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Consider the multiple regression model Y=Bl + Blrt2+ BBXtE +et 1. Explain the six assumptions {MRIMR6) that are needed in orderto establish desirable properties of DLS estimates of, 2. If you suspected that your dependent variable '1'\" was not stationary, explain the three unit root processes that you could test for. 3. What does it mean to 'lag\" one of the variables in this model? 4. What does the \"e\" represent in the model? l. [20] What is the duration of a 3year bond with 10% coupon rate that is currently selling at par? Thecoupgn payments are made annually. 2. [30] A bank has two 3year commercial loans with a present value of $70 million. The rst is a $30 million loan that requires a single payment of $37.8 million in three years, with no payments until then. The second loan is for $40 million. It requires an annual interest paymentof $3.6 million. The principal of $40 million is due in three years. [a] What is the duration of the bankis commercial loan portfolio? [b] What will happen to the valueof its portfolio if the general level of interest rates decreases from 3% to 3'26; 3. [20] Assume that the expectations hypothesis is true for the following two questions: [a] Suppose you see the following bond prices: a 1year $100 zero coupon bond selling for $90.10; a 3year 10% coupon bond selling for par and a 2year coupon bond with annual coupon payments of $100 and a face value of 51000 that is selling for 51000. What is the market forecast of the one year rate 2 years from now? [b] Suppose the current oneyear rate is 5% and two year rate is 5%. If the forecast of the oneyear rate a year from now [assumed to be accurate] is 125%, construct a trading arrangement that is guaranteed to make you money. [Assume the quoted interest rates are for both borrowing and lending]. 4. (30) The Bank of Dixon has assets totaling $180 million with a duration of 5 years and liabilities totaling $160 million with a duration of 2 years. If interest rates increase from 9% by 75 basis points, what is the change in the bankis net worth? What is the change in the bankis equity multiplier and what implication does this have? 5. (10) Use the Fisher relation to prove that if actual inaation rates are less than what was expected, then the ex-post real rate is greater than the ex-ante real rate? he problem). 6. (10) When hired as the manager of the Bank of Davis you were given explicit instructions that net interest margin should not vary more than 10% from the current level of 5%. If you think interest rates will change by at most 200 basis points in the next year, how large can your funding gap be (as a percentage of assets) in order for you to keep your job