Macroeconomics
21st Edition
ISBN: 9781259915673
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 14, Problem 11DQ
To determine
The relation of decline in the real estate value, subprime mortgage loans and the mortgage backed securities to financial crisis of 2007-08.
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Since 2009, how much has been borrowed through the federal funds market?
O. $787 million
O. $43 billion
O. $1,148 billion Incorrect
O. $0
Need help.
Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of asset-backed financial securities at a geometric rate, specifically from $4 to $8 to $16 to $32 to $64 to $128 over a six-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from $4 to $6 to $8 to $10 to $12 to $14.
If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the value of the underlying asset suddenly and unexpectedly fell by $6?
Instructions: Give your answer as a whole number.
Theodore D. Kat is applying to his friendly,
neighborhood bank for a mortgage of $200,000. The
bank is quoting 6%. He would like to have a 25-year
amortization period and wants to make payments
monthly. What will Theodore’s payments be?
48
LO3
Chapter 14 Solutions
Macroeconomics
Ch. 14 - Prob. 1DQCh. 14 - Prob. 2DQCh. 14 - Prob. 3DQCh. 14 - Prob. 4DQCh. 14 - Prob. 5DQCh. 14 - Prob. 6DQCh. 14 - Prob. 7DQCh. 14 - Prob. 8DQCh. 14 - Prob. 9DQCh. 14 - Prob. 10DQ
Ch. 14 - Prob. 11DQCh. 14 - Prob. 12DQCh. 14 - Prob. 13DQCh. 14 - Prob. 14DQCh. 14 - The three functions of money are: LO14.1 a....Ch. 14 - Prob. 2RQCh. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 5RQCh. 14 - Prob. 6RQCh. 14 - Prob. 7RQCh. 14 - Prob. 8RQCh. 14 - Prob. 9RQCh. 14 - Prob. 1PCh. 14 - Prob. 2PCh. 14 - Prob. 3PCh. 14 - Prob. 4PCh. 14 - Prob. 5P
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- 54) If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why? 55) What is the shape of the yield curve when short rates are expected to fall in the medium term, and then increase? Demonstrate this graphically. 56) What is the shape of the yield curve when short-term rates are expected to rise sharply in the mid-term and moderately in the long-term? 57) When interest rates on 1-2-3-4-5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent respectively, what information do we derive on future economic growth and real output?arrow_forwardPlease do your own work, don't copy from the internet Q3) (For the first 20 bond problems, assume interest payments are on an annual basis.) Bond value (LO10-3) The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is 6 percent. 9 percent.arrow_forward7. The Federal Reserve has raised the Federal Funds rate by 3.75 percent within the past year. Ifa bank had capital of 10 percent when the Fed began raising rates and has no loans at risk ofdefault, under what circumstances will its capital position be compromised? Please be specific.8. How do rising interest rates affect the size of real estate loans that lenders will advance?Again, be specific.9. Mortgage rates have risen by about 4 percent over the past year. Does that mean that theacceptable minimum appreciation rate for looking at owner housing relative to renting hasrisen by 4 percent? Why or why not? (Hint: think about our analysis of the buy-rent decision).10. You are evaluating a CMBS. Beyond the standard metrics (i.e., LTV, DCI, etc.), name twothings to consider in evaluating the security.arrow_forward
- 108.) If a General Motors bond brings a 7% annual return, the nominal return on a US Treasury bond that is not inflation indexed is 4%, and the real interest rate is 2%, what is the expected annual inflation rate and default risk on General Motors bond, respectively? 2%, 3% 2%, 2% 4%, 1% 3%, 4%arrow_forwardThe table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year One-Year Bond Rate Multiyear Bond Rate 1 2.00% 2.00% 2 3.00% 3.00% 3 6.00% 5.00% 4 7.00% 7.00% 5 10.00% 8.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) l Subscript 11 = (enter your response here)% l Subscript 21 = (enter your response here)% l Subscript 31 = (enter your response here)% l Subscript 41 = (enter your response here)% l Subscript 51 = (enter your response here)%arrow_forward2. Suppose you bought a condo for $200,000 financing it with a $40,000 down payment of your own funds and a $160,000 mortgage loan from a bank. b. Now assume that, instead of (a), you only put down $20,000 and borrowed $180,000 to buy the condo. Assuming that the market value of your house has risen to $240,000 and ignoring interest and other costs, calculate your rate of return on your asset (ROA) and your rate of return on your equity (ROE).arrow_forward
- Suppose that wealth is $5trn and can be in money and bonds only. Suppose that yearly income is $1.5trn. Also, suppose that money demand function is given by Md = $Y (.8 - 2i) a. What is the demand for money and the demand for bonds when the interest rate is 2% (i=0.02)? 4% (i=0.04)?arrow_forwardAssume that the real risk-free rate is r* = 2% and the average expected inflation rate is 3% for each future year. The DRP and LP for Bond X are each 1%, and the applicable MRP is 2%. What is Bond X’s interest rate? Is Bond X (1) a Treasury bond or a corporate bond and (2) more likely to have a 3-month or a 20-year maturity? SHOW WORK AND USE FINANCIAL CALCULATORarrow_forward3. 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?arrow_forward
- 25) The graph above shows the market for a one-year discount bond with a face value of $1,000. The government's budget deficit increases by $150 million and to finance that deficit it borrows in this market. This will result in the private-sector borrowing to be crowded out by X dollars. What is the value of X? O. 50 O. 100 O. 150 O. 200 26). The graph above shows the market for a one year discount bond with a face value of $1,000. The government's budget deficit increases by $150 million and to finance that deficit it borrows in this market. This results in the private-sector borrowing to be crowded out. At the end, the private sector will end up borrowing X dollars. What is the value of X? O. 50 O. 100 O. 150 O. 200 O. 250arrow_forward15. Consider a government bond with a face value of $10 000, and a present value of $9500. If this bond is offered for sale at $9600, then the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $9500. individuals will purchase the bond at the offer price which will drive the market rate of interest down. the equilibrium market price of this bond has been achieved. the excess demand for the bond at $9600 will drive the price up to the face value of the bond. individuals will purchase the bond at the offer price which will drive the market rate of interest uparrow_forward14. Is there a “natural” rate of interest? What does it mean and what determines it? Is there a curve such as the Phillips curve for the real rate of interest? Discuss. 15. Why does the real interest rate fluctuate over the business cycle? Can monetary factors change it? Discuss. 16. Are the loanable funds and liquidity preference theories of the rate of interest consistent with (i) interest rate targeting, (ii) the Taylor rule? If not, how can they be made consistent?arrow_forward
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