ECON/FINA 301 Money and Banking - Midterm 2, March, 2012
Name:
1. (4 points each) Suppose the present 1-year yield is 1%, but is expected to increase to 2% next year, and that
the expectations theory of the term structure holds.
(a) What should the presen
1.
a)
i0 =
2
i0 + i1
.01 + .02
1
1
=
= .015 = 1.5%
2
2
b) Without term premium we computed in part a that the rate should be
1.5%. If in reality it is 1.65%, it must be because the term-premium is .15%.
c)
i0 + i1 + i2
1
1
1
3
.01 + .02 + i2
1
.025 =
3
i2
ECON/FINA 301 Money and Banking - Midterm 1, February, 2012
Name:
1. (4 points each) Compute the APY of the following.
(a) A 4% annual rate of return compounded monthly.
(b) A 6% monthly rate of return compounded monthly.
(c) A $2,000 perpetuity that pays
1.
a)
AP Y =
1+
i
x
AP Y =
1+
i
x
b)
x
1=
1+
.04
12
12
1 = .0407 = 4.07%
x
1 = (1 + .06)12 1 = 1.0122 = 101.22%
c)
P=
F
100
F
= i =
=
= .05 = 5%
i
P
2, 000
d)
i=
F
P
1
N
1=
1, 030
990
1
6
1 = .0066 = .66%
2.
a) See gure 2.7 in textbook (replace $1,000