eco2115_2023 assignment 1 v2. answers

pdf

School

University of Ottawa *

*We aren’t endorsed by this school

Course

2115

Subject

Economics

Date

Jan 9, 2024

Type

pdf

Pages

Uploaded by DukeGuineaPigMaster921

1 INTRODUCTION TO MONEY AND BANKING ECO 2115 Assignment 1 ANSWERS Fall 2023 Professor: Marc Prud’Homme 1. See excel answer file for numbers and graph. 2. From the textbook in the Data analysis section (towards the end of the chapter) from Chapter 1. Do the following: Exercise 1 – Start both series in January 2000 such as is stated in the exercise but extend your series to latest available period. See the MS Excel template for details. This period is different than that of the book so that we can have access the most recent data available. Include your data and do your calculations on sheet Prob 1. Include your graph on the sheet Graph 1. Answer parts a) to c) in your MS Word document). See excel answer file for numbers and graph Since the year 2000, during both recessions and expansions, the 10-year Canada bond rate shows an overall declining trend. The M2++ money supply growth rate, on the other hand, shows a cyclical pattern. The growth rate of M2++ is positive throughout the years, but it does not show any consistent pattern in recessions and expansions, as can be seen in the following figure (in which shaded areas represent recessions). Note how the rate of growth of the money supply has increased rapidly (i.e., shot up) during the pandemic. 3. From the textbook in the Data analysis section (towards the end of the chapter) from Chapter 2. Do the following: Exercise 1 a. Which bank asset increased the most over this period? Do the calculations in Excel put also write down the answer in your MS Word document which will converted to PDF before submitting. Mortgage loans increased the most. b. Which bank asset increased the least. Do the calculations in Excel put also write down the answer in your MS Word document which will converted to PDF before submitting. Non-Mortgage loans increased the least. As a side note, notice the large increase in personal term deposits and the small increase in personal non chequable

2 deposits. This was caused by the rapid increase of interest rates in recent months. People have been switching away from low interest accounts to higher paying accounts. We can also add, that people are perhaps also moving money away from stocks and Mutual funds into term deposits because they now pay an attractive interest rate. 4. Explain why you will be more or less willing to buy a share of Apple stock in the following situations? a. Your wealth falls. Less, because your wealth has declined. b. You expect the stock to appreciate in value. More, because its relative expected return has risen. c. The bond market becomes more liquid. Less, because it has become less liquid relative to bonds. d. You expect gold to appreciate in value. Less, because its expected return has fallen relative to gold. e. Prices in the bond market become more volatile. More, because it has become less risky relative to bonds. 5. Explain what effect a large federal deficit should have on interest rates. Support your answer with a graph. A large Federal deficit has a significant effect on interest rates. When there is a deficit, the Federal government has to issue more bonds and/or borrow money from the international markets. In both cases, the Federal deficit will cause interest rates to rise. 6. In the aftermath of the global economic crisis that started to take hold in 2008, Canadian government budget deficits increased dramatically, yet interest rates on Canada bonds fell sharply and stayed low for quite some time. Does this make sense? Why or why not? The supply effect (rightward shift of the supply curve) of large deficits should lead to higher interest rates. The effects of the economic crisis led to significantly lower wealth and income, which depressed Canada bond demand but also decreased corporate bond supply by even more because investment opportunities collapsed. The larger leftward shift in the bond supply curve than the rightward shift in the bond demand curve would then result in a rise in bond prices and a fall in interest rates. In addition, due to the severity of the global crisis, Canadian government debt became a haven investment, reducing relative risk and increasing liquidity for Canadian government debt. This significantly raised Canada bond demand, leading to higher bond prices and significantly lower yields. In other words, the decrease in investment opportunities and risk factors significantly offset the wealth effect on demand and the deficit effect on supply. 7. Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer. Yes, interest rates will rise. The lower commission on stocks makes them more liquid relative to bonds, and the demand for bonds will fall. The demand curve B d will therefore shift to the left, and the equilibrium interest rate will rise 8. Complete the following exercises from Chapter 4 in your working document. a. Q14 (Also complete in Excel on sheet Q8a – use Excel’s financial functions for calculations) If the interest rate is 10%, what is the present value of a security that pays you $1100 next year, $1210 the year after, and $1331 the year after that? $1100/(1 + 0.10) + $1210/(1 + 0.10) 2 + $1331/(1 + 0.10) 3 = $3000.

3 b. Q6 If mortgage rates rise from 5% to 10%, but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses? People are more likely to buy houses because the real interest rate when purchasing a house has fallen from 3% (= 5–2%) to 1% (= 10–9%). The real cost of financing the house is thus lower, even though nominal mortgage rates have risen. (If the tax deductibility of interest payments is allowed for, then it becomes even more likely that people will buy houses.) c. Q16 (Also complete in Excel on sheet Q8c – use Excel’s financial functions for calculations) A lottery claims its grand prize is $10 million, payable over five years at $2 million per year. If the first payment is made immediately, what is this grand really prize worth? Use an interest rate of 6%. In present value terms, the lottery prize is worth $2 000 000 + $2 000 000/(1.06) + $2 000 000/(1.06) 2 + $2 000 000/(1.06) 3 + $2 000 000/(1.06) 4 , or $8 930 211. d. Q18 (Also complete in Excel on sheet Q8d – use Excel’s financial functions for calculations) What is the yield to maturity on a simple loan for $1 million that requires a repayment of $2 million in five years’ time? 14.9%, derived as follows: The present value of the $2 million payment five years from now is $2/(1 + i) 5 million, which equals the $1 million loan. Thus 1 = 2/(1 + i) 5 . Solving for i, (1 + i) 5 = 2, so that e. Q19 (Also complete in Excel on sheet Q8e – use Excel’s financial functions for calculations) Which $1000 bond has the higher yield to maturity, a 20-year bond selling for $800 with a current yield of 15% or a 1-year bond selling for $800 with a current yield of 5%? If the 1-year bond did not have a coupon payment, its yield to maturity would be ($1000 – $800)/ $800 = $200/$800 = 0.25, or 25%. Because it does have a coupon payment, its yield to maturity must be greater than 25%. However, because the current yield is a good approximation of the yield to maturity for a 20- year bond, we know that the yield to maturity on this bond is approximately 15%. Therefore, the 1-year bond has a higher yield to maturity. 5 2 1 0.149 14.9%. i = - = =

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Related Documents

Post-lab 4 results.docx

P 8-28 in-class exercise.docx

ECO-20043 - Microeconomics and Decisions - Resource Recs.docx

ECO-20044 - Economic Cost of Decisions - Resource Recs.docx

Practice SAQs Midterm Exam 2.pdf

Screenshot 2023-12-18 at 7.20.24 AM.png

eco2115_2023 assignment 2 v1 (1).pdf

Sample questions Quiz 1.pdf

Sample questions Quiz 2-1.pdf

4.png

IMG_0389.jpeg

Catlett_ECO110_Week4Assignment (2).docx

Recommended textbooks for you

Managerial Economics: Applications, Strategies an...

Economics

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:Cengage Learning

Managerial Economics: A Problem Solving Approach

Economics

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Cengage Learning

Economics Today and Tomorrow, Student Edition

Economics

ISBN:9780078747663

Author:McGraw-Hill

Publisher:Glencoe/McGraw-Hill School Pub Co

Microeconomic Theory

Economics

ISBN:9781337517942

Author:NICHOLSON

Publisher:Cengage

Principles of Economics 2e

Economics

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:OpenStax

MACROECONOMICS

Economics

ISBN:9781337794985

Author:Baumol

Publisher:CENGAGE L

SEE MORE TEXTBOOKS

Recommended textbooks for you

Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Economics Today and Tomorrow, Student Edition
Economics
ISBN:9780078747663
Author:McGraw-Hill
Publisher:Glencoe/McGraw-Hill School Pub Co
Microeconomic Theory
Economics
ISBN:9781337517942
Author:NICHOLSON
Publisher:Cengage
Principles of Economics 2e
Economics
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:OpenStax
MACROECONOMICS
Economics
ISBN:9781337794985
Author:Baumol
Publisher:CENGAGE L