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.”
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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.”
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- If the Fed buys loans from banks, what is the impact on the Loanable Funds Market? A) Decreases the supply of loanable funds and lowers the interest rate. B) Increases the supply of loanable funds and lowers the interest rate. C) Decreases the supply of loanable funds and raises the interest rate. D) Increases the supply of loanable funds and raises the interest rate.Commercial banks increase their reserves after the Fed increases the interest rate it pays on reserves. Which of the columns above could represent this action?Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.
- If reserves are scarce, how would the federal funds rate change (increase or decrease) if the Fed:(a) sells mortgage-backed securities(b) decreases the (minimum) reserve requirements(c) conducts overnight repo operations(d) conducts overnight reverse repo operations.Which 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.In the federal funds markets, financial institutions can borrow money from the Federal Reserve. True False Assuming the STRIPS are held to maturity, their investors know the precise payouts they'll receive. True False
- Suppose that the Fed wants to lower long-term interest rates and buys all the Treasury securities banks hold. Reflect those changes on the balance sheet (commitment to low long term interest rate environment, QE)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?If the Federal Reserve Bank (FRB) announces a change by increasing the Federal Funds rate, this will cause: Group of answer choices A. Bond prices to rise, bond yields to rise C. Bond prices to rise, bond yields to fall B. Bond prices to fall, bond yields to fall D. Bond prices to fall, bond yields to rise
- Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation that the inflation is expected to decline in the near future? Explain.Explain the interest rate sensitivity of government debt as a function of: i) its maturity and ii) the level of coupon it pays.Which 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.