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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Former Federal Reserve Chairman Alan Greenspan has argued that it is very difficult to identify bubbles until after they pop. What is a bubble, and why might bubbles be difficult to identify?
A student remarks: “135,000,000 shares of General Electric were sold yesterday on the New York Stock Exchange, at an average price of $25 per share. That means General Electric just received over
Suppose that the price of Goldman Sachs stock is currently $142 per share. You expect that the firm will pay a dividend of $1.40 per share at the end of the year, at which time you expect that the
Worry,” Wall Street Journal, April 24, 2016. 3.6 The following is from an article on cnbc.com: Typically stock prices increase when the economy is expanding. But on a day when a measure of
A columnist in the Economist argues that the efficient markets hypothesis has been “dealt a series of blows” because “in the late 1990s dot-com companies with no profits and barely any earnings
The British economist John Maynard Keynes once wrote that investors often do not rely on computing expected values when determining which investments to make:Most, probably, of our decisions to do
An article in the Economist notes: “If other people are making a fortune by buying tech stocks, or by trading up in the housing market, then there is a huge temptation to take part, in case one
In a column in the Wall Street Journal, economist Burton Malkiel notes: “Preferred stock is a kind of hybrid security that sits between bonds and common stock.”a. In what sense is a share of
According to Moody’s, “Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.”a. What “obligations” is Moody’s referring to?b. What
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%
Why might the bond rating agencies lower their ratings on a firm’s bonds? 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
The chapter opener noted that in mid-2016, you could earn an interest rate of 0.25% by buying a 3-month Treasury bill or an interest rate of 2.6% by buying 30-year Treasury bond. Briefly explain how
Compare the tax treatment of the coupons on the following three bonds: a bond issued by the city of Houston, a bond issued by Apple, and a bond issued by the U.S. Treasury.
Briefly describe the three theories of the term structure.
What are the two types of income an investor can earn on a bond? How is each taxed?
What are three key facts about the term structure?
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
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and for the period from January 1997 to the present, download to the same graph the data series for the BofA
How does the Treasury yield curve illustrate the term structure of interest rates?
How is a bond’s rating related to the bond issuer’s creditworthiness?
Go to www.treasury.gov and find the page “Daily Treasury Yield Curve Rates.” Briefly describe the current shape of the yield curve. Can you use the yield curve to draw any conclusion about what
In his memoir, former Federal Reserve Chair Ben Bernanke remarked: “In setting longer-term rates, market participants take into account their expectations for the evolution of short-term rates.”
Briefly explain why bonds that have the same maturities often do not have the same interest rates.
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and for the period from January 1957 to the present download to the same graph the data series for the 3-month
We saw that former Federal Reserve Chairman Ben Bernanke argued that low interest rates in the United States during the mid-2000s were due to a global savings glut rather than to Federal Reserve
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 tablet
A report on 401(k) plans notes: “Younger participants tended to favor equity funds … while older participants were more likely to invest in fixedincome securities such as bond funds.”a. What
According to an article in the Economist, in Germany 80% of household wealth is in the form of bank deposits, as opposed to only 20% in the United States. The article notes: “If German … savers
Some economists argue that a boom in stock prices is a sign that profitable business opportunities are expected in the future. Use a demand and supply graph for bonds to show the effect of a boom in
In a large 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
According to an article in the Wall Street Journal in early 2016: U.S. government bonds maturing in more than 25 years returned a negative 1.2% in the month through Thursday … after chalking up 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
The following is from a column on marketwatch.com: “There are lots of things we more or less know will happen…. But what are the potential black swans?”a. What does the columnist mean by a
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 suppose that an increase in business
An article in the Wall Street Journal begins: “Yields on the 10-year government debt of Germany and the U.K. fell to all-time lows, a stark demonstration of the modern era of scant inflation, weak
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
A financial planner writing in the New York Times gave the following sarcastic investment advice: “On Jan. 1 of each year, just figure out which asset class will do really well and move all your
The federal government in the United States has been running large budget deficits.a. Use the loanable funds approach to show the effect of the U.S. budget deficit on the world real interest rate,
What is the difference between market risk and idiosyncratic risk? How does diversification reduce the risk of a financial portfolio?
Suppose that the inflation rate increases, and the Federal Reserve responds by taking actions to raise the short-term nominal interest rate. Use a money market graph to show the result of the Fed’s
According to an article in the Economist about interest rates on European government bonds in 2016, investors were concerned that “European equities are almost 20% below their levels of a year ago;
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
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 what sense do investors face a trade-off between risk and return?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent values and values from the same month five years earlier for the 10-Year Treasury
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
If the current price in the bond market is above the equilibrium price, explain how the bond market adjusts to equilibrium.
How do economists define expected return and risk? Are investors typically risk averse or risk loving? Briefly explain.
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download to the same graph the following data series from January 1957 until the most recent available
Draw a money demand and supply graph that shows how the Federal Reserve can decrease the short-run nominal interest rate.
How will the bond market adjust to an increase in the expected inflation rate? Use a demand and supply graph for bonds to illustrate your answer.
Why does the supply curve for bonds slope up? Why does the demand curve for bonds slope down?
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
What are the determinants of asset demand?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for the 10-year U.S. Treasury note (GS10) from January 1954 until the
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent value and the value from the same quarter four years earlier for Gross Government
Briefly explain what typically happens to interest rates during a recession. Use a demand and supply graph for bonds to illustrate your answer.
Why might the demand curve for bonds shift to the left? Why might the supply curve for bonds shift to the right?
What actions did the Federal Reserve and Treasury take in dealing with the financial crisis?What is the moral hazard problem?How is it related to the Federal Reserve’s and Treasury’s actions?
Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling. Briefly discuss who would gain and who would lose from this legislation.
According to an article in the Wall Street Journal:“The highest U.S. dollar denomination, the $100 bill, trades at a significant premium in many emerging markets.” Why might people in these
Sweden, some banks have closed their ATMs, no longer allow depositors to make cash withdrawals in person at branches, and no longer accept cash deposits.a. What are the benefits to a bank from taking
One of the ways the Federal Reserve carries out its responsibilities for conducting monetary policy is by trying to affect the level of key interest rates. In early 2016, Federal Reserve Chair Janet
Consider the following information from September 15, 2016, for a coupon bond with a face value of $1,000 and a maturity date ofSeptember 15, 2018:Coupon rate: 5.0%Price: $955.11Yield to maturity:
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 a 6.25% coupon each year for the remaining 20 years. Write
A certified financial planner notes that with an unsubsidized student loan, the borrower has the choice of whether to make interest payments on the loan while still in college. She advises that
Norman Jones, an economic historian at the University of Utah, has described the views of the ancient Greek philosopher Aristotle on interest:Aristotle defined money as a good that was consumed by
What is the difference between an investor and a trader? What is financial arbitrage?
Why do consumers usually prefer fixed-payment loans to simple loans when buying cars and houses?
What are TIPS? Why would an investor buy TIPS rather than conventional Treasury bonds?
If you own a bond and market interest rates increase, will you experience a capital gain or a capital loss? Briefly explain.
Briefly define each of the five key financial assets. Is every financial asset also a financial security? Is it possible that what a saver would consider a financial asset a borrower would consider a
What do economists mean by a “bubble”? Why do many economists believe that there was a housing bubble in the United States between 2000 and 2005?
Go to the web site of the Bureau of Economic Analysis (www.bea.gov) and use the data there to calculate the percentage change in GDP for each year from 2000 through 2015. Graph your data. Briefly
What is the difference between direct finance and indirect finance? Which involves financial intermediaries, and which involves financial markets?
By the 2000s, what significant changes had taken place in the mortgage market? What is a “subprime” borrower? What is an “Alt-A” borrower?
Briefly explain why the financial system is one of the most highly regulated sectors of the economy.
What problems did the decline in housing prices that began in 2006 cause for the financial system?
What is the Federal Reserve? Who appoints the members of the Federal Reserve’s Board of Governors? How do the Fed’s current responsibilities compare with its responsibilities when Congress
Briefly describe the three key services that the financial system provides to savers.
Why is a bubble more likely to occur in the housing market than in the market for automobiles or the market for refrigerators?
A student remarks:When I pay my car insurance premiums, I never get that money back. My insurance premiums represent payments for a service I receive from the insurance company. When I deposit money
Panel (b) of Figure 1.3 shows a price index of houses. The late Karl Case of Wellesley College and Robert Shiller of Yale University developed this index. Many economists consider changes in the
In a talk at the White House after the end of the financial crisis, President Barack Obama argued:“Ultimately in this country we rise and fall together: banks and small businesses, consumers and
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?
An article in the Economist magazine notes the following about peer-to-peer lending sites: “Instead of a bank intermediating between savers and borrowers, the two parties deal with each other
Households have a much larger fraction of their savings in pension funds than in bank deposits. If you are saving for retirement, why might you be better off putting your funds in an IRA or a 401(k)
Typically, you will receive a very low interest rate on money you deposit in a bank. Interest rates on car loans and business loans are much higher. Why, then, do most people prefer putting their
Suppose financial intermediaries did not exist and only direct finance were possible. How would this affect the process of an individual buying a car or a house?
During the 2007–2009 recession, many people who had taken out mortgages to buy homes had trouble making the payments on their mortgages.Because housing prices were falling, the amount that people
What makes a dollar bill money? What makes a personal check money? Are there circumstances under which you would be reluctant to accept a dollar bill as money? A personal check?
Why does the Federal Reserve care about the payments system? What does the Fed consider to be the five desirable outcomes for the payments system?
Are the assets included in M1 more or less liquid than the assets included in M2? Briefly explain.
Is the equation of exchange a theory? Briefly explain.
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred. stlouisfed.org) and find the most recent values for the M1 Money Stock (M1), the Currency Component of M1 (CURRENCY), Total
What are the costs of a barter system?
Give two examples of commodity money.
Briefly describe each of the four main functions of money.
Why did governments begin issuing paper currency?
Since 1970, which measure of the money supply has grown more rapidly, M1 or M2? Briefly explain why. Has the growth of M1 been more or less stable than the growth rate of M2?

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