Finance marketing HW

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Economics 350 Student Name:

Spring 2014 ID #:

Homework #1

Due: Hardcopy of you assignment is due on Tuesday, February 11 at the beginning

of class.

Total Points Available: 40

Question 1. (6 points) Update Table 1 of Chapter 3 (page 59) of your textbook with the

most recent (1/20/2014) data available from the Board of Governors of the Federal

Reserve System. This data can be found on the Board’s web site: look for Money

Stock data, release H.6. Please use seasonally adjusted data. (Hint: You will have to

go through a series of menus in the Board website before you reach the data.)

Data dated: _________

($billions)

Currency

+ Travelers checks

+ Demand deposits

+ Other checkable deposits

Total M1

M1

+ Small denomination time deposits

+ Money market mutual fund shares (retail owners)

+ Savings deposits and money market deposit accounts

Total M2

Question 2. Use the tables and formulae in your lecture notes to find the (sometimes

approximate) annual (nominal) yield to maturity for the following securities:

a. (2 points) A fixed payments loan, making a payment of $42.90 each month for 27

years and having a market value of $5,000.

b. (2 points) A discount bond, maturing in 9 years, with a face value of $6,000 and a market value of $3705.78.

c. (2 points) A share of common stock, with a constant annual year-end dividend of

$382.5 and a market value of $8,500.

Question 3. (6 points) Using the bond table when necessary, find the coupon bond with

the highest market value: (1) a 10-percent coupon bond maturing in 8 years, with a

face value of $750 and an (approximate) annual yield to maturity of 10.50 percent;

(2) a 10-percent coupon bond maturing in 8 years, with a face value of $750 and a

yield of 10.45 percent; (3) a 12-percent coupon bond maturing in 6 years, with a face

value of $725 and a yield of 12 percent; and (4) a 12-percent coupon bond maturing

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in 6 years, with a face value of $725 and a yield of 12.3 percent. (Hint: in some

cases, you will be able only to rank market values, rather than find them exactly.)

Question 4. Consider a discount bond with a face value of $2,500 and a maturity date of

January 1, 2015.

a. (2 points) Suppose that on January 1, 2010, when the market’s (nominal) yield to

maturity is 7.0 percent per year, you buy the bond at price P1. What will P1 be?

b. (2 points) Now suppose that on January 1, 2011 the market yield to maturity is 6.5

percent. What will the new price, P2, be?

c. (2 points) What is the (nominal) rate of return that you would earn by holding the

discount bond from January 1, 2010 through January 1, 2011?

d. (8 points) Repeat parts (a) through (c) under the assumption that the discount bond matures on January 1, 2034. Compare your answer here to your answer in part (c).

In which case does the return seem more sensitive to the market interest rates? What

general relationship between interest-rate risk and maturity have you illustrated?

e. (1 points) Suppose that on March 1, 2014, you would like to lock into a one-year return of 7.0 percent. What maturity of discount bond should you buy?

Question 5. Consider the plight of Bill, a taxi driver who invests $1,000 dollars in his

business.

a. (3 points) Suppose that Bill uses the $1,000 to buy a taxicab, which he uses for a

year. On the last day of that year, the taxicab will earn Bill $300. Suppose further

that at the end of the year, the taxicab is worth $800. What is the nominal rate of

return on Bill’s investment?

b. (1 point) Suppose that expected inflation is 4 percent. What is (approximately) the

real rate of return on Bill’s investment?

c. (3 points) Suppose that Bill had rented the cab for a year instead. Assuming that Bill

paid $1,000 for the lease and earning from the taxicab is same as in part a), what is

the nominal rate of return on his investment now?