Mt481 Unit 4

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Chapter 6: Problems: 1 – 4 page 147 Chapter 7: Questions and Applications: q. 2, 4, 10, and 16, pages 169-170 Chapter 6: 1. T-bill Yield Assume an investor purchased a six month T-bill with a $10,000 par value for $9,000 and sold it 90 days later for $9,100. What is the yield? Yield: (Sold Price-Purchase Price/Purchase Price)*(365/time held) Yt=((9100-9000)/9000)*(365/90) Yt=4.506 % or 4.51 % 2. T-bill Discount Newly issued three-month T-bills with a par value of $10,000 sold for $9,700. Compute the T-bill discount. Yield: (Par-Purchase Price/Par)*(360/time held) YD= ((10000-9700)/10000)*(360/90) YD= 12.000% 3. Commercial Paper Yield Assume an investor purchased six-month commercial paper with a face value of $1 million for $940,000. What is the yield? Yield: (Par value-Purchase value/Purchase Price)*(360/time held) Ycp=((1000000-940000)/940000)*(360/180) Ycp=12.766 % or 12.77% 4. Repurchase Agreement Stanford Corporation arranged a repurchase agreement in which it purchased securities for $4.9 million and will sell the securities back for $5 million in 40 days. What is the yield (or repo rate) to Stanford Corporation? Repo rate: (Sold Price-Purchase Price/Purchase Price)*(360/time held) Repo rate= ((5000000-4900000)/4900000)*(360/40) Repo rate= 18.367% or 18.37 % Chapter 7: 2. Sinking-Fund Provision Explain the use of a sinking-fund provision. How can it reduce the investor’s risk? A sinking-fund provision is created by a firm issuing bonds; this fund requires the issuing firm to maintain a predetermined amount of the issued bonds. This provision secures the bond holders investment by lowering payments and providing an umbrella for bonds at maturity. 4. Call Provisions Explain the use of call provisions on bonds. How can a call provision affect the price of a bond? A call provision enables the issuer of a bond to

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