!Answer all please.
53. Assume the spot rates for year 1, year 2 and year 3 are 3.5%, 4% and 4.5%, respectively. There are a 3-year zero coupon bond and a 3-year coupon bond that pays a 5% coupon annually. (a) What are the YTMs of the bonds? (b) Calculate all 1-year forward rates. (c) Calculate the realized returns of the two bonds over the next year if the yield curve does not change. (In year 1 the 1-year spot rate is 3.5%, the 2-year spot rate is 4% and the 3-year spot rate is 4.5%.) 54. A pension plan is obligated to make disbursements of $1 million, $2 million and $1 million at the end of each of the next three years, respectively. Find the durations of the plan's obligations if the interest rate is 10% annually. 55. A local bank has the following balance sheet: Asset Liability Loans $100 million | Deposits $90 million Equity $10 million The duration of the loans is 4 years and the duration of the deposits is 2 years. (a) What is the duration of the bank's equity? How would you interpret the duration of the equity? (b) Suppose that the yield curve moves from 6% to 6.5%. What is the change in the bank's equity value? The term structure is flat at 6%. A bond has 10 years to maturity, face value $100, and annual coupon rate 5%. Interest rates are expressed as EARs. 56. (a) Compute the bond price. (b) Compute the bond's duration and modified duration. (c) Suppose the term structure moves up to 7% (still staying flat). What is the bond's new price' (d) Compute the approximate price change using duration, and compare it to the actual price change. 57. Suppose Microsoft, which has billions invested in short-term debt securities, undertakes the following two-step transaction on Dec. 30, 2009. (1) Sell $1 billion market value of 6-month U.S. Treasury bills yielding 4% (6 month spot rate). (2) Buy $1 billion of 10- year Treasury notes. The notes have a 5.5% coupon and are trading at par. Microsoft does not need the $1 billion for its operations and will hold the notes to maturity. Fall 2008 Page 24 of 66 (a) What is the impact of this two-step transaction on Microsoft's earnings for the first 6 months of 2010? (b) What is the transaction's NPV? Briefly explain your answers. 58. The Treasury bond maturing on August 15, 2017 traded at a closing ask price of 133:16 (i.e., $133 16/32) on August 31, 2007. The coupon rate is 8.875%, paid semi-annually. The yield to maturity was 4.63% (with semi-annual compounding). (a) Explain in detail how this yield to maturity was calculated. (b) Discount the bond's cash flows, using the yield to maturity. Can you replicate the ask price? (The replication should be close but won't be exact.) Show your calculations.Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for April-July are: April May June July Sales $ 550,000 $ 750,000 $ 450.000 $ 350,000 Cost of goods sold 385.000 525.000 315.000 245,000 Gross margin 165,000 225,00D 135 000 105,000 Selling and administrative expenses: Selling expense 75,000 95,000 56,000 35,000 Administrative expense" 42.500 56,800 35.000 33,000 Total selling and administrative expenses 117,500 151,800 91,000 68,000 Net operating income $ 47.500 $ 73.200 $ 44.000 $ 37.000 "Includes $17,000 of depreciation each month. b. Sales are 20% for cash and 80% on account. G. Sales on account are collected over a three-month period with 10% collected in the month of sale; 80% collected in the first month following the month of sale; and the remaining 10% collected in the second month following the month of sale. February's sales totaled $165,000, and March's sales totaled $225,000. d. Inventory purchases are paid for within 15 days. Therefore, 50% of a month's inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $101,500. e. Each month's ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $77,000. f. Dividends of $25,000 will be declared and paid in April. g. Land costing $33,000 will be purchased for cash in May. h. The cash balance at March 31 is $47,000; the company must maintain a cash balance of at least $40,000 at the end of each month. i. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: 1. Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total. Schedule of Expected Cash Collections April May June Quarter Cash sales Sales on account February March April May June Total cash collections2. Prepare the following for merchandise inventory: a. A merchandise purchases budget for April, May, and June. Merchandise Purchases Budget April May June Budgeted cost of goods sold Total needs Required inventory purchases b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total. Schedule of Expected Cash Disbursements for Merchandise Purchases April May June Quarter Beginning accounts payable April purchases May purchases June purchases Total cash disbursements3. Prepare a cash budget for April, May, and June as well as in total for the quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Purchases for inventory Selling expenses Administrative expenses Land purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayment Interest Total financing Ending cash balance30. The demand curve shows the relationship between: A) money micome and quantity demanded. By price and production costs. C) price and quantity demanded. Dj consumer tastes and the quantity demanded. 31. Countercyclical discretionary fiscal policy calls for: A) surpluses during recessions and deficits during periods of demand-pull inflation. 1) deficits during recessions and surpluses during periods of demand-pull inflation. C) surpluses during both recessions and periods of demand-pull inflation. D) deficits during both recessions and periods of demand-pull inflation. 32. As real estate prices plunged in 2007, mortgage defaults and foreclosures rapidly escalated and mortgage-backed financial assets lost much of their value, casting doubts on the solvency of many banks and financial institutions which held them in their portfolios. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world, while losses in the stock markets and housing value declines placed further downward pressure on consumer spending, slowing down economic growth and causing a global recession. 1. Using the AS-AD model, describe the above macroeconomic shock, clearly spelling the causal relationship between changes in underlying parameters and resulting changes in GDP, employment and price level. 2. Because of the Fed's aggressive monetary stimulus, short term interest rates dropped to near zero since the end of 2008, still failing to reduce idle capacity and stop the fall, a scenario that many economists considered consistent with the presence of a "liquidity trap". Explain why monetary policy was not entirely effective to neutralize the shock but, as most economists thought, fiscal policy may be helpful in such scenario (use AS-AD and money market graphs to supplement your answer). 3. In early 2009, economists estimated a spending multiplier m=1.5, and they also concluded that GDP had fell 2.1 trillion dollars below the "full employment GDP". The new government then managed to pass through Congress a fiscal stimulus package amounting to about 0.75 trillion dollars of new spending composed of new government purchases and tax cuts in approximately equal parts. Would you expect this new spending to be sufficient to bridge the gap between actual and potential GDP? (In order to answer this question compute the expected increase in GDP for a stimulus package entirely composed of government purchases, and then argue whether the stimulus would be larger or smaller when it partly involves tax cuts). the GDP gap. If the stimulus above is insufficient, propose a stimulus package that would be "exactly" sufficient to bridge 4. Because the government's budget deficit had increased during the recession (partly through automatic fiscal stabilization), many conservatives argued for the urgent need to reduce government spending. However, liberals argued that rushing such austerity measures may not contribute much to reduce the deficit because they may hurt the recovery. Explain. Answer in the next page
