Question

1.)The following table lists foreign exchange rates between U.S dollars and British pounds(GBP) during April.

Date U.S Dollars per GBP
4/1 1.9564
4/4 1.9293
4/5 1.914
4/6 1.9374
4/7 1.961
4/8 1.8925
4/11 1.8822
4/12 1.8558
4/13 1.796
4/14 1.7902
4/15 1.7785
4/18 1.7504
4/19 1.7255
4/20 1.6914
4/21 1.672
4/22 1.6684
4/25 1.6674
4/26 1.6857
4/27 1.6925
4/28 1.7201
4/29 1.7512


Question: Which day would have been the best way day to convert $ 200 into British pounds?
Which day would have been the worst day? What would be the difference in pounds?


2.)One of the single best sources of information about financial institutions
in the U.S.Flow of funds report produced by the federal reserve. This document contains data on most financial intermediaries. Go to the site of Federal Reserves and find the most current releases. Go to the level tables and answer the following questions.

a.)What percentage of assets do commercial banks hold on loans?
What percentage of assets are held in mortgage loans?

b.)What percentage of assets do savings and loans hold in mortgage loans?

c.)What percentage of assets do credit unions hold in in mortgage loans and in consumer loans?


3.)The most famous financial market in the world is the New York stock exchange. Go to www.nyse.com
a.) What is the mission of NYSE?

b.)Firms must pay a fee to list their shares for sale on the NYSE.
What would be the fee for a firm with five million common shares outstanding?


4.)A lottery claims its grand prize is $ 10 million, payable over 20 years at $ 500,000 per year. If the first payment is made immediately, what is the grand prize really worth? Use an interest rate of 6 % .


5.)Consider a coupon bond that has a $ 1,000 par value, and a coupon rate of 10%.The bond is currently selling for $ 1,150 and has eight years maturity. What is the bonds yield to maturity?


6.)What is the price of a perpetuity that has a coupon of $ 50 per year and a yield to maturity of 2.5 % if the yield to maturity doubles, what will happen to its price?


7.) Assume you just deposited $ 1,000 into the bank account. The current real interest rate is 2% and inflation is expected to be 6% over the next year. What nominal rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a stereo that currently sells for $ 1,050 will you have enough to buy it ?


8.)You have paid $ 980.30 for an 8% coupon bond with a face value of $ 1,000
that matures in five years. You plan on holding the bond for one year.
If you want to earn 9% rate of return on this investment, what price must you sell the bond for? Is this realistic?


9.)Calculate the duration of a $ 1,000,6% coupon bond with three years to maturity. Assume that all market interest rates are 7%.


10.)Consider the bond in the previous question.Calcualte the expected price change if interest rates drop to 6.75% using the duration approximation.Calcualte the actual price change using discounted cash flow.


11.) A bank has two 3-year commercial loans with a present value of $70 million. The first is a $ 30 million loan that requires a single payment of $ 37.8 million in three years with no other payments till then. The second loan is for $ 40 million. It requires an annual interest payment of $ 3.6 million. The principal of $ 40 million is due in three years:

a.)What is the duration of the bank’s commercial loan portfolio?

b.)What will happen to the value of its portfolio if the general level of interest rates increase from 8% to 8.5%?

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