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17. A dealer is quoting a $10,000 face 60 day T-Bill quoted at 3.22 bid, 3.14 ask. You could buy this bill at _____ or sell it at _____. A) $9,947.67 , $9,946.33 B) $9,678.00 , $9,686.00 C) $9,686.00 , $9,678.00 D) $9,946.33 , $9,947.67 E) None of the above Answer: A Page: 131 Level: Medium Rationale: Buy at 10,000× [1-(0.0314× 60/360)] ; Sell at 10,000 × [1(0.0322× 60/360)] 24. A 90 day $1 million CD has a 4% annual rate quote. If you buy the CD, how much will you collect in 90 days? A) $1,040,000 B) $1,009,863 C) $1,000,000 D) $1,015,012 E) $1,010,000 Answer: E Page: 142 Level: Medium Rationale: $1 mill × [1 + (0.04× 90/360) 30. A U.S. exporter sells $50,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 90 day note at a 6% discount. What is the exporter's true effective annual financing cost? A) 6.00% B) 6.18% C) 6.32% D) 6.24% E) 6.45% Answer: C Page: 125 Level: Difficult Rationale: 50,000*[1-(0.06*90/360)] = 49,250; (50,000/49,250)365/90-1 =6.32% 31. A Chinese exporter sells $75,000 of toys to a French importer. The Chinese exporter requires the French importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 60 day note at a 3.5% discount. What is the exporter's true effective annual financing cost? A) 3.62% B) 3.57% C) 3.35% D) 3.78% E) 3.97% Answer: A Page: 125 Level: Difficult Rationale: 75,000*[1-(0.035*60/360)] = 74,562.5; (75,000/74,562.5)365/60-1 =3.62% 32. If a $10,000 par T-Bill has a 4.5% discount quote and a 180 day maturity, what is the price of the T-Bill? A) $9,550 B) $9,525 C) $9,775

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D) $9,675 E) None of the above Answer: C Page: 132 Level: Easy Rationale: 9775=10,000*[1-(0.045*180/360)] 33. A 90 day T-Bill is selling for $9,915. The par is $10,000. The effective annual return on the T-Bill is (watch your rounding) A) 4.09% B) 3.48% C) 3.47% D) 3.52% E) 3.55% Answer: D Page: 124-125 Level: Medium Rationale: (10,000 / 9915)(365 / 90) - 1 34. Suppose that $10 million face value commercial paper with a 270 day maturity is selling for $9.65 million. What is the BEY on the paper? A) 3.627% B) 4.903% C) 4.836% D) 4.934% E) None of the above Answer: B Page: 141 Level: Medium Rationale: ((10 mill / 9.65 mill) – 1)* (365 / 270) 35. A $5 million jumbo CD is paying a quoted 4.25% interest rate on 120 day maturity CDs. How much money could you withdraw at maturity if you invest in the CD? A) $5,000,000 B) $5,069,863 C) $4,929,167 D) $5,212,500 E) $5,070,833 Answer: E Page: 142 Level: Medium Rationale: 5,000,000 *[1 + (0.0425*120/360)] 37. A 120 day maturity money market security has a bond equivalent yield of 4.25%. The security's EAR is A) 4.44% B) 4.28% C) 4.93% D) 4.31% E) None of the above Answer: D Page: 124-125 Level: Difficult Rationale: EAR = (1+ (0.0425 / (365/120)))365/120 – 1 = 4.31% 44. A government securities dealer needs to make an 8% pre-tax annual return on $10 million of capital employed to make it worthwhile to make a market in T-Bills. If the bid discount on $10,000, ninety day T-Bills is 3%, and the dealer can expect to do 5400 round trip deals today what must the ask discount be? Hint: A round trip is a buy and a sell transaction. Answer: Bid Price = 10,000 × [1 - .03× (90/360)] = $9,925

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$10 million × (0.08/365) = (Required Ask Price - $9,925) × 5400 deals Required Ask = $9,925.4059 Ask Discount = (($10,000 - $9,925.41)/$10,000) × (360/90) = 2.9836% Page: 131 Level: Difficult 47. A corporate treasurer has $6 million to park (invest) for 60 days. Commercial paper rates are a 3.44% discount and CD rates are 3.52%. Comparing the bond equivalent yields over a 365 day year, which is the best alternative? What is the opportunity cost of leaving the funds idle? Answer: Find the BEY on each CP: Price = $6 mill * [1 - 0.0344*(60/360)] = $5,965,600 [($6 mill / $5,965,600) - 1] * (365 / 60) = 3.5079% BEY CD: $6 mill × [1 + 0.0352*(60/360)] = $6,035,200 [($6,035,200/$6 mill) - 1] * (365/60) = 3.5689% BEY The best deal is the CD and the opportunity cost is 3.5689% Page: 123, 125 Level: Difficult 50. Ninety day commercial paper can be bought at a 4% discount. What are the bond equivalent yield and the effective annual rate on the commercial paper? Why do these rates differ? Answer: Commercial paper price/100 of par = 100*(1 – (0.04*90/360)) = 99.00 Effective annual rateCP = (100 / 99.00)365/90 – 1 = 4.16% Bond equivalent yield = [(100 – 99.00) / 99.00] * 365/90 = 4.097% The discount quote is an annual quote calculated as (Par - Price) / Par, assuming that there are 360 days in a year. The bond equivalent yield is an annual rate calculated as (Par - Price) / Price, which is the normal way to express a percentage return ($ return per $ invested), assuming that there are 365 days in the year. The effective annual return or EAR is the same as the bond equivalent yield, except that the EAR annualizes the rate of return assuming the proceeds from each 90 day period are reinvested during the next 90 day period and so on. Page: 126 Level: Medium 51. You are a corporate treasurer for Esso Oil. The quoted rate on dollar denominated euro commercial paper is just blipped down recently. Your firm can issue $5 million of 30 day euro commercial paper in the London markets at 3.45%. You can also invest the proceeds in the U.S. in comparable maturity negotiable dollar denominated CDs which are quoting 3.95%. Ignoring any transactions costs, how much money, if any, can Esso make by borrowing in the euro markets and investing in the U.S.? Is this a good deal or not? Should you expect it to last? Explain. Answer: Initial proceeds from issuing euro commercial paper (CP) = $5 million * [1(0.0345*30/360)] = $4,985,625 Invest the proceeds of $4,985,625 in 30 day CDs and will wind up with $4,985,625 * [1+(0.0395*30/360)] = $5,002,036 Repay the $5,000,000 owed on the CP and Esso will clear $2,036. If the CDs are not very risky then this represents an arbitrage opportunity for Esso, because they are not using their own money the rate of return is infinite. Since this is an arbitrage strategy we would not expect this big a difference in the rates to persist. (Exxon constructed a similar arbitrage several years ago using euro commercial paper and T-bills.) Page: Integrative Level: Difficult

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