Suppose that you own a four year maturity Treasury bond that pays $ 100,000 in principal at maturity and $ 3,000 every six months in coupon interest. Use the features of the bond to explain what Treasury IOs and POs are.
Answer to relevant QuestionsConsider a $ 100 million pool of conventional mortgages paying 8 percent interest. Suppose that you create one PO and one IO for this entire pool. Describe what a PO and IO would look like for this mortgage pool. Explain why bank managers often refuse to sell securities at a loss relative to book value. What is the cost of continuing to hold discount instruments? What are the costs of selling securities at a gain? Suppose that a bank currently owns a $ 5 million par value Treasury bond, purchased at par, with four years remaining to maturity that pays $ 200,000 in interest every six months. Its current market value is $ 5.23 million. ...What key attributes of a security make it a suitable investment for a bank? Explain how the forward market for foreign exchange differs from the spot market. When will forward exchange rates be at a premium or discount to spot exchange rates?
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