Explain why the return associated with an investment includes both the income paid by the issuer and the change in value associated with the investment. Suppose interest rates on residential mortgages of equal risk were 8 percent in California and 10 percent in New York. a.Could this differential persist? What forces might tend to equalize rates? b.Would differentials in borrowing costs for businesses of equal risk located in California and New York be more or less likely to exist than differentials in residential mortgage rates? Would differentials in the cost of money for California and New York firms be more likely to exist if the firms being compared were very large or very small? c. What are the implications of the trend for financial institutions to become large mega banking organizations and to engage in nationwide branching? Which fluctuate more, short-term or long-term interest rates? Why? Suppose a new process was developed that could be used to make oil out of seawater. The equipment required would be quite expensive but would, in time, lead to very low prices for gasoline, electricity, and other types of energy. What effect would this development have on interest rates? Suppose a new, highly liberal Congress and presidential administration were elected. The first order of business for these bodies was to take away the independence of the Federal Reserve System and force the Fed to greatly expand the money supply. What effect would this change have on the level and slope of the yield curve in the following circumstances? a.Immediately after the announcement.Two or three years in the future Suppose interest rates on long-term Treasury bonds rose from 5 to 10 percent as a result of higher interest rates in Europe. What effect would this change have on the price of an average company’s common stock? How does the Federal Reserve change the money supply in the United States? What action would the Fed take to increase interest rates? To decrease interest rates? How are the values of financial assets affected by changes in interest rates? When investors expect interest rates to increase in the future, would they prefer to purchase short-term or long-term investments? Explain. Which would be of greater concern to those who hold short-term investments: interest rate price risk or reinvestment rate risk? Explain.
Explain why the return associated with an investment includes both the income paid by the issuer and the change in value associated with the investment.
Suppose interest rates on residential mortgages of equal risk were 8 percent in California and 10 percent in New York.
a.Could this differential persist? What forces might tend to equalize rates?
b.Would differentials in borrowing costs for businesses of equal risk located in California and New York be more or less likely to exist than differentials in residential mortgage rates? Would differentials in the cost of money for California and New York firms be more likely to exist if the firms being compared were very large or very small?
c. What are the implications of the trend for financial institutions to become large mega banking organizations and to engage in nationwide branching?
Which fluctuate more, short-term or long-term interest rates? Why?
Suppose a new process was developed that could be used to make oil out of seawater. The equipment required would be quite expensive but would, in time, lead to very low prices for gasoline, electricity, and other types of energy. What effect would this development have on interest rates?
Suppose a new, highly liberal Congress and presidential administration were elected. The first order of business for these bodies was to take away the independence of the Federal Reserve System and force the Fed to greatly expand the money supply. What effect would this change have on the level and slope of the yield curve in the following circumstances? a.Immediately after the announcement.Two or three years in the future
Suppose interest rates on long-term Treasury bonds rose from 5 to 10 percent as a result of higher interest rates in Europe. What effect would this change have on the price of an average company’s common stock?
How does the Federal Reserve change the money supply in the United States? What action would the Fed take to increase interest rates? To decrease interest rates?
How are the values of financial assets affected by changes in interest rates?
When investors expect interest rates to increase in the future, would they prefer to purchase short-term or long-term investments? Explain.
Which would be of greater concern to those who hold short-term investments: interest rate price risk or reinvestment rate risk? Explain.
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