Chapter 4 HW 2

[Tanja Tarasov]

Question 36:
Money markets are markets for

a. Foreign currency exchange.
b. Consumer automobile loans.
c. Corporate stocks.
d. Long-term bonds.
e. Short-term debt securities.


The right definition of money markets is the borrowing and lending money for three years or less. That means for a short term time. And if you e.g. borrow money, you have some debts. Thus only the explanation [color=red]e[/color]. can be the correct answer.


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Question 38:
You recently sold 100 shares of Microsoft stock to your brother at a family reunion.  At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates.  Which of the following best describes this transaction?

a. This is an example of a direct transfer of capital.
b. This is an example of a primary market transaction.
c. This is an example of an exchange of physical assets.
d. This is an example of a money-market transaction.



In this case [color=red]a[/color] describes it adequately. Because the declaration is suitable for this transaction.
You, as a holder of shares, resold them to the brother ( intermediary), what have no impact on microsoft (company itself). This is a secondary market transaction.

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Question 40:
You recently sold 200 shares of Disney stock to your brother.  This is an example of:

a. A money market transaction.
b. A primary market transaction.
c. A secondary market transaction.
d. A futures market transaction.


Like the description in question 38 and 41 we have the [color=red]secondary market transaction[/color]

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Question 41:

Which of the following are examples of a primary market transaction?

a. A company issues new common stock.
b. A company issues new bonds.
c. An investor asks his broker to purchase 1,000 shares of Microsoft common stock.


Answer [color=red]a and b[/color] have to be correct.

c can´t be primary, because the market where shares are sold to investors, either directly or through an intermediary, in our case this is a broker is a secondary market transaction. 




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Question 65:

You observe the following yield curve for Treasury securities:

Maturity Yield
1 year 5.5%
2 years 5.8
3 years 6.0
4 years 6.3
5 years 6.5

Assume that the pure expectations hypothesis holds.  What does the market expect will be the yield on 4-year securities, 1 year from today?

a. 6.00%
b. 6.30%
c. 6.40%
d. 6.75%
e. 7.30%



to answer to this question we use the formula “one-year forward rate”

at first we take the yield from year 5 and year 1

6,5=(5,5+4x)/5
= 6,75%, [color=red]therefore d is correct[/color]

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Question 66:

Given the following data, find the expected rate of inflation during the next year.

•  k* = real risk-free rate = 3%.
•  Maturity risk premium on 10-year T-bonds = 2%.  It is zero on 1-year bonds, and a linear relationship exists.
•  Default risk premium on 10-year, A-rated bonds = 1.5%.
•  Liquidity premium = 0%.
•  Going interest rate on 1-year T-bonds = 8.5%.

a.  3.5%
b.  4.5%
c.  5.5%
d.  6.5%
e.  7.5%

according to Fisher’s interest rate formula:
k = k* + IP + DRP + LP + MRP


[color=red]We have[/color] :
k = 8,5
k* = 3
DRP = 0
LP = 0
MRP = 0

[color=red]to solve the problem of the unknown IP[/color]:
IP = k – k* - DRP – LP- MRP
IP = 8,5 – 3 = 5,5 %


Answer [color=red]c is correct[/color].
In this case there is no DRP in the first year, no MRP and no LP.