Question

(1.)

a) Suppose that the bank discount yield on a 71-day Treasury bill is 4.86%. What is the bond equivalent yield on the T-bill? Assume that the face value of the T-bill is $10,00

b) Suppose that your are hired as an investment analyst with an insurance company. On MarketAxess (a ?xed income trading platform), you notice that a bond dealer is quoting a 180-day Treasury bill at a 3.75 bid and 3.60 ask. At price could the T-bill be sold? You may assume that the face value of the T-bill is $10,000.

c) Suppose the Fed wished to decrease the money supply. List two policy actions they could undertake to achieve this goal.

d) If the required reserveratio is15.00%, then according to the simple money multiplier, how much will one dollar added to the monetary base increase the money supply?

Answer 1

a) BEY = 365 x discount yield / (360 - days x discount yield) = 365 x 4.86% / (360 - 71 x 4.86%) = 4.98%

b) Bid Yield = (F - P) / F x 360 / 180

=> 3.75% = (10,000 - P) / 10,000 x 2

=> Price, P = $9,812.50 is the sell price.

c) The Fed can increase interest rates, increase reserve requirement, or sell bond in open market in order to decrease the money supply.

d) Money Multiplier = 1 / reserve ratio = 1 / 15% = 6.67

Hence, $1 added to monetary base will increase money supply by $6.67