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Important General Instructions for Reporting Numerical Answers:

– Do not round intermediate calculations.

– Report your answers to the number of decimal places requested.

– Unless otherwise instructed, solve problems in the given units. IE: if given units are in $K, complete your computations in these units and, as applicable, report your answer in these units (without writing “$” or “K”).

– Do not report any numerical answer as a percent. IE: for example, write

0.324 instead of 32.4%.

– Report negative numbers with a leading minus sign, like this (for example):

-23.451

Not like this: (23.451).

– Note that Canvas removes trailing insignificant figures. If you type, for example, 41.350, Canvas will remove the last decimal place and record your answer as 41.35 This is fine because 41.35 = 41.350.

– Assume time is measured in years unless otherwise stated.

Q1:

Complete the sentence below, and provide a reason for your choice. IE: choose one answer starting without “because” and one answer starting with “because.”

Holders of long-term Treasury Bonds generally…

A. Because long-term Treasuries provide the safety of a stream of cash flows for a lifetime.

B. Like to balance these investments with short-term Treasury holdings

C. Get a lower interest rate than holders of short-term Treasuries

D. Because they are conservative investors.

E. Demand a higher interest rate than holders of short-term Treasuries.

F. Because the risk of Treasury Bonds increases with duration.

Q2:

At EOY 20X1, BetaBank offers a one year CD with an APR of 4%, compounded quarterly. Inflation (r_{inf}) is running at 4.0% annually at this time. What is the real rate of return on this CD? Do not round intermediate calculations. Round your answer to four decimal places and do not represent your answer as a percent. IE: write 0.2672 not 26.72%.

Hint: you must convert the APR to an EAIR.

Q3:

If the real return of a CD is positive, this means that:

A) The inflation rate is low.

D) B and C

E) None of the listed answers

B) An investor in this CD will be able to buy more stuff when the contract matures than when it originated.

C) The CD is outpacing inflation.

Q4:

Given the CPI data shown (measured at the end of each year), what was the inflation rate in 2014? Do not round intermediate calculations. Round your answer to 4 decimal places and do not represent your answer as a percent. IE: write 0.2672 not 26.72%.

Q5:

The bonds used to compute this curve are all zero-coupon bonds, with a face value of $1,000. About how much would you expect to pay today for a five-year, zero coupon Treasury Bond? (Hint: each zero coupon bond will pay its owner $1,000 at the end of the bond contract, and nothing before then).

B) 623

A) 924

C) 765

E) None of the listed answers are within 20% of the correct value

D) 681

Q6:

Consider this CPI Inflation Table:

The average price of a 3-bedroom, 2 bath, single family home in Oxford OH rose from $100K in 2017 to $110K in 2018.Did the average price of this home type increase more or less than overall inflation during this period?

A. Less

B. More

Q7:

Which of the below choices are risks of Treasury Securities?

i. Inflation risk

ii. Gamma risk

iii Default risk

iv. Interest rate risk

v. Seasonal risk

C) i, ii, and iv

B) i, iii, and iv

D) iii, iv and v

A) i, ii, and iii

E) None of above

Q8:

A Treasury auction is held for $100MM Face-Value of 6-year, zero coupon bonds.

If auction-investors pay $70MM for the bonds, what is r_{rf}? Do not round intermediate calculations. Round your answer to 4 decimal places and do not represent your answer as a percent. IE: write 0.2672 not 26.72%.

Q9:

The Treasury just sold a bunch of 5-year, zero coupon $100 face-value bonds for an interest rate (r_{rf}) of 6.0%. If r_{inf} is 2.0% at the time of the sale, then jumps to 3.0% the next day, what is (approximately) r_{rf} of the bonds on the next day? Assume nothing changes overnight except for the jump in the inflation rate. Hint: Assume r_{rf} = r_{inf} + all other treasury bond interest rate risks.

Do not round intermediate calculations. Round your answer to 4 decimal places and do not represent your answer as a percent. IE: write 0.2672 not 26.72%.

Q10:

Yesterday, you bought a 5-year, zero coupon, $100 face-value Treasury bond with an interest rate (r_{rf}) of 6.0% and a price of $74.73 per bond. r_{inf} was 2.0% at the time, but jumped to 4.0% overnight. Nothing changed overnight except for the jump in the inflation rate. How much can you sell your bond for today? Hint: Assume r_{rf} = r_{inf} + all other treasury bond interest rate risks.

Do not round intermediate calculations. Round your final answer to 2 decimal places.

Q11:

Investors receive a 8% annual interest rate on their bank deposits. (These are essentially as risk-free as Treasuries, because the Federal Government guarantees banks deposits against defaults {within certain limits}). If the annual inflation rate is zero, what is the real interest rate will the investors will earn on their deposits?

Do not round intermediate calculations. Round your answer to 4 decimal places and do not represent your answer as a percent. IE: write 0.2672 not 26.72%.

Q12:

Investors receive a 6% annual interest rate on their bank deposits. If the annual inflation rate is 4%, what is the real interest rate on these deposits?

Do not round intermediate calculations. Round your answer to 4 decimal places and do not represent your answer as a percent. IE: write 0.2672 not 26.72%.

Q13:

Consider the Yield Curve

Is this curve inverted?

A. Yes

B. No

hw09_cpidata.png

hw09_yieldcurve.png

hw09_invertedyieldcurve.png

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