Questions and Answers HUID:

1. Suppose the size of the OMO you described in part (b) was $100 Million, the reserve requirement is 10%, banks are holding 10% in excess reserves, and there is no change in cash held by the public in response to the Fed action. By how much will the money supply change as a result of this OMO? Show your calculations
2. Below is the balance sheet for Pacific Northwest Bank. Assume the items listed are the bank?s only assets and liabilities, the reserve requirement is 10%, and that Pacific Northwest is holding $1.5 Billion in excess reserves.

Pacific Northwest Bank Balance Sheet

Assets Liabilities

Vault Cash $ 200 Million Checking Deposits ?

Deposits with the Fed $ 1.8 Billion Savings Deposits $8 Billion

Loans $ 8 Billion

T-Bonds $ 4 Billion Bank Capital

?

1. What must be the total amount of checking deposits?
2. What is the amount of the bank?s capital?
3. Suppose a local resident, Bill Gates, withdraws $1Billion from his checking account at Pacific Northwest to fund his next operating system, ?Windows FU.? He holds the money in cash in the safe of his Richmond mansion. By how much will the money supply change as a result of Gates? withdrawal? Show your calculations.
4. What is the yield of a bond which has a face value of $5,000, a coupon rate of 5%, matures in five years, and sells for $5,000?
5. What is the face value of a zero coupon bond which matures in exactly four years, has a price of $6,000 and a yield of 4%? Show your calculations
6. For parts a. and b. below, assume the following: E(rM) = 7% rF = 2% Expected risk premium on Boeing stock = 7%
7. What is the value of ? for Boeing stock? Show your work
8. Explain why increased volatility in the price of the underlying stock increases the price of an option on that stock.

Questions and Answers HUID: 1) Suppose the size of the OMO you described in part (b) was $100 Million, the reserve requirement is 10%, banks are holding 10% in excess reserves, and there is no change in cash held by the public in response to the Fed action. By how much will the money supply change as a result of this OMO? Show your calculations 2) Below is the balance sheet for Pacific Northwest Bank. Assume the items listed are the bank's only assets and liabilities, the reserve requirement is 10%, and that Pacific Northwest is holding $1.5 Billion in excess reserves. Pacific Northwest Bank Balance Sheet Assets Liabilities Vault Cash $ 200 Million Checking Deposits ? Deposits with the Fed $ 1.8 Billion Savings Deposits $8 Billion Loans $ 8 Billion TBonds $ 4 Billion Bank Capital ? A. What must be the total amount of checking deposits? B. What is the amount of the bank's capital? C. Suppose a local resident, Bill Gates, withdraws $1Billion from his checking account at Pacific Northwest to fund his next operating system, \"Windows FU.\" He holds the money in cash in the safe of his Richmond mansion. By how much will the money supply change as a result of Gates' withdrawal? Show your calculations. 3) What is the yield of a bond which has a face value of $5,000, a coupon rate of 5%, matures in five years, and sells for $5,000? 4) What is the face value of a zero coupon bond which matures in exactly four years, has a price of $6,000 and a yield of 4%? Show your calculations 5) For parts a. and b. below, assume the following: E(rM) = 7% rF = 2% Expected risk premium on Boeing stock = 7% 6) A. What is the value of for Boeing stock? Show your work Explain why increased volatility in the price of the underlying stock increases the price of an option on that stock