Book Chapters Attached

Chapter 3:

1. Identify the relevant Characteristics of any security that can affect its yield.

3. Discuss the relationship between the yield and liquidity of securities.

4. Do investors in high tax brackets or those in low tax brackets benefit more form tax-exempt securities? Why? At a given point in time, which offers a higher before-tax yield: municipal bonds or corporate bonds? Why? Which has the higher after yield tax? If taxes did not exist, would Treasury bonds odder a high or lower yield than municipal bonds with the same maturity? Why?

5. Explain how a yield curve would shift in response to a sudden expectation of raising interest rates, according to the pure expectations theory.

8. Explain the liquidity premium theory.

10. If a downward sloping yield curve is mainly attributed to segmented markets theory, what does this suggest about the demand for and supply of funds in the short term and long term maturity markets?

13. What factors influence the shape of the yield curve? Describe how financial market participants use the yield curve.

15. Assuming that liquidity and interest rate expectation are both important for explaining the shape of a yield curve, what does a flat yield curve indicate about the market's perception of future interest rates?

16. Assume that the yield curves in the US, France and Japan are flat. IF the US yield curve suddenly becomes positively sloped, do you think the yield curves in France and Japan would be affected? If so, how?

Problem 4.

Assume that interest rates for one-year securities are expected to be 2% today, 4% one year from now, and 6% two year from now. Using only pure expectation theory, what are the current interest rates on 2 year and 3 year securities?

Chapter 4:

1. Briefly describe the origin of the Federal Reserve System. Describe the function of the Fed district banks.

2. What are the main goals of the Federal Open Market Committee? How does it attempt to achieve these goals?

3. Explain how the Fed increased the money supply through open market operations.

10. Why do the Fed's open market operation have a different effect on the money supply than do transaction between two depository institutions?