Homework 2

Homework 2 - Finance Homework 2 ARE 171A Winter 2011 A....

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Finance Homework 2 ARE 171A Winter 2011 A. Havenner Seven problems on two pages. Please show your setup equations explicitly, and box your answers. State your interest rate answers with four significant digits (e.g., .01234 for 1.234%), and your dollars answers in dollars and cents (e.g., $1,000,000.43 for a million dollars and 43 cents); carry five digits in your calculations. Rates are always annual effective rates and bond coupons pay semi-annually unless otherwise indicated. 1. A 6 month Treasury bill! with no coupon is currently paying 0.177% (notice that this is not 17.7%, but instead slightly less than a fifth of a percent -- watch your zeros). [5] i) What will this bill sell for per $1,000 of face value? [3] iiJ How much will the investor make when the bill is redeemed? [2] iii) Why on earth would an investor buy such a bill? 2. Suppose tomorrow the yuan surpasses the dollar as the global currency and safe haven, and excess demand for Treasuries declines so their prices fall and the market rate for the bond above increases to 1.75%, i) ii) What will the price per $1,000 of the Treasury be in this case? How much money will the investor gain or lose per $1,000? 3. According to Bloomberg, on January 12,2011 the market interest rate for a 5 year Treasury with a coupon of 1.5% (paid semi-annually) was 1.38%.
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This note was uploaded on 02/27/2012 for the course ARE 171A taught by Professor Whitney during the Spring '08 term at UC Davis.

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Homework 2 - Finance Homework 2 ARE 171A Winter 2011 A....

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