1 a. (10pts) Explain why you would be more or less willing to buy a share of Google stock in the following situations: (Discuss factors related to course materials regarding asset demand and its determinants) i. You expect the stock to appreciate in value, i. Prices in bond market become more volatile. b. (10pts) Does an increase in money supply decrease the interest rate? Discuss in terms of liquidity effect, income effect, price level effect and expected inflation effect 2 a. (10pts) Assuming expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years. 5%,4%3%,4%,5% b) (5pts) How would your yield curve change if people preferred short-term bonds to long-term bonds? c)(5pts) What does your yield curve in (a) predict about business cycle and inflation? 3 a. (12pts) Using the supply and demand for bonds and liquidity preference frameworks, show (graphs required) how interest rates are affected when the riskiness of bonds rises. Are the results the same in the two frameworks? Explain. b. (8pts) Explain what might happen to risk premium on corporate bonds during business cycle expansions and during recessions. 1 a. (10pts) Explain why you would be more or less willing to buy a share of Google stock in the following situations: (Discuss factors related to course materials regarding asset demand and its determinants) i. You expect the stock to appreciate in value, i. Prices in bond market become more volatile. b. (10pts) Does an increase in money supply decrease the interest rate? Discuss in terms of liquidity effect, income effect, price level effect and expected inflation effect 2 a. (10pts) Assuming expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years. 5%,4%3%,4%,5% b) (5pts) How would your yield curve change if people preferred short-term bonds to long-term bonds? c)(5pts) What does your yield curve in (a) predict about business cycle and inflation? 3 a. (12pts) Using the supply and demand for bonds and liquidity preference frameworks, show (graphs required) how interest rates are affected when the riskiness of bonds rises. Are the results the same in the two frameworks? Explain. b. (8pts) Explain what might happen to risk premium on corporate bonds during business cycle expansions and during recessions
