Explain in depth

1. During periods when investors suddenly become fearful that stocks are overvalued, they dump their stocks and the stock market experiences a major decline. During these periods, interest rates also tend to decline. Use the loanable funds framework discussed in this chapter to explain how a massive sell-off of stocks leads to lower interest rates.

 

2.  How might expectations of higher prices in the United States affect the demand for loanable funds, the supply of loanable funds, and interest rates in the United States? Offer a logical explanation of why such an impact on interest rates in the United States might spread to other countries.

 

3. Given your knowledge of how interest rates are influenced by various factors reflecting the demand for funds and the supply of funds available in the credit markets, Make a short essay to explain how and why interest rates will change over the next three months.

 

4. Assuming that liquidity and interest rate expectations 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?

 

5. Interpret the following comments made by Wall Street analysts and portfolio managers

a. "Low-rated bond yields rose as recession fears caused a flight to quality.

b. "The shift from an upward-sloping yield curve to a downward-sloping yield curve is sending a warning about a possible recession."

 

6. Assume that, as of today, the annualized interest rate on a three-year security is 10 percent and the annualized interest rate on a two-year security is 7 percent. Use this information to estimate the one-year forward rate two years from now.