Econ423.TEST.B

Econ423.TEST.B - ECON 423: Fall 2011 Test 18 On my honor, I...

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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 zero-con 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 T-bond 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. T-bfl 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: F-P P [w , 0, 05);“) qzo 960 loco-965 o p 175 .. .0 q a, 5 3 6 3 5 010 looo- q'lo qbs M '- 0-030 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 “gt-H qoq :‘JClGO \ 0: because Hoe rcaI Cos-t a4 “.0 P \ 51/ i botrawmg decreased Guava-h; / p demanded Shofis I044 because /\ Q {rm-rear vatue dcut.as:d.. Question 2. a. During the current financial crisis, an investor bought a $10,000 T-Bill (zero-coupon) with 182 days to maturity at a price of $9,980. What was the yield to maturity on this investment? (6 points) [0,000-9,980 33;, : w x m9. ~ ‘7,qu fl O‘Llfulo b. Could an investor who bought this T-Bill have sold it for more than its face value before it matured? Why or Why not? (4 points). No; uou camno+ seat a zero-coupon. bonoL For more. +ha~ :+s 30cc. value. because/here a”, no Coupon; paymen-l'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 $40,000 at the end of 5 years to make a down payment to buy a house. Assume that you will be saving annually at the end of each year. If the interest rate is 0.02, what should your annual saving be? (6 points) 9—5— (I.oa\5-l)= Ll01000 .03.. CF 3 51636.34 4. The following are two U.S. Treasury Bond prices on September 15, 2009 Asked Maturity E Coupon : Bid 5 Asked 1 Chg yield I 2012 Sep15 1.375 99:24 : 99:24 +1 1.4588 2012 Sep30 4.250 . 108209 108:10 3 +2 1.4102 a. Why is there a difference in the above two bond (asked) prices even though both bonds are maturing very close to each other (September 2012). Very brief answer please.(3 points) There is a. ah-H‘erenre. because. +he. ‘6. bonds have. d.{‘peren+ coopon. ra+es. For {be second and, «the. coupon. ra-te. ‘I‘I'T'mv, So :4 is sold 0+ ptemmm' b. On September l5"‘ 2011, The Wall Street Journal reported that the above 2012 September 15'” bond had an asked yield of 0.15% or yield to maturig of 0.15%. Calculate the asked price of this bond on September 15‘”, 201 l? (7 points) [:O.l5°lo .0015 one gear +0 maul-arr“) / ' Coupon, role. : l.3“IS°/o ' 7 , / . PB: ‘00 '/ 4_ |,3'15[’_ _..'._.— 1420015 foals 1+.ool‘5 c. Calculate the total holding period return and the annual rate of return for an investor who bought the September 15, 2012 bond on September 15, 2009 and sold it on September 15, 2011? (7 points) ' ’ q q 211, ‘ * To+a| rel-urn. = (101.33.“ qq HM» a. Iaiaat +3(I.37$\= 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 repor-ted. +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. had-the 9 bu.» rtsuHs ire prcdggh‘ng tetcs‘s..ons |--l queer-lets ahead. Ioth o+her variables showed. no medic-lions 6 quarters ahead,+h€ yield. outvc Sh-wcd some probaanI-lfl. The bes-l- 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/(ca-l-ors equa+ ‘ . 9 m V¢+(NVS a guend curve” 'I f E), M / ...
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Econ423.TEST.B - ECON 423: Fall 2011 Test 18 On my honor, I...

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