Fin 65 Test #1
1. A corporate bond has 15 years to maturity and pays a semi-annual coupon of 4%. The par value is $1000.
a. A required rate of return for the bond can be computed as . Currently, the risk free rate is 0.5% and the risk premium is 2% above the risk free rate.
Find the value of the bond using the equation,
b. If the Federal Reserve Bank decides to loosen its monetary policy by 25 basis points, find the new value of the bond. Assume that the risk premium does not change.
c. What do you solutions to (a) and (b) tell you about the relationship between interest rates and asset prices?
2. A US Treasury Bill has a face value of $1M and a time to maturity of 183 days.
a. Currently the risk free rate is 0.5%. Find the price of the T-Bill using the equation,
Note: Short-term securities do not typically use compound interest.
b. If the Federal Reserve Bank decides to loosen its monetary policy by 25 basis points, find the new value of the bill.
c. Are T-Bills considered to be a liquid asset?