Hey, need help with the following multi-part macroeconomics problem. Thank you in advance! In this problem, consider a simple mutual fund. Households and businesses invest in the fund by buying shares; the fund uses this money, in turn, to invest in a range of assets, including equities and bonds. If an investor wishes to divest from the fund, she can “redeem” her shares. Redeeming involves selling the shares back to the mutual fund for a price called the “net asset value” (NAV). The NAV is equal to the difference between assets and liabilities, divided by the total number of investors in the fund (similar to the shareholders’ equity discussed in this chapter). The NAV is updated at the end of each day. Thus every investor who redeems on a given day will get the same price.
8, Q4) Hey, need help with the following multi-part
In this problem, consider a simple mutual fund. Households and businesses invest in the fund by buying shares; the fund uses this money, in turn, to invest in a range of assets, including equities and bonds. If an investor wishes to divest from the fund, she can “redeem” her shares. Redeeming involves selling the shares back to the mutual fund for a price called the “net asset value” (NAV). The NAV is equal to the difference between assets and liabilities, divided by the total number of investors in the fund (similar to the shareholders’ equity discussed in this chapter). The NAV is updated at the end of each day. Thus every investor who redeems on a given day will get the same price.
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What does this fund’s
balance sheet look like? -
Suppose several large investors in the mutual fund start getting nervous about market conditions and decide to redeem, all on the same day. How will these redemptions affect the fund’s balance sheet?
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Suppose now that investors anticipate that other (large) investors will redeem. How will this affect their incentives to redeem? Link your answers to the notion of bank runs discussed in this chapter.
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Assume that the economy has 15 other, identical mutual funds. As the fund in part b begins selling assets to pay back investors, the market price of those assets drops. How would this price drop affect the balance sheets of the other mutual funds that invest in those assets? Does this also relate to bank runs? Clarify the differences between your answers
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