1. Concisely explain the economic role of brokers, dealers, investment bankers and the role of the New York Stock Exchange specialist (please, make sure that your answer cover the entire question).
2. Calculate the amount of excess reserve of a bank with 15,000,000 of reserve and 100.000,000 of deposits if the reserve requirement is 10%
3. Suppose the yield on a 30-year corporate bond rated Aaa is 9.50 percent and the yield on a 30-year Treasury bond is 9.00 percent. What is the default risk premium? Would you expect a higher or lower default risk premium on an A-rated bond?
4. Calculate the gross profit that an underwriter would make if it sold $20 million worth of bonds at par (face value) and paid the firm that sold the bonds 98.75% of par
5. If a bond dealer bought a $100,000 municipal bond at 92% of par and sold it at 96% of par, how much money did the dealer make on the bid-ask spread?
6. List and concisely discuss the risks faced by bond investors.
7. If your bank held 3% of the units issued by a unit trust and the mortgages in the trust repaid $15,000,000 in interest and $2,300,000 in principal in its first year, how much principal and interest would your bank receive that year?
8. Concisely explain the difference between a market order and a limit order.
9. The one-year real rate of interest is currently estimated to be 3 percent. The current annual rate of inflation is
2 percent, and market forecasts expect the annual rate of inflation to be 5 percent. Approximately, what is the current one-year nominal rate of interest?
10. Given the economic role of the money market, concisely explain the importance of the typical characteristics of money market securities
END OF THE REGULAR EXAMINATION
QUESTIONS FOR EXTRA CREDITS
1. A depository institution holds vault cash of $1 million, reserve deposits at the Fed of $49 million. If that institution holds $500 million in transactions deposits and is subject to a 3 percent reserve requirement on the first $50 million of those deposits and to a reserve requirement of 10 percent on all transactions deposits over $50 million, what are its required reserves? What are its excess reserves? (5 EXTRA POINTS)
2. You purchased a one-year Treasury security with a promised yield of 7 percent. You expected the annual rate of inflation to be 2.5 percent; however, the actual rate turned out to be 6 percent. What were your expected and your realized real rate of interest? (4 EXTRA POINTS)
3. Define marketability and concisely explain why marketability of a security is important to both investor and issuer. (3 EXTRA POINTS)
4. Concisely explain why asset-backed securities are very important in the capital markets and what is their relation with the sub-prime mortgage crisis? (3 EXTRA POINTS)
5. Concisely explain why the FOMC is the key policy group within the Fed. (3 EXTRA POINTS)
The solution calculates a gross profit and determines the price of the municipal bonds. The risks faced by bond investors are determined.