICY PRACTICE PROBLEM SET 3: ANSWERS QUESTIONS AND PROBLEMS FROM THE TEXTBOOK: Chapter 6 - # 1, 2, 6, 7, 8, 9, 11, & 15 (pp143-144) 1. The bond with the C rating should have a higher interest rate because it has a higher default risk, which reduces it’s demand and increases its interest rate relative to that on a Baa bond. 2. U.S Treasury bills have lower default risk and more liquidity than negotiable CDs. Consequently, the demand for Treasury bills is higher, and they have a lower interest rate. 6. (a) The yield to maturity would be 5% for a one-year bond, 6% for a two-year bond, 6.22% for a three-year bond, 6.5% for a four-year bond, and 6.6% for a five-year bond. ( b ) T h
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302fall11pp3ans UD - UNIVERSITY OF DELAWARE DEPARTMENT OF...

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