Question:

The table below shows hypothetical values, in billions of dollars.

a. use the table to calculated the M1 and M2 money supply for each year, as well as the growth rates of M1 and M2 money supply from the previous year.

b. Why are the growth rates of M1 and M2 so different? Explain discussing components of each.

                                                                        2009   2010   2011   2012

A. Currency                                                   900     920     925     931

B. Money market mutual fund shares 680          681     679     688

C. Savings account deposits 5,500          5,780 5,968 6,105

D. Money market deposit accounts1,214            1,245 1,274 1,329

E. Demand and checkable deposits 1,000         972     980    993

F. Small denomination time deposits 830           861     1,123 1,566

G. Traveler's checks                        4          4          3          2

H. 3-month treasury bills                1,986             2,374 2,436 2,502

Question:

a)When is the current yield a good approximation to the yield to maturity?

b)Why would a government choose to issue a perpetuity, which requires payments forever, instead of a terminal loan, such as a fixed-payment loan, discount bond, or coupon bond? Set up a simple numerical example.

c)Under what conditions will a discount bond have a negative nominal interest rate? Is it possible for a coupon bond or a perpetuity to have a negative nominal interest rate? Set up a simple example where iis the interest rate, P - current price, C - coupon payment, and F - face value of a bond.

Question:

a)What is the yield to maturity on a simple loan for $1 million that requires a repayment of $2 million in five years' time? Solve numerically.

b)Which $1,000 bond has the higher yield to maturity, a twenty-year bond selling for $800 with a current yield of 15% or a one-year bond selling for $800 with a current yield of 5%?

Question:

a) Consider a bond with a 4% annual coupon and a face value of $1,000. Complete the following table. What relationship do you observe between years to maturity, yield to maturity, and the current price?

Years to              Yield to               Current

Maturity             Maturity             Price

2                          2% 

2                          4% 

3                          4% 

5                          2% 

5                          6% 

b)A $1,000-face-value bond has a 10% coupon rate, its current price is $960, and it is expected to increase to $980 next year. Calculate the current yield, the expected rate of capital gain, and the expected rate of return.

Question:

The demand curve and supply curve for one-year discount bonds with a face value of $1,000 are represented by the following equations:

Bd: Price = -0.6Quantity + 1,140

Bs: Price = Quantity + 700

Suppose that, as a result of monetary policy actions, the Federal Reserve sells 80 bonds that it holds. Assume that bond demand and money demand are held constant.

a) How does the Federal Reserve policy affect the bond supply equation?

b) Calculate the effect on the equilibrium interest rate in this market, as a result of the Federal Reserve action.