Suppose that a commercial bank wants to buy Treasury bills. These instruments pay $6,000 in one year and are currently selling for $6,100.The yield to maturity of these bonds is%. (Round your response to two decimal places.)Is this a typical situation?OA. No. In normal times banks will not choose to pay more than the face value of a discount bond, since that implies negative yields tomaturity.B. Yes. Often times, investors and banks will choose to pay more than the face value of a discount bond. It is more convenient to holdTreasury bills or keep their funds as deposits at the central bank because they are stored electronically.

Treasury bills pay in one year = $6000 Selling price = $6100

Answered: Suppose that a commercial bank wants to…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Without the threat of inflation, an increase in the money supply could reduce interest rates and bond prices would increase. Thus, bond portfolio managers would purchase more bonds now, causing immediate upward pressure on bond prices. True or False?
After a bond has been issued, its value will fall if interest rates in the economy rise. What is the reason for that?
Bond prices change whenever the market interest rate changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is this statement true or false. Explain your answer by making up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.
D3) Finance Suppose Bond A carried a higher yield than comparable Bond B because of investors’ uncertainty about the future of company B. If you were an investment manager who thought the market was overplaying these fears. In particular, if you thought that yields on Bond A would fall by 50 basis points. Which bonds would you buy or sell? Explain in words.
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
For a bank that funds its fixed-rate loans with floating rate deposits whose cost varies with a the 3-month LIBOR, it can magnify its strategic interest rate exposure by entering into a plain vanilla interest rate swap where it receives the fixed-rate and pay the floating rate. True False
ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
An investor is considering between purchasing a Treasury Bond and a bond from a large corporation. Both bonds have a face value of $1,000. The Treasury Bond has no risk, while the corporate bond has a 10% change of not repaying (a default). Both bonds are 2-year bonds and don't pay any coupons, only the final payment at maturity. a) Assuming that the interest rate in year 1 is 10% and in year 2 is expected to be 5%, what is the current price of each bond? Why are the values different? b) Now assume that the investor purchased the Treasury Bond a year has passed. How much can this bond be sold for if the interest rate is confirmed at 5%? c) Continue assuming that the investor purchased the Treasury Bond a year has passed. If the investor is offered the corporate bond for $800, should it be purchased? Explain.
Now suppose there is no financial intermediary to handle liquidity shocks. However, at t = 1 a market for bonds opens up and agents can trade their wealth at t = 1 for wealth at t = 2. Each bond pays 1 at t = 2 and its price is pM. Calculate the consumer's optimal investment decision IM at t = 0, the price of the bond pM, and the optimal consumption in the two states cM, cM. Compare the mutual fund and bond market allocations: are c4 and c bigger or smaller than cf and c, respectively?
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
You have just purchased an Australian Treasury Bill, which is a zero-coupon bond security with a positive yield to maturity. The yield to maturity has increased by 0.5% immediately after your purchase. In which direction should the price have moved? NOTE: a zero-coupon bond is one that only pays a single payment (i.e., the principal amount) at maturity. No coupons are paid. A.Upwards B.Cannot determine from available information C.Price will remain unchanged D.Downwards E.None of the other answers

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