Question 1: Consider all questions below

Orange County Case : Use the details provided in class notes and the erisk.com case study for background.

(A) Suppose that the $7.5 billion portfolio was not leveraged, and simply invested in zero coupon bonds, with identical maturity T. Find T that would justify the losses suffered ($1.6 billion), given an increase in (short term) interest rates of 2.7% (from 3% to 5.7%) using a) Duration approximation for price change

(B) Bob Citron used the Repo Market to leverage up his position from $7.5 billion to a total portfolio value of about $20.5 billion. (i) Explain how such operation would work in practice (provide an example).

(C) A large portion of the total portfolio was invested in securities similar to inverse floaters. Inverse floaters are securities with coupon payments that are inversely related to a reference floating rate. Assume for simplicity that a fraction x of the $20.5 billion portfolio was invested in 1-year T-bills, and the other (1 ? x) was invested in inverse floaters, with annual coupon payments c (t) = 15% ? rTBill (t ? 1), and exactly 3-years to maturity. Assume for simplicity that rTBill (t ? 1)

(i) Generically speaking, how can we compute the duration of an inverse floater? Is it positive or negative? (no calculations)

(ii) Suppose the 1,2, and 3 year term structure of interest rates on Dec 31, 1993 were 3.64%, 4.20% and 4.46% respectively. The corresponding discount factors are 0.9642, 0.9193, 0.8747 respectively (continuous compounding). What is the duration of the inverse floater? (calculations needed)

(iii) Using the duration of the inverse floater from (ii) and the duration of the entire portfolio from part (B) find x.

(D) Convexity: Consider the portfolio in part (C). What is its convexity with respect to current interest rate? (Note that just as duration, the convexity of a portfolio is the value weighted sum of complexities of individual securities).

Question 2: Answer all questions below

Which ofthe following is correct MM propostion in a world oftaxes is based on the assumption that corporate taxes are lower than personal taxes MM proposition in a Iworld of taxes is based on the assumption that corporate taxes are equal to personal taxes When both corporate and personal taxes are considered. the value of the firm initially declines with debt and then starts to increase. When both personal and corporate taxes are considered.debt nancing no longer increases the value of the rm When both personal and corporate taxes are considered. debt financing still increases rm value but to a lesser extent compared to when personal taxes are zero Question 6 10 pts Which of the following statements regarding the balance sheet is INCORRECT? if\" The balance sheet reports long-term debt on the right-hand side. If\" The balance sheet reports the market values of assets, liabilities, and shareholders' equity. f\" The balance sheet provides a snapshot of a rm's nancial position at a given point in time. 5\"\" The balance sheet reports stockholders' equity on the right- hand side. QUESTION 25 An underperforming economy is one where O A. Actual real GDP is below the full employment level of GDP. O B. Workers' job performance lags due to slow changes in technology. O C. Actual real GDP is higher than the full employment level of GDP. O D. The full employment level of GDP is almost equal to actual real GDP.Question 5 The company has a $150,000 liability at December 31, 2021, of which $30,000 of it is payable in 2027. in to Orcenter 31, 2021 balance sheet, the company reports the $150,000 debt as a: $150,000 current liability in the balance sheet. $30,000 current liability and a $120,000 long-term liability in the balance sheet. $150,000 long-term liability in the balance sheet. $120,000 current liability and a $30,000 long-term liability in the balance sheet. . PreviousD Question 11 1 pts AS 150 125 Price level 100 (CPI 75 50 AD? 25 AD 0 2 4 6 8 10 12 Real GDP (billions of dollars per year) In the graph above, point Ez represents: O real GDP above full-employment GDP. O real GDP that equals full-employment GDP. O a depression. O real GDP below full-employment GDP. D Question 12 1 pts AS 150 125 Price level 100 (CPD) 75 50 AD? TAD 0 2 4 6 8 10 12 Real GDP (billions of dollars per year) As the economy moves to the right in the graph above along the upward-sloping aggregate supply curve the: O unemployment rate rises. unemployment rate falls. O inflation rate falls. O none of these