MONEY MARKET

1.What is the discount yield, bond equivalent yield, and effective annual return on a $1 million Treasury bill that
curently sells at 97.375 percent of its face value and is 65 days
from maturity? (LG 5-2)
Pf = Php1,000,000
P0 = Php1,000,000 (0.99375) = Php993,750 n
= 65

Discount yield
Id= (1,000,000 - 993,750) x 360
1,000,000 65
= 3.4615%

Bond equivalent yield

Ibe = (1,000,000 - 993,750) x 365
993,750 65
= 3.5317%

Effective annual return

365/65
EAR = [ 1 + 3.5317% ] -1
365/65
= 3.5833%
Pf = Php1,000,000
P0 = Php1,000,000 (0.99375) = Php993,750 n
= 65

Discount yield
Id= (1,000,000 - 993,750) x 360
1,000,000 65
= 3.4615%

Bond equivalent yield

Ibe = (1,000,000 - 993,750) x 365
993,750 65
= 3.5317%

Effective annual return

365/65
EAR = [ 1 + 3.5317% ] -1
365/65
= 3.5833%
2.What is the discount yield, bond equivalent yield, and effective annual return on a $5 million commercial paper
issue that currently sells at 98.625 percent of its face value and is 136 days from maturity? (LG 5-1)

3. Calculate the bond equivalent yield and effective annual return on a negotiable CD that is 115 days from maturity
and has a quoted nominal yield of 6.56 percent. (LG 5-2)

4. Calculate the bond equivalent yield and effective annual return on fed funds that are 3 days from maturity and

have a quoted yield of 0.25 percent. (LG 5-1)

5. You would like to purchase a Treasury bill that has a $10,000 face value and is 68 days from maturity. The current
price of the Treasury bill is $9,875. Calculate the discount yield on this Treasury bill. (LG 5-2)
8. Refer to Table 5–5. (LG 5-2)
a. Calculate the ask price of the T-bill maturing on October 3, 2013, as of June 21, 2013.
b.Calculate the bid price of the T-bill maturing on December 19, 2013, as of June 21, 2013.
10. A T-bill that is 225 days from maturity is selling for $95,850. The T-bill has a face value of $100,000. (LG 5-2)
a. Calculate the discount yield, bond equivalent yield, and EAR on the T-bill.

b. Calculate the discount yield, bond equivalent yield, and EAR on the T-bill if it matures in 300 days.
12. If the overnight fed funds rate is quoted as 2.25 percent, what is the bond equivalent rate? Calculate the bond
equiv- alent rate on fed funds if the quoted rate is 3.75 percent. (LG 5-2)

14. Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent
bank at a price of $24,950,000, with the promise to buy them back at a price of $25,000,000. (LG 5-2)
a. Calculate the yield on the repo if it has a 7-day maturity.
b. Calculate the yield on the repo if it has a 21-day maturity.
15. Calculate the bond equivalent yields and the equivalent annual returns for the repurchase agreements described
in Problem 14. (LG 5-2)

16. You can buy commercial paper of a major U.S. corporation for $495,000. The paper has a face value of $500,000
and is 45 days from maturity. Calculate the discount yield and bond equivalent yield on the commercial paper. (LG 5-
2)

17. Suppose an investor purchases 125-day commercial paper with a par value of $1,000,000 for a price of $995,235.
Calculate the discount yield, bond equivalent yield, and the equivalent annual return on the commercial paper. (LG 5-
2)
18. A bank has issued a six-month, $2 million negotiable CD with a 0.52 percent quoted annual interest rate (iCD, sp).
(LG 5-2)
a. Calculate the bond equivalent yield and the EAR on the CD.

b. How much will the negotiable CD holder receive at maturity?

c. Immediately after the CD is issued, the secondary market price on the $2 million CD falls to $1,998,750. Cal- culate
the new secondary market quoted yield, the bond equivalent yield, and the EAR on the $2 million face value CD.
BOND MARKETS
1. Refer to the T-note and T-bond quotes in Table 6–1. (LG 6-2)
a. What is the asking price on the 2.750 percent November 2042 T-bond if the face value of the bond is $10,000?
b. What is the bid price on the 3.125 percent August 2013 T-note if the face value of the bond is $10,000?

2. Refer again to Table 6–1. (LG 6-2)

a. Verify the asked price on the 0.250 percent August 2014 T-note for Tuesday, July 16, 2013. The asked yield on the
note is 0.159 percent and the note matures on August 31, 2014. Settlement occurs two business days after pur- chase;
(i.e., you would take possession of the note on Thursday, July 18, 2013).
b. Verify the asked yield on the 0.250 percent May 2014 T-note for July 16, 2013. The asked price is 100.1094 and the
note matures on May 31, 2014.

4. On October 5, 2019, you purchase a $11,000 T-note that matures on August 15, 2031 (settlement occurs two days
after purchase, so you receive actual ownership of the bond on October 7, 2019). The coupon rate on the T-note is
4.875 percent and the current price quoted on the bond is 105.75 percent. The last coupon payment occurred on May
15, 2019 (145 days before settlement), and the next coupon payment will be paid on November 15, 2019 (39 days
from settlement). a. Calculate the accrued interest due to the seller from the buyer at settlement. b. Calculate the
dirty price of this transaction.
5. On October 5, 2019, you purchase a $10,000 T-note that matures on August 15, 2031 (settlement occurs one day
after purchase, so you receive actual ownership of the bond on October 6, 2019). The coupon rate on the T-note is
4.375 percent and the current price quoted on the bond is 105.250 percent. The last coupon occurred on May 15,
2019 (144 days before settlement), and the next coupon payment will be paid on November, 2019 (40 days from
settlement).
a) Calculate the accrued interest (per face value of the bond) due to the seller from the buyer at settlement.

b) Calculate the dirty price (per face value of the bond) of this transaction .

6. Consider an investor who, on January 1, 2016, purchases a TIPS bond with an original principal of
$103,000, an 8 percent annual (or 4 percent semiannual) coupon rate, and 12 years to maturity.
a. If the semiannual inflation rate during the first six months is 0.2 percent, calculate the principal amount
used to determine the first coupon payment and the first coupon payment (paid on June 30, 2016). (Round
your answer to 2 decimal places. (e.g., 32.16))
b. From your answer to part a, calculate the inflation-adjusted principal at the beginning of the second six
months.
c. Suppose that the semiannual inflation rate for the second six-month period is 1.3 percent. Calculate the
inflation-adjusted principal at the end of the second six months (on December 31, 2016) and the coupon
payment to the investor for the second six-month period. What is the inflation-adjusted principal on this
coupon payment date?

7. Consider an investor who, on January 1, 2019, purchases a TIPS bond with an original principal of
$116,000, an 10 percent annual (or 5 percent semiannual) coupon rate, and 15 years to maturity.
a. If the semiannual inflation rate during the first six months is 0.4 percent, calculate the principal amount
used to determine the first coupon payment and the first coupon payment (paid on June 30, 2019).
b. From your answer to part a, calculate the inflation-adjusted principal at the beginning of the second six
months.
c. Suppose that the semiannual inflation rate for the second six-month period is 1.0 percent. Calculate the
inflation-adjusted principal at the end of the second six months (on December 31, 2019) and the coupon
payment to the investor for the second six-month period.
8. 7.85>6.91

9.
STOCK
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3.
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 Chap 11
26. What are the advantages and disadvantages of international expansion? (LG 11-8)

1.What is meant by the term depository institution? How does a depository institution differ from an industrial
corporation?

2. What are the major sources of funds for commercial banks in the United States? What are the major uses of funds
for commercial banks in the United States? For each of your answers, specify where the item appears on the balance
sheet of a typical commercial bank. (LG 11-2, LG 11-3)
The major source of funds for commercial banks in the US are deposits (liability) and borrowed or other liability funds
(liability). The major use of the funds is loans and investing securities (Assets)
12. What are the main off-balance-sheet activities undertaken by commercial banks? (LG 11-4)
(=What are off-balance-sheet items and why are they important to some financial firms?)
Off-balance-sheet items are usually transactions that generate fee income for a bank (such asstandby credit guarantees)
or help hedge against risk (such as financial futures contracts). Theyare important as a supplement to income from loans
and to help a bank reduce its exposure tointerest-rate and other types of risk
17.