Finance Midterm

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

$1,000.00. When coupon rate = required return; price = par

Bank A has an increase in deposits of $20 million dollars and all bank reserve requirements are 10 percent. Bank A loans out the full amount of the deposit increase that is allowed. This amount winds up deposited in Bank B. Bank B lends out the full amount possible as well and this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these three banks?

Bank A starts with 20m Since reserves are required to hold 10%, they will loan out the other 90% Bank A loans to Bank B (20x90%)= 18 Bank B loans to Bank C (20x90%)= 16.2 Total= 20m + 18m + 16.2m =54.20m

Depository institutions include

Banks and thrifts

An insurance company is analyzing the following three bonds, each with five years to maturity, annual interest payments, and is using duration as the measure of interest rate risk. What is the duration of each of the three bonds?

For this question use Period ; CF ; 1/(1+rb)^t; CF/(1+rb)^t; PV of CF x T Period= number of periods Rb= rate T= number of period PV of CF = CF/(1+rb)^t

Money markets trade securities that I. mature in one year or less. II. have little chance of loss of principal. III. must be guaranteed by the federal government.

I and II only

Which of the following would normally be expected to result in an increase in the supply of funds, all else equal? I. The perceived riskiness of all investments decreases. II. Expected inflation increases. III. Current income and wealth levels increase. IV. Near term spending needs of households increase as energy costs rise.

I and III only

Compute the present values of the following annuities 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:

Payment= 678.09 Years= 7 Interest Rate= 13% N=7 I/Y= 13 PMT= -678.09 PV= ? FV= 0 PV= 2,998.93 (First day - BGN mode/ Last day- END mode) 2nd -> PMT -> 2nd -> ENTER

As of 2016, which one of the following derivatives instruments had the greatest amount of notional principal outstanding?

Swaps

The Fed funds rate is the rate that

banks charge each other on loans of excess reserves

Before 2003 the discount window loan rate was set

below the target Fed funds rate

The most diversified type of depository institutions is

commercial banks

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely

conduct an IPO with the assistance of an investment banker. (Merger)

The largest capital market security outstanding in 2016 measured by market value was

corporate stocks

The Securities Exchange Commission (SEC) does not

decide whether a public issue is fairly priced

The required rate of return on a bond is a. the interest rate that equates the current market price of the bond with the present value of all future cash flows received. b. equivalent to the current yield for nonpar bonds. c. less than the E(r) for discount bonds and greater than the E(r) for premium bonds. d. inversely related to a bond's risk and coupon e. None of these choices are correct.

e. None of these choices are correct.

Financial intermediaries' ability to reduce the average cost of collecting information because of their efficient operations allows them to take advantage of

economies of scale (ex. massive buying power, Walmart low price guarantee)

A decrease in reserve requirements could lead to an

increase in bank lending and an increase in the money supply

A 10-year maturity coupon bond has a six-year duration. An equivalent 20-year bond with the same coupon has a duration

less than 12 years

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

less than its PV

According to the liquidity premium theory of interest rates,

long-term spot rates are higher than the average of current and expected future short-term rates.

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 party selling the bond cannot remember. If the par value is $1,000, how many interest payments remain?

on a financial calculator: I = 10, PV = −863.73, PMT = 80, FV = 1,000, ⇒⇒ n = 12 years

A $1,000 par value bond with five years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond's price change?

on a financial calculator: N = 10, I = 2.5, PMT = 30, FV = 1,000 ⇒⇒ PV = $1,043.76 on a financial calculator: N = 10, I = 2.75, PMT = 30, FV = 1,000 ⇒⇒ PV = $1,021.60. Or, the bond decreased in price by $22.16. N= 5 x 2 I/Y= 5% / 2 = 2.5% PMT= 6%/2=3% x par value FV=1000

Convexity arises because

present values are a nonlinear function of interest rates.

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n)

primary market transaction (public)

The interest rate used to find the present value of a financial security is the

required rate of return

Insolvency risk at a financial intermediary (FI) is the risk

risk that an FI may not have enough capital to offset a sudden decline in the value of its assets

A security has an expected return less than its required return. This security is

selling for more than its PV. PV of a security is found through required rate of return

Liquidity risk at a financial intermediary (FI) is the risk

that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices

The discount rate is the rate that

the Federal Reserve charges on loans to commercial banks.

The basic principle of valuation states that the value of any asset is

the present value of all future cash flows generated by the asset

Duration is

the weighted average time to maturity of the bond's cash flows

A bond that pays interest annually has a 6 percent promised yield and a price of $1,025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is six years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

$1,054.01 1,025 + [−6 × (−0.0050/1.06) × $1,025] = 1,054

A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent. What is the fair value (or price) of this stock?

$37.04 Rs = (4 × 1.25) / 0.135 = 37.04

Suppose we observe the following rates: 1R1 = 10%, 1R2 = 14%, and E(2r1) = 18%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2?

(1 + 1R2) = {(1 + 1R1)(1 + E(2r1) + L2)}1/2 (1 + 1R2)2 = (1 + 1R1)(1 + E(2r1) + L2) 1.2996 = (1.10)(1 + 0.18 + L2) 1.2996/1.10 = 1 + 0.18 + L2 1.18145 = 1 + 0.18 + L2 L2 = 0.00145 = 0.145%

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? Assume annual payments.

-D = [(Δpb/pb)/(Δrb/1+rb)] [(20/975)/(.0050/1.0975)] =4.5 years

The duration of a 180-day T-Bill is (in years)

0.493 180/365 = 0.493

Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)?

1 + 1R2 = {(1 + 1R1)(1 + E(2r1))}1/2 1.10 = {1.08(1 + E(2r1))}1/2 1.21 = 1.08(1 + E(2r1)) 1.21/1.08 = 1 + E(2r1) 1 + E(2r1) = 1.1204 E(2r1) = 0.1204 = 12.04%

Households are increasingly likely to both directly purchase securities (perhaps via a broker) and also place some money with a bank or thrift to meet different needs. Match up the given investor's desire with the appropriate intermediary or direct security. I. Money likely to be needed within six months II. Money to be set aside for college in 10 years III. Money to provide supplemental retirement income IV. Money to be used to provide for children in the event of death 1. Depository institutions 2. Insurer 3. Pension fund 4. Stocks or bonds

1, 4, 3, 2

Suppose we observe the three-year Treasury security rate (1R3) to be 12 percent, the expected one-year rate next year—E(2r1)—to be 8 percent, and the expected one-year rate the following year—E(3r1)—to be 10 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate?

1.12 = {(1 + 1R1)(1 + E(2r1))(1 + E(3r1))}1/3 1.123 = {((1 + 1R1)(1 + E(2r1))(1 + E(3r1))} 1.4049 = (1 + 1R1)*1.08*1.1 1 + 1R1 = 1.4049/(1.08*1.10) 1R1 = 0.1826 = 18.26%

A common stock paid a dividend at the end of last year of $3.50. Dividends have grown at a constant rate of 6 percent per year over the last 20 years, and this constant growth rate is expected to continue into the future. The stock is currently selling at a price of $35 per share. What is the expected rate of return on this stock?

16.6 percent E(rs)= [Dividend x (1+rb)/current price] + rb

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:1R1 = 6%, E(2r1) = 7%, E(3r1) = 7.5%, E(4r1) = 7.85%Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities.

1R1 = 6.00% 1R2 = [(1 + 0.06)(1 + 0.07)]1/2 − 1 = 6.50% 1R3 = [(1 + 0.06)(1 + 0.07)(1 + 0.075)]1/3 − 1 = 6.83% 1R4 = [(1 + 0.06)(1 + 0.07)(1 + 0.075)(1 + 0.0785)]1/4 − 1 = 7.09%

One-year T-bills currently earn 3.45 percent. You expect that one year from now, one-year T-bill rates will increase to 3.65 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

1R2 = [(1 + 0.0345)(1 + 0.0365)]1/2 − 1 = 3.55%

Assume the current interest rate on a one-year Treasury bond (1R1) is 4.50 percent, the current rate on a two-year Treasury bond (1R2) is 5.25 percent, and the current rate on a three-year Treasury bond (1R3) is 6.50 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3 (E(3r1) or 3f1)?

1f3= [(1.0650)^3/(1.0525)^2] - 1 1f3= 9.04%

Assume that there are no liquidity premiums. You just bought a 15-year maturity Xerox corporate bond rated AA with a 0 percent coupon. You expect to sell the bond in eight years. Find the expected interest rate at the time of sale (watch out for rounding error).

1f6= [((1+1r15)^15/(1+1r8)^8)^1/15 You use 8 because it will sell in year 8 and 15 because it will mature in year 15.

YIELD CURVE FOR ZERO COUPON BONDS RATED AA Assume that there are no liquidity premiums. To the nearest basis point, what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?

1f6= [(1+1r10)^10/(1+1r6)^6)^1/4] -1 =[(1.0947)^10/(1.0885)^6)^1/4] - 1 = 10.41% You use 10 because if you bought six years from now, it would mature at year 10

Match the intermediary with the characteristic that best describes its function. I. Provide protection from adverse events. II. Pool funds of small savers and invest in either money or capital markets. III. Provide consumer loans and real estate loans funded by deposits. IV. Accumulate and transfer wealth from work period to retirement period. V. Underwrite and trade securities and provide brokerage services. 1. Thrifts 2. Insurers 3. Pension funds 4. Securities firms and investment banks 5. Mutual funds

2, 5, 1, 3, 4

An annual payment bond has a 9 percent required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change?

2.75 percent −12 × (−0.0025/1.09) = 0.0275

Suppose you owned stock in a company for the last three years. You originally bought the stock three years ago for $30 and just sold it for $56. The stock paid an annual dividend of $1.35 on the last day of each of the past three years. What is your realized return on this investment?

26.85 percent CF0 = −$30, CF1 = $1.35, CF2 = $1.35, CF3 = $57.35 Compute IRR = 26.85%.

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, 2f1 according to the unbiased expectations theory?

2f1= [(1+1r2)^2/(1+1r1)] - 1 2f1= [(1.065)^2/(1.055)] - 1 = 7.51%

A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

3.32 years 3.32 = (12% × 1) + (11% × 2) + (10% × 3) + (67% × 4)

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, 3f1?

3f1= [(1+1r3)^3/(1+1r2)^2] - 1 3f1= [(1.09)^3/(1.065)^2] - 1 3f1= 14.18%

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?

A decrease in U.S. inflationary expectations

Writing question 2

A large FI has a greater incentive to monitor the behavior of funds demanders in indirect financing. The FI supposedly hires and trains experts who know how to collect information about a funds demander and evaluate whether the funds demander is acting appropriately. In direct finance, a funds demander sells claims to the public at large. In this case there is little incentive for an individual claim holder to monitor and attempt to enforce good behavior on the part of the funds user. The benefit of monitoring and enforcement is shared among all claim holders, but the cost would be borne by the sole individual. This is termed the "free-rider" problem. If there is improved monitoring of borrower behavior, the problem of agency costs is likely to be reduced.

a. What is the duration of a zero-coupon bond that has eight years to maturity? b. What is the duration if the maturity increases to 10 years? c. What is the duration if the maturity increases to 12 years?

A. 8 years B. 10 years C. 12 years

Which of the following are capital market instruments? 10-year corporate bonds 30-year mortgages 20-year Treasury bonds 15-year U.S. government agency bonds All of these choices are correct

All of these choices are correct. (Capital- longer than a year)

Writing question

An asset broker assists buyers and sellers of securities by providing a mechanism for buyers or sellers to process their orders. If the broker simply assists one party in finding another party, the broker charges a small fee called a commission. An asset dealer buys the security for his or her own account at the bid price and then sells the security at a higher ask price. The dealer profits by earning the bid-ask spread or the difference between the buy and sell price. The dealer's function is riskier because the dealer must maintain an inventory of the asset and honor quotes to buy and sell. If the security is risky, the value of the inventory can fluctuate with market prices. The broker takes less risk because he or she does not own the security.

The major liability of the Federal Reserve is

Currency outside banks

Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy because

DI deposits are a major portion of the money supply

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(4r1), is 6.10 percent. According to the liquidity premium theory, what is the liquidity premium on the four-year Treasury security, L4?

E(1r4) + L4 = [(1+1r4)^4/(1+1r3)^3]- 1 .0610 + L4= [(1+.0550)^4/(1+.0525)^3] - 1 .0610 + L4= [(1.24)/(1.17)] - 1 L4= 1.06253568 - 1 = .0625 - .0610 = .0015 or .15%

The Wall Street Journal reports that the rate on four-year Treasury securities is 5.60 percent and the rate on five-year Treasury securities is 6.15 percent. According to the unbiased expectations theory, what does the market expect the one-year Treasury rate to be four years from today, E(5r1)?

E(5r1)= [(1+1r5)^5/(1+1r4)^4] -1 (1.0615)5/(1.056)4 = 1 + E(5r1) 1 + E(5r1) = 1.0838 E(5r1) = 8.38%

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?

E(rs)= [Dividend x (1+rb)/current price] + rb =[.35 x (1.105)/24.25] + 0.105 =12.09

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?

E(rs)= [Dividend x (1+rb)/current price] + rb [.46 x ((1.145)/(44.12))]+.145 = 15.69

Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because

FIs can diversify away some of their risk and closely monitor the riskiness of their assets

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?

FV= PV(1+I/Y)^N FV=500(1.06)^3= 595.51 595.51-500= 95.51

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?

FV=PV(1+I/Y)^N 2,000=1,200(1.075)^N N=7.06

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 fair present value? b. If the required rate of return on the stock is 15 percent, what should the fair value be four years from today?

Fair present value = Div. (1+rb)^t/P% change A. = 2.5(1.015)^1/.12-.015 =24.17 B. = 2.5(1.015)^4/.15-.015 =19.65

Secondary markets help support primary markets because secondary markets I. offer primary market purchasers liquidity for their holdings. II. update the price or value of the primary market claims. III. reduce the cost of trading the primary market claims.

I, II, and III

An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2 percent. Which statement(s) below is/are true? I. 4 percent is the desired real risk-free interest rate. II. 6 percent is the approximate nominal rate of interest required. III. 2 percent is the expected inflation rate over the period.

I, II, and III are true

What factors are encouraging financial institutions to offer overlapping financial services such as banking, investment banking, brokerage, etc.? I. Regulatory changes allowing institutions to offer more services II. Technological improvements reducing the cost of providing financial services III. Increasing competition from full-service global financial institutions IV. Reduction in the need to manage risk at financial institutions

I, II, and III only

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency

II only

A decrease in interest rates will

Increase the bonds duration

_________ and __________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets.

Monitoring; diversification

Which of the following bond types pays interest that is exempt from federal taxation?

Municipal bonds

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

N = 10PMT = 100I/Y = 9FV = 1,000 Solve for PV which is $1064.18; Market value is underpriced by $14.18.

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?

N= 6 I/Y= .10 PV= 0 PMT= -1000 FV= ? FV= 7,715.61 7,715.61(1.10) = 8,487.17

Suppose you can save $2,000 per year for the next ten years in an account earning 7 percent per year. How much will you have at the end of the tenth year if you make the first deposit today?

N=10 I/Y=7% PV=0 PMT= -2000 FV= ? =$29,567.20

An insurance company is trying to sell you a retirement annuity. The annuity will give you 20 payments with the first payment in 12 years when you retire. The insurance firm is asking you to pay $50,000 today. If this is a fair deal, what must the payment amount be (to the dollar) if the interest rate is 8 percent?

N=20 I/Y=.08 50,000 x 1.08^11 = PMT x PVIFA 116,589.94 = PMT x 9.81814737 PMT= 11,874

Which of the following is/are money market instrument(s)?

Negotiable CDs

A preferred stock from Hecla Mining Co. (HLPRB) pays $3.50 in annual dividends. If the required rate of return on the preferred stock is 6.8 percent, what is the fair present value of the stock?

P0 = $3.50/0.068 = $51.47

You buy a car for $38,000. You agree to a 60-month loan with a monthly interest rate of 0.55 percent. What is your required monthly payment?

PVIFA= (1-(1+r)^-N)/R PVIFA= (1-(1.0055)^-60/.0055 =50.98653 PMT= 38,000/PVIFA (50.98653) =745.29

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?

PVIFA= (1-(1+r)^-N)/R =(1-(1.006667)^-180)/.006667 =104.63806359 180,000/104.63806359= 1,720.17 Or N= 15 x 12 = 180 I/Y= 8%/12= .66667 PV= -180,000 FV=0 PMT=? 1,720.17

The diagram below is a diagram of the User of funds -> Underwriter-> Supplier of Funds

Primary Markets

The Fed offers three types of discount window loans. ______________ credit is offered to small institutions with demonstrable patterns of financing needs, _____________ credit is offered for short-term temporary funds outflows, and _____________ credit may be offered at a higher rate to troubled institutions with more severe liquidity problems.

Seasonal; primary; secondary

An annuity and an annuity due with the same number of payments have the same future value if r = 10%. Which one has the higher payment?

The annuity has the higher payment. Annuity= Ending payment Annuity due= Beginning payment

A bond that you held to maturity had a realized return of 8 percent, but when you bought it, it had an expected return of 6 percent. If no default occurred, which one of the following must be true?

The coupons were reinvested at a higher rate than expected.

The major asset of the Federal Reserve is

U.S. Treasury securities

An investment pays $400 in one year, X amount of dollars in two years, and $500 in three years. The total present value of all the cash flows (including X) is equal to $1,500. If i is 6 percent, what is X?

X= [PV-((PMT1/(1 + I/Y^N))-((PMT3/1 + I/Y^N))] x 1.06^2 X=[1500-(400/1.06)-(500/1.06^3)] x 1.06^2 X= 789.70

Based on economists' forecasts and analysis, one-year T-bill rates and liquidity premiums for the next four years are expected to be as follows: 1R1=5.65% E(2r1)=6.75% L2=0.05% E(3r1)=6.85% L3=0.10% E(4r1)=7.15% L4=0.12% Calculate the four annual rates

Year 1- 5.65% Year 2- 1r2= [(1 + 5.65%)(1+6.75%+.05%)]^1/2 - 1 Year 3 1r3=[(1 + 5.65%)(1+6.75%+.05%)(1+6.85%+.10%)]^1/3 - 1 Year 4 1r4= [(1 + 5.65%)(1+6.75%+.05%)(1+6.85%+.10%)(1+7.15%+.12%)]^1/4 - 1

On March 11, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:1R1 = 4.75%, 1R2 = 4.95%, 1R3 = 5.25%, 1R4 = 5.65%Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of March 11, 20XX

Year 2 1f2=[(1+1r2)^2/(1+1r1)] - 1 1f2= [(1.0495)^2/(1.0475)] - 1 1f2= 5.15% Year 3 1f3=[(1+1r3)^3/(1+1r2)^2] - 1 1f3=[(1.0525)^3/(1.0495)^2] - 1 Year 4 1f4=[(1+1r4)^4/(1+1r3)^3] - 1 1f4=[(1.0565)^4/(1.0525)^3] - 1

A recent edition of The Wall Street Journal reported interest rates of 6 percent, 6.35 percent, 6.65 percent, and 6.75 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory, what are the expected one-year rates for years 4, 5, and 6 (i.e., what are 4f1, 5f1, and 6f1)?

Year 4 4f1 = [(1 + 1R4)4/(1 + 1R3)3] − 1 = [(1 + 0.0635)4/(1 + 0.06)3] − 1 = 7.41% Year 5 5f1 = [(1 + 1R5)5/(1 + 1R4)4] − 1 = [(1 + 0.0665)5/(1 + 0.0635)4] − 1 = 7.86% Year 6 6f1 = [(1 + 1R6)6/(1 + 1R5)5] − 1 = [(1 + 0.0675)6/(1 + 0.0665)5] − 1 = 7.25%

A recent edition of The Wall Street Journal reported interest rates of 2.25 percent, 2.60 percent, 2.98 percent, and 3.25 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory of the term structure of interest rates, what are the expected one-year rates during years 4, 5, and 6?

Year 4 E(1r4)= [(1+1r4)/(1+1r3)]- 1 Year 5 E(1r5)=[(1+1r5)/(1+1r4)]- 1 Year 6 E(1r6)=[(1+1r6)/(1+1r5)]- 1

A negotiable CD is

a marketable bank-issued time deposit that specifies the interest rate earned and a fixed maturity date

Commercial paper is

a short-term unsecured promissory note issued by a company to raise funds for a short time period (key- short term)

Calculate the yield to maturity on the following bonds: a. A 9 percent coupon (paid semiannually) bond, with a $1,000 face value and 15 years remaining to maturity. The bond is selling at $985. b. An 8 percent coupon (paid quarterly) bond, with a $1,000 face value and 10 years remaining to maturity. The bond is selling at $915. c. An 11 percent coupon (paid annually) bond, with a $1,000 face value and 6 years remaining to maturity. The bond is selling at $1,065.

a. on a financial calculator: N = 30, PV = −985, PMT = 45, FV = 1,000, ⇒⇒ I = ytm = 4.593% for 6 months or 9.186% per year. b. on a financial calculator: N = 40, PV = −915, PMT = 20, FV = 1,000, ⇒⇒ I = ytm = 2.329% for 3 months or 9.316% per year. c. on a financial calculator: N = 6, PV = −1,065, PMT = 110, FV = 1,000, ⇒⇒ I = ytm = 9.528%

Of the following, the most likely effect of an increase in income tax rates would be to a. decrease the savings rate. b. decrease the supply of loanable funds. c. increase interest rates. d. all of these choices are correct

all of these choices are correct

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. Morgan Stanley is acting as a(n)

asset transformer