Money & Banking.

2016
1. How many price ratios do exist in a barter economy if there are 10 commodities
to be exchanged?
1

Price ratios = ( 1)
2

1
2

10(10-1)=45

n- number of commodities
Answer: 45
2. If the number of price ratios is 190, how many commodities are in the market?
1

Price ratios = n(n 1) ; 190 = ( 1);

Answer: n=20
3. Bills income is $3,000. He spends $1,000 on consumption and $500 on an
investment in a newly constructed house. He acquires $700 in financial assets .What
is the amount of surplus funds he has available to lend?
Income Consumption = Savings
Savings= investment(real assets) + Surplus Fund(hoarding and lending)
Savings: 3000 1000=2000
Surplus fund: 2000-500= 1500
4. ABC Ltd. Had gross sales of $1,5 million and total expenses of $1 million.
Assume that ABC Ltd wants to undertake a capital investment of $0,7 million. What
is the minimum amount of bonds it would have to issue to do so, if ABC ltd pays out
$0,3 million in dividends?
Sales Expenses = Income
Income Dividends = Savings
Income: 1,5 1= 0,5
Savings:0,5 0,3 = 0,2
0,7 0,2= 0,5(we need to loan)

5. A 10,000 machinery depreciates 10% per year. Find its value after 3,5 years.
= (1 + )
FV= 10,000 (1 0,1)5 = 5904.9
6. In the current (2015) year the population of Russia was 144 million people.
Find the Russian population in 2020 if growth rate equals 1% annually??
FV = 144 * (1-0,01) 5 = 136,942
7.Level of annually comp interest rate??
In order to invest 10 000 currency units in 2000 in 11 months.
P = 10 000
Int amount = 2000
n = 11 months
i=?
1

=( ) 1

=12 000 1 /12

(
)11
=10 000

1 = 2,2 %

8.You need a loan of 10 000 for emergency, ability to repay the loan in the amount
not more than 11 500. (two years from now; max I of the loan??)
P = 10 000
S 11 500
n=2
=(

11 500 1
10 000

)2 1 7,2 %

9. How many years it will take for money to fourfold(*4)?

r=10%
S = P(1+n)^n
S=4P
4P=P*1,1^n
n= (lnS-lnP)/(ln(1+r)
n= ln4/ln1,1 = 14,54
10. Formula for effective interest rate.
Which is better- 10,75% compounded semiannually
10,5% compounded continuously?
1)ie=(1+0,1075/2)2-1=0,110389
2)ie=e0,105-1=0,1108
Answer: 10,5% continuously
11. A firm has two alternatives:
-raise a loan of 1000 in 3 months at 10% compounded quarterly
-discount a bill of exchange per value 1050 in 90 days, discount rate-10%. What is
the best business decision?
1) ie=(1+0,1/4)4-1= 0,1038 (10,38%)
2) Price= (1-d%/100*day/365)*nominal value
1-price=(1-10/100*90/365)*1050=1024,11
2-(10500-1024,11)/1024,11*365/90=0,1025 (10,25%)
Answer: discount a bill

12 1st loan 100,000 in 3 month for 11% per annum

2nd loan 80,000 in 15 month for 8% quarterly
Now 50,000 payment and final payment in 10 month under 12% interest rate
What is the Final payment?
1. S1=100,000*(1+0,11)^(90/360)=A
2. S2=80,000*(1+0,08\4)^(4*(450/360))=B
3. S3=50,000*(1+0,12)^(300/360)=C
4. A*(1+0,12)^(210/360)=E
5. B*(1+0,12)^(150/360)=D
6. Final Payment= E+D-C
13
Initial
1
2
3
4
5
a
-100
30
40
50
60
70
250
b
-100
60
40
50
30
70
250
a) 70 % of the asset covered by 10% loan by investor, 30% -by 12% loan from
bank
b) 50% of the asset covered by 12% loan by investor, 50%-by 11% loan from bank
Find: Net present value
aWACC=0,7*0,1+0,3*0,12=0,106
bWACC=0,5*0,12+0,5*0,11=0,115
aNPV=-100+(30/(1+0,106))+(40/(1+0,106)^2)++(70/(1+1,106)^5)=A
bNPV=-100+(60/(1+0,115)+(40/(1+0,115)^2)++(70/(1+0,115)^5)=B
Answer: A, B

14. What is the liquidity premium, if coupon rate of a bond is treasury note coupon
is 10%
r bond =r = 10%
treasury note coupon = 2%
r treasury = 2%
rf=2%
Inflation = 3%
rp = risk premium = 5%
Liquidity premium?
r =(rr + ie )*+ lp + rp
*-risk-free = 2%
ANSWER: 10%=2%+LP+5%, therefore LP= 3%
15.
9%->15%->11%
yield curve

(1 + 0.09)x(1 + 0.15) 1 = 11,9%

3
(1 + 0,09)(1 + 0,15)(1 + 0,11) 1 = 11,6 %
16.
RETA = ?
r=3%
=2
r=7

APM
RETA = r + x (RETp r)
RETA = 3% + 2 x (7% - 3%)
RETA = 11%

17. Coupon= 100

Price of console-? ( ),
i=5%
Price= Coupon/i= 100/0.05=2,000
18. Calculate the price of a 4-year bond with the rate of maturity of 4 years, at the
beginning of the 3rd year if the face value=1000.
Coupon rate=10%, market interest rate=10% and decreased by 8% (at the end of the
1st year)
PV=100/(1+0,08)^4-3 + 1100/(1+0,08)^4-2
PV=1635,67 - answer
19. Price of stock with gross rate equal to 5%, dividends=100, expected return=
10%.
Solution:
= 0
= 100

1+0.05

1 +

=2100

0.10.05

20. What will be expected return of stock if the price = 1000, D=50, +1 =
20

+ (+1 )

50 + 20
70
=
1000
1000

21
Suppose that the current interest rate of bonds fall from 10 to 5%. Calculate price of
stock if risk premium was 2%, the face value of a share is 1000. Dividend is 120 and
there is no expected capital gain or loss.
1 :
Formula:
RETstock =rbond +risk prem.
7%
5%
2%
2 :
Formula:
RETc =
120+0
1000

+(+1 )

= 0.12 (whats equilibrium return after change: 10 => 5)

So, 0,07 =

120+(1000 )

Now current price:

0,07Pt = 1120 Pt
1,07Pt = 1120
Pt = 1120/1,07 = 1046,73
22
Suppose you plan to buy a nominal share at 1000 which provides dividends 50%.
FV=1000
D1=50 D2=60
Expected sales price = 1050. You want to earn 15% return. At what price/value you
should get this share?
PV =

50
(1+0,15)

+
1

1110
(1+0,15)2

= 882.8

23. Calculate the yield of zero coupon bond if the current price is 1,000 the
Nominal value(FV)=1,200
Term to maturity=3 years, n = 3, r-?
=

(1 + )

1000 =

1200
(1 + )3

1,000 (1 + )3 =1,200
24. Calculate the expected return on a newly issued 3-year bond with face value
1,000, purchased at par and coupon rate 5% after interest rate decreased from 5% to
3%
=
50

+(+ )

50

1050 =

50
(1+0,03)

50

1050

+ (1+0,03)2 + (1+0,03)3 = 1056,57

= 50 +
+1 =

1038,27 1056,57
= 0,03
1056,57

50
1050
+
= 1038,27
(1 + 0,03) (1 + 0,03)2
Answer: 1038,27

25. If the current price of a financial instrument that pays no dividends or interest
is 1,200 and the expected future price one year one year from now has just
decreased from 1,500 to 1,300, what will happen to the current price?
=

+ (+1 )

CF=0 , Pt=1,200; Pt+1= 1,500___1,300

=

15001200
1200

=0.25

0.25x=1300-x
1.25x=1300
X=1040

26. Calculate 3 month forward rate, if spot rate is 1,5 $/ and interest rates in
both countries are equal to 6% p.a., but the expected rate of inflation in the UK is 4%
and in the US is 5%.
1 + =

(1 +

(1 + )

= (1 +

0,06 0,04 312 3

0,06 0,05 312
) 12 =
(1 +
) 12
12
1,5
12
3

1,02 3
=(
) 1,5 = 1,544997
1,01

27. Suppose a bank lends $100 million in pounds at 10% for one year selling 1-year
deposit certificates of $10 million at 8% to finance the deal. Current spot rate is 1.6
$/, but expected spot rate in a year from now is 1.5 $/. Should the Bank purchase
1-year forward if forward year rate is 1.58 $/?
Assets

Liabilities

L $100m = 62,5m

CP
$100m

62,5m * 1,1= 68,75m

$108,625

+1 = $108,625-$108=$0,625
+1 +1 = $103,125 $108
=

8%

= $4,875 < 0

0,08*68,75m=5,5m
68,75m*1,5=103,125

28
Big Mac costs $4 in NY and 3,5 in Europe. Is euro over or undervalued given
0.8/$?
Solution: 1) $0.8 3.5 => X= $4.375 = $4.38 2)
1X

$4$4.38
$4.38

100% = - 8.68%

Conclusion: is undervalued

29
What would be expected exchange rate in February if current is 85 RUR/. Expected
inflation in Russia 12%, 4% in Europe?
Solution:

/
/

Answer: , RUR/.

%/
%/

= , RUR/.

30.

31. Use T-accounts to show the impact of open market purchases of $300, 000
from DIs on balance sheets the Central bank and DIs, monetary base and money
stock if cr = 0.25, rr= 0.10, er=0.05.
Omos- 3000000 cr=0.25 rr=0.1 er=0.05
Multiplier= (1+cr)/(er+cr+rr)=3.125
Change in MS=multiplier*change in MB
Change in MB=change in R+change in C= +3000000
CB

DIs

+3000000

+3000000

+3000000

securities

reserves

reserves
-3000000
Securities

32. If mult=4, DIs reduce their discount loans by $100,000 , what happens to
reserves, the monetary base and the money supply after the change has worked its
way through the entire banking system? Use T-accounts to explain your answer.
find R, MS and MB. Use t accounts
CB

DIs

-100000

-100000

-100000

-100000

Discount

reserves

reserves

DW

operation
withdrawal

R= -100000
Change in MB= change in C+ change in R= -100000
Change in MS= multiplier * change in MB = -400000
33. Use T-accounts to show the impact of extending of the collateralized loans of
$100,000 on balance sheets of the Central Bank and DIs, monetary base and money
stock if cr=0.25, rr=0.10, er=0.05.
DIs
+100,000

+100,000

reserves

Loans with the

CB
+100,000

+100,000

loans

reserves

34 Use T-accounts to show the impact of reducing of required reserves ratio from
7 to 5% on balance sheets of the Central bank and DIs, if the initial amount of
minimum reserves is $10 billion.
CB
1)RR$10b
2) RR$7.14b
3)RR$10b
10b=7%
X=5%

DI
1)RR$10b
RR
7,14
2.86

ER

1
=

=20*2.868=57.26

x=7.14
35. Use T-accounts to show the impact of deposit withdrawals of $150,000 from
DIs on balance sheets of customers, the Central bank and DIs, monetary base and
money stock if cr= 0.25, rr= 0.10, er=0.05

36. Mult=4
OMOs=-100.000 to the public
R-? MB- ? MS-?
DW- discount windows
MB- monetary base
CB
A
L
-100.000 100.000
DW
reserves

DIs
A
-100.000
reserves

RR = 100.000
MB = C +R = -100.000
MS = C +D = -100.000
D= 1/rr *ER = -900.000
1/rr = 10 ; *ER= - 90.000
MS = C +D = -900.000

L
100.000
DW

Customer
A
L
+100000
securities
-100.000
deposits

37. Mult=4
OMOs=100.000 from the public 30% withdraws
R-? MB- ? MS-?
CB
A
L
DIs
+100.000 +100.000
A
L
securities reserves
reserves
deposit
100.000
-30.000

100.000
-30.000

Deposit =70.000
Cash = 30.000
Customer
R=70000
MB = C +R = 3000+7000=10.000
MS=Mult * MB = 4 * (-100.000) = 400.000

38
MS = $500million
RR= $110million
rr 10%-5%
cr= 0.35; er=0.1
OMOs - ?
MS=Mult * MB = Mult *(BR+1/BR)
Mult =(1+0.35)/(0.05+0.35+0.1)=2.7
500.000= 2.7*(0 + x)

A
-100000
securities
+100.000
deposits
-30.000
cash

39.
OMOs-?
MS= - $100b
BR incr. $70
Mult=4
-100b=4*(70bil+x)
-380=4x
X=- 95 billions?