Conside the following shocks to the bond market: (A) an increase in perceived risk, (B) an increase in the government deficit. Explain how the above shocks to the bond market affect the money market. Show your findings graphically, making sure that all is labeled correctly.
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Conside the following shocks to the bond market:
(A) an increase in perceived risk,
(B) an increase in the government deficit. Explain how the above shocks to the bond market affect the
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- How do you think the shape of the yield curve for commercial paper and other money market instruments compares to the yield cure for treasury securities? Explain your own interpretation. Many financial institutions borrow heavily in the money markets using mortgages and montages backed securities as collateral. How do you explain the impact of the credit crisis on deficit and surplus units that participate in the money market? Do you think that the money market should be regulated to ensure proper collateral in the money market? Can you explain how activities in the secondary T-bill market are conducted? How can this kind of activity benefit investors in T-bills? Why might a financial institution sometimes consider T-bills as a potential source of funds?Explain how the bond market facilitate government (fiscal) policies. How do you think the bond market could discipline a government & discourage the government from borrowing (& spending) excessively?Provide an explanation of whether it is advantageous for a bank to classify debt investments as “held to maturity “or “available for sale” if the required return by the market declines? What impact will this have on the bank's balance sheet and net income?
- If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could financial futures. A. sell put B. sell call C. buy put D.buy callWhich of the following will have the same effect on money supply as raising the reserve requirement? a) The central bank decreases the interest rate. b) The central bank purchases bonds in the market. c) The central bank purchases securities and debentures in the market. d) Lower bond prices.Nominal interest rates are the rates stated or quoted in the terms or contract of a particular security. Which is false about the factors that influences nominal interest rates? a. Government issued securities will only include maturity risk premium if the security is a long-term one b. The liquidity risk premium which is present in all corporate securities are used to compensate investors for the possibility of difficulty in converting the security into cash c. The short-term government securities do not have a real risk-free rate component d. Regardless of whether issued by the government or corporation, nominal rates have inflation premiums
- What will happen to the price of bonds, quantity of bonds and interest rate if bonds become riskier than stocks and the government starts spending more than their tax revenue? Show this on a graph.Considering the Market for Loanable Funds, explain what the following statement means: “Bonds should be issued only if the potential increase in interest rates is attributed to a strong demand for loanable funds RATHER than the FED’s reduction in the supply of loanable funds.”Which of the following is most correct? Treasury bonds carry high default risk because government has the option not to pay its indebtedness. Corporate bonds have lower interest rates compared with treasury bonds because bonds were issued with the aid of financial intermediaries. Corporate bonds have no default risk because they are backed by their corporate assets. Treasury bonds have lower interest rates because they are assumed to carry no default risk.
- Suppose that the central bank sells government bonds. Use a graph of the money market to show what this does to the value of money and price level.With open market operations, the federal reserve sets the interest rate it lends to banks. Ture or falseWhich of the following is most true? The nominal rate of a government long-term security can be used as a proxy for the real risk free rate. A direct relationship is exhibited between the investors’ willingness to supply funds and the interest rates of securities. Finance managers tend to favor more on long-term financing if the nation’s Gross Domestic Product is expected to contract. Maturity risk premium is always included in the nominal rate of any corporate security since corporations are perceived as less riskier than government.
