The FOMC has instructed the FRBNY Trading Desk to purchase $500 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 5 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. a. Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply? b. What is the full effect of this purchase on bank deposits and the money supply if borrowers return only 95 percent of these funds to their banks in the form of transaction deposits?
> You can invest in taxable bonds that are paying a yield of 9.50 percent or a municipal bond paying a yield of 7.75 percent. If your marginal tax rate is 21 percent, which security bond should you buy?
> What is the bond quote for a $1,000 face value bond with an 8 percent coupon rate (paid semiannually) and a required return of 7.5 percent if the bond is 6.48574, 8.47148, 10.519, and 14.87875 years from maturity? Periodic The Bond Face Value Coupon
> A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 4.50 percent yield to maturity and a similar risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes?
> Refer to Table 6–7. Verify the yield of 4.403 percent on the Southern bonds with a coupon of 4.400 percent and a maturity date of July 1, 2046. Settlement occurs two days after purchase, so actual ownership of the bond occurs on May 25,
> Use the bond pricing formula and Table 6–6 to calculate the number of years (to the nearest 1/1000th of a year) between the May 25, 2016, settlement date and the maturity date on the City of New York general obligation bonds maturing on
> Refer to Table 6–6. Verify the yield to maturity of 4.69 percent on the State of Illinois municipal bonds. Settlement occurs two days after purchase, so actual ownership of the bond occurs on May 25, 2016. Table 6–6:
> Refer to Table 6–6. a. On May 23, 2016, what were the coupon rate, price, and yield on municipal bonds issued by the Delaware River Port Authority? b. What was the yield to maturity, on May 23, 2016, on State of California bonds maturin
> Refer to the T-note and T-bond quotes in Table 6–1. a. What is the asking price on the 2.750 percent November 2023 T-bond if the face value of the bond is $10,000? b. What is the bid price on the 0.500 percent August 2016 T-note if the
> What is the bid price of a $10,000 face value T-bill with a bid rate of 2.23 percent if there are 10, 25, 50, 100, and 250 days to maturity? Face Bid The Answer Days to Maturity Value Rate Will Be $10,000 10,000 $9,993.81 9,984.51 2.23% 10 2.23 25 1
> Refer to Table 5–5. a. Calculate the ask price of the T-bill maturing on September 1, 2016, as of May 16, 2016. b. Calculate the bid price of the T-bill maturing on November 10, 2016, as of May 16, 2016. Table 5–5:
> Consider a 12-year, 12 percent annual coupon bond with a required rate of return of 10 percent. The bond has a face value of $1,000. a. What is the fair present value of the bond? b. If the required rate of return rises to 11 percent, what is the fair pr
> Suppose you purchase a T-bill that is 125 days from maturity for $9,765. The T-bill has a face value of $10,000. a. Calculate the T-bill’s quoted discount yield. b. Calculate the T-bill’s bond equivalent yield.
> You would like to purchase a Treasury bill that has a $10,000 face value and is 68 days from maturity. The current price of the Treasury bill is $9,875. Calculate the discount yield on this Treasury bill.
> Calculate the bond equivalent yield and effective annual return on fed funds that are 3 days from maturity and have a quoted yield of 0.25 percent.
> Calculate the bond equivalent yield and effective annual return on a negotiable CD that is 115 days from maturity and has a quoted nominal yield of 6.56 percent.
> What is the discount yield, bond equivalent yield, and effective annual return on a $5 million commercial paper issue that currently sells at 98.625 percent of its face value and is 136 days from maturity?
> Calculate the bond equivalent yields and the equivalent annual returns for the repurchase agreements described in Problem 14. Data from Problem 14: Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a corres
> Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $24,995,000, with the promise to buy them back at a price of $25,000,000. a. Calculate the yield on the repo if it has a 7-
> You have discovered that when the required rate of return on a bond you own fell by 0.50 percent from 9.75 percent to 9.25 percent, the fair present value rose from $975 to $995. The bond pays interest annually. What is the duration of this bond?
> The overnight fed funds rate on May 20, 2016, was 0.37 percent. Compute the bond equivalent rate and the effective annual return on the fed funds as of May 20, 2016.
> If the overnight fed funds rate is quoted as 0.75 percent, what is the bond equivalent rate? Calculate the bond equivalent rate on fed funds if the quoted rate is 1.00 percent.
> What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent? 14 percent? What can you conclude about the relationship between duration and yield to maturity?
> What is the quoted yield of a $10,000 face value T-bill with a market price of $8,885 if there are 10, 25, 50, 100, and 250 days to maturity? Face Market The Answer Days to Maturity Value Price Will Be $10,000 10,000 10,000 $8,885 8,885 8,885 10 4.0
> What is the duration of a zero-coupon bond that has eight years to maturity? What is the duration if the maturity increases to 10 years? If it increases to 12 years?
> What is the discount yield, bond equivalent yield, and effective annual return on a $1 million Treasury bill that currently sells at 99.375 percent of its face value and is 65 days from maturity?
> The FOMC has instructed the FRBNY Trading Desk to purchase $750 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and g
> A company recently paid a $0.35 dividend. The dividend is expected to grow at a 10.5 percent rate. At a current stock price of $24.25, what return are shareholders expecting?
> Ecolap Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what return are shareholders expecting?
> What are the monthly payments (principal and interest) on a 15-year home mortgage for an $180,000 loan when interest rates are fixed at 8 percent?
> You can save $1,000 per year for the next six years in an account earning 10 percent per year. How much will you have at the end of the sixth year if you make the first deposit today?
> If an ounce of gold, valued at $1,200, increases at a rate of 7.5 percent per year, how long will it take to be valued at $2,000?
> How much money would you have to deposit today in order to have $2,000 in four years if the discount rate is 8 percent per year?
> Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a two year, $1,000, zero-coupon bond. a. What is the duration of the coupon bond if the
> If you deposit $500 in a bank account that earns 6 percent per year, how much total interest will you have earned after the third year?
> Consider a firm with a 9.5 percent growth rate of dividends expected in the future. The current year’s dividend was $1.32. What is the fair present value of the stock if the required rate of return is 13 percent?
> Paychex Inc. (PAYX) recently paid a $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what return are shareholders expecting?
> Calculate the future value of the following annuity streams: a. $5,000 received each year for five years on the last day of each year if your investments pay 6 percent compounded annually. b. $5,000 received each quarter for five years on the last day of
> Calculate the present value of the following annuity streams: a. $5,000 received each year for five years on the last day of each year if your investments pay 6 percent compounded annually. b. $5,000 received each quarter for five years on the last day o
> Financial analysts forecast L Brands (LB) growth for the future to be 12.5 percent. LB’s most recent dividend was $0.60. What is the fair present value of L Brands’s stock if the required rate of return is 14.5 percent?
> A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 1.5 percent over the last 15 years and you expect this to continue. a. If the required rate of return on the stock is 12 percent, what is its fai
> Assume the current interest rate on a one-year Treasury bond ( 1 R 1 ) is 4.50 percent, the current rate on a two-year Treasury bond ( 1 R 2 ) is 5.25 percent, and the current rate on a three-year Treasury bond ( 1 R 3 ) is 6.50 percent. If
> Calculate the fair present value on a stock that pays $5 in dividends per year (with no growth) and has a required rate of return of 10 percent
> A $1,000 par value bond with seven years left to maturity has a 9 percent coupon rate (paid semiannually) and is selling for $945.80. What is its yield to maturity?
> Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $1 million loan with a 12 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $1 million CD with a 10 percent yield to maturit
> Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. a. If the Federal Reserve decreases the reserve requirement to 8 perc
> You note the following yield curve in The Wall Street Journal. According to the unbiased expectations theory, what is the one-year forward rate for the period beginning two years from today, 3 f 1 ? Maturity ………………………Yield One day ……………………………..2.00% O
> If you note the following yield curve in The Wall Street Journal, what is the one-year forward rate for the period beginning one year from today, 2 f 1 according to the unbiased expectations theory? Maturity ………………………….Yield One day …………………………………2.00%
> The Wall Street Journal reports that the rate on three-year Treasury securities is 5.25 percent and the rate on four-year Treasury securities is 5.50 percent. The one-year interest rate expected in three years, E( 4 r 1 ) , is 6.10 percent. According to
> Suppose we observe the following rates: 1 R1 = 10% , 1 R 2 = 14% , and E( 2 r 1 ) = 18% . If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2?
> BSW Corporation has a bond issue outstanding with an annual coupon rate of 7 percent paid quarterly and four years remaining until maturity. The par value of the bond is $1,000. Determine the fair present value of the bond if market conditions justify a
> What is the yield to maturity on the following bonds; all have a maturity of 10 years, a face value of $1,000, and a coupon rate of 9 percent (paid semiannually). The bonds’ current market values are $945.50, $987.50, $1,090.00, and $1,
> Suppose we observe the three-year Treasury security rate to be 12 percent, the expected one-year rate next year— E( 2 r 1 ) —to be 8 percent, and the expected one-year rate the following year— E( 3 r 1 ) —to be 10 percent. If the unbiased expectations
> A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000 sells for $1,100. What is the bond’s yield to maturity?
> What is the value of a $1,000 bond with a 12-year maturity and an 8 percent coupon rate (paid semiannually) if the required rate of return is 5 percent, 6 percent, 8 percent, and 10 percent? Periodic The Bond Face Number of Coupon Раyment, $ Require
> a. What is the duration of a two-year bond that pays an annual coupon of 10 percent and has a current yield to maturity of 12 percent? Use $1,000 as the face value. b. What is the duration of a two-year zero-coupon bond that is yielding 11.5 percent? Use
> You have just been offered a bond for $863.73. The coupon rate is 8 percent payable annually, and the yield to maturity on new issues with the same degree of risk are 10 percent. You want to know how many more interest payments you will receive, but the
> The current one-year Treasury-bill rate is 5.2 percent and the expected one-year rate 12 months from now is 5.8 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security?
> Nikki G’s Corporation’s 10-year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next 10 years. The liquidity risk
> Tom and Sue’s Flowers Inc.’s 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation premium is 2.25 percent annually and the real risk-free rate is expected to be 3.50 percent annually over the next 15 years. The default ri
> A two-year Treasury security currently earns 1.94 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.50 percent per year. Calculate the maturity risk premium on
> Johnson Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the current market price of these bonds?
> Refer again to the bond information in Problem 1. You expect to hold the bond for three more years, then sell it for $990. If the bond is expected to continue paying $75 per year over the next three years, what is the expected rate of return on the bond
> You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return earned on this bond.
> Which countries or regions of the world have the largest stock markets?
> Who are the major regulators of the stock markets?
> Suppose an investor purchases 125-day commercial paper with a par value of $1,000,000 for a price of $995,235. Calculate the discount yield, bond equivalent yield, and the equivalent annual return on the commercial paper.
> Describe the three forms of stock market efficiency.
> Are stock market indexes consistently accurate predictors of economic activity?
> Who are the major holders of corporate stock?
> What is the difference between a price-weighted stock market index and a value-weighted stock market index?
> What are the major U.S. stock market indexes?
> What are flash trading, naked access, and dark pool trading? What are the benefits and drawbacks of these activities?
> What are limit up–limit down rules?
> What are circuit breakers in the context of stock market trading and volatility?
> Why are stock markets the most watched and reported of the financial security markets?
> What is a subprime mortgage? What instrumental role did these mortgages play in the recent financial crisis?
> Compute the present values of the following first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period: Present Value Present Value (Payment made on (Payment made on first d
> What is a jumbo mortgage?
> What are “points” on a mortgage? What factors does a mortgage borrower need to consider when deciding whether or not to take points on a mortgage?
> What are the benefits and drawbacks to a mortgage borrower when refinancing a mortgage?
> Explain the difference between a fixed-rate mortgage and an adjustable-rate mortgage. Include a discussion of mortgage borrowers’ versus mortgage lenders’ preferences for each.
> Explain the difference between a federally insured mortgage and a conventional mortgage.
> What is the purpose of putting a lien against a piece of property?
> Who are the major participants in the mortgage markets?
> What are the four major categories of mortgages and what percentage of the overall market does each entail?
> What is a mortgage-backed bond? Why do financial institutions issue MBBs”?
> Describe a collateralized mortgage obligation. How is a CMO created?
> Compute the future values of the following first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period: Future Value Future Value (Payment made on Interest last day of period
> How has the U.S. government’s sponsorship of FNMA and FHLMC affected their operations? Describe the problems these two GSEs have experienced over the last 15 years.
> What is the Federal National Mortgage Association? How does this organization play a role in secondary mortgage markets?
> What is the Government National Mortgage Association? How does this organization play a role in secondary mortgage markets?
> What is a pass-through security?
> How did mortgage-backed securities contribute to the recent financial crisis?
> What is a mortgage sale? How does a mortgage sale differ from the securitization of a mortgage?
> How did the U.S. secondary mortgage markets evolve?
> What is an option ARM? What are the different options available with this type of mortgage?
> Why are mortgage markets studied as a separate capital market?
> What is a bond indenture?
> You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.50 in dividends next year. a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of
> How does a firm commitment underwriting differ from a best-efforts underwriting?
