Directions: Answer the following questions. Explain how youreached the answer or show your work if a mathematical calculationis needed, or both.
1. Assume that as of today, the annualized interest rate on athree-year security is 8 percent, while the annualized interestrate on a two-year security is 6 percent. Use only this informationto estimate the one year forward rate two years from now.
2. You need to choose between investing in a a one-yearmunicipal bond with a 6 percent yield and a one year corporate bondwith a 9 percent yield. If your marginal federal income tax rate is20 percent and no other differences exist between these twosecurities, which one would you invest in?
3. Assume that interest rates for one-year securities areexpected to be 3 percent today, 6 percent one year from now, and 7percent two years from now. Using only the pure expectationstheory, what are the current interest rates on two-year andthree-year securities?
4. Identify some factors that influence the shape of the yieldcurve. Describe how financial market participants use the yieldcurve to make decisions.
5. Assume there is a sudden expectation of increasing interestrates in the future. What would be the effect on the shape of theinterest curve? Explain.
6. Identify the primary objectives of the Federal Open MarketCommittee and the means by which it attempts to achieve theseobjectives.
7. What is the Beige Book and why do market participants payattention to it?
8. Is it the role of the Fed or Congress to determine the fateof large financial institutions that are near bankruptcy?
9. Does the Federal Reserve directly or indirectly influenceequity security prices? Based on your response, do equity marketparticipants focus on current Fed actions or the expected ones whenit comes to pricing equity securities?
10. Visit the Consumer Financial Protection Bureau's website.Identify one policy objective and its effects on consumers andbusinesses.
Directions: Answer the following questions. Explain how youreached the answer or show your work if a mathematical calculationis needed, or both.
1. Assume that as of today, the annualized interest rate on athree-year security is 8 percent, while the annualized interestrate on a two-year security is 6 percent. Use only this informationto estimate the one year forward rate two years from now.
2. You need to choose between investing in a a one-yearmunicipal bond with a 6 percent yield and a one year corporate bondwith a 9 percent yield. If your marginal federal income tax rate is20 percent and no other differences exist between these twosecurities, which one would you invest in?
3. Assume that interest rates for one-year securities areexpected to be 3 percent today, 6 percent one year from now, and 7percent two years from now. Using only the pure expectationstheory, what are the current interest rates on two-year andthree-year securities?
4. Identify some factors that influence the shape of the yieldcurve. Describe how financial market participants use the yieldcurve to make decisions.
5. Assume there is a sudden expectation of increasing interestrates in the future. What would be the effect on the shape of theinterest curve? Explain.
6. Identify the primary objectives of the Federal Open MarketCommittee and the means by which it attempts to achieve theseobjectives.
7. What is the Beige Book and why do market participants payattention to it?
8. Is it the role of the Fed or Congress to determine the fateof large financial institutions that are near bankruptcy?
9. Does the Federal Reserve directly or indirectly influenceequity security prices? Based on your response, do equity marketparticipants focus on current Fed actions or the expected ones whenit comes to pricing equity securities?
10. Visit the Consumer Financial Protection Bureau's website.Identify one policy objective and its effects on consumers andbusinesses.
