1). Explain the Fed's three tools of monetary policy and how each is used to change the money supply. Does each tool affect the monetary base or the money multiplier?

2). Suppose everything else equal; a) the Central Bank raises the reserve requirement to 20 percent, b) the currency deposit ratio rises to 60 percent. Which development, a) or b) will affect the money multiplier more? Why?

3). Suppose the Central Bank of Turkey starts to pay interest on reserves. Under what circumstances this would affect the short term policy interest rate?

2. An investor plans to retire in 10 years. As part of the retirement portfolio, the investor buys a newly issued, 12-year, 8% annual coupon payment bond. The bond is purchased at par value, so its yield-to-maturity is 8.00% stated as an effective annual rate.

a. Calculate the approximate Macaulay duration for the bond, using a 1 bp (0.01%) increase and decrease in the yield-to-maturity and calculating the new prices per 100 of par value to six decimal places.

b. Calculate the duration gap at the time of purchase. (Hint: An investor plans to retire in 10 years. So, this investor’s investment horizon is 10 years.)

c. Does this bond at purchase entail the risk of higher or lower interest rates?

d. A bond is currently trading for 98.722 per 100 of par value. If the bond’s yield-to-maturity (YTM) rises by 10 basis points, the bond’s full price is expected to fall to 98.669. If the bond’s YTM decreases by 10 basis points, the bond’s full price is expected to increase to 98.782. What is the bond’s approximate convexity?

1. Abdul Inc., wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. Its investment banker states that investors would use an 11.4 percent discount rate to value such bonds. At what price would these bonds sell in the marketplace? How many bonds would the firm have to issue to raise $1 million? Assume semi-annual interest payments.

(b) Investor A holds a 15-year bond, while investor B has an 7-year bond. If interest rate increases by 1 percent, which investor will have the higher interest rate risk? Explain.

(c) Investor A holds a 10-year bond paying 8 percent a year, while investor B also has a 10-year bond that pays a 6 percent coupon. Which investor will have the higher interest rate risk? Explain.

2.Assume the following for a one-year rate adjustable rate mortgage loan that is tied to the one-year Treasury rate: Loan amount: $200,000 Annual rate cap: 1% Life-of-loan cap: 4% Margin : 2.50% First-year teaser rate: 5.50% One-year Treasury rate at end of year 1: 5.25% One-year Treasury rate at end of year 2: 5.50% Loan term in years: 15 Given these assumptions, calculate the following: a.Initial monthly payment b.Loan balance end of year 1 c.Year 2 contract rate d.Year 2 monthly payment e.Loan balance end of year 2 f.Year 3 contract rate g.Year 3 payment

Use the geometric series to derive the present value of an annuity due.

Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could equally well focus on any other component of cash flow. Dog Days is considering a proposal to produce and market a caviar-flavored dog food. It will involve an initial investment of $90,000 that can be depreciated for tax straight- line over 10 years. In each of years 1 to 10, the project is forecast to produce sales of $100,000 and to incur variable costs of 50% of sales and fixed costs of $30,000. The corporate tax rate is 30%, and the cost of capital is 10%.

1. a) Calculate the NPV and accounting break-even levels of fixed costs.

2. b) Suppose that you are worried that the corporate tax rate will be increased immediately after you commit

   to the project. Calculate the break-even rate of taxes.

3. c) How would a rise in the tax rate affect the accounting break-even point?

AAPL paid $4.68 in dividend last year. The company has EPS of 15.6, ROE of 16% and required 12.7% rate of return. What is the forward P/E ratio for AAPL?

Please do this in excel and show formulas.

In 300 words, Under what circumstances would it be appropriate for a firm to use different costs of capital for its different operating divisions? If the overall firm WACC were used as a hurdle rate for all divisions, would the riskier divisions or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are the two techniques you would use to develop a rough estimate for each division’s cost of capital?

explain why maximizing profits falls short of maximizing shareholders wealth

A bond has a 10% coupon rate, payable quarterly. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 14%. What is the price of the bonds?

In no more than 300 words, explain why the quality of corporate governance is relevant to the effective management of educational institutions.

Financial intermediaries play a major role in the financial markets . without financial intermediaries being in place, some financial market transactions may not occur smoothly. Required:

a) Explain and discuss the functions of financial intermediaries in the economy

b) Identify and discuss the relative advantage and disadvantages of financial intermediations and disintermediation

Comment on the major challenges to Basel II implementation in the Caribbean in relation to credit risk management.

MM with Corporate Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $16 million of 6% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 10%.

1. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.

   Company U: $   million
   Company L: $   million

2. What is r_s for Firm U? Round your answer to one decimal place.

   %

   What is r_s for Firm L? Do not round intermediate calculations. Round your answer to one decimal place.

   %

3. Find S_L, and then show that S_L + D = V_L results in the same value as obtained in Part a. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.

   S_L = $   million

   S_L + D = $   million

4. What is the WACC for Firm U? Do not round intermediate calculations. Round your answer to two decimal places.

   %

   What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.

   %