Question

In: Economics

Question One (10 Marks) Assuming the government is selling a government bond to fight COVID-19, and...

Question One
Assuming the government is selling a government bond to fight COVID-19, and at the same time, ASHANTI Goldfields Company is selling a corporate bond to increase its production. Underwhatconditionswilltheproduction-linkedcorporatebondbeover- subscribed at the expense of the government bond. Explore all possible scenarios. [Not more than one-page]
Question Two
The President of Ghana launched the COVID-19 business alleviation program in collaboration with the National Board for Small Scale Industries (NBSSI), Trade Associations, and some selected banks. Under the program, the government is giving funds without interest to selected financial institutions for onward lending to businesses at a 3% interest. The program is aimed at helping beneficiaries to sustain their
Examiner: Dr. Edward Asiedu and Dr. Johnson Appiah-Kubi Page 1 of 2

businesses during the Covid-19 pandemic. Use this information to answer the following questions.
a. Explain in your own words, the monetary policy tool being used by the government under this program. [Maximum of half a page]
b. Ifthegovernmenthadpeggedtheinterestrateundertheprogramatthe monetary policy rate, will this have been a better way of setting the rate? Explaintheadvantagesanddisadvantagesofeachscenario. [Notmorethan one-page] (7.5 Marks)
c. Explaintheexpectedimpactofthelow-interestrateprogramongross domestic product (GDP), articulating the possible pathways. [Not more than one-page] (7.5 Marks)
Question Three
a. Based on the functions of the banking system, give reasons why governments bail outbanksduringaneconomiccrisis? [Notmorethanone-page](10Marks)
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. [Not more than one-page]

Solutions

Expert Solution

Answer to Question 1)

Bonds are a form of debt instruments which can be issued by governments or by companies which are allowed to under local administration guidelines.

The institution which issues bonds, requires to return the amount collected initially and also pays a dividend which, it is free to decide upon. It is also important to note, that bonds may be available on discount or on a premium and are determined by the risk factor and the necessity of the enterprise itself.

For example, the government is a secure entity and the chances of default are minimum. On the contrary, Ashanti Goldfields is a private company and may default on its loan. Thus, which Ashanti Gold Fields may offer a bond at a discount, the government would most likely never do so as the risk factor in Ashanti Gold Fields is higher than that of the government itself.

Thus, if with an investment of 500$, Ashanti Goldfields provides a return of 550$ at an interest rate of 10% per annum to the end consumer, chances of subscription of this bond type increase in comparison to government bonds which may only be able to provide 2% interest rate on similar investment.

The trade-off between risk and returns is the reason why Ashanti Gold Fields may be over subscribed up and over the government bonds which are available in the market. The simple logic of Ashanti Gold fields providing better returns is the reason it may see higher volume of subscriptions than government bonds.

Please feel free to ask your doubts in the comments section if any.


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Assuming the government is selling a government bond to fight COVID-19, and at the same time, ASHANTI Goldfields Company is selling a corporate bond to increase its production. Under what conditions will the production-linked corporate bond be over- subscribed at the expense of the government bond. Explore all likely scenarios.
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Assuming the government is selling a government bond to fight COVID-19, and at the same time, ASHANTI Goldfields Company is selling a corporate bond to increase its production. Under what conditions will the production-linked corporate bond be oversubscribed at the expense of the government bond. Explore all possible scenarios
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