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
semiannually 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%,
[5]
i)
[5]
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 semiannually) was 1.38%.
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 Spring '08
 WHITNEY
 Annual Percentage Rate, Debt, Mortgage loan, Mathematical finance

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