Money Banking And The Financial System 1st Edition R Glenn Hubbard ,Anthony Patrick O'Brien - Solutions

Understand the basic operations of the stock market (pages 157–162)
The Federal Reserve sets a target for the federal funds rate, which is the interest rate banks charge each other on overnight loans.Although the Fed doesn’t actually set the federal funds rate, it
In mid-2010, some policymakers and economists were afraid that the U.S. economy might slip into another recession, even though the previous recession had ended less than one year earlier. A column in
The following is from an article in the Wall Street Journal describing events in the market for Treasury securities that day: “Treasurys prices were mixed, with the shorter end of the curve rising
Writing in late 2009, a columnist in the Wall Street Journal argued, “The current yield on 30-year Treasuries is about 4.4%, and on 10-year bonds it’s about 3.4%. Anyone lending their money for
The following is from the Annual Report for 2007 for the Vanguard 500 Index Fund:The Federal Reserve Board extended its money-tightening campaign during the first half of the year, raising its target
The following excerpt from an article in the Wall Street Journal describes Federal Reserve Chairman Ben Bernanke’s interpretation of the yield curve in 2006:Fed Chairman Ben Bernanke . . . believes
[Related to Solved Problem 5.2 b on page 144]Use the data on Treasury securities in the following table to answer the question:Assuming that the liquidity premium theory is correct, on March 5, 2010,
[Related to the Making the Connection on page 136] What is the yield to maturity on a Treasury bill that matures one year from now, has a price of $1,010, and has a face value of $1,000?If the
[Related to Solved Problem 5.2 a on page 141]Interest rates on U.S. Treasury bills are typically much lower than interest rates on U.S. Treasury notes and bonds. If the federal government wants to
[Related to Solved Problem 5.2 a on page 141]An anonymous billionaire investor was quoted in the Wall Street Journal as asking: “Has there ever been a carry trade that hasn’t ended badly?”What
A student says, “The interest rate on the oneyear Treasury bill is currently 0.29%, while the interest rate on the 30-year Treasury bond is currently 4.10%. Why are any investors buying the
Suppose that the interest rate on a one-year Treasury bill is currently 3% and that investors expect that the interest rates on one-year Treasury bills over the next three years will be 4%, 5%, and
Suppose that you have $1,000 to invest in the bond market on January 1, 2012. You could buy a one-year bond with an interest rate of 4%, a two-year bond with an interest rate of 5%, a three-year bond
Suppose that you want to invest for three years to earn the highest possible return. You have three options: (a) Roll over three one-year bonds, which pay interest rates of 8% in the first year, 11%
Briefly describe the three theories of the term structure.
What are three key facts about the term structure?
What is the term structure of interest rates?What is the Treasury yield curve?
What is a junk bond? Predict what will happen to the yields on junk bonds as the level of economic activity rises and falls during the business cycle. Illustrate your answer with a demand and supply
Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments (that is, they consider
Some aspects of the tax status of a return from a bond may cause the yield to maturity to be an inaccurate measure of an investor’s return from owning the bond. Suppose that Bob owns a bond that
As mentioned in the chapter, during early 2010, investors began to worry that the government of Greece might default on its bonds. The rating agencies downgraded Greek bonds several times. Following
[Related to the Making the Connection on page 134] If investors began to believe that the probability that the Treasury might default on its bonds had increased, what would we observe in the market
[Related to the Chapter Opener on page 123]Why would credit rating agencies indicate that they might reduce the AAA rating on U.S.Treasury bonds if the federal government runs high deficits over a
In 2010, Romania had been running large budget deficits. In an attempt to reduce the deficits, the Romanian government planned to reduce pensions to retired government workers. However, Romania’s
[Related to Solved Problem 5.1 on page 131]Suppose a candidate who runs on a platform of“soak the rich” wins the 2012 presidential election. After being elected, he or she persuades Congress to
In April 2009, as part of the stimulus package intended to fight the recession of 2007–2009, Congress authorized “Build America Bonds,”which states and cities could issue to build roads,
Some economists have argued that one important role of ratings agencies is to keep the managers of firms that issue bonds from using the funds raised in ways that would not be in the best interests
[Related to the Making the Connection on page 127] According to an article in the New York Times, “It was the near universal agreement that potential conflicts were embedded in the[bond] ratings
In 2010, Republic Services, a waste management firm, issued 10-year notes and 30-year bonds.According to an article in the Wall Street Journal, the 10-year notes had a risk premium of 1.40 percentage
Moody’s has a separate ratings scale for municipal bonds. Here is Moody’s definition of its Aaa rating for municipal bonds: “Issuers or issues rated Aaa demonstrate the strongest
According to Moody’s, “Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.”a. What “obligations” is Moody’s referring to?b. What does Moody’s mean
Compare the tax treatment of the coupons on the following bonds: a bond issued by the city of Houston, a bond issued by GE, and a bond issued by the U.S. Treasury
What are the two types of income an investor can earn on a bond? How is each taxed?
How does the interest rate on an illiquid bond compare with the interest rate on a liquid bond?How does the interest rate on a bond with high information costs compare with the interest rate on a
Draw a demand and supply graph for bonds that shows the effect on a bond that has its rating lowered. Be sure to show the demand and supply curves and the equilibrium price of the bond before and
What is meant by a bond issuer’s creditworthiness? What is a bond rating? Who are the major credit rating agencies?
What is default risk? How is default risk measured?
What is the risk structure of interest rates? Briefly explain why bonds that have the same maturities often do not have the same interest rates.
Explain why bonds with different maturities can have different interest rates(pages 135–147)
Explain why bonds with the same maturity can have different interest rates(pages 124–134)
[Related to the Making the Connection on page 113] We have seen that Federal Reserve Chairman Ben Bernanke has argued that low interest rates in the United States during the mid-2000s were due to a
Writing in early 2010, a columnist in the Wall Street Journal observed,“Remarkably, the Treasury market has not yet panicked about the deficits: Yields have barely risen this week.”a. What is the
How would the following events affect the demand for loanable funds in the United States?a. Many U.S. cities increase business taxes to help close their budget deficits.b. Widespread use of handheld
Repeat Problem 4.7 for a large open economy.
In a small open economy, how would each of the following events affect the equilibrium interest rate?a. A natural disaster causes extensive damage to homes, bridges, and highways, leading to
Suppose that in a large open economy, the quantity of loanable funds supplied domestically is initially equal to the quantity of funds demanded domestically. Then an increase in business taxes
The federal government in the United States has been running very large budget deficits.a. Use the loanable funds approach to show the impact of the U.S. budget deficit on the world real interest
Define each of the following:a. Closed economyb. Small open economyc. Large open economyd. World real interest rate
When are economists most likely to use the bond market approach to analyze changes in interest rates? When are economists most likely to use the loanable funds approach?
In the loanable funds model, why is the demand curve downward sloping? Why is the supply curve upward sloping?
Compare the bond market approach to the loanable funds approach by explaining the following for each approach.a. What the good isb. Who the buyer isc. Who the seller isd. What the price is
[Related to the Chapter Opener on page 87]Suppose that in 2010 most investors accept Bill Tedford’s forecast that inflation will be higher in future years.a. What will be the effect on bond prices
[Related to the Solved Problem 4.3 on page 106]A column in the Wall Street Journal warns: “Be wary of long-term bonds. . . . We run the risk of inflation in due course. Longer-term bonds are most
[Related to the Solved Problem 4.3 on page 106]In the article referenced in Solved Problem 4.3, Consumer Reports also advised, “Bonds could do well in 2010 if deflation reigns . . . .”a. What is
In March 2010, Greece announced that it might have trouble in the future paying off the bonds it had sold to finance its government deficits.The Wall Street Journal reported, “Prevailing
Explain what will happen to the equilibrium price and equilibrium quantity of bonds in each of the following situations. (If it is uncertain in which direction either the equilibrium price or
What is the Fisher effect? Use a demand and supply graph for bonds to illustrate the Fisher effect.
Briefly explain what typically happens to interest rates during a recession. Use a demand and supply graph for bonds to illustrate your answer.
Many economists assume that a boom in the stock market is a sign that profitable business opportunities are expected in the future. Use a demand and supply graph for bonds to show the impact of a
For several years in the late 1990s, the federal government in the United States ran a budget surplus. Use a demand and supply graph to illustrate the impact that moving from a budget deficit to a
Use a demand and supply graph for bonds to illustrate each of the following situations. Be sure that your graph shows any shifts in the demand or supply curves, the original equilibrium price and
In the United States, during some years in the 1970s, the real rate of interest on many bonds was negative.a. How can the real rate of interest be negative?b. Why were lenders willing to accept a
For each of the following situations, explain whether the demand curve for bonds, the supply curve for bonds, or both would shift. Be sure to indicate whether the curve(s) would shift to the right or
Briefly explain whether each of the following statements is true or false:a. The higher the price of bonds, the greater the quantity of bonds demanded.b. The lower the price of bonds, the smaller the
If the current price in the bond market is above the equilibrium price, explain how the bond market adjusts to equilibrium.
Why does the supply curve for bonds slope up?Why does the demand curve for bonds slope down?
Explain why each of the following changes might occur:a. The demand curve for bonds shifts to the left.b. The supply curve for bonds shifts to the right.
[Related to the Making the Connection on page 93] What type of portfolio should a new college graduate start to build? Briefly explain what types of assets may be good choices to include in a
[Related to the Making the Connection on page 93] In discussing how to build a financial portfolio for retirement, Christine Fahlund, a financial planner with T. Rowe Price, argues:“It’s all
[Related to the Making the Connection on page 90] An article in the Economist magazine observes that: “It is in the nature of black-swanlike events that they are near-impossible to predict.” What
In 2010, Google founders Larry Page and Sergey Brin sold some of their stock in the company.Google issued a statement that Page and Brin’s stock sales were “part of their respective longterm
What is diversification? How does it reduce the risk of a financial portfolio?
What is the difference between market risk and idiosyncratic risk?
In what sense do investors face a trade-off between risk and return?
Define risk averse. Are investors typically risk averse or risk loving?
How do economists define expected return and risk?
What are the determinants of asset demand?
What is a portfolio?
Use the loanable funds model to analyze the international capital market (pages 107–114)
Use the bond market model to explain changes in interest rates (pages 102–107)
Use a model of demand and supply to determine market interest rates for bonds(pages 94–102)
Discuss the most important factors in building an investment portfolio (pages 88–94)
An article in the Wall Street Journal contained the following:Prices of U.S. Treasury securities advanced Thursday as reports pointed to . . . easing price pressures. It “looks like inflation fear
Suppose that on January 1, 2012, the price of a one-year Treasury bill is $970.87. Investors expect that the inflation rate will be 2% during 2010, but at the end of the year, the inflation rate
For several decades in the late nineteenth century, the price level in the United States declined.Was this likely to have helped or hurt U.S.farmers who borrowed money to buy land? Does your answer
Why might the actual real interest rate differ from the expected real interest rate? Would this possible difference be of more concern to you if you were considering making a loan to be paid back in
Suppose you are about to borrow $15,000 for four years to buy a new car. Briefly explain which of these situations you would prefer to be in:a. The interest rate on your loan is 10%, and you expect
What are TIPS?
What is deflation? If borrowers and lenders expect deflation, will the nominal interest rate be higher or lower than the expected real interest rate? Briefly explain.
What is the difference between the actual real interest rate and the expected real interest rate?
What is the difference between the nominal interest rate on a loan and the real interest rate?
Suppose that you are considering investing in a four-year bond that has a face value of $1,000 and a coupon rate of 6%.a. What is the price of the bond if the market interest rate on similar bonds is
Suppose that you just bought a four-year $1,000 coupon bond with a coupon rate of 6% when the market interest rate is 6%. One year later, the market interest rate falls to 4%. What rate of return did
Suppose that on January 1, 2011, you purchased a coupon bond with the following characteristics:Face value: $1,000 Coupon rate: 8 3/8 Current yield: 7.5%Maturity date: 2015 If the bond is selling for
In October 2009, the Bay Area Toll Authority issued $1.3 billion in bonds with 40-year maturities to raise funds to repair the San Francisco–Oakland Bay Bridge. Would these bonds be of interest
Suppose that for a price of $950 you purchase a 10-year Treasury bond that has a face value of$1,000 and a coupon rate of 4%. If you sell the bond one year later for $1,150, what was your rate of
What is interest-rate risk? Why does a bond with a longer maturity have greater interest-rate risk than a bond with a shorter maturity?
What is the difference between the yield to maturity on a coupon bond and the rate of return?
Consider the following analysis:The rise and fall of a bond’s price has a direct inverse relationship to its yield to maturity, or interest rate. As prices go up, the yield declines and vice versa.

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Money Banking And The Financial System 1st Edition R Glenn Hubbard ,Anthony Patrick O'Brien - Solutions

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