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Describe the role of a country"s central bank and the tools that a central bank can use to control the money supply, and explain how a central bank can use monetary tools to implement monetary policy.
Explain the relationship among the required reserve ratio, the potential deposit expansion multiplier, and deposit expansion multiplier.
Discuss the impact of expansionary and restrictive fiscal policies based on the basic Keynesian model, the crowding-out model, the new classical model, and supply-side model.
Define inflation, discuss its causes, distinguish between anticipated and unanticipated inflation, and discuss the harmful effects of both on economic activity.
A 10-year, 10 percent annual coupon $1,000 bond trades at a yield to maturity of 8 percent. The bond has duration of 6.994 years. What is the modified duration of this bond?
Rank the bonds in terms of convexity, and express the convexity relationship between zeros and coupon bonds in terms of maturity and duration equivalencies.
What will be the bond new prices if market yields change immediately by +/ - 0.10 percent? What will be the new prices if market yields change immediately by +/ - 2.00 percent?
Using your answers to parts (a) and (b), what is the percentage change in the bond’s price as a result of the 1 percent increase in interest rates?
Consider a 12-year, 12 percent annual coupon bond with a required return of 10 percent. The bond has a face value of $1,000.
In general, what changes have occurred in the financial markets that would allow financial institutions to restructure their balance sheets more rapidly and efficiently to meet desired goals?
If the interest rate prediction had been available during the time period in which the loan and the liability were being negotiated, what suggestions would you have offered to reduce the possible effe
Verify your answer to part (c) by calculating the change in the market value of equity assuming that the relative change in all market interest rates is an increase of 30 basis points.
If you use only duration to immunize your portfolio, what three factors affect changes in the net worth of a financial institution when interest rates change?
Consider the case in which an investor holds a bond for a period of time longer than the duration of the bond, that is, longer than the original investment horizon.
Show that if interest rates rise to 10 percent within the next year and your investment horizon is four years from today, you will still earn a 9 percent yield on your investment.
Calculate the duration of a two-year, $1,000 bond that pays an annual coupon of 10 percent and trades at a yield of 14 percent. What is the expected change in the price of the bond if interest rates d
You have discovered that the price of a bond rose from $975 to $995 when the yield to maturity fell from 9.75 percent to 9.25 percent. What is the duration of the bond?
How is duration related to the interest elasticity of a fixed-income security? What is the relationship between duration and the price of the fixed-income security?
You can obtain a loan for $100,000 at a rate of 10 percent for two years. You have a choice of paying the principal at the end of the second year or amortizing the loan that is, paying interest (10 pe
Maximum Pension Fund is attempting to balance one of the bond portfolios under its management. The fund has identified three bonds that have five year maturities and trade at a yield to maturity of 9
A six-year, $10,000 CD pays 6 percent interest annually and has a 6 percent yield to maturity. What is the duration of the CD? What would be the duration if interest were paid semiannually?
What conclusions can you reach about the relationship between duration and the time to maturity? Plot the relationship.
What is the duration of this loan? What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent?
A one-year, $100,000 loan carries a coupon rate and a market interest rate of 12 percent. The loan requires payment of accrued interest and one-half of the principal at the end of six months. The rema
Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a two-year, $1,000 zero-coupon bon