w12as2sol

w12as2sol - Deposit + 100 Bank A +100 Other Banks -100...

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Solutions to Assignment 2 1. 1 + 1 = 1.7355 (1.10) (1.10) 2 2. 1 + 1 = 1.808 solving for r =7%. (1+r) (1+r) 2 3. 2.3 = PVIFA(r,5) *PVIF(r,8) solving for r ~7% 4. YTM = C/Price = 8/80 = .10. Stated yield is 8%. 5.Semi-annual yield = 2%, YTM = 4% 6. If the bond sells for $97, it pays to buy the bond and strip it because its value as strips is $99. (8)(.90) + (108)(.85) = 99. If the bond sells for $101, strips should be purchased for $99 and reconstituted into a bond, which can be sold for $101. 7.a . Since the bond is selling at discount YTM C/par = .07 or 7% b. Value of all strips = 3.5 PVIF (.03,1)+ 3.5 PVlF (.035,2) + 3.5 PV1F (.03375,3) + 103.5 PV1F (.0325,4) = 100.89 > 95 Buy the bond and strip it to make an arbitrage profit of 100.89-95=5.89 T-account A. a) Bank Reserve - 100 Deposit – 100 Required Reserve = -12 Reserve Deficit = 88 Money Contraction b) Bank Reserve + 100 Deposit + 100 Required. Reserve. = 12 Excess Reserve = 88 Money Expansion B. Bank A BOC Reserve + 100
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Unformatted text preview: Deposit + 100 Bank A +100 Other Banks -100 Other Banks Reserve 100 Deposit 100 No impact on money supply C. a) Bank A Loan + 100 Deposit + 100 Required = -12 (deficit) Loan does not add to Reserve b) Bank A BOC Reserve 12 Discount loan 12 Discount loan +12 Reserve + 12 Money Expansion c) Repayment in (a ) Bank A BOC Reserves +100 Reserve +100 Loans -100 Money Expansion Repayment in (b) Bank A BOC Reserve -12 Discount Loan -12 Discount Loan -12 Reserv-12 Money Contraction d. a) Impacts of decreasing the reserve ratio : Banking system Required Reserve = 10 Excess Reserve = 2 Reserve + 12 Deposit + 100 Money Expansion b) Banking system Impacts of increasing the reserve ratio: Required Reserve = 14 Reserve + 12 Deposit + 100 Deficit Reserve = 2 Money Contraction E. BOC Bank A Reserve + 100 Reserve + 100 Deposit + 100 Government Deposit -100 Required. Reserve. = 12 Excess Reserve = 88 Money Expansion...
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w12as2sol - Deposit + 100 Bank A +100 Other Banks -100...

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