Question 7
a) If interest rates are 8%, what is the price of a 4-year bond with a face value of £100 and an annual coupon of 7%?
(10 marks)
b) If interest rates are 9%, what is the price of a 4-year bond with a face value of £100 and an annual coupon of 7%?
(10 marks)
c) If the bond was a perpetual bond and the interest rates are 8% and the rests are similar to above (a or b), what will be its price?(8 marks)
d) Explain the relationship between bond prices and interest rates. Use graph where appropriate.
(7 marks)
(Total: 35 marks)
Question 9
a) Explain what is meant by direct vs. indirect financing and the roles of financial intermediaries.
(10 marks)
b) Explain the characteristics of money market and capital market instruments and provide examples.
(10 marks)
c) Assume that you just deposited £1,250 into a bank account. The current real interest rate is 1% and inflation is expected to be 5% over the next year.
What is the nominal rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a bicycle that currently sells for £1,300, will you have enough money to buy it?
(10 marks)
d) Let us suppose that you can purchase a Treasury Bill in the market for £19,750. The price at maturity is $20,000. If the discount rate quoted from the market is 3.8%, how many days until maturity is this Treasury Bill?
(5 marks).