Submitted by: Submitted by gabefly123
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Pages: 12
Category: Business and Industry
Date Submitted: 03/31/2016 07:20 PM
Question 1
a)
Circle the bullet for statements that are true:
A Treasury bill is a short-term pure-discount security issued by the government with
up to six months to maturity.
Bankers Acceptances are considered low-risk securities because of the bank
endorsement.
Money-market yields are always quoted as effective-annual yields.
Financial assets are claims on real assets.
The New York Stock Exchange is the world’s largest dealer market.
The bid-ask spread compensates market makers for providing immediacy
services.
An investor buying a security on margin borrows part of the cost of the security from
a broker and immediately sells the security in the open market.
Holding other factors constant, the duration of a zero-coupon bond is higher when the
bond’s yield to maturity is lower.
One of the problems of using coupon bonds in a net-worth immunization
strategy is that duration changes every time the bond’s yield to maturity
changes. To mitigate this problem, one can apply a strategy which involves both
duration and convexity.
When considering the utility indifference curve of a risk-seeking investor, the
measure of the degree of risk aversion (A) is negative.
Question 2
a)
The bid and ask bank discount yields of a T-bill are 6.1% and 5.9% respectively.
The maturity of the T-bill is 54 days.
i)
Find the bid-ask spread of the T-bill.
Answer
We use the equation for the bond equivalent yield:
rBDY
1,000 P 360
1,000
n
n
P 1,000 1 rBDY
360
To find the bid price, we solve:
n
P(bid ) 1,000 1 rBDY (bid )
360
54
1,000 1 0.061
360
$990.85
To find the ask price, we solve:
n
P(ask ) 1,000 1 rBDY (ask )
360
54
1,000 1 0.059
360
$991.15
Thus, the bid-ask spread of the T-bill is given by:
P(ask) – P(bid) = 991.15 – 990.85 = $0.30....