Each of the following single items is an example of a security except: O 3-month Treasury bill O Share of Starbuck Corporation stock O 30-year residential mortgage O 5-year, zero coupon Starbucks Corporation bond
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- Suppose the economy of a large nation has a defense industry, a banking industry, and apharmaceutical industry. 1-unit output of defense requires 0.6 inputs of defense, 0.2 inputs ofbanking, and 0.2 inputs of pharmaceuticals. 1-unit output of banking requires 0.1 inputs ofdefense, 0.4 inputs of banking, and 0.5 inputs of pharmaceuticals. 1-unit output of pharmaceuticalsrequires 0.1 inputs of defense, 0.2 inputs of banking, and 0.2 inputs of pharmaceuticals.If the nation wants to have surpluses of 106 units of defense production, 243 units of bankingproduction, and 216 units of pharmaceutical production, find the gross production of eachindustry.How coronavirus will dominate African interest rate decisionsJOHANNESBURG ‐ Central bankers in five key sub‐Saharan African countries will meet on interestrates in the next ten days as the focus turns to them for measures to shore up their economies thatare expected to be hit by the novel coronavirus.“We expect the Covid‐19 outbreak and current market turmoil to be major points of discussion aspolicymakers deliberate on the rate decision, with the bias certainly downwardsfor those countrieswhich have scope to cut,” said Ridle Markus, an economist for sub‐Saharan Africa at Absa Bank Ltd.Policymakers in oil‐producing countries “will need to balance the significant downside risks togrowth, brought by the slump in oil prices, against the risksresulting from the deteriorating balanceof payments and worsening inflation outlook,” he said.Here’s what central bankers in the region may do in the next ten days:South Africa, March 18 ‐ Repurchase rate: 6.25%Inflation rate: 4.5% (January) By…**Practice** suppose that many insurance companies sell contracts of the following format:- The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value. - If the cell phone is stolen, they get the value of the phone back (that is, Anne would get$700 from the insurance company if her phone were stolen, and Bob would get $600) Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. What is the actuarially fair premium and who buys the full insurance plan?a. The actuarially fair premium is 260 and only Bob buys itb. The actuarially fair premium is 130 and both Anne and Bob buy itc.The actuarially fair premium is 180 and both…
- **Practice** suppose that many insurance companies sell contracts of the following format: - The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value.- If the cell phone is stolen, they get the value of the phone back (that is, Anne would get $700 from the insurance company if her phone were stolen, and Bob would get $600) Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. Continue assuming that the insurance companies are risk-neutral and competitive, but now instead of assuming that the risks are correlated instead of independent. Specifically, suppose that with probability 0.2, a bandit group raids the city and…Now suppose agent C can produce private information about the true realization x at t=1 at the cost γ. Suppose lA=lB=φA=φB=1. Suppose γ=4. - Suppose agent B proposes to borrow LB=50 by posting the bond. Does agent C always lend?- What is the maximum amount LB that agent B can borrow with probability 1? What is the haircut?When company executives buy and sell stock basedon private information they obtain as part of theirjobs, they arc engaged in insider lmding.:t Give an example of inside information that mi~;htbe useful for buying or selling stock.h. "rho,::,.. who trnriP "'tnrh hMM nn in"irlPinformation usuaUy cam very high rates ofreturn. Docs this fact violate the efficient marketshypothesis?c. Insider trading is illegal. Why do you supposethat is?
- Do you think that a U.S. Treasury bill will have a riskpremium that is higher than, lower than, or the sameas that of a similar security (in terms of maturity andliquidity) issued by the government of Colombia?You are in the market for a used car. At a used carlot, you know that the Blue Book value of the car youare looking at is between $15,000 and $19,000. Ifyou believe the dealer knows as much about the caras you do, how much are you willing to pay? Why?Assume that you care only about the expected valueof the car you will buy and that the car values aresymmetrically distributed.23. Refer to Problem 22. Now you believe the dealerknows more about the car than you do. How muchare you willing to pay? Why? How can this asymmetric information problem be resolved in a competitivemarket?5. Consider the set-up in the lecture slides on credit: There are two borrowers (denoted by S and R respectively) each of whom need 1 unit of credit for an investment. There is one lender (denoted by L) with one unit of credit and can only lend to one borrower. both the lender and borrowers are risk-neutral (that is, they only care about the expected profits and expected returns respectively). Further, the borrowers and lender have a reservation return of zero (that is, they will undertake to borrow or lend as long as the expected return or profit is strictly greater than zero). Finally, each borrower will repay if she is able to and nothing is repaid if the investment fails (i.e. there is limited liability). (a) Suppose that there are two states of the world (g,b) each occurring with equal probability. In state g the return to S is 1.4 and R’s return is 1 + d for some d > 0. In state b, S’s return is 1.4 and R’s return is 0. Suppose that the bank can charges a separate interest…
- What do the authors mean when they state that financial intermediaries can achieve economies of scale with respect to transaction costs? A. Intermediaries can spread transaction costs across larger transaction volumes, so the cost per unit is lower. B. Intermediaries tend to specialize in certain types of transactions, so their costs are lower because they operate at lower volume than other types of financial firms.In what way might consumer protection regulationsnegatively affect a financial intermediary’s profits?Can you think of a positive effect of such regulationson profits?Explain why you would be more or less willing to buylong-term Delta Air Lines bonds under the followingcircumstances:a. The company just released its financial statements, indicating that income decreased and liabilities increased.b. You expect a bull market in stocks (stock prices areexpected to increase).c. You have analyzed your country’s monetary policyand expect interest rates to decrease.d. Brokerage commissions on bonds fall.e. Your income and wealth increased over the last two years
