Let's talk about bonds. A bond is basically a type of loan. When a bond is sold, who is acting as the borrower? O a. The person or organization that is buying the bond. b. The person or organization that is selling the bond. Oc. Anyone who purchases the bond from the first buyer. Od. The Federal Reserve.

Let's talk about bonds. A bond is basically a type of loan. When a bond is sold, who is acting as the borrower? O a. The person or organization that is buying the bond. b. The person or organization that is selling the bond. Oc. Anyone who purchases the bond from the first buyer. Od. The Federal Reserve.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter17: Financial Markets

Section: Chapter Questions

Problem 38P: Suppose Ford Motor Company issues a five year bond with a face value of 5,000 that pays an annual...

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Suppose Ford Motor Company issues a five year bond with a face value of 5,000 that pays an annual coupon payment of $150. What is the interest rate Ford is paying on the borrowed funds? Suppose the market interest rate rises from 3 to 4 a year after Ford issues the bonds. Will the value of the bond increase or decrease?
Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan If: The borrower has been late on a number of loan payments Interest rates In the economy as a whole have risen since the bank made the loan The borrower Is a firm that has just declared a high level of profits Interest rates in the economy as a whole have fallen since the bank made the loan
Calculate the equity each of these people has in his or her home: Fred just bought a house for 200,000 by putting 10 as a down payment and borrowing the rest from the bank. Freda bought a house for 150,000 in cash, but if she were to sell it now, it would sell for 250,000. Frank bought a house for 100,000. He put 20 down and borrowed the rest from the bank. However, the value of the house has now increased to 160,000 and he has paid off 20,000 of the bank loan.
(d) Suppose A&K Sound System is considering building a record studio in Cayman Islands. (i) Assume that A&K Sound System needs to borrow money on the bond market. Why would an increase in interest rates affect the decision of whether to build the studio? (ii) If A&K Sound System has enough of its funds to finance the new studio without borrowing, would an increase in interest still affect the decision about whether to build the studio? Explain your answer.
Imagine that a local water company issued $10,000 ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%. a. Given the change in interest rates, would you expect to pay more or less than $10,000 for the bond? b. Calculate what you would actually be willing to pay for this bond.
3. think through a couple of other such shifters using the bond supply/demand picture. a. Suppose that households learn that they are entering a recession. This means that they need to prepare for a higher risk of being unemployed for a long period of time. How will this possibility affect their demand for government bonds? Explain your answer. What will happen to the equilibrium interest rate in the government bond market? b. Suppose that banks are told that they must be backed by a lot more equity capital, unless their assets consist of government bonds. How will this affect their demand for government bonds? What will happen to the equilibrium interest rate in the government bond market?
(1) Suppose you just bought a treasury bill for $965 that matures in three months (91 days), and has a face value of $1,000. What is your bond’s current discount yield? What is your bond’s current investment yield? ANS: (2) The French Government runs a budget surplus to finance its expenditure. Use the loanable funds model to show what happens to the interest rate, investments, and the quantity of loanable funds. ANS: (3) Which of the following is money? An American Express traveler’s check Checking deposits at Washington Mutual bank. The check you have just written to pay for school fees. ANS:
Suppose that the bank holds $15m of treasury bonds, $10m of reserves, $30m of checkable deposits, $20 of time deposits and has $6m of capital. How much loan does the bank have if we know it doesn't have any other assets or liabilities Suppose in the same bank checkable deposits and reserves pay 0 interest. The interest rate on treasuries is 3%, loans pay 7% and time deposits pay 5%. How much profit does the bank make? What is the banks return on assets?
Suppose that Intel is considering building a new chip-making factory a. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel’s decision about whether to build the factory? b. If Intel has enough of its own funds to finance the new factory without borrowing, would an increase in interest rates still affect Intel’s decision about whether to build the factory? Explain!
1. Using a supply and demand diagram for each of the following scenarios, show howthe market for money is affected in the long run. Explain your answer. (a) Everyone subscribes to r/WallStreetSilver, and starts investing in silver and gold. (b) Commercial banks raise their mortgage rates, even though the Bank of Canadaretains a low Bank Rate. (c) The Bank of Canada prints money and mails $1,000 to every Canadian.
Table shows the amount of savings and borrowing in a market, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? Now, imagine the supply curve shifts so that there will be $50 million less supplied at every interest rate. Calculate the current and the new equilibrium interest rate and quantity, and explain the situation: the reasons of decrease of supply and what new equilibrium mean. Interest rate Qs Qd 5 200 470 6 270 320 7 320 320 8 350 300 9 400 200 10 500 100