1. Compute the present value of a two-period annuity of $1 per period if the discount rate is 10 percent.

2. A two-period annuity of $1 per period has a present value of $1.808.  Find the discount rate from the present value table.

3. An annuity of $1 period runs from time 9 through time 13. The annuity has a present value of $2.3. Find the yield to maturity on this annuity.

4. A perpetual bond has a coupon of $8, par value of $100, and price of $80. Compute its yield to maturity, current yield, and stated yield.

5. Assume a bond paying a coupon of $4 semiannually and having a $100 par value and price. Determine the semiannual and annual yields to maturity.

6. Suppose Treasury STRIPS per $100 of par are $90 for a one-period and $85 for a two-period. A two-period bond with an $8 annual coupon and $100 par sells for $97. What arbitrage opportunities are available? What arbitrage opportunities would be available if the coupon-bearing bond sold for $101?

7. Suppose you have Monica's job at the Spittoon Co. (she got transferred to the Pentagon).  Use this information to answer the question that follow:

A 2-year Government of Canada bond is available with a face value of $100.  The bond pays interest semi

annually at a rate of 7% per annum.  The bond is currently selling at $95.  The bond has exactly 2 years

remaining until maturity and exactly 6 months until its next coupon payment. The following spot rates of interest are also currently available on treasury strips per $100 par:

Your co-manager, Bill tells you that his banker has suggested that the company should invest $100,000 in

2-year Government bonds.  Bill said the company can earn 6% by lending short-term in the spot market; any alternative investment would have to have a yield to maturity of at least 6%.  The banker assured your boss that the yield on the 2-year Government of Canada bonds was well over 6%, but Bill did not trust his motives because he stands to earn a commission if the company buys the bonds. 

Questions

a) Now your boss wants to know from you whether the yield to maturity on the 2-year bond is indeed more than 6%. How would you respond without actually calculating the yield to maturity?

b)  Is the 2-year Government of Canada bond properly priced? How can you exploit the mispricing to generate arbitrage profit?

Explain and determine in each case the effects on Reserves ( Required, and Excessive or Deficit Reserves) using T-account .Assume a reserve ratio on deposits equal to 12%. Evaluate also the qualitative impacts on Money Supply in the system(expansion or contraction ).

A. a) Suppose a bank customer cashed a $100 check to obtain currency for a weekend holiday.

b) After holidays, the customer re-deposits $100 he still has.

B. Bank X  receives deposits of $100 in the form of checks on other banks, then it sends them to the Bank of Canada for collection. Illustrate the impact on deposits of other banks and bank X.

C. a.  A customer borrows $100 from bank Y and the money is still not withdrawn from the bank. Assume that the reserves are not enough to support any new deposits.

b. Determine and illustrate the amount the bank Y should borrow from Bank of Canada to face the shortage of liquidity in a).

c. Illustrate the implication of the repayment of borrowing in a) and b).

D. Illustrate the impact of  :

a) reducing the reserve ratio to 10% and having $100 deposits in the banking system.

b) increasing the reserve ratio to 14% and  having $100 deposits in the banking system.

E.A government employee deposits a salary check for $100  in bank Z. The check is written on the Treasury's account with the Bank of Canada.