Finance Assignment

Describe an economic trade-off faced by the Fed in achieving its economic policy objectives.

Fed has a responsibility of maximizing employment, stabilizing prices, and ensuring a stable economy. Thus if it implements a policy that stimulates investments, the economic growth will increase, reduce unemployment but increase inflation. However, if it adopts a restrictive policy, the inflation is lowered whereas unemployment is increased and economic growth is lowered.

What are recognition and implementation lags? How do these influence security prices?

The period between when the problem is in existence up to when it is recognized by Fed is known as recognition lag. The recognition lag occurs due to periodic reporting of economic statistics to give a glimpse of the problems. When Fed realizes a problem but fails to implement a policy to address, it results in implementation lag.

Why might the Fed’s monetary policy depend on the fiscal policy that is implemented?

If the government policy is depending on a lot of borrowing by the government in local institutions, the interest rates will be pushed upward. Therefore, Fed will need to adopt a loose monetary policy that reduces the effect of fiscal policy on interest rates due to stimulated economic growth.

Stock market conditions serve as a leading economic indicator. Assuming the U.S. economy is in an expansion, what are the implications of this indicator? Why might this indicator be inaccurate?

If stock market conditions serve as a leading economic indicator, the movement in the stock market will be on an upward trajectory before the economy begins to recover from the recession. When the economy is in expansion, the prices will stagnate at some point showing the reduced opportunity for inflow of capital due to prior massive investment. The indicator may be inaccurate since the investors will be less willing to sell their investments in anticipation of better prices.

Assess the economic situation today. Is the current administration more concerned with reducing unemployment or inflation? Does the Fed have a similar opinion? If not, is the administration publicly criticizing the Fed? Is the Fed publicly criticizing the administration? Explain.

The current situation of the US economy is one faced with a decline in GDP by 3.5% from 2020, the high annual unemployment rate of 8.1%, high job losses with small businesses experiencing negative effects from COVID 19. Most small businesses are on paycheck protection program loans as the country also experiences a trade deficit of 18%. The current administration is concerned with reducing unemployment, an opinion shared with Fed. The Fed has adopted federal funds rate and forward guidance aimed at stimulating organic growth of business-boosting employment.

What type of organization issues commercial paper? Given the short-term nature of commercial paper, why would rating agencies assign ratings to them?

Commercial papers are a form of unsecured promissory note that usually has a fixed interest rate paid on them. They are issued by large companies and commercial banks to meet the value of short-term receivables and financial obligations. The ratings are met to attract trust upon the potential lenders of services based on the note.

The maximum maturity of commercial paper is 270 days. Why would an organization issue commercial paper rather than longer-term securities, even if it needs funds for a long period?

The commercial papers are usually paid on face value and based on the current market rate, unlike long-term securities that are paid at a specific rate regardless of the operation of the market.

Assume an investor purchased a three-month T-bill with a $10,000 par value for $9,500 and sold it 45 days later for $9,600. What is the yield?

(500/9600) * (45/365) = 0.0064 * 100% = 0.6 %

A money market security that has a par value of $10,000 sells for $8,924.70. Given that the security has a maturity of two years, what is the investor’s required rate of return?

$(10,000 -8924.70) = $ 1175.30, 1175.3/(1 + IRR) = $ 10,000. IRR = 9.44 %

A U.S. investor obtains British pounds when the pound is worth $1.30 and invests in a one-year money market security that provides a yield of 4 percent (in pounds). At the end of one year, the investor converts the proceeds from the investment back to dollars at the prevailing spot rate of $1.32 per pound. Calculate the effective yield.

The effective yield is 37.28%


Bernanke, B. S. (2020). The new tools of monetary policy. American Economic Review110(4), 943-83.

Boushey, H., Nunn, R., & Shambaugh, J. (2019). Recession ready: Fiscal policies to stabilize the American economy. Washington, DC: Brookings.

Brown, P. J. (2020). Bond markets: structures and yield calculations. Routledge.

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