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Chapter 3 Exercises

This document provides 12 practice exercises related to money markets and bond markets. The exercises cover calculating yields on various financial instruments like commercial paper, T-bills, and repurchase agreements. Additional questions calculate bond prices given market rates, total interest payments on inflation-indexed bonds, and determining the optimal choice between bond investment options.

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109 views2 pages

Chapter 3 Exercises

This document provides 12 practice exercises related to money markets and bond markets. The exercises cover calculating yields on various financial instruments like commercial paper, T-bills, and repurchase agreements. Additional questions calculate bond prices given market rates, total interest payments on inflation-indexed bonds, and determining the optimal choice between bond investment options.

Uploaded by

Hình Vận
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 3 -EXERICISES

Money markets

1. Assume an investor purchased six-month commercial paper with a face value of $1


million for $940,000. What is the yield?

2. Stanford Corporation arranged a repurchase agreement in which it purchased


securities for $4.9 million and will sell the securities back for $5 million in 40 days.
What is the yield (or repo rate) to Stanford Corporation?

3. You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you hold it until
maturity, what is the T-bill yield? What is the T-bill discount?

4. Phil purchased an NCD a year ago in the secondary market for $980,000. The NCD
matures today at a price of $1million, and Phil received $45,000 in interest. What is
Phil’s return on the NCD?

5. Suppose you want to earn an annualized discount rate of 2.5%. What would be the
most you would pay for a 182-day Treasury bill that pays $10,000 at maturity?

6. What is the minimum discount rate you will accept if you want to earn at least a
0.25% annualized yield on a 182-day $1,000 T-bill?

7. The price of a 145-day commercial paper is $4,525. If the annualized discount rate is
5.25%, what will the commercial paper will pay at the day of maturity?

8. In a Treasury auction of $2.1 billion par value 91-day T-bills, the following bids were
submitted:

Bidder Bid Amount Price per


($ million) $100
1 500 99.40
2 750 99.01
3 1500 99.25
4 1000 99.36
5 600 99.39
a) If only these competitive bids are received, who will receive T-bills, in what quantity,
and at what price?

b) If the Treasury also received $750 million in non-competitive bids, who will receive
T-bills, in what quantity, and at what price?

Bond markets

9. An inflation indexed Treasury bond has a par value of $1,000 and a coupon rate of 6
percent. An investor purchases this bond and holds it for one year. During the year,
the consumer price index increases by 1 percent every six months. What are the total
interest payments the investor will receive during the year?

10. A & B Corporation issued bonds for 10 years, with face value of $10,000 and a 6%
annual coupon rate. What is the current market price of the bond if the market rate is
8%? How would your answer change if the market rate falls to 6%? Assume semi-
annual payments.

11. An investor has the following options:

a. To buy a two-year $1,000 zero-coupon bond at a market price of $860.

b. To buy a two-year $1,000 bond with an annual interest of 3% for $900.

Assuming annual payments, which option do you think the investor should choose?

12. Sun Corporation has a convertible bond with face value of $1,000, coupon rate of 6%,
and with annual payments for 5 years. The bond can be converted into 25 shares of
common equity (currently trading at $45 per share).What will be the best option for
the investor—to convert the bonds or to sell them? The market rate is 7%.

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