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)

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter17: Financial Markets

Section: Chapter Questions

Problem 37P: Imagine that a local water company issued 10,000 ten-year bond at an interest rate of 6. You are...

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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.
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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.
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1. Nominal Interest Rates/Yield Curves Forecasters predict that the annual rate of inflation will continue to be 1.2% for the foreseeable future. The nominal interest rate of Treasury securities with different maturities is shown below: Maturity Nominal Rate of Return 2.2% 2.6% 3,2% 3.8% 4.5% 1 year 2 years 5 years 10 years 20 years a. Plot the yield curve using Excel b. What shape is the yield curve? What does it say about the future direction of interest rates under the expectations theory? c. Approximately what real interest rate do Treasury securities offer investors at each maturity? d. If the nominal rate of interest paid by every Treasury security above suddenly increased by 1.5%, without any change in inflationary expectations, what effect, if any, would it have on your answers to part c? Explain.
Discuss the concept of duality in economics, where concepts like risk and return represent dual aspects of investment decisions. Provide examples from financial markets.
Which of the following are yield curves NOT used for? a.Explaining the relationship between inflation and interest rates. b.Forecasting future changes in economic activity. c.Forecasting future interest rates. d.Forecasting future rates of inflation. e.Explaining how investors prefer less liquidity to more liquidity.
Savings, Investment Spending, and the Financial System- End of Chapter Problems 16. Sallie Mae is a quasi-governmental agency that packages individual student loans into pools of loans and sells shares of these pools to investors as Sallie Mae bonds. a Sallie Mae's packaging process is called .Compared to a scenario where investors can only buy and sell individual loans, the pooling process results in and for an investor. b. Sallie Mae's actions will cause investors to supply funding to students, creating loans at a interest rate. c. Suppose that a very severe recession hits and, as a consequence, many graduates cannot get jobs and default on their student loans. These defaults will create for investors and cause the bonds to become than expected, leading to loans available at a interest rate.
17. When the interest rate in an economy rises, the stock market typically reacts negatively. This is because (a) the future dividends companies provide to their investors are discounted more heav- ily. (b) the present values of the future dividends companies provide to their investors decrease. (e) investors sell their investments in the stock market and deposit the money into banks. (d) All of the above are correct. 18. Suppose that the interest rate is 8%. The sum of the present values of three payments of $500 to be received in 3 consecutive years is calculated as (a) 8500 x 1.08 x 3 (b) S00 (1.08) (1.08 1O8 (c) 8500 x 1.08 + 8500 x (1.08)2 + 8500 x (1.08)3 (d) x 3 1O8 19. When a person buys insurance, which of the following best describes the economic transaction? (a) The person donates money to the insurance company. (b) The insurance company pays the person to buy the risk, a desirable commodity, from him/her. (c) The person pays to sell the risk, an undesirable commodity, to…
4-4The federal government (1) encouraged the development of the savings and loanindustry, (2) virtually forced the S&L industry to make long-term, fixed-interest-rate mortgages, and (3) forced S&Ls to obtain most of their capital asdeposits that are withdrawable on demand. a.Would the S&Ls be better off if rates are expected to increase or to decreasein the future? b.Would the S&L industry be better off if the individual institutions sold theirmortgages to federal agencies and then collected servicing fees or if theinstitutions held the mortgages that they originated?
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