Essay1

Lei Sep. 7, 2011

Assignment 2

Chapter 3 4. Face Value $1,000 1,000 1,000 1,000 Total Payments 24 24 24 24 Periodic Coupon Payment 40 40 40 40 Required Return 5% 6 8 10 The Bond Value Will Be $1,268.30 1,169.40 1,000.00 862

6. Market Value $945.50 987.5 1,090.00 1,225.88 Total Payments 20 20 20 20 Periodic Coupon Payment 45 45 45 45 Face Value 1,000 1,000 1,000 1,000 The Yield to Maturity Will Be 9.87% 9.19 7.69 5.97

10. a. a premium bond b. a par bond c. a discount bond d. a discount bond e. a premium bond f. a par bond 22. a. 1.9 b. 2 c. Duration increases with maturity at a decreasing rate. Chapter 4 5. The primary responsibilities of the FOMC are to formulate policies to promote full employment, economic growth, price stability, and a sustainable pattern of international trade. 1

8. FRB presidents serve on the FOMC. FRBs set and change discount rates. 11. A decrease in the discount rate can cause the loans be transacted through each Federal Reserve Bank’s discount window and involve the discounting of eligible short-term securities in return for cash loans. 14. a. Panel A: Initial Balance Sheets Federal Reserve Bank Assets Securities Assets Liabilities $60m Reserve accounts Bank Three Liabilities $540m Transaction deposits 60m $60m

Loans Reserve deposits at Fed (10% of deposits) Panel B: Sheet Immediately after Decrease in Reserve Requirement Federal Reserve Bank Assets Liabilities Securities $49m Reserve accounts Bank Three Assets Liabilities Loans $552m Transaction deposits Reserve deposits at Fed 49m (8% of deposits) Cash 11m (from liquidated reserves) Panel C: Balance Sheet after All Changes Resulting from Decrease in Reserve Requirement Federal Reserve Bank Assets Liabilities $60m Securities Reserve accounts Bank Three Assets Liabilities Loans $690m Transaction deposits Reserve deposits at Fed 60m (8% of deposits) 2

$600m

$49m

$612m

$60m

$750m

b. Panel A: Initial Balance Sheets Federal Reserve Bank Assets Securities...