Problem 1: Government economists have forecasted one-year T-bill rates for the following five years, as follows:
Year 1-year rate (%)
1 4.25
2 5.15
3 5.50
4 6.25
5 7.10
You have a liquidity premium of 0.25% for the next two years and 0.50% thereafter. Would you be willing to purchase a four year T-bond at a 5.75% interest rate?
Problem 2: Borrowed 1,000,000 for two years at an 11.5% interest rate, the risk free rate is 2%. The maturity risk premium for a two year loan is 1%, and inflation is expected to be 3% next year. What does this information imply about the rate of inflation in the second year?
Problem 3: The following market interest rates for both borrowing and lending are observed:
1 year rate = 5%, 2 year rate = 6%, one year rate one year from now = 7.25%
How can you take advantage of these rates to earn a riskless profit? Assume that the expectations theory for interest rates holds.
Problem 4: If interest rates on one to five year bonds are currently 4%, 5%, 6%, 7%, 8%, and the term premiums for one to five year bonds are 0%, 0.25%, 0.35%, 0.40% and 0.50%, predict what the one year interest rate will be two years from now?
Problem 5: Is a Treasury bond issued 29 years ago with six months remaining before it matures a money market instrument?
Problem 6: Which of the money market securities is the most liquid and considered the most risk-free? Why?
Problem 7: Who issues commercial paper and for what purpose?
Problem 8: Why are banker's acceptances so popular for international transactions?
Problem 9: What is the annualized discount and investment rate % on a Treasury bill that you purchase for $9,900 that will mature in 91 days for $10,000?
Problem 10: The price of %8,000 face value commercial paper is $7,930. If the annualized discount rate is 4%, when will the paper mature? If the annualized investment rate % is 4%, when will the paper mature?
Problem 11: The annualized discount rate on a particular money market instrument is 3.75%. The face value is $200,000 and it matures in 51 days. What is the price? What would be the price if it had 71 days to maturity?
Problem 12:
A. In a Treasury auction of $2.1 billion par value 91 day T-bills, the following bids were submitted:
Bidder Bid Amount Price
1 $500 million $0.9940
2 $750 million $0.9901
3 $1.5 billion $0.9925
4 $1 billion $0.9936
5 $600 million $0.9939
If only these competitive bids are received, who will receive T-bills, in what quantity, and at what price?
B. If the Treasury also received $750 million in noncompetitive bids, who will receive T-bills, in what quantity, and what price? (refer to the above table)
Problem 13: Answer the following questions:
Explain why it is inappropriate to use one yield to discount all the cash flows of a financial asset?
Why can a financial asset be viewed as a package of zero-coupon instruments?