Concept explainers
a.
To identify: The effect on yield curve immediately after the announcement of the new congress administration.
Introduction:
Yield: Yield is the percentage of securities at which the return is provided by the company to its investors. Yield can be there in the form of dividend and interest.
Steeper Yield Curve: A curve which has shown the expected increment in the interest rates due to inflation is known as steeper yield curve.
b.
To identify: The effect on yield curve if the Congress and administration exists for two or three years in future.
Introduction:
Yield: Yield is the percentage of securities at which the return is provided by the company to its investors. Yield can be there in the form of dividend and interest.
Steeper Yield Curve: A curve which has shown the expected increment in the interest rates due to inflation is known as steeper yield curve.
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Chapter 6 Solutions
Bundle: Fundamentals of Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
- (a) Suppose that the economy of Microland is expanding rabidly. Due to this rapid expansion, the Federal Reserve Bank is pursuing a contractionary monetary policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. (b) Suppose that the economy of Macroland is expanding rabidly. Due to this rapid expansion, the Federal Government is pursuing a contractionary fiscal policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. Is there any crowding-out due to the contractionary fiscal policy?arrow_forwardPandemic has caused higher unemployment rate and lower growth in GDP. Federal Reserve wants to buy more 1-year and 10-year Treasury securities and sell 5-year Treasury securities to stimulate the economy. What would be shape of Treasury yield curve as a result of this move by Fed? Explain this yield curve using appropriate theory of term structure.arrow_forwardIf the Fed were to reduce course and suddenly start buying twice as much federal debt as it has in the past, pushing bond prices up, what would happen to the yields on federal debt? a) Go up b) Go down c) Stay the samearrow_forward
- To fight inflation, another monetary policy tool the Fed could use is to change the reserve requirement. With the reserve requirements, and as the result, the equilibrium federal goal of curbing inflation, the Fed should funds rate will A increase; drop OB. decrease; rise C. decrease; drop D, increase; risearrow_forwardPlease do ABC!arrow_forwardAll other things being equal, which of the following would cause interest rates to rise? a. The economy slides into a recession. b. The federal government's budget deficit declines. c. The rate of inflation decreases. d. The Federal Reserve contracts the money supply.arrow_forward
- Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall that the yield curve is currently upward sloping. Also recall that Carson is concerned about a possible slowing of the economy because of potential Fed actions to reduce inflation. It needs funding to cover payments for supplies. It is also considering the issuance of stock or bonds to raise funds in the next year a. At a recent meeting, the Chief Executive Officer (CEO) stated his view that the economy will remain strong, as the Fed's monetary policy is not likely to have a major impact on the interest rates. So he wants to expand the business to benefit from the expected increase in demand for Carson's products. The next step would be to determine how to finance the expansion. The Chief Financial Officer (CFO) stated that if…arrow_forwardApart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity-influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: Statements When the Fed increases the money supply, short-term interest rates tend to decline. When the economy is weakening, the Fed is likely to increase short-term interest rates. During the credit crisis of 2008, investors around the world were fearful about the collapse of real estate markets, shaky stock markets, and illiquidity of several securities in the United States and several other nations. The demand for US Treasury bonds increased, which led to a rise in their price and a decline in their yields. When the economy is weakening, the Fed is likely to decrease short-term interest rates. True Falsearrow_forwardShould the economy’s current fragile recovery gather momentum, it is likely the Federal Reserve will decide to subtract liquidity from the economy. How will it do that? By selling U.S. Treasury bonds By purchasing U.S. Treasury bonds By having the U.S. Treasury purchase goods and services By having the U.S. Treasury lower taxes By having the U.S. Treasury raise taxesarrow_forward
- A new technology is developed that increases firms' expected profits. Draw a curve that shows the effect of this event. 10- Draw a point at the new equilibrium quantity of loanable funds and the new equilibrium real interest rate. 8- When a shortage or a surplus arises in the loanable funds market 6- A. the nominal interest rate is pulled to the new equilibrium level OB. the supply of loanable funds changes to return the economy to its original real interest rate 4- OC. the demand for loanable funds changes to return the economy to its original real interest rate OD. the real interest rate is pulled to the new equilibrium level 2- Real interest rate (percent per year) SLF DLF 0 Loanable funds (trillions of 2009 dollars) >>> Draw only the objects specified in the question. Garrow_forwardIf the economy continues to be strong, Carson Company may need to increase its production capacity by about 50% over the next few years to satisfy demand. It would also need financing to expand and accommodate the increase in production. The yield curve is currently upward sloping. Now, Carson is concerned about a possible slowing of the economy because of the potential actions of the Bangko Sentral ng Pilipinas (BSP) to reduce inflation. It is also considering issuing stock or bonds to raise funds in the next year. a. If Carson issued stock now, it would have the flexibility to obtain more debt and would also be able to reduce its cost of financing with debt. Why? b. Explain why institutional investors, such as mutual funds and pension funds, that invest in stock for long-term periods (at least a year or two) might prefer to invest in initial public offerings than to purchase other stocks that have been publicly traded for several years. c. Given that institutional investors such…arrow_forwardSuppose the central bank wishes to increase the money supply by $500 million and does so by purchasing one-year zero coupon bonds from an economic agent to increase bank reserves. If the central bank buys bonds with an interest rate of 2.5%, how many bonds must they buy to reach their targeted increase in the money supply? Assume the required reserve ratio is 10% and commercial banks fully loan out. Hint: you will need to use the money multiplier in this answer as well as bond pricing - a zero coupon bond is a promise to pay $1000 in one year. Assume there is no currency in thearrow_forward