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QUESTION 1
Period
€/$ Rate
Nominal €/$ index
Eurozone Price Index
US Price Price Index
Real €/$ Index
1
€1.10/$1
100
2
€0.90/$1
81.82
105
110
85.72
3
€1/$1
90.91
115
120
94.86
4
€0.95/$1
86.36
130
140
93
5
€1.20/$1
109.09
135
145
118.04
QUESTION 2
(i) What is the approximate annualized yield on a 6-month Treasury bill that is sold at £99 in the primary market? Show your calculations.
(ii) A 10-year Treasury bond (TBOND1) is sold on the market one day at 100 with an annual coupon of £7. The following day bad news hits the global stock markets and a new 10-year Treasury bond (TBOND 2) is sold on the market at a £5 annual coupon. What is the approximate new secondary market price of TBOND1? Show your calculations.
(iii) In a world where interest rates are rising and in your view are likely to continue to do so would you prefer to buy or short government bonds? Which would you be more likely to buy or short 5 years bonds or 20-year bonds? Explain your reasoning.
a. Calculate the companys disbursement float, collection float, and net float. b. How would you answer to part (a) change if the collected funds were available in one day instead of two?
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