Economic Questions Homework Rubric (1) Standard level credit Homework CreditThese are the possible scores on the homework assignment 5.0 credit Fu

Economic Questions Homework Rubric (1)

Standard

level credit

Homework CreditThese are the possible scores on the homework assignment

5.0 credit

Full Credit

Homework is complete and without error or with one or two minor mistakes.

4.0 credit

Standard Credit

Homework is complete but with some errors such as a three or more minor errors or a couple major errors.

3.0 credit

Some Credit

Homework is incomplete such as parts of questions not attempted or is complete but contains numerous major errors.

0.0 credit

No Credit

Homework is not turned in or is turned in late

5.0 分

总得分： 5.0 ，满分 5.0 ECN 135 Winter 2019
Instructor: Derek Stimel
Homework #1
Due Friday Jan 25 by 5 PM in Canvas
Assignment must be uploaded to Canvas as a pdf file or MS Word.
It is ok to scan a hand-written document, but scan to pdf only (no jpeg or camera photo, etc.)
Also, scan must be a single file (no multiple documents or files).
Question 1)
Quick Answers. For each of the following you only need to provide a one or two-word response (choose
one of the underlined phrases for each statement).
a)
When giving consideration to a crypto-currency like Bitcoin, we can say that is or is not a store of
value, one of the functions of money?
b)
When giving consideration to a crypto-currency like Bitcoin, we can say that is or is not a
medium of exchange, one of the functions of money?
c)
Raising funds for your startup through Kickstarter, a “funding platform”, is direct or indirect
finance?
d)
Borrowing money through Lending Club (www.lendingclub.com) is direct or indirect finance.
e)
By total value of assets, private pension funds or mutual funds are collectively the larger
intermediaries in the United States based on our most recent data from class.
f)
By total value of assets, debt or equity capital markets are collectively larger in the United States
based on our most recent data from class.
g)
If people transfer funds from saving accounts to checking accounts, M1 will or will not increase.
h)
If people transfer funds from saving accounts to checking accounts, M2 will or will not decrease.
2)
For each of the following think about whether the portion of assets the person has in both M1 and
M2 is going up, down, or staying the same. Provide a brief explanation (i.e. for each part you
should state what happens to M1 and what happens to M2).
a)
Emily withdraws funds from her checking account and deposits them into a money market mutual
fund.
Emilia withdraws funds from her checking account and uses them to buy shares of stock.
Emma sells some artwork and deposits the proceeds into her checking account.
Emerald takes some cash from her pocket and deposits it into her saving account.
b)
c)
d)
3)
a)
b)
c)
For each of the following state whether it is True or False and provide a brief explanation (1 or 2
sentences) as to why it is true or false.
When we say a bank is engaging in asset transformation we mean in part that the bank is raising
funds by selling low risk assets to depositors.
Financial intermediaries like banks make it more difficult for their customers to time big
purchases like a new car.
When an individual buys a bond, their net worth instantly increases.
Page 1 of 3
4)
Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20%
annual yield to maturity.
a)
Without any calculation, briefly explain whether this bond will be selling a premium or a
discount.
Calculate the price of this bond.
Calculate the duration of this bond.
Suppose the interest rates in the economy rise by 5 percentage points immediately after someone
bought this bond. Show a calculation using duration for what should happen to the price of this
bond immediately.
Suppose now one year passes and the interest rates in the economy are still 5 percentage points
higher. If the person that owns this bond sells it for fair value, what would be their one year rate
of return? Show a calculation.
b)
c)
d)
e)
5)
For each of the following state whether it is True or False and provide a brief explanation (1 or 2
sentences) as to why it is true or false.
a)
b)
c)
All else the same, a higher coupon rate will mean a higher price for a standard coupon bond.
All else the same, a higher coupon rate will mean a higher duration for a standard coupon bond.
All else the same, a shortage in the money market will lead to the price of bonds falling.
6)
Suppose that currently nominal interest rates, inflation, and expected inflation are all 2% right
now.
Suppose the Federal Reserve increases interest rates in the economy. Draw a well labeled supply
and demand diagram that shows how they typically would do that and how it affects the supply &
demand in the money market and bond market.
Suppose that when the Federal Reserve takes this action and expected inflation decreases from
2% to 1%. Show the effect of this change in supply & demand diagrams for the money market
and bond market (draw new diagrams, do not use the same diagrams you drew in part a).
Taking part a) and part b) together, would the Fed’s actions on interest rates likely be larger or
smaller than the standard liquidity effect? Briefly explain your answer.
Suppose that due to the Fed’s actions, nominal interest rates are now 2.5%, expected inflation is
1%, and current inflation has remained 2% (due to completely stick prices). Compared to the
initial numbers given at the start of this question, is the Fed’s actions beneficial for
borrowers/lenders/both/neither? Briefly explain your answer.
a)
b)
c)
d)
***********************End of Graded Homework Assignment******************************
The following questions are not to be turned in. They are Chapter 6 questions and are here for you so you
have some practice on that material in addition to sample exams, before the midterm.
I)
Use the following Table to answer these questions. The table provides the expected yield to
maturity for commercial paper and treasury bills
Year
2018
2019
2020
1-year
Commercial
1-year
Paper
Treasury Bills
Yield to Maturity (expected)
6%
4%
8%
3%
10%
2%
Page 2 of 3
a)
b)
c)
Calculate the risk spread for each year.
Based on your calculation from part a), is there evidence of an expected flight to quality? Briefly
explain.
Assume the yields to maturity in 2018 and 2020 are equilibrium in the commercial paper and
Treasury bill markets. Briefly explain what likely happened with regard to supply and demand for
each market.
II)
You requested one of your analysts to provide you information on bonds now and in the future.
Your analyst tells you that the average annual interest rate on a 5-year bond is 6%. They also tell
you the following projections.
Time Period
Current 1-year rate (aka now)
Expected 1-year from now
Expected 2-years from now
Expected 3-years from now
1-year bond interest rate
5%
7%
6%
4%
a)
You realize that your analyst forgot to tell you the forecast for the expected 1-year interest rate, 4years from now. Based on the data given, use expectations theory to provide an estimate for it.
Show work.
b)
If you believe there is a 1% liquidity or term premium on the 5-year bond rate, how would that
change your estimate in a) if at all?
c)
If you believe in the segmented markets theory, briefly explain what relationship exists between
the current 1-year bond interest rate and the 5-year bond interest rate.
III)
Your boss runs into your office one day and excitedly throws down a spreadsheet with the following
information about your current corporate bond rates and estimated liquidity premiums.
Current Bond Maturities
1-year bond
2-year bond
3-year bond
Reported Yield to Maturity
(inclusive of any
premiums)
2%
2%
2%
Estimated Liquidity
Premium
0%
1%
2%
a)
Based on expectations theory, what is the expected one-year interest rate, one year from today?
b)
Based on liquidity premium theory, what is the expected one-year interest rate, one year from
today?
c)
If you believe in liquidity premium theory, what is the shape of the yield curve for your
company?
d)
Your boss believes in liquidity premium theory and thinks your company should issue as many 1year corporate bonds now at the current 1-year rate, in order to lock-in the lowest rate possible. If
you believe in liquidity premium theory too, do you agree with your boss? Briefly explain.
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