Fin๎5329๎Exam,๎Professor๎Hein,๎fall๎2008,๎September๎16,๎2008๎
Directions:๎In๎your๎blue๎book,๎completely๎answer๎each๎of๎the๎following๎ten๎questions,๎showing๎
any๎calculation๎work,๎as๎needed.๎The๎questions๎donโt๎have๎to๎be๎answered๎in๎this๎order,๎just๎
make๎sure๎to๎use๎the๎following๎numbering๎system๎when๎you๎record๎your๎answer๎in๎the๎blue๎
book.๎You๎are๎free๎to๎use๎the๎textbook๎and๎your๎notes,๎but๎keep๎your๎eyes๎on๎your๎own๎paper.๎
๎
1. Briefly compare and contrast the Federal Home Loan Bank system and the Federal Home
Loan Mortgage Corporation (Freddie Mac).
2. Why are we not discussing the โfailureโ of Ginnie Mae, the Government National Mortgage
Association, today? Explain.
3. Suppose that the WSJ quotes the stated yield on a close to 5 year to mature TIPS as being
1.298%, while the stated yield on a close to 7 year to mature TIPS as being 1.504%. Calculate the
forward rate implicit in these two respective interest rates, showing all work. And explain the
maturity and the timing of the forward rate. Would you say this forward rate was best thought of
as a nominal forward rate or a real forward rate? Why? What is the difference in the two?
4. Briefly compare and contrast the default risk in a โfed fundsโ transaction with that of an
overnight repurchase agreement. In which transaction would you think that there would be
greater default risk concern? Why? Explain.
5. Please explain why one could argue that the stated interest rate on a Treasury bill security
understates its โtrue yieldโ.
6. Would you say that real interest rates today in the US are low, or high? Why? Explain.
7. Suppose that a security has an โembedded optionโ in it. Would you think this would cause the
interest rate to be higher, or lower, than a similar security that doesnโt have such an embedded
option? Why? Explain.
8. AIG has been in the financial news lately concerning its financial health. What type of financial
institution would you consider AIG to be? Why? Explain. Would you consider AIG to be a
major โplayerโ in the fed funds market or not? Why? Explain.
-Over-
