Part 3 Financial Assets New York be more or less likely to exist than differentials in residential mortgage rates Would differentials in the cost of money for New York and California firms be more likey to exist if the firms being compared were very large or if they were very small? What the implications of all of this with respect to nationwide branching? are 6-2 Which fluctuate more-long-term or short-term interest rates? Why? 6-3 Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short term basis? Why? 6-4 Suppose the population of Area Y is relatively young, and the population of Area O is rela- tively old, but everything else about the two areas is the same. a. Would interest rates likely be the same or different in the two areas? Explain. b. Would a trend toward nationwide branching by banks and the development of nation- wide diversified financial corporations affect your answer to part a? Explain. 6-5 Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive, but it would in time lead to low prices for gasoline, electricity, and other types of energy. What effect would this have on interest rates? 6-6 Suppose a new and more liberal Congress and administration are elected. Their first order of business is to take away the independence of the Federal Reserve System and to force the Fed to greatly expand the money supply. What effect will this have: a. On the level and slope of the yield curve immediately after the announcement? b. On the level and slope of the yield curve that would exist 2 or 3 years in the future? It is a fact that the federal government (1) encouraged the development of the savings and 6-7 loan industry, (2) virtually forced the industry to make long-term fixed-interest-rate mort- gages, and (3) forced the savings and loans to obtain most of their capital as deposits that were withdrawable on demand. a. Would the savings and loans have higher profits in a world with a "normal" or an inverted yield curve? Explain your answer. b. Would the savings and loan industry be better off if the individual institutions sold their mortgages to federal agencies and then collected servicing fees or if the institu- tions held the mortgages that they originated? 6-8 Suppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest rate- in Europe. What effect would this have on the price of an average company's common stocka What does it mean when it is said that the United States is running a trade deficit? Wha impact will a trade deficit have on interest rates? 6-9 6-10 Suppose you have noticed that the slope of the corporate yield curve has become steen over the past few months. What factors might explain the change in the slope? ns Assume that yields on U.S. Treasury securities were as follows: YIELD CURVES 6-1
