ECON 203 What is the formula for the price of a 50 yr coupon bond

Question 2

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Two calculations, 5 points each

1. What is the formula for the price of a 50 yr coupon bond with 37 years left until maturity if the bond has a face value of $1000, an annual coupon rate of 10%, and a yield to maturity of 5%? (just the formula, do not calculate)

2. Assume a corporation issues a 10yr bond with 5% annual coupons and a face value of $1,000. The bond is not issued at par, rather it is issued at a price of $900. Over the course of the life of the bond what is the sum total of payments the corporation will have to make to the investor who bought this bond?

Question 3

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1. Using the graph below say whether, the economy is likely poised to grow in the future or head into a recession? Explain your answer using as much evidence from the graph as you can.

Question 4

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Say whether each of the statements below are true or false and explain the reasoning that allowed you to reach that conclusion. (4 points each, 8 points total)

1. Increasing haircuts in the overnight repo market are analogous to withdrawals from the shadow banking system.

1. A particular expansionary monetary policy action may result in both credit and quantitative easing occurring simultaneously. However, particular policies need not always do both at the same time.

Question 5

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20 points. Answer the following question briefly but concisely:

1. Prior to the recent financial crisis it was believed that the Federal Reserve's discount window as well as the FDIC acting as deposit insurer were sufficient to prevent a run on the financial system.

a. On what assumption(s) was this view based?

b. Explain how the crisis proved this view false?

c. Identify two specific Federal Reserve actions that extended its role as lender of last resort beyond what it traditionally had been.

d. Did these actions contribute to “moral hazard”?

e. Should the Federal Reserve and the Treasury have required more changes from the banks in exchange for bailing them out? What kinds of changes should they have asked for/demanded?

Question 6

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20 points. Answer the following question briefly but concisely:

2. There is a big debate about what caused the financial crisis. Some of the key views are that the financial crisis was caused by 1) Lack of financial regulation that let financial institutions engage in excessively risky behavior 2) Monetary Policy that kept interest rates too low for too long and led to a housing bubble that had to burst eventually 3) Fraud by key bankers that was facilitated by financial de-regulation 3) Inability for any of the participants in the financial system to understand what they were doing 4) A system of incentives facing rainmakers, ratings agencies, regulators and others that led them to realize they could make lots of many by crashing the economy.

Write a short essay explaining your views of the causes of the financial crisis? Which of these are right; which wrong? Give evidence. A good essay is one that has a strong connection to logic and facts.

Question 7

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20 points. Answer the following question briefly but concisely:

3. Given the financial crisis, what types of regulations and restrictions are necessary to significantly reduce the likelihood of this happening again? What kinds of reforms are in the Dodd-Frank act? What are the strengths and weaknesses of these? What others are needed? Why? Does the Federal Reserve need to be reformed as part of this? If so, what changes would you recommend there? Why?