This preview shows pages 1–6. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: ECON 423: Fall 2011
Test 18 On my honor, I have neither given nor received unauthorized aid on this test: _“ Name (if your signature above is NOT legible):_ SECTION I: 3 points each 1. Which of the following situations will hurt a borrower?
a. f the expected inﬂation at the time of taking a loan is 4% and the actual inﬂation during the R
period that the debt is held is 5%. ' g ‘9’
If the expeCted inﬂation at the time of taking a loan is 3% and the actual inﬂation during the Jena, ‘6'»
' s
0 period that the debt is held is 1%. c. If the expected inﬂation at the time of taking a loan is 10% and the actual inflsz during the ‘o
period the debt is held is 10%. d. If the expected inﬂation at the time of taking a loan is l% and the actual inﬂatioﬁrring the
period the debt is held is l% 2. Let us say that interest rates for all terms to maturity rise by 1%. Which of the following portfolio
will likely get hurt the most? (Assume that the four portfolios are equal in size before the interest
rat increase and that the yield curve is flat). A portfolio invested only in two year zerocon on bonds. . ~A portfolio invested only in two year coupon b ds. A portfolio invested only in ten year zero—coupon bonds. A portfolio invested only in ten year coupon bonds. 3. Let us say that you are holding a 2 year Treasury bond. Which of the following is likely to have I
caused a fall in the price of your bond? ,9 co unt cf " y c “C a
I a. An increase in the risk spread between a 2 year Tbond and the 2 year Corporate Bond. ‘P
b. An increase in the risk premium for Greek bonds. Fed’s recent announcement about its “twist” monetary policy. 04’ ' L 1, to "d
. All ofthe above. ’\v S e H 51’ P \b \‘/ 4. An increase in the principal amount of a mortgage when the monthly payment does not cover the
rincipal and interest is called
M fa Negative Amortization / Negative Equity
c. M in
d. Hﬁut 5. You recently purchased a coupon bond at a discount. Which of the following must be true on
your investment at the time of purchase?
Yield to Maturity > CurrenLYield > Coupon rate
. Coupon rate > Yield to Maturity > Current Yield
c. Coupon rate > Current Yield > Yield to Maturity
(1. Current Yield >Yield to Maturity > Coupon rate. p8< FV Coupon. < In L Yrm £3>FV COUpon. 71c > VT,“ 6. You have personal funds of $10,000 that you want to invest in a mutual fund whose behavior in
the next quarter is determined by the economic conditions as deﬁned in the following table. .. expecired. Value=lle150
Economic Conditlon P(X) Value of Mutual fund Eco. Expansion 0.50 Si 5,000 ¥
Eco. Slowdown 0.50 $7,500 If the maximum loss that you can take is $10,000 and if you do not have pay interest on your
loan, the maximum amount that you will borrow to invest in this mutual fund is a. $0
b. $10,000 '0; 00° _ .___._———
f a— c $40,000 X :4, $30,000 —7 I 5 00 7. Which of the following is both a debt market and a capital market instrument?  a. Commercial uper. bands 7 I 9 r 1‘ Mortgage.
0. US. Tbﬂ d. Google Sh%s. 8. Which of the followigiis NOT an asset item in the Fed’s balance sheet? Discount loans . Mortgage Backed ecurities ¥'
u .u'u . eLLC ,7) 4/2
' 9. If interest rates on one year, two year and three year Treasury bonds are equal, the liquidity
premium theory implies that
a. Short term interest rates are expected to be constant during the next three yeB‘s.
\/ Short term interest rates are expected to fall during the next three years.
c. Short term interest rates are expected to rise during the next three ygars.
d. Need more information to answer this. 10. It is a common practice to denominate prices of goods in US. dollars in many foreign countries.
The function of money that the US. dollar performs in this case is:
a. Transfer of Risk ‘ / b. Store of Val/e .‘L Unit of Account
‘0 . Means of Accrual SECTION 11:
Question 1:
a. Consider the market for one year discount bonds of face value of $1 000. Below are the
market supply and demand for the bond. Calculate the yield for each price level and draw
the supply and demand curves (showing both price and interest rates). (10 points)
Price Quantity Demanded Quantity Supplied (Elbond) {Billions of dollars) {Billionsofdollars) 3”000
$960 160 ~ 70
$965 120 80
$970 95 95
$975 90 110
$980 85 130
l: FP
P
[w , 0, 05);“) qzo
960
loco965 o p 175
.. .0
q a, 5 3 6 3 5 010
looo q'lo qbs
M ' 0030 cl /,
97" 150
IOOO" ‘V'IE
_.....—————— = O 0156
(1'15
Q
1000— €30 e
W 3 o 030.4
930 b. Assume that this equilibrium is at an expected inﬂation of 2%. Now assume that expected inﬂation
changes to 3% and the real interest rate is unchanged in the new equilibrium. Show how your graph is affected, and calculate the new equilibrium bond price and interest rate. Explain veg brieﬂy why the
curve(s) shifts? (8 points) . ‘1?
l :fi'li'rE L 1" 0.030? H‘eoJ
0.030(1— .09.  0.010q +.o3 4049‘wa
‘000 3 Grumman Supplat‘d Shide “gtH
qoq :‘JClGO \ 0: because Hoe rcaI Cost a4
“.0 P \ 51/ i botrawmg decreased Guavah; / p demanded Shofis I044 because
/\ Q {rmrear vatue dcut.as:d.. Question 2. a. During the current ﬁnancial crisis, an investor bought a $10,000 TBill (zerocoupon) with
182 days to maturity at a price of $9,980. What was the yield to maturity on this investment? (6 points) [0,0009,980 33;, : w
x m9. ~ ‘7,qu ﬂ
O‘Llfulo b. Could an investor who bought this TBill have sold it for more than its face value before it
matured? Why or Why not? (4 points). No; uou camno+ seat a zerocoupon. bonoL For more. +ha~ :+s 30cc. value. because/here a”, no Coupon; paymenl's, 17+ would be set .‘nq .‘4 for more than. us war H\
c. You have paid $1030.00 for an 8% coupon bo with a face value of $1,000 that matures in
ﬁve years. You plan on holding the bond for 0 years. If you want to earn an annual rate of return of 9% on this investment, what price 111 u sell the bond for? Assume that coupon
payments are not reinvested. (8 points) PV= 1030.00
Fv= P54» (a\(.oX)(I,ooo\ ' d. You have taken up your first job and you want to start saving to have $40,000 at the end of 5
years to make a down payment to buy a house. Assume that you will be saving annually at
the end of each year. If the interest rate is 0.02, what should your annual saving be? (6 points) 9—5— (I.oa\5l)= Ll01000 .03..
CF 3 51636.34 4. The following are two U.S. Treasury Bond prices on September 15, 2009 Asked Maturity E Coupon : Bid 5 Asked 1 Chg yield I
2012 Sep15 1.375 99:24 : 99:24 +1 1.4588
2012 Sep30 4.250 . 108209 108:10 3 +2 1.4102 a. Why is there a difference in the above two bond (asked) prices even though both bonds are
maturing very close to each other (September 2012). Very brief answer please.(3 points) There is a. ahH‘erenre. because. +he. ‘6. bonds have. d.{‘peren+ coopon. ra+es. For {be second and,
«the. coupon. rate. ‘I‘I'T'mv, So :4 is sold 0+ ptemmm' b. On September l5"‘ 2011, The Wall Street Journal reported that the above 2012 September 15'” bond had an asked yield of 0.15% or yield to maturig of 0.15%. Calculate the asked
price of this bond on September 15‘”, 201 l? (7 points) [:O.l5°lo .0015
one gear +0 maularr“) / '
Coupon, role. : l.3“IS°/o ' 7 , / .
PB: ‘00 '/ 4_ ,3'15[’_ _..'._.— 1420015 foals 1+.ool‘5 c. Calculate the total holding period return and the annual rate of return for an investor who
bought the September 15, 2012 bond on September 15, 2009 and sold it on September 15,
2011? (7 points) ' ’ q q 211, ‘ * To+a relurn. = (101.33.“ qq HM» a.
Iaiaat +3(I.37$\= 9175 (1+1) Question 4. Estrella and Mishkin (E&M) in their paper entitled “Yield Curve as a predictor of
US. recessions” report that the yield curve outperforms the other variables considered in their paper in one to six quarter ahead forecasting of US. recessions. TRUE 0R FALSE. What are the variables used by E&M in their study? Explain BRIEFLY the ﬁndings reported by E&M.
(11 points) False.) Es+reum and, maskim reported. +ha+
Hm, timid, Quwc Ou+ptr4mms “'16 O+hfr Variables eonm‘ducd in +hn’r Paper in greener +han, One quar+er ahead. $Orecasim
at u.S. I'C(cs5i0n$. The 9geld curve. hadthe 9 bu.» rtsuHs ire prcdggh‘ng tetcs‘s..ons l queerlets ahead. Ioth o+her variables showed. no
mediclions 6 quarters ahead,+h€ yield. outvc Shwcd some probaanIlﬂ. The besl prednc+0r
/0/Or one period ahgad was leading ecOnom,‘c . A
PiedIC‘i’OfS such as Sauna  wwsom. O+her Variables used [,9 E mcludc lead,ng aeonomic, incl/(calors equa+ ‘
. 9 m V¢+(NVS a
guend curve” 'I f E), M / ...
View Full
Document
 Spring '08
 VD

Click to edit the document details