Chapter 9
1. Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in othercountries?
2. In what ways can the regional Federal Reserve banks influence the conduct of monetarypolicy?
3. Which entities in the Federal Reserve System control the discount rate? Reserve requirements? Open marketoperations?
Chapter 10
1. Which goals of the Fedconflict?
2. If the Fed has an interest-rate target, meaning they want to control the interest rate at a specific rate such as 4%, why will an increase in the demand for reserves lead to a rise in the moneysupply?
3. What are the three monetary tools that the Fed uses to influence the direction of interest rates? Which one is most commonly used and which one is least commonlyused?
Chapter 3
1. Consider a bond with a 6.00% annual coupon and a face value of $1,000. Complete the following table:
Table 1
|
Years to Maturity
|
Discount Rate
|
Current Price
|
|
3
|
5%
|
|
|
3
|
7%
|
|
|
6
|
7%
|
|
|
9
|
7%
|
|
|
9
|
9%
|
|
2. Assume you just deposited $1,000 into a bank account. The current real interest rate is 6.00% and inflation is expected to be 6.00% over the next year.
What nominal interest rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a laptop that currently sells for $1,050, will you have enough to buyit?
3. A 10-year, 7% coupon bond with a face value of $1,000 is currently selling for $871.65. Compute your rate of return if you sell the bond next year for $880.
Chapter 4
1. What effect will a sudden decrease in the volatility of gold prices have on interest rates?
2. How might a sudden decrease in people's expectations of future real estate prices affect interestrates?
3. Explain what effect a large federal deficit might have on interestrates?
4. Using a supply and demand analysis for bonds, show what the effect is on interest rates when the riskiness of bondsincrease.
5. Will there be an effect on interest rates if brokerage commission on stocks increase?Explain.
6. The president of the US announces in a press conference that they will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates?
7. Predict what will happen to interest rates if the public suddenly expects a large increase in stock prices?
Chapter 5
1. If the yield curve looks like the one shown below, what is the market predicting about the movement of short-term interestrates?
2. If the yield curve looks like the one shown below, what is the market predicting about the movement of short-term interestrates?
3. What effect, would reducing income tax rates have on the interest rates of municipal bonds? Would interest rates of Treasury securities be affected, and if so how?
4. Predict what will happen to interest rates on corporate bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt and the public believesit?
5. Predict what would happen to the risk premiums on corporate bondsif brokerage commission were increased in the corporate bondmarket?
6. Economists have forecasted one-year T-bill rates for the following five years, as shown below. You have liquidity premium 0.25% for the next two years and 0.50% thereafter. Would you be willing to purchase a five- year T-bond at a 5.75% interestrate?
Table 2
Year
|
1-yearrate |
|
1
|
2.00%
|
|
2
|
3.00%
|
|
3
|
4.50%
|
|
4
|
5.75%
|
| 5 |
6.50% |
7. Debt issued by Southeastern Corporation currently yields 8.00%. A municipal bond of equal risk currently yields 9.00%. At what marginal tax rate would an investor be indifferent between these twobonds?