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1)-Suppose the CFO of an American corporation with surplus cash flow has $90 million to invest and the corporation does not believe it will need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1 year CD deposits in US banks is .5 %, while the rate on 1 year CD deposits (denominated in Australian dollars) is currently 2.5 %. Suppose further that the exchange rate currently is (.8) Australian Dollars per US$.What must the CFO expect about the Australian Dollar/US$ exchange rate 1 year fromnow if she chooses to invest in the US $ CD’s instead of the Australian CD’s2) Suppose a mid-sized regional bank has $1 million dollars which it is considering investing either in 30 year zero coupon Treasury bonds or in a jumbo 30 year fixed rate residential mortgage with fixed monthly payments of $5650.Assume that the treasury bonds are currently priced to yield 4% if held until maturity. Assume that the bank requires a premium of 150 basis points in the mortgage`s annualized yield over treasury bond yields before it will lend in the residential mortgage market.A) Write down the present value equations that the bank would use to determined the annualized percentage rate of return on the residential mortgage. (Wherever possible, plug data from the above problem into the equations.B) How will the bank use the information on the annualized percentage rate of mortgage obtained in part (a) when deciding whether to invest in T-Bonds or whether to make the residential mortgage?3-A) Given the following data on yields of 10 year Treasury notes and 10 year TIPS, what conclusion do you draw about changes in investors` expectation of inflation rates in the US during the past year? Show your solutions.10 Year TIPS Yield-0.70%0.49%B)Explain your answer to part (A), that is explain the difference between the yields on TIPS and the yield regular treasury securities. Include a brief discussion of any factors in addition to inflation expectations that affect the relationship between yields on TIPS and yields o treasurieshas been in place since fall 2012 what do the above data suggest about the change in the required real yield on default risk free long term treasuries during the period QE3 has been in place?with declining real growth expectations? the face value received when the note matured.a)Why is it unusual for yields on longer term notes to be lower than yields on shorter term notes?b)what expectations would lead a risk neutral investor to buy the 2 year note (instead of the 1 year ) given its lower yield? include your calculations.5-A)How does the fed`s QE policy affect the balance sheets of the banks with which it deals in the ”open market”B)-Explain why the effect of a given volume of treasury and /or mortgage-backed security purchases by the fed in the open market can have effects on lending, spending, money creation and real growth that vary widely depending on the behavior of banks and potential borrowers.investors expect that there is a 4% probability that Byhy Corporation will default within the next year and that if it defaults they will only be able to recover 30% of the maturity value of the corporation`s bonds.a) Suppose that several prominent highly leveraged corporations( other than ByHy) default on their bonds. What would you expect to happen to the price of ByHy`s bonds and why? Discuss the effects on ByHy`s bonds price of changes in expected and required rates of return.b) Assume that after news of the defaults by other highly leveraged corporations, investors now expect an 8% probability of default and a recovery rate of 20% in the event of default on ByHy`s bonds. Also assume that increased uncertainty about the future of the high yield market has caused the required rate of return on ByHy`s bonds to change to 10%.What will be the new yield to maturity on the ByHy`s bonds?
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