Question

1. What happens to Bond prices, quantities and interest rates if (Make sure to include the supply and demand graph for bonds for each question (15 points):           

a) Decrease in wealth

b) Increase in risk.

c) Decrease in liquidity

2. Explain the 4 tools of monetary policy and how they impact interest rates, financial markets, housing, and GDP (20 points). Make sure to include the money graph.

3. What happens to interest rates, financial markets, housing, and GDP if the Fed. lowers the Federal Funds interest rate (10 points)?

4. In an excel spreadsheet, calculate the real interest rate over the past 24 months (using monthly data) for the 30 year Treasury bond rate as the nominal interest rate and assuming that expected inflation was equal to actual inflation (based on the change in CPI). Make sure to include the Fisher Equation (15 points).

5. Explain Interest Rate Swaps, currency swaps, and stock options. (15 points)

6. Explain how the Mortgage Secondary Market (Securitization) Works. Make sure to include the major plays and size of the secondary market, the pros and cons, Mortgage characteristics, and 3 types of Mortgage Backed Securities. Should we continue to have Fannie and Freddie? What should the role of our government be in securing them? Why? (25)

Answer 1

1)Decrease in wealth :-

Every reduction in wealth result into decrease within the demand of the bond that have an effect on worth & rate of interest of the such bond

Any perchantage reduction within the wealth of the voters affected the buying power of the voters of the state, this by impact affects the demand of bond as a results of that rate of interest conjointly decrease as demand of the bond decrease.

2) increased in Risk :-

As an element impact the increased within the risk for bond worth volatility increase the danger for consumers of the bond in impact the bond demand can is also decrease.

At another purpose as increasing the danger issue Demand is also increased as rule of '' HIGHER the danger HIGHER THE RETURN''.

3)Decrease in Liquidity :-

As a results of Decreasing the markets acceptance to the bond stigmatization image the proportional Liquidity decrease.

As rule of thumb the when acceptance of the bond whole the liquid nature is shrinking so rate of interest incereases as a effective of decrease in demand of the market

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