Question 14 (5 marks) The Institutional Investor/ The Money Market

a. Jarvis University (JU) is a private, multi-program U.S University with a $2billion endowment fund. JU is heavily dependent on its endowment fund to support ongoing expenditures. The endowment fund must make $126 million annual contribution, which is indexed to U.S education cost inflation index (which is at 3%). The endowment fund has also budgeted $200 million to construct a new library.

(i) What is JU required return? (1 marks)

(ii) What is JU's risk tolerance? (1 marks)

(iii) Outline JUs five constraints (1 marks)

b. Calculate the bond equivalent yield for a 180-day T-bill that is purchased at a 6% "ask" rate. If the bill has a face value of $10,000, calculate its price. (1 marks)

c. A bill has a bank discount yield of 6.81% based upon the asked price, and 6.90% based upon the bid price. The maturity of the bill (already accounting for skip-day settlement) is 60 days.

Calculate the bond equivalent yield of the bill as well as its effective annual yield based upon the asked price. (1 marks)