Question

Instructions:

1. Your answers should be precise. Do not give information not directly relevant for answering the questions. Show all your work in numerical problems to receive full credits. The assignment will be graded on a scale of 0-5. Clarity and grammatical correctness will carry some weights in the evaluation of this assignment. Please refer to the scoring rubric. You must submit your answers to Q.1 – 2. You are not required to submit your answers to Q.3 - 7. 1. Consider a bond with a 5% annual coupon and a face value of $1,000. Complete the following table. What relationships do you observe between years to maturity, yield to maturity, and the current price? Show all your work.

Years To Maturity	Yield To Maturity	Current Price
2	2%
2	4%
3	4%
3	6%
4	2
4	6

2. “The Federal Reserve System resembles the U. S. Constitution in that it was designed with many checks and balances.” Do you agree? If so, discuss at least three distinctive features of the structure and organization of the Fed that provide with these checks and balances. If not, explain why. (3 points)

Answer 1

Face value = 1000

Coupon = 1000 * 5% = 50

Bond price = Coupon * (1-((1+YTM)^(-Number of periods))/YTM)+(Face value/((1+YTM)^Number of periods)

Years to maturity	Yield to maturity	Bond price calculation	Bond price
2	2%	= 50*((1-((1+2%)^(-2)))/2%)+(1000/((1+2%)^2))	1,058.25
2	4%	= 50*((1-((1+4%)^(-2)))/4%)+(1000/((1+4%)^2))	1,018.86
3	4%	= 50*((1-((1+4%)^(-3)))/4%)+(1000/((1+4%)^3))	1,027.75
3	6%	= 50*((1-((1+6%)^(-3)))/6%)+(1000/((1+6%)^3))	973.27
4	2%	= 50*((1-((1+2%)^(-4)))/2%)+(1000/((1+2%)^4))	1,114.23
4	6%	= 50*((1-((1+6%)^(-4)))/6%)+(1000/((1+6%)^4))	965.35

An increase in years to maturity assuming all other things same bond price increases it means the bond price and years to maturity are positively corelated.

An increase in yield to maturity assuming all other things same bond price decreases it means the bond price and yield to maturity are negatively corelated.

Please note i have solved first question as per policy.