1. Consider a 30-year corporate bond paying 9 percent semi-annual coupon. The current yield to maturity is 11 percent. (14 points)

Find the modified duration. (6 points)

Refer to part a. If the interest changes by 25 basis points, what is the exact change in price? (4 points)

Refer to part b. If the interest changes by 25 basis points, what is the approximate change in price? (4 points)

2. You expect a share of stock to pay dividends of $1.00, $1.25, and $1.50 in each of the three years. You believe the stock will sell for $20 at the end of the third year. What is the stock price if the discount rate for the stock is 10%? (5 points)

3. Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidlyat a rate of 50 percent per yearduring Years 4 and 5. After Year 5, the company should grow at a constant rate of 8 percent per year. If the required return on the stock is 15 percent, what is the value of the stock today? (10 points)

4. Suppose that the public wishes to hold $0.35 in pocket money (currency and coin) and $0.25 in time and savings deposits. Suppose that banks wish to hold $0.20 for each new dollar of transaction money received. Suppose that $0.05 finds its way outside of the domestic banking system. Suppose the reserve requirement on transaction deposits is 3 percent and that on time and savings deposits is 4%. (20 points)

What is the size of the transaction deposit multiplier?

What is the size of the money multiplier?

Suppose $5 million in new excess reserves appear in the banking system. How much will be created in the form of deposits and loans?

By how much did the leakages of funds from the banking system reduce the size of the transaction deposit multiplier? (Hint: compute the simple transaction deposit multiplier).

If the Fed purchases $175 billion worth of government securities on the open market, what is the effect on the money supply?