3. The coronavirus continues to have a major impact on interest rates. In Data Assignment #2 you calculated and graphed interest rate spreads. The spread between default risk free government bonds, and private corporate bonds, jumped in 2020 when covid emerged and the economy shut down. What caused the jump in the interest rate spread when covid hit? Use supply and demand to illustrate your answer. Explain shift factors for full credit. Label axis and curves. (HINT: before doing shifts, set up initial spread (default risk premium)

3. The coronavirus continues to have a major impact on interest rates. In Data Assignment #2 you calculated and graphed interest rate spreads. The spread between default risk free government bonds, and private corporate bonds, jumped in 2020 when covid emerged and the economy shut down. What caused the jump in the interest rate spread when covid hit? Use supply and demand to illustrate your answer. Explain shift factors for full credit. Label axis and curves. (HINT: before doing shifts, set up initial spread (default risk premium)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Which of the following is TRUE for a coupon bond? 31 Select one: a. The yield is less than the coupon rate when the bond price is below the par value b. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate c. The yield to maturity is greater than the coupon rate when the bond price is above the par value. d. The price of a coupon bond and the yield to maturity are positively related.
a. Based on the functions of the banking system, give reasons why governments bail out banks during an economic crisis? b. Is the World heading for a recession? Explain the conditions under which the world can be classified as being in a recession as COVID-19 persists. Explain linking the pandemic to the various stages of a recession.
1) Assuming that the current interest rate is 3 percent, compute the present value of a 5-year, 5 percent coupon bond with a face value of $1000. What happens when the interest rate goes to 4 percent? 2). Which of these $100 face value one-year bonds will have the highest yield to maturity and why? a. A 6 percent coupon bond selling for $85. b. A 7 percent coupon bond selling for $100.
5. Explain the major assumptions of the basic EOQ model.
5. Consider the set-up in the lecture slides on credit: There are two borrowers (denoted by S and R respectively) each of whom need 1 unit of credit for an investment. There is one lender (denoted by L) with one unit of credit and can only lend to one borrower. both the lender and borrowers are risk-neutral (that is, they only care about the expected profits and expected returns respectively). Further, the borrowers and lender have a reservation return of zero (that is, they will undertake to borrow or lend as long as the expected return or profit is strictly greater than zero). Finally, each borrower will repay if she is able to and nothing is repaid if the investment fails (i.e. there is limited liability). (a) Suppose that there are two states of the world (g,b) each occurring with equal probability. In state g the return to S is 1.4 and R’s return is 1 + d for some d > 0. In state b, S’s return is 1.4 and R’s return is 0. Suppose that the bank can charges a separate interest…
Bond A pays $8,000 in 20 years. Bond B pays $8,000in 40 years. (To keep things simple, assume that theseare zero-coupon bonds, meaning the $8,000 is theonly payment the bondholder receives.)a. If the interest rate is 3.5 percent, what is the valueof each bond today? Which bond is worth more?Why? (Hint: You can use a calculator, but the ruleof 70 should make the calculation easy.)b. If the interest rate increases to 7 percent, what isthe value of each bond? Which bond has a largerpercentage change in value?c. Based on the example above, complete the twoblanks in this sentence: “The value of a bond[rises/falls] when the interest rate increases,and bonds with a longer time to maturity are[more/less] sensitive to changes in the interestrate.”
In answering the question, you should emphasize the line of reasoning that generated your results; it isnot enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required,in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeledand must show directional changes.Janet Smith deposits $1,000 of her cash holdings in her checking account at First Federal Bank. Thereserve requirement is 20 percent and the bank has no excess reserves.a. What is the immediate effect of her deposit on the money supply? Explain why.b. What is the maximum amount of money First Federal can initially loan out? Explain how youdetermined this amount.c. What is the maximum amount of money the entire banking system can create? Explain how youdetermined this amount.d. Give one reason why the money supply may not increase by the amount you identified in (c).
1. Suppose that people expect the one-year interest rate will equal 1% forever. a. Consider a ten-year zero coupon (discount) bond with a face value of $1000. The bond has a current price of $910. Is the term premium positive or negative? b. Redo question (a), assuming that the bond has a current price of $900. c. Using FRED, plot the behavior of the term premium on a 10-year zero coupon bond over the past 25 years in the US.
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14. 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?
(1) Suppose you just bought a treasury bill for $965 that matures in three months (91 days), and has a face value of $1,000. What is your bond’s current discount yield? What is your bond’s current investment yield? ANS: (2) The French Government runs a budget surplus to finance its expenditure. Use the loanable funds model to show what happens to the interest rate, investments, and the quantity of loanable funds. ANS: (3) Which of the following is money? An American Express traveler’s check Checking deposits at Washington Mutual bank. The check you have just written to pay for school fees. ANS:
The consumer views present and future consumption as perfect complements and would like to consume equal amounts in both periods, i.e., . Suppose, however, that there is a credit market imperfection that prevents this consumer from borrowing at all, i.e., . a. Show the consumer's lifetime budget constraint and indifference curves on a diagram. Note that because the consumer prefers to purchase present and future consumption in equal amounts, the indifference curves will be kinked at. Note also that because the consumer cannot borrow, the budget constraint will be kinked at the consumer's initial endowment. Recall that the budget constraint is given by: Recall also that the consumer's endowment for each period can be expressed as: b. Calculate the consumer's optimal current-period and future-period consumption and optimal saving and show this in your diagram. Does the existence of the credit market imperfection affect the consumer's choices? Recall that savings is given by: c. Suppose…