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Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities. Plot the resulting yield curve.
Immediately prior to the beginning of year 2, LIBOR rates increase to 6 percent. What is the expected net interest income in year 2? What would be the effect on net interest income of a 2 percent decr
Scandia Bank has issued a one-year, $1 million CD paying 5.75 percent to fund a one-year loan paying an interest rate of 6 percent. The principal of the loan will be paid in two installments: $500,000
The current one-year Treasury bill rate is 5.2 percent, and the expected one year rate 12 months from now is 5.8 percent. According to the unbiased expectations theory
Explain the changes in the maturity values if the yields increase 1 percent. Assume that the insurance company has no other assets. What will be the effect on the market value of the company’s e
Does Consumer Bank face interest rate risk? That is, if market interest rates increase or decrease 1 percent, what happens to the value of the equity? How can a decrease in interest rates create inter
What is a maturity gap? How can the maturity model be used to immunize an FI"s portfolio? What is the critical requirement that allows maturity matching? to have some success in immunizing the balance
Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test?
What are the reasons for not including demand deposits as rate-sensitive liabilities in the repricing analysis for a commercial bank? What is the subtle but potentially strong reason for including dem
Calculate the repricing gap and the impact on net interest income of a 1percent increase in interest rates for each position.
If a bank manager was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the bank"s six-month repricing gap to take advantage of this a
What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative?
What is a maturity bucket in the repricing model? Why is the length of time selected for repricing assets and liabilities important in using the repricing model?
What is the repricing gap? In using this model to evaluate interest rate risk, what is meant by rate sensitivity? On what financial performance variable does the repricing model focus? Explain.
Fed funds versus the Discount Rate Compare and contrast the Fed funds rate and the discount rate. Which do you think is more volatile? Which market do you think is more active? Why?
Bond Equivalent Yields Suppose a T-bill has 75 days to maturity and an asked discount of 4 percent. What is the bond equivalent yield?
Money Market Prices The rate on a particular money market instrument, quoted on a discount basis, is 5 percent. The instrument has a face value of $100,000 and will mature in 40 days. What is its pric
Suppose that you are the chief economic advisor to the president of the United States. You are asked to propose a strategy to bring the economy out of recession. Unemployment is at 13 percent and infl
Q = 70 – 3.5P – 0.6M + 4Pzwhere ˆQ is the estimated number of units of good X demanded, P is the price of the good, M is income, and Pz is the price of related good Z. (All parameter
Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ Soup. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum c
Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250.
For each of the following, draw a diagram that illustrates the likely effect on the market for eggs. Indicate in each case the impact on equilibrium price and equilibrium quantity.
A group has chartered a bus to Atlanta. The driver costs $200, the bus costs $500, and parking in Atlanta will be $90. You have already paid $700 to reserve the bus and a driver
What is the difference between the price paid by consumers and the price received by producers? Has the quantity of beer sold increased or decreased?
Eastman Publishing Company is considering publishing a paperback textbook on spreadsheet application for business. The fixed cost of manuscript preparation