Question

1. Consider the following supply and demand for money of an economy: MS = 400 +...

1. Consider the following supply and demand for money of an economy:

MS = 400 + 20i

MD = 2000 – 30i

Find the equilibrium interest rate.

2. Consider the following savings and investment functions of an economy:

S = 40 + 5i

I = 400 – 3i

Find the equilibrium interest rate.

3. Consider the following Treasury quote:

104-13+/24+. If you are the seller of the bond, at what price will you sell?

4. Consider a bond paying an annual coupon of $80 with a face value of $1,000. Calculate the yield to maturity if the bond has 20 years remaining to maturity and is priced at $1,200. What would be the holding period yield if the bond is held for 15 years and sold at $1,100?

5. Suppose that you bought a 14% Drexler bond with time to maturity of 9 years for $1,379.75 (semiannual coupons, interest rate=8%). After another ½ year, you sold the bond.

a. Assuming that the required rate of return remained at 8%, what would the selling price be? What is the rate of return from this investment?

b. Assuming that the required rate of return decreased to 7.5%, what would the selling price be? What is the rate of return from this investment?

6. Consider a five-year bond paying 10 percent coupon annually. The bond is priced at $1,200.

a. Find the yield to maturity.

b. Find the realized yield, assuming that coupons are reinvested at the yield to maturity.

c. Find the realized yield, assuming that coupons are reinvested at the following rates: r0=9%, r1=9.5%, r2=10%, r3=10.5%, r4=11%, r5=11.5%.

d. Refer to part (c). Explain why the yield is different than the yield to maturity.  

7. An 8 1/2 30-year US corporate bond is callable in 12 years. It is currently sold at a price of $960. The call premium is 10 percent. The prevailing market interest rate at the call date is 8 percent.

a. What is the yield to call to an investor who does not reinvest the call price at the prevailing interest rate at the call date?

b. What is the yield to call to an investor who reinvests the call price at the prevailing interest rate at the call date?

8. Consider a 90-day Treasury bill whose price is 94.5%.

a. Find the yield on a discount basis.

b. Find the yield on a coupon equivalent basis. c. Find the effective yield.

Homework Answers

Answer #1

Answer : 1) Given, money demand = 2000 - 30i

Money supply = 400 + 20i

At equilibrium, demand = supply

=> 2000 - 30i = 400 + 20i

=> 2000 - 400 = 20i + 30i

=> 1600 = 50i

=> i = 1600/50 = 32

Therefore, the interest rate at equilibrium is 32% .

2) Given , Saving (S) = 40 + 5i ;

Investment (I) = 400 - 3i

At equilibrium, Saving = Investment

=> 40 + 5i = 400 - 3i

=> 5i + 3i = 400 - 40

=> 8i = 360

=> i = 360/8 = 45

Therefore, the interest rate at equilibrium is 45%.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
5. Suppose that you bought a 14% Drexler bond with time to maturity of 9 years...
5. Suppose that you bought a 14% Drexler bond with time to maturity of 9 years for $1,379.75 (semiannual coupons, interest rate=8%). After another ½ year, you sold the bond. a. Assuming that the required rate of return remained at 8%, what would the selling price be? What is the rate of return from this investment? b. Assuming that the required rate of return decreased to 7.5%, what would the selling price be? What is the rate of return from...
A bond that pays coupons annually is issued with a coupon rate of 4 percent, maturity...
A bond that pays coupons annually is issued with a coupon rate of 4 percent, maturity of 30 years, and a yield to maturity of 7 percent. What annual rate of return will be earned in the following situations by an investor who purchases the bond and holds it for 4 year if the bond’s yield to maturity when the investor sells is 8 percent? a) All coupons were immediately consumed when received. b) All coupons were reinvested in your...
A 30-year maturity 10% coupon bond paying coupons semiannually is callable in 10 years at a...
A 30-year maturity 10% coupon bond paying coupons semiannually is callable in 10 years at a call price of $1,200. The bond currently sells at a yield to maturity of 5%. a) What is the selling price of the bond at present? b) What is the yield to call? c) Suppose that the investor decided to hold the bond only for 5 years. The reinvestment rate of coupon payments is 8.5%. The forecasted yield to maturity by the end of...
Two years ago, you purchased a bond for $1036.67. The bond had two years to maturity,...
Two years ago, you purchased a bond for $1036.67. The bond had two years to maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year, you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound yield on the bond? Time Prevailing Reinvestment Rate 0 (purchase date) 6.0% End of Year 1 7.2% End of Year 2 (maturity date)...
14. An investor purchases a just issued 30-year, 10.500% semi-annual coupon bond at 104.079 percent of...
14. An investor purchases a just issued 30-year, 10.500% semi-annual coupon bond at 104.079 percent of par value and sells it after 10 years. The bond’s yield to maturity is 9.584% at time of sale, and rises to 10.100% immediately after the purchase but before the first coupon is received. All coupons are reinvested to maturity at the new yield to maturity. Show the sources of return below. (a) Total coupon payments:   (b) Reinvestment income from coupons: (c) Sale price...
14. An investor purchases a just issued 30-year, 10.500% semi-annual coupon bond at 104.079 percent of...
14. An investor purchases a just issued 30-year, 10.500% semi-annual coupon bond at 104.079 percent of par value and sells it after 10 years. The bond’s yield to maturity is 9.584% at time of sale, and rises to 10.100% immediately after the purchase but before the first coupon is received. All coupons are reinvested to maturity at the new yield to maturity. Show the sources of return below. Because the yield to maturity changed between bond purchase and sale, the...
​Zero-coupon bond. Wesley Company will issue a zero-coupon bond LOADING... this coming month. The projected bond...
​Zero-coupon bond. Wesley Company will issue a zero-coupon bond LOADING... this coming month. The projected bond yield LOADING... is 6%. If the par value LOADING... is ​$5,000​, what is the​ bond's price using a semiannual convention if a. the maturity LOADING... is 10 ​years? b. the maturity is 40 ​years? c. the maturity is 60 ​years? d. the maturity is 100 ​years? Part B Callable bond. Corso Books has just sold a callable bond. It is a​ thirty-year monthly bond...
Question 1 of 71 The yield to maturity on a coupon bond is … ·      always greater...
Question 1 of 71 The yield to maturity on a coupon bond is … ·      always greater than the coupon rate. ·       the rate an investor earns if she holds the bond to the maturity date, assuming she can reinvest all coupons at the current yield. ·      the rate an investor earns if she holds the bond to the maturity date, assuming she can reinvest all coupons at the yield to maturity. ·      only equal to the internal rate of return of a bond...
Suppose you purchase a 8-year, 6% semi-annual coupon bond for 89.153. Immediately after you purchase the...
Suppose you purchase a 8-year, 6% semi-annual coupon bond for 89.153. Immediately after you purchase the bond, the yield for equivalently risk bonds decreases by 100 basis points. However, instead of holding the bond until maturity, you plan to hold the bond for 3 years and then sell it. All coupons will be reinvested at the prevailing yield on equivalently risky bonds. What will be your return on this investment in this scenario? Round your answer to three decimal places.
A bond is selling for $934.74. The coupon rate is 8%. It has ten-years until maturity,...
A bond is selling for $934.74. The coupon rate is 8%. It has ten-years until maturity, with semi-annual compounding. 1. Assume that the re-investment/interest rate has changed to 10%. Calculate the realized compound yield at a re-investment rate of 10%. 2. If an investor wanted to maximize the rate of return, what would you advise the investor to do—sell or hold the bond? Why?