Chapter 10 Problems
1. How much interest would be earned (on a simple interest basis) from a three-day money market loan for $1 million at an interest rate of 12 percent (annual rate)? Suppose the loan were extended on the third day for an additional day at the going market rate of 11 percent. How much total interest income would the money-market lender receive?
Interest owed at 12% for 3 days would be: $1,000,000 (.12) (3/360)=$1,000.
Additional interest owed for 1 more day: $1,000,000 (0.11) (1/360) = $305.56
Total interest income for the lender will be: $1,000 + 305.56 = $1,305.56
3. Suppose the yield spread between the three-month U.S. Treasury bill rate and the three-month bank CD rate were 35 basis points. An investor has $250,000 to invest in either of these instruments for three months. How much does the investor surrender in total interest income for three months if he or she invests in Treasury bills instead of CDs? Does the investor receive any offsetting benefits by buying the bills and not the CDs?
An investor with $250,000 to invest would lose the following amount of income for 3 months by avoiding the bank CDs in favor of Treasury bills:
$250,000 x 0.0035 x 90 = $218.75
The offsetting advantage of the bills, if they are U.S. Treasury bills, is their exemption from state and local government income taxes, and their greater marketability and lower credit (default) risk. The CDs, in contrast, are fully taxable, less marketable and have very low default risk.
4. Please identify each of the key terms and concepts discussed in this chapter whose definition or description is listed below. a.
Money transferred by writing a check and presenting it for collection.
b. Funds available for immediate payment.
c. Time span between issue date and redemption date for a financial asset. Original maturity
d. Time span between...
Please join StudyMode to read the full document