1. Financial assets and real assets play different roles in the real economy. The aggregated balance sheet of a closed economy is given below. The economy has two banks A and B, a corporate sector, and a household sector. Identify the real assets and calculate the national wealth of the economy. (5 points)

Assets ($ Billion)		Liability ($ Billion)
Households Deposits	$100,000	Deposits with Bank A	$20,000
Bank As Loan to Households	$20,000	Deposits with Bank B	$80,000
Bank Bs Loan to Firms	$80,000	Loan from Bank A	$20,000
Plant and Equipment	$150,000	Loan from Bank B	$80,000
Property and Land	$200,000
Goods and Inventory	$125,000

2. Money market instruments are a group of very liquid, short-term financial assets. Please list three money market instruments. (3 points)

3. Mutual fund is a financial intermediary that allows retail investors to participate into the investment of assets in large denominations, such as money market instruments. Consider a fund with a front-end load of 3%. The net asset value (NAV) is currently $10. Assume the annual expense ratio of the fund is 2% (applied to beginning-of-year net asset under management) and the annual gross return to the portfolio managed by the fund is 10%.
   1. What will be the offer price posted by the fund house for you to buy one share?
   2. If you start with $1000, what will be your ending wealth one year later if you invest all in the fund for one year? (7 points)

4. Securitization is an important financial innovation. Consider a collateralized debt obligation (CDO) with a $100 million face value and the following tranching characteristics. Tranche A has the highest priority in getting payment and Tranche C has the lowest. If there is no default and the total return to the underlying assets is 20% per year, what is the rate of return to the investors of tranche C? (5 points)

Tranche	Weight	Annual Return
A	60%	4%
B	30%	6%
C	10%	Residual