1. Suppose interest rates on residential mortgages of equal risk are 5.5% in California and 7.0% in New York. Could this differential persist? What forces might tend to equalize rates? Would differentials in borrowing costs for businesses of equal risk located in California and 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 likely to exist if the firms being compared were very large or if they were very small? What are the implications of all of this with respect to nationwide branching?
2. 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?
3. 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.

1. Suppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest rates in Europe. What effect would this have on the price of an average company's common stock?