answer the qts and show your work.

1 Federal Reserve Bank (FED) lowered the target for federal funds rate from 5.25% in June 2006 to 0-25% in December 2008. and the target has remained at this level since then. Discount rate (ie , primary credit rate) declined from 6 25% in June 2006 to 75% in February 2010, and it has remained at this level ever since. FED in June 2006 was deeply concerned that housing bubble burst would have a devastating effect on the economy. (a). Although Fed cannot exert direct control over the federal funds rate, it can indirectly influence the level of federal funds rate by manipulating three tools of monetary policy. Explain how Fed can decrease the federal funds rate via these three instruments (b). Also predict and explain the effects of such policy on the U.S. interest rates (both short-term and long-term), consumption spending, business spending, net export, aggregate output (GDP) and inflation rate. 2. (a). Please explain the difference between TIPS and STRIPS. Under what economic situation would it be advantageous to purchase TIPS? Please provide an example of how TIPS bonds work. (b). Why would a company issue convertible bonds? Why would an investor purchase convertible bonds? Why would an investor purchase bonds with detachable warrants? c) What is the difference between competitive bidding and noncompetitive bidding for Treasury securities? Please provide an xample of how the Treasury auction process works. (d) Please explain the difference between revenue bond and general obligation bond. Part Il: Problems 1. What 99 3/8 percent of its face value and is 120 days from maturity? are the discount yield, bond equivalent yield, and effective annual return on a $100,000 Treasury bill that currently sells at al return on a negotiable CD that is 68 days from maturity and hasa quoted nominal yield of 34% (b). If $1 million is invested in this CD, how much (in 5's) will the investor receive at matunty? (c). Immediately after the CD is issued, the secondary market p secondary market quoted yield (sy), the bond equivalent yield, and the EAR on this CD ice on the $1 million CD rises to $1,003.000. Calculate the new 3, A 30-year, $1,000 par bond has a 7% annual coupon rate The b the bond is trading with annualized yield to call ( bond's current yield? Assume the bond pays interest semiannually (i.e, twice a year). 4. (a) ABC Co. bonds is 9.01% How many years do these bonds have left until they mature? ond is callable afterthe th year for a cal pre um of S1 060 YTC) of 8 %, what is the bond's annualized yield to maturity (YTM)? What is the has 10% coupon bonds (Par $1,000) making annual payments with a YTM of 8 5%. The current yield on these b) A corporate bond has the coupon rate of 8% and the yield to maturity (YTM) of 9% What can you infer about the current yield of this bond? Specifically, is itbelow 8%, between 8% and 9%, or above 9%? Please explan trea current yeda compute the current yield of a hypothetical bond with 8% coupon rate and 9% YTM) bond with a coupon rate of 8.5% Bond D is a discount bond with a coupon rate of 5.5%. Bond bonds make semiannual payments, have a YTM of 7%, a par value of $1,000, and have five years to matur What is the current yield for make semiannuat pa remains unchanged, what is the expected capital gains yield over the next year for Bond Bond P? For Bond D? If interest rate the expected capitalg For Bond D? t of Treasury notes and bonds quotes from Table 6-1 in your book. 2027 Feb bond is a Treasury STRIP bond th bonds is $ 100,000. These quotes are as of July 16", 2010. Please use these figures to answer Question 4 1 Federal Reserve Bank (FED) lowered the target for federal funds rate from 5.25% in June 2006 to 0-25% in December 2008. and the target has remained at this level since then. Discount rate (ie , primary credit rate) declined from 6 25% in June 2006 to 75% in February 2010, and it has remained at this level ever since. FED in June 2006 was deeply concerned that housing bubble burst would have a devastating effect on the economy. (a). Although Fed cannot exert direct control over the federal funds rate, it can indirectly influence the level of federal funds rate by manipulating three tools of monetary policy. Explain how Fed can decrease the federal funds rate via these three instruments (b). Also predict and explain the effects of such policy on the U.S. interest rates (both short-term and long-term), consumption spending, business spending, net export, aggregate output (GDP) and inflation rate. 2. (a). Please explain the difference between TIPS and STRIPS. Under what economic situation would it be advantageous to purchase TIPS? Please provide an example of how TIPS bonds work. (b). Why would a company issue convertible bonds? Why would an investor purchase convertible bonds? Why would an investor purchase bonds with detachable warrants? c) What is the difference between competitive bidding and noncompetitive bidding for Treasury securities? Please provide an xample of how the Treasury auction process works. (d) Please explain the difference between revenue bond and general obligation bond. Part Il: Problems 1. What 99 3/8 percent of its face value and is 120 days from maturity? are the discount yield, bond equivalent yield, and effective annual return on a $100,000 Treasury bill that currently sells at al return on a negotiable CD that is 68 days from maturity and hasa quoted nominal yield of 34% (b). If $1 million is invested in this CD, how much (in 5's) will the investor receive at matunty? (c). Immediately after the CD is issued, the secondary market p secondary market quoted yield (sy), the bond equivalent yield, and the EAR on this CD ice on the $1 million CD rises to $1,003.000. Calculate the new 3, A 30-year, $1,000 par bond has a 7% annual coupon rate The b the bond is trading with annualized yield to call ( bond's current yield? Assume the bond pays interest semiannually (i.e, twice a year). 4. (a) ABC Co. bonds is 9.01% How many years do these bonds have left until they mature? ond is callable afterthe th year for a cal pre um of S1 060 YTC) of 8 %, what is the bond's annualized yield to maturity (YTM)? What is the has 10% coupon bonds (Par $1,000) making annual payments with a YTM of 8 5%. The current yield on these b) A corporate bond has the coupon rate of 8% and the yield to maturity (YTM) of 9% What can you infer about the current yield of this bond? Specifically, is itbelow 8%, between 8% and 9%, or above 9%? Please explan trea current yeda compute the current yield of a hypothetical bond with 8% coupon rate and 9% YTM) bond with a coupon rate of 8.5% Bond D is a discount bond with a coupon rate of 5.5%. Bond bonds make semiannual payments, have a YTM of 7%, a par value of $1,000, and have five years to matur What is the current yield for make semiannuat pa remains unchanged, what is the expected capital gains yield over the next year for Bond Bond P? For Bond D? If interest rate the expected capitalg For Bond D? t of Treasury notes and bonds quotes from Table 6-1 in your book. 2027 Feb bond is a Treasury STRIP bond th bonds is $ 100,000. These quotes are as of July 16", 2010. Please use these figures to answer Question 4