D6) Since funds must keep flowing for a country to remain economically viable, briefly explain the role of financial institutions and financial markets in ensuring a regular funds flow between demanders and suppliers of funds. (80-100 words) A 15-year annual coupon bond trades for $1,200 in the market. If the market interest rate is 4%, what is the bond’s coupon rate?
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- I (Interest rates) 1. Consider a bank account paying interest rate R2 = 4% with semi-annual compounding frequency. What is the equivalent rate R1 with yearly compounding frequency? What is the equivalent rate Rc with continuous compounding? 2. Explain briefly (in words) what are the potential pitfalls of using the Internal Rate of Return (IRR) for the evaluation of investment projects. 3. Consider the following two bonds: bond (A) is a zero-coupon bond with maturity TA and duration DA = TA; bond (B) is a coupon bond with maturity TB > TA and duration DB = TA. Which of the two bonds has a greater convexity? (Justify your answer.)1. Briefly explain the following: a. You want to sell your bond that has a par value of ₱100,000 plus a 5 percent annual coupon rate thatwill mature after one year. The prevailing interest rate is 8%. Will you be able to sell your bond for ₱100,000 or higher? Briefly explain your answer.b. Is it possible for a country to have a twin deficit (a budget deficit and trade deficit) at the same time? How will this affect the economy? Briefly explain the benefits and dangers of a twin deficit.c. Which is better for the receiving country, FDI or FPI? Briefly explain your answer.D4) Finance If the foreign interest rate is 4%, the risk premium on domestic assets, ρ, is 18%, and the expected rate of depreciation of the domestic currency against the foreign currency is 3%, what is the domestic interest rate in percentage terms, given covered interest parity holds? [All variables have a 1-year time frame.]
- Suppose the central bank wishes to increase the money supply by $500 million and does so by purchasing one-year zero coupon bonds from an economic agent to increase bank reserves. If the central bank buys bonds with an interest rate of 2.5%, how many bonds must they buy to reach their targeted increase in the money supply? Assume the required reserve ratio is 10% and commercial banks fully loan out. Hint: you will need to use the money multiplier in this answer as well as bond pricing - a zero coupon bond is a promise to pay $1000 in one year. Assume there is no currency in the1. Suppose a commercial bank wants to buy Treasury bills. If you know that these instruments pay €5,000 in a year and currently sell for €5,012. Which is the yield to maturity of these bonds? Is this a typical situation? Because? 2. A government bond of face value £1,000 has a coupon rate 2%, its current price is £1,100 and its price is expected to increase to £1, 150 next year. Calculate the current coupon yield, the rate expected capital gain (only taking into account prices) and total return expected (capital gains and coupon gains).a. The spot price of the British pound is currently $1.50. If the risk-free interest rate on 1-year government bonds is 1% in the United States and 2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?b. How could an investor make risk-free arbitrage profits if the forward price were higher than the price you gave in answer to part (a)? Give a numerical example.
- H2. Suppose, Bangla Link Telecom Company plans to issue a bond with 15 years of maturity to arrange a new fund for installing a 5G network across the country. The return of this bond will be adjusted with IP, MRP, DRP, and Rf. The adjustment will be as follows: IP of 1st year is 3.5%, 2nd year 4.5%, and 3 years and beyond is 6.5%.; rate of return of 0.1% to calculate MRP; LP 1%; DRP 1.5%; and the risk-free rate is 3.5%. What will be the rate of Bangla Link bonds after 15 years?4) The table below shows the interest rates available from investing in risk-free U.S. Treasury securities with different terms to maturity. Put another way, the table below presents the current spot yield curve. What is the present value (PV) of an investment that promises to pay $4,000 at the end of each year for the next four years with the first cash flow being paid one year from today? (provide your answer in the space below) Term in years: Rate: 1 1.8% 2 3 4 2.25% 2.30% 2.66% The Present Value of the annuity described above is: 5 3.13%Mf2. Suppose in Month 1 the yield on ten-year bonds issued by the government in a country was 1.8% (also the coupon rate). In the following Month 2, the yield was 2.3%. Predict the effect of these changes in yield on the price of the ten-year government bonds, assume a face value, 1000. You will need to calculate the duration, modified duration, convexity and clearly explain your results.
- You bought Japanese government bond yesterday by paying 600,000 yen. The bond offers you 24,000 yen in year 1, 24,000 yen in year 2 and 624,000 yen in year 3. (1) How much is the internal rate of return (interest rate) of this bond? Answer should be in percentage. Write an answer like one of the examples. <Example> 2 or 2.0 Answer % (2) If the market interest rate goes up today, which of the following three explanations is correct? You can sell the bond today only below 600,000 yen. You can sell the bond today at 600,000 yen. You can sell the bond today above 600,000 yen. (3) If Mr. X buys your bond at 603,000 yen from you, how much is the internal rate of return (IRR) for Mr. X? IRR is the same as the answer of (1) in the above. IRR is below the answer of (1) in the above. IRR is above the answer of (1) in the above.Suppose government economists have forecasted one-year T-bill rates for the following two years. They are as follows: Year 1-year rate 1 4.50% 2 5.00% At what annual required rate of interest, bond investors would be willing to purchase a 2-year T-bond now? 9.725% or higher. 4.75% or higher. 4.875 or lower. 9.50% or lower.a) At 21 February 2018, the US Government could borrow at an annual 10-year yield of 2.89%. At that yield, how much were financial markets paying for the right to receive $100 from the US Government 10 years later? (b) Suppose a 5-year zero-coupon bond (??? = $100) issued by the US government is currently trading at $90. What is the annual yield an investor would receive for buying such a bond and holding it to maturity? (c) Suppose the US Federal Reserve (the US Central Bank) wants to lower longer-maturity yields. Briefly explain the process (known as Quantitative Easing) it could use to achieve this.