EC 370 Name:

Xiang LI (GE)
Midterm 1 - PART 2 UO ID:

INSTRUCTIONS: Compile all pages into one pdf document and submit one and only one legible pdf
document to Canvas by 11:59pm (PDT), Monday, April 20. Points will be deducted if submissions do
not follow the instructions.

QUESTION 1: 12 POINTS
Suppose Tarth, an imaginary country, only produces two goods: glass and steel. The table below lists the
quantity and price of each good in 2017, and 2018.

2017 2018
Quantity Price Quantity Price
Glass 10 6 20 7
Steel 5 8 15 7

Fill in the blank cells. You need to show calculations or explanations for each of the value.

2017 2018
Nominal GDP 100
Real GDP 100
GDP deflator 1
Inflation NA

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QUESTION 2: 12 POINTS
The questions below are about yield to maturity.
(1) A coupon bond has face value of $1,000, and coupon rate of 8%. Price of this bond is $1,300 today.
The bond matures in 3 years. Write down the equation that solves for yield to maturity of this bond.
You don’t need to solve for the value of the yield to maturity. (3 points)

(2) Suppose you are considering investing $1,000 in one of the following bank deposits: First deposit, which
will pay an interest rate of 4% per year for three years; Second deposit, which will pay an interest rate
of 10% the first year, 1% the second year, and 1% the third year. Which deposit should you choose?
Why? (3 points)

(3) Treasury-bill (or T-bill) is one type of discount bond. What is the yield to maturity on a 1-year,
$1,000-face value T-bill with a current price of $900? (3 points)

(4): Rank the following $1,000 face-value coupon bonds by increasing order of yield to maturity (i.e. from the
smallest to the largest) (3 points)
(A) a 10 percent coupon bond selling for $1,100
(B) a 12 percent coupon bond selling for $900
(C) a 11 percent coupon bond selling for $1,000
(D) a 12 percent coupon bond selling for $800

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QUESTION 3: 12 POINTS
Today you buy a $1,000-face value, 6% coupon bond for $1,000. The bond matures in 12 years.
(1) How much will this bond pay you in year 10?

(2) What is the present value of the cashflow you receive in the last period from this bond?

(3) Find the sum of the present values of all coupon payments

(4) What is the price of this bond when it has one year left to maturity?

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QUESTION 4: 20 POINTS
The following table shows 4 coupon bonds. All bonds have same face value of $100, and same coupon rate of
10%. Today (at time t), you buy bonds, which are held for one year. Next year (at time t+1), you sell the
bonds. Today (at time t), interest rate is 20%. Suppose next year (at time t+1), interest rate decreases to
15%. Answer the following questions. Round your result to 2 decimal places.

Bond No. Years to Ma- Current Price at t ($) Price at Rate of Capi- Rate of Re-
turity at t Yield (at t) t+1($) tal Gain (%) turn (%)
(%)
#1 20 NA $51.30 34.52% NA
#2 10 $58.08 $76.14 31.10%
#3 5 NA NA NA NA
#4 1 NA NA NA
(1) For Bond # 1: what is price next year? (3 points)

(2) For Bond # 2: what is current yield? (3 points)

(3) For Bond # 2: what is rate of return? (3 points)

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(4) For Bond # 3: what is price next year? You are given the following information: 1.22 = 1.44, 1.23 =
1.73, 1.24 = 2.07, 1.25 = 2.49, 1.152 = 1.32, 1.153 = 1.52, 1.154 = 1.75, 1.155 = 2.01. (3 points)

(5) For Bond # 4: what is price this year? (3 points)

(6) For Bond # 4: what is price next year? (3 points)

(7) If today, you know for sure that interest rate would decrease in the future, would you want to buy
longer-term bonds or shorter-term bonds? Why? (2 points)