Assignement #2

Topics: Bond, Fractional-reserve banking, Federal Reserve System Pages: 3 (283 words) Published: March 17, 2014
Solutions - Assignment 2

1. 1.808 = 1 PVIFA(r,2) ► r = 7%

2. Try 7%. PVIFA(r,13) – PVIFA(r,8) = 8.3577 ‑ 5.9713 = 2.3864.

3. a. Price = 7 PVIF(4%,1) + 107 PVIF(10%,2) = 95.1605
b. The stated yield is 7 percent. The current yield is 7/95.1605 = 7.36 percent. The yield to maturity is 9.78 percent. c. The approximation is {7 + (100-95.1605)/2}/{(100+95.1605)/2)=9.65% d, Solve for C using 100 = C PVIF(4%,1)) + (100+C) PVIF(10%,2)  C=9, Stated yield=9.72% =YTM

4. Price = (5)(.95 + .87) + (.87)(100) = 96.10
The yield to maturity is found by solving the following equation for y. 96.10 = 5 /(1 +y )+ 105/(1 +y )2
The solution is y = .0716.
5. c/Price = .06. Substitute Price = 90. c = $5.40. Solve the following equation for y. 90 = 5.4 /(1 +y )+ 105.4/(1 +y )2
The solution is, y = .1126.
6. y = c/P = 8/80 = .10. Stated yield is 8%.

7.a. Since the bond is selling at discount YTM C/par = .07 or 7% b. Value of all strips = 3.5 PVIF (.03,1)+ 3.5 PVlF (.035,2) + 3.5 PV1F (.03375,3) + 103.5 PV1F (.0325,4) = 100.89 > 95 Buy the bond and strip it to make an arbitrage profit of 100.89-95=5.89

8. T-account
A. a)Bank

Reserve - 100 Deposit – 100Required Reserve = -12
Reserve Deficit = 88
Money Contraction

b) Bank

Reserve + 100 Deposit + 100Required. Reserve. = 12
Excess Reserve = 88
Money Expansion

B.Bank ABOC

Reserve + 100 Deposit + 100 Bank A +100
Other Banks -100

Other Banks

Reserve – 100 Deposit – 100No impact on money supply

C. a)Bank A

Loan + 100 Deposit + 100Required = -12 (deficit)
Loan does not add to Reserve

b)Bank ABOC

Reserve 12 Discount loan 12Discount loan+12Reserve + 12

Money Expansion

c)Repayment in (a ) Bank ABOC
Reserves +100 Reserve +100
Loans -100
Money Expansion
Repayment in (b)Bank ABOC...
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