a) A bond you are evaluating has a 9% coupon rate (paid quarterly), a $1,000 face value, and is 11 years from maturity. i) If the required rate of return on the bond is 6%, what is its fair present value? Show your workings. [3 marks]

ii) If the required rate of return on the bond is 8%, what is its fair present value? Show your workings. [3 marks]

iii) If the required rate of return on the bond is 10%, what is its fair present value? Show your workings. [3 marks]

iv) What do your answers to parts (i) through (iii) suggest about the relation between required rate of return and present values? [1 mark] b) A U.S. FI has US$200 million worth of one-year loans earning an average rate of return of 6 percent (i.e. initial investment is US$200 million worth). In addition, the FI also has one-year single-payment Canadian dollar loans of Canadian dollar C$110 million earning 8 percent (i.e. initial investment is US$100 million worth). The FI's total funding source is US$300 million in US dollar $ one-year CDs, on which they are paying 4 percent. Initially the exchange rate is C$1.10 per US$1. The one-year forward rate is C$1.14 per US$1. What is the bank's dollar percent spread if they hedge fully using forwards? [12 marks]

c) An investment bank agrees to underwrite an issue of 27 million shares of stock for Cherry tree Corp.

i) The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $14.75 per share to Cherry tree Corp. for the 27 million shares of stock. The investment bank then sells those shares to the public for $13.95 per share. How much money does Cherry tree Corp. receive? What is the profit to the investment bank? [3 marks]

ii) Suppose that the investment bank agrees to underwrite the 27 million shares on a best efforts basis. The investment bank is able to sell 25.9 million shares for $14.35 per share, and it charges Cherry tree Corp. $0.325 per share sold. How much money does Cherry tree Corp. receive? What is the profit to the investment bank? Ignore any other costs and expenses. [3 marks] d) Bank Rosemary currently has $400 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10% of transaction deposits. If the Federal Reserve increases the reserve requirement to 12%, calculate the change in bank deposits. Show the balance sheet of Bank Rosemary and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Rosemary withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Rosemary in the form of transaction deposits. [12 marks]