Eco201Pricniples of Macroeconomics Final Exam

2. Jordan, Bradford D., Susan D. Jordan, and David R. Kuipers. "The Mispricing of    Callable U.S. Treasury Bonds: A Closer Look." Journal of Futures Markets 18.1 (1998): 35-51. Web.

21. Universal Forests current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate what is the required return?

To begin, The Federal Reserve System opted to raise interest rates that were placed near zero years ago in order to aid the economy’s growth and prevent inflation from exceeding the target number. Several factors including: the five percent drop in the unemployment rate, and the increase in wages, and the outlook on future inflation contributed to the Federal Reserve’s decision take this action. However, the increase in interest rates in December has generated mixed results, and it appeared the Federal Reserve would announce the interest rates were going to increase again. Instead, Janet Yellen, the chairman of the Federal Reserve, announced that there were better days ahead for the economy, and a slow and careful approach to future increases in the interest rate would serve the economy best, ensuring the growth is maintained. Although the interest rates remained the same early in 2016, they are expected to increase during the June meeting of the Federal Reserve. but cited the economy needed low interest rates in order for the economy to maintain growth. I find it interesting that Yellen continues to worry about inflation growing in the coming years, although the interest rate increase should keep inflation in check through its effect of the economic markets. Yellen sites that she would like the inflation to become and stay at 2 percent each year. However, the current inflation rate is .9 percent, so the the economy is a long way from achieving its target inflation rate

The United States is the leading economy across the globe and experienced several tribulations in the recent past following the 2008 global recession. Despite these recent challenges, there are expectations among policymakers and financial experts that the country will experience solid economic growth. Actually, financial analysts have stated that the U.S. economy will be characterized by increased consumer spending, increased investments by businesses, reduced rate of unemployment, and reduction in government cut. Some analysts have also stated that the country’s economy will strengthen in 2014 with an average of 2.7 percent or more. However, these predictions can only be understood through an analysis of the current macroeconomic

I take the “Long –Term U.S. Government Bond Returns from 1926-1987” as appropriate risk free rate from Exhibit 4. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. “Long –Term U.S. Government Bond Returns from 1926-1987” are include the whole lifetime of Marriot and are more or less risk free.

The FOMC was created to control the supply of money, the members consist of the board of governors all together are 12 members, Seven members and five reserve bank presidents. The Federal Reserve raised the objective range for the government funds rate, the expansion left the target range higher. Unemployment was a major topic that was discussed during the meeting many times. Unemployment predictions stayed at 4.5% for the next three years. Government officials recognized a further fortifying in labor market conditions by bringing down their long run estimate of unemployment. The median of projections for the unemployment rate in the final quarter of 2017 was 4.5 percent, unaltered from December and 0.2 percentage point below the median evaluation. Survey based measures of long term inflation expectations remained largely stable over the past few months, market based measures of inflation were viewed as being low. The FOMC prediction for consumer price inflation was untouched for 2017. The members kept on anticipating that inflation would increase slowly over this period, as food and energy costs, alongside the costs of non-energy imports, were relied upon to begin steadily rising this year.

Today, September 21, the Federal Open Market Committee (FOMC) had an announcement released at 2:00 p.m. in which it was declared that the FOMC will keep their policies intact. I was unable to follow the announcement at the time of release, although I was informed of the decision a little before 5:00pm. I immediately checked federalreserve.gov when given the opportunity and further learned the reasoning behind the FOMC’s decision. The FOMC felt the economy is still stagnant and not growing at the rate they would like. Due to this, they kept their policies intact hoping the economy will right itself.

After reading the recent statement, I now know that despite the hurricanes and the toll they took on the U.S., our economy is going good: economic activity is increases, unemployment rate has decreased, and consumption and investment has increased. The aftermath of the hurricanes will still disrupt the economy, but the effects will only last a little while. The FOMC expects the economy to continue to grow. Throughout this year, inflation is below 2 %, and the committee wants to keep it that way. Another thing that I learned, is that the federal funds rate all depends on economic activity.

* We assume a risk-free rate of 5.09%. This number comes from the current yield of the 30 year T-bond as shown in Exhibit 5.

The main exchange rates exposures are: British pounds, Deutsch Mark, Japanese Yen and Belgian Francs.

| • Earn interest return from USD deposits: = 60,018,756 × 0.01652 = 495,155• Withdraw all USD deposits with interest: = 60,018,756 + 495,155 = 60,513,911•

The risk free rate is taken as 4.58% as it is the average of the Long-term U.S. government bond returns from 1926 to 1987 in exhibit 4.

b) & c) With a same $18,000 investment, in order to earn $35,000 after 6 years, how the nominal interest rates of the First National Bank differ if coumpounded annually, semiannually, quarterly and daily?

In regards to default risk, T-bills are risk-free because the Treasury must redeem them. Being that they must be redeemed, also shows that they are independent of the state of the economy. They are, however, susceptible to other forms of risk. If the rates were to increase or decrease, T-bills would then be susceptible to reinvestment rate risk, the risk that they might not be able to be reinvested at the same rate. For this investment, the expected rate of return on T-bills is calculated to be 5.5% .

Forecast net cash flows for St. Paul Co. under each of the three exchange rate scenarios. Explain how St. Paul’s projected net cash flows are affected by possible exchange rate movements. Explain how it can restructure its operations to reduce the sensitivity of its net cash flows to exchange rate movements without reducing its volume of business in New Zealand.