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

[Related to the Making the Connection on pages 70] Consider the following information on two U.S. Treasury bonds:Briefly explain how two securities that have the same yield to maturity can have
[Related to the Making the Connection on page 68] In early 2009, an article in the New York Times observed: “Without a cure for the problem of bad assets, the credit crisis that is dragging down
Ford Motor Company has issued bonds with a maturity date of November 1, 2046 that have a coupon rate of 7.40%, and coupon bonds with a maturity of February 15, 2047 that have a coupon rate of 9.80%.
The following information from the close of trading on January 15, 2010 is for an IBM bond with a face value of $1,000 and a maturity date of October 22, 2012:Coupon rate: 5.050%Price: $1,096.20
[Related to the Chapter Opener on page 51]A student asks:If a coupon bond has a face value of $1,000, I don’t understand why anyone who owns the bond would sell it for less than $1,000.After all,
What is financial arbitrage?
What is the difference between an investor and a trader?
Briefly explain why yields to maturity and bond prices move in opposite directions.
What is a capital gain on a financial security? If you own a bond and market interest rates increase, will you experience a capital gain of a capital loss?
What is the difference between the primary market for a bond and the secondary market?
Many retired people buy annuities. With an annuity, a saver pays an insurance company, such as Berkshire Hathaway Insurance Company or Northwestern Mutual Insurance Company, a lump-sum amount in
Suppose that in exchange for allowing a road to pass through his farmland, George Pequod has been paid $135 per year by the township he lives in. He had been promised that he and future owners of his
Consider a $1,000 face value bond that sells for an initial price of $450. It will pay no coupons for the first 10 years and will then pay 6.25%coupons for the remaining 20 years. Write down an
[Related to Solved Problem 3.3 on page 66] For each of the following situations, write the equation needed to calculate the yield to maturity.You do not have to solve the equations for i; just write
Consider the case of a two-year discount bond—that is, a bond that pays no coupon and pays its face value after two years rather than one year. Suppose the face value of the bond is$1,000, and the
Suppose that you are considering subscribing to Economist Analyst Today magazine. The magazine is advertising a one-year subscription for $60 or a two-year subscription for $115. You plan to keep
Assume that the interest rate is 10%. Briefly explain whether you would prefer to receive(a) $75 one year from now, (b) $85 two years from now, or (c) $90 three years from now? Would your answer
Write an expression showing the relationship among the amount borrowed on a fixed-payment loan, the payments on the loan, and the yield to maturity.
Write an expression showing the relationship among the price of a discount bond, the bond’s face value, and the yield to maturity.
Write an expression showing the relationship among the amount borrowed on a simple loan, the required loan payment, and the yield to maturity.
Write an expression showing the relationship among the price of a coupon bond, the coupon payments, the face value, and the yield to maturity.
What is the yield to maturity? Why is the yield to maturity a better measure of the interest rate on a bond than is the coupon rate?
When corporations borrow money for a long period, why do they prefer to borrow in the form of coupon bonds rather than in the form of fixed-payment loans?
[Related to the Making the Connection on page 62] What is a STRIP? Why were STRIPS created? What need were STRIPS intended to fill?
Why do consumers usually prefer fixed-payment loans to simple loans when buying cars and houses?
Explain in which category of debt instrument the following belong:a. Car loanb. U.S. Treasury bondc. Three-month U.S. Treasury billd. Mortgage loan
Define and briefly explain the following terms:a. Face valueb. Couponc. Coupon rated. Current yielde. Maturity
What is the difference between a debt instrument and an equity?
[Related to Solved Problem 3.1 B on page 57] In early 2010, newspapers reported that NBA superstar Kobe Bryant had signed an extension to his existing contract. His salaries in future years under the
[Related to Solved Problem 3.1 B on page 57]In 2010, Aroldis Chapman, a baseball player who had defected from Cuba, signed a contract with the Cincinnati Reds. According to baseball writer Keith
[Related to the Solved Problem 3.1 A on page 55]In this problem, suppose that in addition to the two CDs described in Solved Problem 3.1 A, we have a third CD in which you might invest—one that
[Related to Solved Problem 3.1 A on page 55]Look again at Solved Problem 3.1 A. Would the answer change if the second CD pays an interest rate of 1% the first two years and 10% in the third year?
[Related to Solved Problem 3.1 A on page 55]Suppose that you are considering investing$1,000 in one of the following bank CDs:● CD 1, which will pay an interest rate of 5%per year for three
Norman Jones, an economic historian at the University of Utah, has described the view of the ancient Greek philosopher Aristotle on interest:Aristotle defined money as a good that was consumed by
How is the price of a financial asset related to the payments to be received from owning it?
Define the following:a. Time value of moneyb. Present valuec. Discounting
What is the present value of $1,200 to be received in one year if the interest rate is 10%?
If you deposit $1,000 in a bank CD that pays interest of 3% per year, how much will you have after two years?
Give an example of a financial transaction that requires a payment in the future.
What are the main reasons that lenders charge interest on loans?
Explain the difference between nominal interest rates and real interest rates(pages 74–77)
Explain the difference between interest rates and rates of return (pages 72–74)
Understand the inverse relationship between bond prices and bond yields(pages 67–72)
Explain the relationship between the yield to maturity on a bond and its price (pages 62–66)
Distinguish among different debt instruments and understand how their prices are determined (pages 59–62)
Explain how the interest rate links present value with future value (pages 52–59)
In late 2009, Federal Reserve Chairman Ben Bernanke wrote the following in a column published in the Washington Post:[Proposals in Congress to reduce the independence of the Fed] are very much out of
What does the statistical evidence show about the link between the growth rate of the money supply and the inflation rate in the long run? Is the link between the growth rate of the money supply and
[Related to the Chapter Opener on page 25]In 2009, Zimbabwe ended its hyperinflation by adopting the U.S. dollar as legal tender. What potential problems could this strategy have for the Zimbabwean
[Related to the Making the Connection on page 41] In 1919, the British economist John Maynard Keynes wrote the well-known book The Economic Consequences of the Peace, in which he argued that the
[Related to the Making the Connection on page 41] When the German government succeeded in putting an end to the hyperinflation in 1924, would this have been better news for borrowers or for lenders?
How does a high rate of inflation affect the value of money? How does it affect the usefulness of money as a medium of exchange?
During the late nineteenth century, the United States experienced a period of sustained deflation, or a falling price level. Explain in terms of the quantity theory of money how a deflation is
on page 38]A student makes the following statement: “If the money supply in a country increases, then the level of total production in that country must also increase.” Briefly explain whether
[Related to Solved Problem
If during 2012 the money supply increases by 4%, the inflation rate is 2%, and the growth of real GDP is 3%, what must have happened to the value of velocity during 2012?
Briefly discuss the pros and cons of a central bank being independent of the rest of the government.
What is a hyperinflation? What is the cause of hyperinflation?
What is purchasing power? How is it affected by inflation?
What is the quantity theory of money? What does the quantity theory indicate is the cause of inflation?
What is the equation of exchange? Is the equation of exchange a theory? Briefly explain.
[Related to the Making the Connection on page 35] Explain whether you agree with the following statement:The Federal Reserve believes that two-thirds of the currency included in M1 is actually
Why might households and firms in a foreign country prefer to use U.S. dollars rather than their own country’s currency in making transactions? What advantages or disadvantages do foreign
In a report published in 2009, investment analyst Ned Davis referred to gold as “real money.”Is gold used as money in the United States?What point was Davis making?Source: E. S. Browning,
Why aren’t credit cards included in M1 or M2?
Suppose you withdraw $1,000 from your checking account and use the funds to buy a certificate of deposit at your bank. How will these actions affect M1 and M2?
Explain whether each of the following is included in only M1, only M2, or both M1 and M2:a. Traveler’s checksb. Savings depositsc. Certificates of depositd. Checking account deposits
Define liquidity. Rank the following assets in terms of liquidity, from most to least liquid:money market mutual fund, savings account, corporate stock, dollar bill, house, gold bar, checking account.
Since the 1960s, which measure of the money supply has grown more rapidly, M1 or M2?Briefly explain why this is the case. Has the growth of M1 been more or less stable than the growth rate of M2?
Are the assets included in M1 more or less liquid than the assets included in M2? Briefly explain.
Suppose that debit cards, ATMs, ACH transactions, and other forms of electronic funds transfers did not exist. How would this change the way you shop and pay bills? How would transactions costs in
One historian has given the following description of the economy of the Roman Empire in the third century under the emperor Diocletian:The coinage had become so debased as to be virtually worthless.
Suppose that an economy in 10000 B.C. used a rare stone as its money. Suppose also that the number of stones declined over time as stones were accidentally destroyed or used as weapons.What probably
Is the United States likely to become a “cashless society”? Briefly explain.
Why did governments begin issuing paper currency? Why was paper currency needed?
What is a payments system? If there were a decrease in the efficiency of the payments system, what would be the cost to the economy?
[Related to the Making the Connection on page 30] Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling.Briefly discuss who
Discuss whether your money, wealth, or income increases in each of the following situations:a. The value of your house increases.b. Your boss gives you a 10% raise.c. You take cash out of the bank
In November 2009, the government of North Korea announced that it was replacing the existing currency with a new currency. The government would allow people to exchange only a limited amount of the
Suppose that you live in a simple farm economy where milk is accepted as the primary form of money. Discuss the difficulties with using milk as money in regard to:a. A medium of exchangeb. A unit of
What is commodity money? How does it differ from fiat money?
Is the store-of-value function unique to money? If not, give some other examples of stores of value.Must money be a store of value to serve its function as a medium of exchange? Why or why not?
What are the four main functions of money?Describe each function.
What makes a dollar bill money? What makes a personal check money? What factors, if changed, would affect your willingness to accept a dollar bill or a check as money?
[Related to the Making the Connection on page 27] Following the end of World War II in 1945, the Reichsmark, the German currency, lost so much value that a barter economy arose.During this period,
[Related to the Making the Connection on page 27] Should the packs of Marlboro cigarettes used to pay taxi drivers in Russia in the late 1980s be considered money? Briefly explain.If Marlboro
What are the key differences between using a deerskin as money and using a dollar bill as money?
Why might an individual find a $20 Federal Reserve Note to be more desirable as a form of money than a $20 gold coin? Which would the government find more desirable? Briefly explain.
What are transactions costs? How does using money affect the level of transactions costs in an economy?Problems and Applications
What are the costs of a barter system?
What is specialization? How does it improve an economy’s standard of living?
Use the quantity theory of money to analyze the relationship between money and prices in the long run (pages 37–43)
Explain how the U.S. money supply is measured (pages 33–37)
Explain the role of the payments system(pages 31–33)
Discuss the four key functions of money(pages 28–31)
Analyze the inefficiencies of a barter system(pages 26–28)
How does the creation of a secondary market in mortgages help to promote home ownership?Why might the federal government decide to intervene in the housing market to promote home ownership?
on page 15 shows the Case-Shiller price index of houses. This index was developed by economists Karl Case of Wellesley College and Robert Shiller of Yale University. Many economists consider changes
Panel (b) of Figure
Why is a bubble more likely to occur in the housing market rather than in the market for automobiles or the market for refrigerators?

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

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