a)
A zero coupon bond with a face value of $10,000 that matures in 2 years goes on sale
today for $9,100.

Required

i)
Determine the bond’s yield to maturity

(4 marks)
ii)
If within an hour of purchasing this bond the interest rate changes to 5
percent and then decided to sell the bond, determine the profit (loss) you
expect to make.

(2 marks)

b)
i)
What is liquidity risk?

(2 marks)

ii)
How do banks solve liquidity problems

(2 marks)

c)
i)
How are Eurodollars created?

(2 marks)

ii)
Explain how banks can overcome tight money regulations.
(3 marks)

d)
Briefly explain the functions of financial intermediaries in an economy. (5 marks)

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