Question

Which of the following organizations was bailed out with significant funding from the Federal Reserve? a....

Which of the following organizations was bailed out with significant funding from the Federal Reserve?

a. Long-Term Capital Management hedge fund

b. Lehman Brothers

c. Ford Motor Company

d. Orange County pension fund

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How do depository institutions attempt to maintain a profitable business?

a. Accepting interest rate risk for its customers

b. Earning a positive spread between their assets and their cost of funds

c. Borrowing funds from the Federal Reserve’s discount window

d. By “buying” funds for more than they “sell” funds

e. All of the above

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Suppose a Treasury Inflation-Protected Security (TIPS) has a par value of $10,000 and an annual coupon rate of 5%. If the inflation rate is 2% for the first 6 months and 3% for the remaining 6 months of the year, then what will be the approximate coupon payment at the end of the year?

a. $200

b. $500

c. $510

d. $525

e. None of the above

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High yield bonds are

a. commonly called junk bonds

b. issues with quality ratings designated as non-investment grade

c. issues that may have been rated investment-grade at the time of issue but have since been down-graded to non-investment grade

d. all of the above

e. both a. and b.

Homework Answers

Answer #1

1. Answer is C.

Ford was not part of the Troubled Asset Relief Program (TARP) but receive huge loans from the government.

2. Answer is B

Any depository will earn profit if they lend at higher rate to their clients than what they are offering to their customers

3. Answer is E

Face value = 10,000

Coupon = 5%

Coupon payment = 500

Inflation is 1st 6 months = 2%

Inflation in next 6 months = 3%

Average inflation = 2.5%

New face value after 2.5% inflation adjustment = 10,000*1.025 = 10,250

Coupon payment = 0.05* 10,250 = 512.5

4. Answer is E

High yield bonds are bonds which carry higher risk and demand higher compensation. They are also catagorized into junk bond and non investment grade bond due to high risk involved.

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