Book: Financial Markets and Institutions (8th, by Mishkin)

Please show every steps clearly and one by one.

Part 1:

1. For a bond that has a coupon of 3.4%, principal value of $100,000, what is the price of this bond at the following maturities and Y-T-M's?

a. 3 years, YTM of 5%

b. 7 years, YTM of 5%

c. 7 years, YTM of 2%

2. A seven year, 8% coupon bond with a face value is priced at $932.25. Compute your rate of return if you sell it in one year at $915.23.

3. Calculate the duration of a $2,000, 5 year U.S. corporate bond that has a coupon rate of %7.5%.

4. You have a $100,000 bond portfolio that has four bonds: 25% in a 3.2 duration bond, 75% in a 4.7 duration bond and 25% in a 6.2 duration bond. Compute the duration of this portfolio.

Part 2:

1. Explain why you would be more or less willing to buy a house under the following circumstances:

a. You just inherited $100,000

b. Real estate commissions fall from 6% of the sales price to 4% of the sales price.

c. You expect Polaroid stock to double in value next year.

d. Prices in the stock market become more volatile.

e. You expect housing prices to fall.

2. Summarize the shift factors of demand for bonds and explain the movement they cause to the demand curve.

3. Summarize the shift factors of supply for bonds and explain the movement they cause to the supply curve.

Part 3:

1. What is good about a Junk Bond? Why would you not want to buy one?

2. Debt issued by a municipality that has a five year maturity has a yield of 5%, A corporate bond of a similar credit risk and maturity has a yield of 6%. The tax rate is 40% for you. Which bond should you buy? Why?

3. The one year interest rate is 6%. The two year interest rate is 7%. What is the one year interest rate starting one year from today?

4. One-year government debt rates for each of the next 4 years are expected to be 4%, 5%, 5.9% and 6.4%, respectively. If the four year bond is yielding 5.9, is there a liquidity premium? If so, how much?

Part 4:

1. Summarize the strong form of the efficient markets hypothesis and the semi-strong form of it (use all web resources to develop your answer). Which one seems to best reflect what we know about the financial markets in a developed economy?

2. What is a random walk as it relates to stock prices? What is the implication for predicting future stock prices?

3. Why has Behavioral Finance grown as a field of study?