Assignment Details

Subject: Business / Finance

Question11. An investor purchases a 30-year municipal bond for $960. The bond’s coupon rate is 8 percent and, it still had 16 years remaining until maturity. If the investor holds the bond until it matures and collects the $1000 par value from the municipality and his marginal tax rate is 34 percent, what will be his (effective) yield to maturity? (5 points)

12. An investor purchases a 30-year U.S. government bond for $1,020. The bond’s coupon rate is 9 percent and, it still had 14 years remaining until maturity. If the investor holds the bond until it matures and collects the $1000 par value from the Treasury and his marginal tax rate is 39 percent (we assume that the bond is taxable), what will be his after-tax (effective) yield to maturity? (5 points)13. Suppose that the public wishes to hold $0.35 in pocket money (currency and coin) and $0.25 in time and savings deposits. Suppose that banks wish to hold $0.20 for each new dollar of transaction money received. Suppose that $0.05 finds its way outside of the domestic banking system. Suppose the reserve requirement on transaction deposits is 3 percent and that on time and savings deposits is 4%. (20 points)a. What is the size of the transaction deposit multiplier?b. What is the size of the money multiplier?c. Suppose $5 million in new excess reserves appear in the banking system. How much will be created in the form of deposits and loans?d. By how much did the leakages of funds from the banking system reduce the size of the transaction deposit multiplier? (Hint: compute the simple transaction deposit multiplier).e. If the Fed purchases $175 billion worth of government securities on the open market, what is the effect on the money supply?14. Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidly—at a rate of 50 percent per year—during Years 4 and 5. After Year 5, the company should grow at a constant rate of 8 percent per year. If the required return on the stock is 15 percent, what is the value of the stock today? (10 points)15. You expect a share of stock to pay dividends of $1.00, $1.25, and $1.50 in each of the three years. You believe the stock will sell for $20 at the end of the third year. What is the stock price if the discount rate for the stock is 10%? (5 points)16.Compare and contrast the expectations theory and the liquidity premium theory of the term structure of interest rates. (10 points)17. Suppose today’s 10-year rate is 9 percent. Today’s 4-year rate is 7 percent. Estimate the 6-year forward rate in four years if the 10-year rate has a .3 percent liquidity premium. (6 points)18. Consider a 30-year corporate bond paying 9 percent semi-annual coupon. The current yield to maturity is 11 percent. (14 points)a. Find the modified duration. (6 points)b. Refer to part a. If the interest changes by 25 basis points, what is the exact change in price? (4 points)c. Refer to part b. If the interest changes by 25 basis points, what is the approximate change in price? (4 points)19. Consider a 30-year corporate bond paying 8 percent semi-annual coupon. The current yield to maturity is 10 percent. Find the approximate bond’s modified duration by using changes in the interest rate up and down by 5 basis points. (10 points)20. What is a monetary policy target? Explain why it is difficult for the Fed to target both the interest rate and the money supply simultaneously. (7 points)