FINANCE PAPER

Assignment answers

1. t+2r1=[(1+ti3)3/(1+ti2)2]-1 = One year forward rate

ti2=Annualized two-year interest rate; 6% (0.06)

ti3=Annualized three-year interest rate; 8% (0.08)

= [(1+0.080)3/(1+0.06)2]-1

=1.1211-1 = 0.1211

=12.11%

2. The Investment: $100

The one-year of municipal bond will gain the interest of money 6 (100*6%)

The one-year of corporate bond will make the interest of money 9 (100*9%) however in this bond it has a minimal government income tax and the rate of 20%. (11×20%)=2.2→(11-2.2) = 8.8

The corporate bond gives the higher yield of 2.8 (8.8-6). It’s profitable to fund into the

Corporate bond.

3. Interest rates on two-year securities:

(1 + _ti₂) ² = (1 + _ti₁) (1 + _t+1r₁)

(1 + _ti₂) ² = (1 + 0.03) (1 + 0.06)

(1 + _ti₂) ² = 1.0918

1+_ti₂ = 1.00842724

_ti₂ = 0.0084

Interest rates on three-year securities:

(1 + _ti₃) ³ = (1 + _ti₁) (1 + _t+1r₁) (1 + _t+2r₁)

(1 + _ti₃) ³  = (1+0.03) (1+0.06) (1+0.07)

_ti₃ = 0.0136

4. The form of the yield curve is influenced by the demand and supply situations for securities in various maturity markets. Interest rate expectations, the desire for liquidity, and the desire of investors or borrowers for a certain maturity will all impact demand and supply circumstances. The yield curve can be used to estimate the market’s future interest rate predictions. Market players might use this information to compare their own expectations to the market’s predictions in order to make borrowing or investment decisions.
5. Short-term securities’ demand would fall, putting downward (upward) pressure on their prices (yields). Long-term securities’ demand would rise, putting upward (or downward) pressure on their prices (yields). If the yield curve was initially sloped upward, it would now be sloped horizontally (less steep). If it had formerly inclined downhill, it would now be steeper.
6. Directs open market operations (buying and selling of U.S. government securities), which are the primary instruments of monetary policy
7. The Beige book is a compendium of regional economic circumstances in each of the 12 districts. This book is distributed to FOMC members prior to each meeting to keep them up to speed on regional circumstances before making monetary policy decisions.
8. The Fed may claim that the credit crisis poses a threat to the financial system and that it was necessary to act to avert a worse disaster. Some opponents may claim that the Fed wields too much authority and that Congress should be engaged in decisions about the use of public cash to bail out financial companies.
9. The Federal Reserve directly effects equity security prices. They adjust interest rates based on the state of the economy and the demand for funds.
10. If you established a bank or credit card account, your contract most certainly includes an arbitration provision. If you have a legal dispute with a financial service provider, arbitration agreements may limit your alternatives.