.Explain these questions.

Question 2 (20 Marks). a) A bond with a coupon rate of 7% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on February 15 at 101% of the par value. The par value of the bond is 1000. What is the invoice price of the bond? The coupon period has 182 days. (5 marks) b) Prices of zero-coupon bonds reveal the following pattern of forward rates: Year Forward rate (%) 5% 2 7% 8% In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of $60 with par value $1,000. i. What is the price of the coupon bond? (5 marks) ii. Under the expectations hypothesis, what is the expected realized compound yield of the coupon bond? (5 marks) ii. If you forecast that the yield curve in 1 year will be flat at 7%, what is your forecast for the expected rate of return on the coupon bond for the 1-year holding period? (5 marks)Q2. It is May 15, 2000 and an investor is planning to invest $100 million in one of the two portfolios below. The investor's main concern is the change in interest rates that might affect the short-term value of the portfolio. Compute the percentage change in price of the security stemming from duration and convexity. Which portfolio is less sensitive to changes in interest rates (assume 1% increase in interest rates)? Assume today is May 15, 2000, which means you may use the yield curve presented in the following table: mama") m- 6.49% 6.71% 6.84% _ 6.88% I Portfolio A 40% invested in 1.5-year zero coupon bond 60% invested in 1.5-year coupon bond paying 9% annually 0 Portfolio B - 50% invested in 2-year zero coupon bond 50% invested in 1.5-year floating rate bond with zero spread and annual payments. 16. Suppose that there are only two goods, books and coffee. Justine gets utility from both books and cof- fee, but her indifference curves between them are concave rather than convex to the origin. a. Draw a set of indifference curves for Justine. b. What do these particular indifference curves tell you about Justine's marginal rate of substitution between books and coffee? c. What will Justine's utility-maximizing bundle b. look like? (Hint: Assume some level of income for Justine and some prices for books and coffee, then draw a budget constraint.) C. d. Compare your answer to (b) to real-world behaviors. Does the comparison shed any light d. on why economists generally assume convex preferences? * 17. Chrissy spends her income on fishing lures (L) and gui- tar picks (G). Lures are priced at $2, while a package e. of guitar picks costs $1. Assume that Chrissy has $30 to spend and her utility function can be represented as 20. Che U(L,G) = 105Go5. For this utility function, MUZ = sub 0.51 05Gos and MUG = 0.5105G-05 whacalculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) (LO5.3) 6. Joshua borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge. What is the finance charge on this loan? (LOS.4) 7. In problem 5, Joshua borrowed $500 on January 1, 2017, and paid it all back at once on December 31, 2017. What was the APR? (LO5.4) 8. If Joshua paid the $500 in 12 equal monthly payments in problem 5. what is the APR? (LO5.4) 9. Sidney took a $200 cash advance by using checks linked to her credit card account. The bank charges a 2 percent cash advance fee on the amount borrowed and offers no grace period on cash advances. Sidney paid the balance in full when the bill arrived. What was the cash advance fee? What was the interest for one month at an 18 percent APR? What was the total amount she paid? What if she had made the purchase with her credit card and paid off her bill in full promptly? (L05.4) 10. Brooke lacks cash to pay for a $600 washing machine. She could buy it from the store on credit by making 12 monthly payments of $52.74 each. The total cost would then be $632.88. Instead, Brooke decides to deposit $50 a month in the bank until she has saved enough money to pay cash for the washing machine. One year later, she has saved $642-$600 in deposits plus interest. When she goes back to the store, she finds that the washing machine now costs $660. Its price has gone up 10 percent-the current rate of inflation. Was postponing her purchase a good trade-off for Brooke? (L05.4) 11. What are the interest cost and the total amount due on a six-month loan of $1,500 at 13.2 percent simple annual interest? (L05.4) 12. After visiting several automobile dealerships, Richard selects the car he wants. He likes its $10,000 price, but financing through the dealer is no bargain. He has $2,000 cash for a down payment, so he needs an $8,ooo loan. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $8,ooo for a period of four years at an add-on interest rate of 11 percent. (LOS.4) a. What is the total interest on Richard's loan? b. What is the total cost of the car? TE E Focus + 100% Book Pro DN DD