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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

=+24. Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting
=+ How would your yield curves change if people preferred shorter-term bonds to longer-term bonds?
=+the following paths of one-year interest rates over the next four years:a. 4%, 6%, 11%, 15%b. 3%, 5%, 13%, 15%
=+23. Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting
=+20. If expectations of future short-term interest rates suddenly fell, what would happen to the slope of the yield curve?
=+ 19. If the yield curve suddenly became steeper, how would you revise your predictions of interest rates in the future?
=+ Would you be more or less willing to accept the expectations theory?
=+18. If yield curves, on average, were flat, what would this say about the liquidity (term) premiums in the term structure?
=+Art Studio: ElectraGraphics, Inc.Yield to Maturity Term to Maturity
=+the yield curve indicate about the market’s predictions for the inflation rate in the future?Mishkin Economics of Money. . .Second proof: 1/13/00 Figure: 6.d (EOC)Width: 16.2 picas Depth: 14
=+17. If a yield curve looks like the one shown in the figure below, what is the market predicting about the movement of future short-term interest rates? What might
=+Art Studio: ElectraGraphics, Inc.Yield to Maturity Term to Maturity
=+14. If bond investors decide that 30-year bonds are no longer as desirable an investment as they were previously, Mishkin Economics of Money. . .Second proof: 1/13/00 Figure: 6.c (EOC)Width: 16.2
=+bond if interest rates on one-year bonds are expected to be the same in both years.” Is this statement true, false, or uncertain?
=+13. “According to the expectations theory of the term structure, it is better to invest in one-year bonds, reinvested over two years, than to invest in a two-year
=+through a third party. How does the pre-2008 scenario illustrate a conflict of interest similar to the role that credit-rating agencies played in the global financial crisis?
=+housing market in 2008, mortgage lenders required a house inspection, but this inspection was arranged
=+same one or two inspection companies in the same geographical market. Following the collapse of the
=+12. Prior to 2008, mortgage lenders required a house inspection to assess a home’s value, and often used the
=+ What effect would the change have on interest rates on U.S. Treasury securities?
=+11. If the income tax exemption on municipal bonds were abolished, what would happen to the interest rates on these bonds?
=+its peak in October 2008. What explains this sudden increase?
=+paper and three-month AA-rated nonfinancial commercial paper steadily increased from its usual level of close to zero, spiking to over a full percentage point at
=+10. During 2008, the difference in yield (the yield spread)between three-month AA-rated financial commercial
=+smaller scale than nominal U.S. Treasury bonds of equivalent maturity. What can you conclude about the liquidity premiums of TIPS versus nominal U.S. bonds?
=+price of bonds is adjusted for inflation over the life of the debt instrument. TIPS bonds are traded on a much
=+7. The U.S. Treasury offers some of its debt as Treasury Inflation Protected Securities, or TIPS, in which the
=+Is this statement true, false, or uncertain? Explain your answer.
=+6. “If bonds of different maturities are close substitutes, their interest rates are more likely to move together.”
=+large capital injections and an ownership stake. How would this affect, if at all, the yield and risk premium on AIG corporate debt?
=+to the severity of the global financial crisis. As a result, the U.S. government stepped in to support AIG with
=+4. In the fall of 2008, AIG, the largest insurance company in the world at the time, was at risk of defaulting due
=+interest rates, a corporate bond with a Moody’s Baa rating or a corporate bond with a C rating? Why?
=+2. Which should have the higher risk premium on its
=+1. If junk bonds are “junk,” then why do investors buy them?
=+What happens to the difference between the adjusted value of an investment and its inflationadjusted value asa. inflation increases?b. the investment horizon lengthens?c. expected returns increase?
=+.htm and review how changes in inflation alter your real return.
=+2. One of the points made in this chapter is that inflation erodes investment returns. Go to http://www.moneychimp.com/articles/econ/inflation_calculator
=+What would a car that costs $22,000 today have cost the year you were born?
=+1. Increasing prices erode the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to
=+rates compare to the three scenarios presented in Figure 11 of this chapter?
=+d. Based on your answers to parts (a) through (c), how do the actual data on money growth and interest
=+overall effect of money growth on interest rates?
=+available. Assuming the liquidity and other effects are fully incorporated into the bond market after two years, what do your results imply about the
=+from 2000:Q1 with the interest rate from 2002:Q1, and so on, up to the most recent pairwise data
=+the interest rate eight quarters later. For example, create a scatter plot comparing money growth
=+c. Repeat part (a) again, except this time compare the contemporaneous money growth rate with
=+and so on, up to the most recent pairwise data available. Compare your results to those obtained in part (a), and interpret the liquidity effect as it relates to the income, price-level, and
=+b. Repeat part (a), but this time compare the contemporaneous money growth rate with the interest rate four quarters later. For example, create a scatter plot comparing money growth from 2000:Q1
=+quarter of data available. On the scatter plot, graph a fitted (regression) line of the data (there are several ways to do this; however, one particular chart layout has this option built in.)
=+a. Create a scatter plot, with money growth on the horizontal axis and the 10-year treasury rate on the vertical axis, from 2000:Q1 to the most recent
=+money supply indicator, adjust the units setting to“Percent Change from Year Ago,” and for the 10-year treasury bond, adjust the frequency setting to“Quarterly.” Download the data into a
=+2. Go to the St. Louis Federal Reserve FRED database, and find data on the M1 money supply (M1SL)and the 10-year U.S. treasury bond rate. For the M1
=+b. What is the change in yield on the 10-year treasury bond over the last year of data available? Is this result consistent with your answer to part (a)?Briefly explain.
=+a. What is the percent change in net worth over the most recent year of data available? All else being equal, what do you expect should happen to the price and yield on the 10-year treasury
=+adjust the units setting to “Percent Change from Year Ago,” and for the 10-year bond, adjust the frequency setting to “Quarterly.”
=+1. Go to the St. Louis Federal Reserve FRED database, and find data on net worth of households and nonprofits (HNONWRQ027S) and the 10-year U.S.treasury bond (GS10). For the net worth indicator,
=+b. Calculate the effect on the equilibrium interest rate in this market, as a result of the Federal Reserve action.
=+a. How does the Federal Reserve policy affect the bond supply equation?
=+ Suppose that, as a result of monetary policy actions, the Federal Reserve sells 90 bonds that it holds.Assume that bond demand and money demand are held constant.
=+25. The demand curve and supply curve for one-year discount bonds with a face value of $1,050 are represented by the following equations:Bd: Price = -0.8 * Quantity + 1,160 Bs: Price = Quantity +
=+b. Given your answer to part (a), what is the expected interest rate in this market?
=+a. What is the expected equilibrium price and quantity of bonds in this market?
=+24. The demand curve and supply curve for one-year discount bonds with a face value of $1,000 are represented by the following equations:Bd: Price = -0.8 * Quantity + 1,100 Bs: Price = Quantity +
=+rates are affected when the riskiness of bonds rises. Are the results the same in the two frameworks?
=+23. Using both the supply and demand for bonds and liquidity preference frameworks, show how interest
=+interest rates are procyclical (rising when the economy is expanding and falling during recessions).
=+22. Using both the liquidity preference framework and the supply and demand for bonds framework, show why
=+show what effect this action has on interest rates. Is your answer consistent with what you would expect to find with the liquidity preference framework?
=+21. An important way in which the Federal Reserve decreases the money supply is by selling bonds to the public. Using a supply and demand analysis for bonds,
=+b. If you are risk-averse and had to choose between the stock and the bond investments, which would you choose? Why?
=+a. Which investment should you choose to maximize your expected return: stocks, bonds, or commodities?
=+following table, which gives the probabilities of possible returns from each investment:
=+20. Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser
=+What does this say about the income, price-level, and expected-inflation effects?
=+yield on 3-month Treasury bills was close to 0%. Given these high rates of money growth, why did interest rates stay so low, rather than increase?
=+19. M1 money growth in the U.S. was about 15% in 2011 and 2012, and 10% in 2013. Over the same time period, the
=+ Discuss the possible resulting situations.
=+reputation for advocating an even slower rate of money growth than the current chair, what will happen to interest rates?
=+18. If the next chair of the Federal Reserve Board has a
=+16. Would fiscal policymakers ever have reason to worry about potentially inflationary conditions? Why or why not?
=+15. Predict what will happen to interest rates if prices in the bond market become more volatile.
=+14. Predict what will happen to interest rates if the public suddenly expects a large increase in stock prices.
=+with a new anti-inflation program. Predict what will happen to interest rates if the public believes him.
=+13. The president of the United States announces in a press conference that he will fight the higher inflation rate
=+12. Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.
=+deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for quite some time. Does this make sense? Why or why not?
=+11. In the aftermath of the global economic crisis that started to take hold in 2008, U.S. government budget
=+10. Explain what effect a large federal deficit should have on interest rates.
=+6. “The more risk-averse people are, the more likely they are to diversify.” Is this statement true, false, or uncertain? Explain your answer.
=+c. Brokerage commissions on stocks fall.d. You expect interest rates to rise.e. Brokerage commissions on bonds fall.
=+4. Explain why you would be more or less willing to buy long-term AT&T bonds under the following circumstances:a. Trading in these bonds increases, making them easier to sell.b. You expect a bear
=+d. You expect interest rates to rise.
=+c. You expect inflation to rise, and gold prices tend to move with the aggregate price level.
=+3. Explain why you would be more or less willing to buy gold under the following circumstances:a. Gold again becomes acceptable as a medium of exchange.b. Prices in the gold market become more
=+c. You expect Microsoft stock to double in value next year.d. Prices in the stock market become more volatile.e. You expect housing prices to fall.
=+2. Explain why you would be more or less willing to buy a house under the following circumstances:a. You just inherited $100,000.b. Real estate commissions fall from 6% of the sales price to 5% of
=+c. The bond market becomes more liquid.d. You expect gold to appreciate in value.e. Prices in the bond market become more volatile.
=+1. Explain why you would be more or less willing to buy a share of Microsoft stock in the following situations:a. Your wealth falls.b. You expect the stock to appreciate in value.
=+To compute the values for savings bonds, read the instructions on the page and click on Get Started. Fill in the information (you do not need to fill in the Bond Serial Number field) and click on

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