Question

1. A: what is the public good that a central bank provides? does it justify the existence of the central bank in the government sector? Explain

B) What is the yield to maturity on a $10,000 face value discount bond maturing in one year that sells for $9,600? Show work

C) suppose the credit rating agencies have upgraded the ratings of a bond issued by xyz inc. from speculative grade to investment grade.. What effect will it have on the secondary market for the bond? What will happen to price and YTM? Use a secondary market diagram to explain your answer

Table - Assets Amount (millions of USD)

Currency 200

Money Market Mutual Fund Shares 1,500

Saving Deposits 5,000

Checking deposits 2,500

Small Denomination time deposits 2,700

Large denomination time deposits 3,500

Pension Funds 8,700

Large cap mutual fund shares 9,500

D) Using the information in the table, calculate the country's M1 and M2. Suppose an amount of $700 million was withdrawn from large cap mutual funds and deposited in savings accounts. How will that affect M1 and M2?

E) "A discount loan has the same effect on monetary base as does an open market purchase." Do you agree? Explain using an example and showing the relevant T-accounts (balance sheets) for the Fed and the banking system. Between these two actions, is one preferred to the other by the Fed? Why or why not?

Answer 1

1.B) Yield to Maturity = [C + (F-P)/n] ÷ [(F+P)/2]

C= coupon rate

F= Face Value

P= Price

n= number of years

= [0 + 10000-9600/1] ÷ [ (10000+9600)/2]

= 4.08%

C) Bond rating is determined by issuer's financial ability to make interest payments and repay the loan in full at maturity. Bonds with lower ratings are speculative bonds and those with better ratings are investment grade.

Since the credit rating agencies have upgraded the ratings of a bond issued by xyz Inc from speculative grade to investment grade it will adjust the bond price upward . The investor enjoys marked to market profit on his investment. This means the price will increase and yield will fall. Similarly downgraded ratings leads to rise in yield payable that leads to fall in price.