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# T-Bill, Commercial paper, Bond, Mortgage

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1. What is the discount yield, bond yield, and effective annual return on a \$1million Treasury bill that currently sells at 97 3/8 percent of its face value and is 65 days sells at maturity?

2. Suppose you purchase a T-bill that is 125 days from maturity for \$9,765. The T-bill has a face value of \$10,000.
a. Calculate the T-bill's quoted discount yield.
b. Calculate the T-bill's bond equivalent yield.

3. You can buy commercial paper of a major US 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.

4. You can invest in taxable bonds that are paying a 9.5 percent annual rate of return or a municipal bond paying a 7.75 percent annual rate of return. If your marginal tax rate is 21 percent, which security should you buy? Hilton hotels corp has a convertible bond issue outstanding. Each bond, with a face value of 1000 can be converted into common shares at a rate of 61.2983 shares of stock per 1000 face value bond ( the conversion rate), or \$16.316 per share. Hilton's common stock is trading (on the NYSE) at \$15.90 per share and the bonds are trading at \$975.
a. Calculate the conversion value of each bond.
b. Determine if it is currently profitable for bond holders to convert their bonds into shares of Hilton common stock.

5. Why are mortgage markets studied as separate capital market?

6. You plan to purchase a 100,000 house using a 30 year mortgage obtained from your local credit union. The mortgage rate offered to you is 8.25 percent. You will make a down payment of 20 percent of the purchase price.
a. Calculate your monthly payments on this mortgage.
b. Calculate the amount of interest and, separately principal paid in the 25th payment.
c. Calculate the amount of interest and, separately principal paid in the 25th payment.
d. Calculate amount of interest paid over the life of this mortgage.

7. What is mortgage sale? How does a mortgage sale differ from the securitization of mortgage?

#### Solution Preview

1. What is the discount yield, bond yield, and effective annual return on a \$1million Treasury bill that currently sells at 97 3/8 percent of its face value and is 65 days sells at maturity?

Face Value (F)= \$1,000,000
Price =P= 97.375% of \$1,000,000 = \$973,750
Days to maturity=t= 65 days
Discount yield ={ (F-P)/F} x (360/t)
Discount yield= 14.54% ={(1000000-973750)/1000000} x (360/65)

Return over the next 65 days= 2.70% =(1000000/973750)-1
Effective annual return= 16.14% =(1+0.027)^(365/65)

Bond equivalent yield= (365 x Discount rate)/ (360- Discount ratex Days to maturity)= 15.14% =(365 x 0.1454)/(360-0.1454x65)

2. Suppose you purchase a T-bill that is 125 days from maturity for \$9,765. The T-bill has a face value of \$10,000.

a. Calculate the T-bill's quoted discount yield.

Face Value (F)= \$10,000
Price =P= \$9,765
Days to maturity=t= 125 days
Discount yield ={ (F-P)/F} x (360/t)
Discount yield= 6.77% ={(10000-9765)/10000} x (360/125)

b. Calculate the T-bill's bond equivalent yield.

Face Value (F)= \$10,000
Price =P= \$9,765
Days to maturity=t= 125 days
Bond equivalent yield ={ (F-P)/P} x (365/t)
Discount yield= 7.03% ={(10000-9765)/9765} x (365/125)

3. You can buy commercial paper of a major US 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.

discount yield.

Face Value (F)= \$500,000
Price =P= \$495,000
Days to maturity=t= 45 days
Discount yield ={ (F-P)/F} x (360/t)
Discount yield= 8.00% ={(500000-495000)/500000} x (360/45)

bond equivalent yield.

Face Value (F)= \$500,000
Price =P= \$495,000
Days to maturity=t= 45 days
Bond equivalent yield ={ (F-P)/P} x (365/t)
Discount yield= 8.19% ={(500000-495000)/495000} x (365/45)

4. You can invest in taxable bonds that are paying a 9.5 percent annual rate of return or a municipal bond paying a ...

#### Solution Summary

Answers questions on yields on treasury bill, commercial paper, conversion value of bonds, mortgage payments etc.

\$2.19

## Financial Institutions and Markets

1) Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will _________________ the price of T-bills in the market and places __________________ pressure on the yield of T-bills.

A) decrease; downward
B) decrease; upward
C) increase; upward
D) increase; downward

2) True or False? A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.________________________________

3) ____________ facilitate transactions on the New York Stock Exchange by executing stock transactions for their clients.

A) Floor brokers
B) Capstone members
C) Specialists
D) none of the above

4) A(n) ______ in the discount rate may signal a stimulative economic policy and anticipation that the Fed will attempt to ______ market interest rates.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

5) In response to the September 11 attack, the Fed ________ the supply of loanable funds in the banking system, which placed _______ pressure on interest rates.

A) decreased; upward
B) decreased; downward
C) increased; upward
D) increased; downward
E) The Fed did not change the supply of loanable funds in response to the
September 11 attack.

6) Money market securities generally have ______. Capital market securities are typically expected to have a ______.

A) less liquidity; higher annualized return
B) more liquidity; lower annualized return
C) less liquidity; lower annualized return
D) more liquidity; higher annualized return

7) The ______ is directly responsible for controlling money supply growth.

B) FOMC
C) Board of Governors
D) president of the United States

8) Which of the following is not true with respect to the discount rate?

A) An adjustment in the discount rate affects the money supply only if depository institutions respond to the adjustment.
B) The discount window offers depository institutions three types of credit.
C) To decrease the money supply, the Fed would increase the discount rate.
D) All of the above are true with respect to the discount rate.

9) Kudrow stock just paid a dividend of \$4.76 per share and plans to pay a dividend of \$5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kudrow stock, according to the dividend discount model, is \$__________.

A) 39.67
B) 41.67
C) 33.33
D) 31.73
E) none of the above

10) Which of the following is not a major component of the Federal Reserve System?

A) member banks
B) Federal Open Market Committee
C) Securities and Exchange Commission
D) Board of Governors

11) The federal government demand for loanable funds is __________. If the budget deficit was
expected to increase, the federal government demand for loanable funds would ________.

A) interest elastic; decrease
B) interest elastic; increase
C) interest inelastic; increase
D) interest inelastic; decrease

12) If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ______ and prices of existing bonds to ______.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

13) Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ______ shortly thereafter which in turn places ______ pressure on U.S. interest rates.

A) increase; downward
B) increase; downward
C) decrease; downward
D) decrease; upward

14) Securities with maturities of one year or less are class¬ified as ____________________.

A) capital market instruments.
B) money market instruments.
C) preferred stock.
D) none of the above

15) The appropriate discount rate for valuing any bond is the____________.

A) bond's coupon rate.
B) bond's coupon rate adjusted for the expected infla¬tion rate over the life of the bond.
C) Treasury bill rate with an adjustment to include a risk premium if one exists.
D) yield that could be earned on alternative invest¬ments with similar risk and maturity.

16) A call provision normally _______________

A) allows the firm to call bonds at par value.
B) gives the firm the option to call bonds at market value.
C) allows the firm to call bonds at a price below par value.
D) requires the firm to call bonds at a price above par value.

17) If security prices fully reflect all market related informa¬tion (such as historical price patterns) but do not fully reflect all other public informa¬tion, security markets are

A) weak form efficient.
B) semi strong form efficient.
C) strong form efficient.
D) B and C.
E) None of the above.

18) Assume that you purchased bonds of a corporation one year ago. Today, it is announced that the firm plans a leveraged buyout. The market value of your bonds will ______ as a result.
____________

A) rise
B) decline
C) be zero
D) be unaffected

19) If the economy weakens, there is _________ pressure on interest rates. If the Federal Reserve increases the money supply there is ______ pressure on interest rates (assume that inflationary expectations are not affected).

A) upward; upward
B) upward; downward
C) downward; upward
D) downward; downward

20) If interest rates suddenly ____________, those existing bonds that have a call feature are __________ likely to be called.______________

A) decline; more
B) decline; less
C) increase; more
D) none of the above

21) The ______ is commonly used to determine what a stock's price should have been.

A) capital asset pricing model
B) Treynor Index
C) Sharpe Index
D) B and C

22) When financial institutions expect interest rates to ______, they may ______.

A) increase; sell bonds and buy short term securities
B) increase; sell short term securities and buy bonds
C) decrease; sell bonds and buy short term securities
D) B and C

23) Which of the following transactions would not be considered a secondary market transaction?
____________

A) an individual investor purchases some existing shares of stock in IBM through his broker
B) an institutional investor sells some Disney stock through its broker
C) Microsoft issues new shares of common stock using its investment bank
D) all of the above would occur on the New York Stock Exchange

24) An institution that originates and holds a fixed rate mortgage is adversely affected by _______ interest rates; the borrower who was provided the mortgage is adversely affected by _______ interest rates.

A) stable; decreasing
B) increasing; stable
C) increasing; decreasing
D) decreasing; increasing

25) Mortgage companies specialize in ___________________.

A) purchasing mortgages originated by other financial institutions.
B) investing and maintaining mortgages that they create.
C) originating mortgages and selling those mortgages.
D) borrowing money through the creation of mortgages that is used to invest in real estate.

26) A short-interest ratio of 20 or more indicates that many investors ___________

A) believe that the stock price is currently overvalued.
B) believe that the stock price is currently undervalued.
C) are selling the stock short.
D) both A and C.

27) The first-time issuance of shares by a specific firm to the public is referred to as a(n)

A) stock repurchase.
B) secondary stock offering.
C) initial rights issue.
D) initial public offering (IPO).

28) If the Treasury uses a relatively large proportion of ______ debt to finance the deficit, this may place upward pressure on ______ interest rates, and corporations may reduce their investment in fixed assets.

A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) b and c

29) American Depository Receipts (ADRs) are attractive to U.S. investors because __________

A) U.S. analysts do not follow them closely.
B) companies represented by ADRs are required to file financial statements consistent with those in the United States.
C) both A and B.

30) Shareholders can most easily measure a firm's performance by monitoring changes in its __________ over time.

A) share price
B) employee job descriptions
C) Board of Directors
D) asset size

31) Treasury bills are sold through _____ when initially issued. ______________

A) insurance companies
B) commercial paper dealers
C) auction
D) finance companies

32) Global crowding out is described in the text to mean the impact of ________________.

A) excessive U.S. population growth on interest rates.
B) excessive global population growth on interest rates.
C) an excessive budget deficit in one country on interest rates of another country.
D) an excessive budget deficit in one country on exchange rates.

33) ____________ facilitate transactions on the New York Stock Exchange by taking positions in specific stocks; they also stand ready to buy or sell these stocks.

A) Floor brokers
B) Capstone members
C) Specialists
D) none of the above

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