# ps1sol - Financial Economics V 3025 Rajiv Sethi Phone 854...

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Financial Economics V 3025 Spring 2008 Rajiv Sethi 5B Lehman Phone: 854 5140 Problem Set 1 Due Date: Tuesday February 5 1. (a) Let P denote the price paid per hundred dollars in face value. Since the market P as follows: 100 P 100 = 0 : 0510 so P = 94 : 90 : The total interest earned per \$100 in face value is therefore \$5 : 10 : The investment rate is therefore 5 : 10 94 : 90 = 0 : 053741 = 5 : 3741% : (b) If bidder 987 had chosen to bid 5.15% instead of 5.05%, the market clearing rate would have been the same. Bidder 281 would have received and allocation of 8 instead of 2 ; and bidder 987 would have received and allocation of 4 instead of 10 : (c) If the issue was for a total of \$80 million in face value, and all bids were exactly the same, the market clearing rate would have been 5.15%. (d) If the issue was for a total of \$80 million in face value, bids would probably have

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ps1sol - Financial Economics V 3025 Rajiv Sethi Phone 854...

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