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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
sem!~~11111~i!lIy
unles~oth~rwise
indicated.
~
A 6 month Treasury bill
l
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)
of face value?
[3]
ii)
How much will the inves
r make
en the bill is redeemed?
[2]
6ji)
Why on earth would an investor buy such a bill?
Y
WSuppose 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)
What will the price per $1,000 of the Treasury be in this case?
[5]
@!)
How much money will the investor gain or lose per $1,000?
/
3.
Accordi~loomberg,
on January 12,2011 the market interest rate for a 5 yearTreasury
with a coupon
of~(paid semiannual~r~
was 1.38%.
[4]
i)
What should this security sell for per $1,000 of face value
and
is it selling at, above, or
below par?
[4]
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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.
 Spring '08
 WHITNEY

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