Supposed commercial banks in Canada are required to maintain a reserve requirement equal to 20% of deposits. Also, assume that these banks do not hold any excess reserves.

a. If the Bank of Canada sells $2 million of government bonds, what is the effect on Canada's reserves and money supply? (4 marks)

b. Now suppose the Bank of Canada lowers the reserve requirement to 5%, but the commercial banks choose to hold another 5% of deposits as an excess reserve. Why might banks do so? (2 marks)

What is the overall change in the money multiplier and the money supply as a result of these actions? (4 marks)

The m-year spot rate of interest s,, is given by the formula: $. = 0.050 - for " = 1, 2 and 3 500 (i) Calculate the implied one-year forward rates applicable at times / = 1 and / = 2. [3] (ii) An investor purchases a 3-year bond that provides coupons of 6% pa payable annually in arrears and is redeemable at par. Show that the fair price for this bond is $104.36 per $100 nominal. [1] (iii) Calculate the investor's gross redemption yield. [3] (iv) Calculate the par yield of the bond. [3] [Total 10]The claim amounts for a certain insurance company follow a Pareto distribution with probability distribution function given by: 250" (250 + x)-1 (i) Show that the maximum likelihood estimator for o is given by: a = In(250 + x; ) -nIn 250 [4] A random sample of 150 claims gives > In(250+ x, ) = 869. (ii) Given that the estimator is asymptotically unbiased, obtain a 95% confidence interval for the parameter o. [5] [Total 9]