Macroeconomics

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Need all questions answered straight and to the point

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1.Surplus and Deficit Units Explain the meaning of surplus units and deficit units. Provide an example of each. Which types of financial institutions do you deal with? Explain whether you are acting as a surplus unit or a deficit unit in your relationship with each financial institution.

2. Types of Markets Distinguish between primary and secondary markets. Distinguish between money and capital markets.

3. Imperfect Markets Distinguish between perfect and imperfect security markets. Explain why the existence of imperfect markets creates a need for financial intermediaries.

4. Efficient Markets Explain the meaning of efficient markets. Why might we expect markets to be efficient most of the time? In recent years, several securities firms have been guilty of using inside information when purchasing securities, thereby achieving returns well above the norm (even when accounting for risk). Does this suggest that the security markets are not efficient? Explain.

5. Securities Laws What was the purpose of the Securities Act of 1933? What was the purpose of the Securities Exchange Act of 1934? Do these laws prevent investors from making poor investment decisions? Explain.

6. International Barriers If barriers to international securities markets are reduced, will a country’s interest rate be more or less susceptible to foreign lending and borrowing activities? Explain.

7. International Flow of Funds In what way could the international flow of funds cause a decline in interest rates?

1. Characteristics That Affect Security Yields Identify the relevant characteristics of any security that can affect its yield.

2. Impact of Credit Risk on Yield What effect does a high credit risk have on securities?

3. Impact of Liquidity on Yield Discuss the relationship between the yield and liquidity of

securities.

4. Tax Effects on Yields Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? At a given point in time, which offers a higher before-tax yield: municipal bonds or corporate bonds? Why? Which has the higher after-tax yield? If taxes did not exist, would Treasury bonds offer a higher or lower yield than municipal bonds with the same maturity? Why?

5. Pure Expectations Theory Explain how a yield curve would shift in response to a sudden expectation of rising interest rates, according to the pure expectations theory.

6. Forward Rate What is the meaning of the forward rate in the context of the term structure of interest rates? Why might forward rates consistently overestimate future interest rates? How could such a bias be avoided?

7. Pure Expectations Theory Assume there is a sudden expectation of lower interest rates in the future. What would be the effect on the shape of the yield curve? Explain.

8. Liquidity Premium Theory Explain the liquidity premium theory.

1. Forward Rate

a. Assume that, as of today, the annualized two-year interest rate is 13 percent and the one-year interest rate is 12 percent. Use only this information to estimate the one-year forward rate.

b. Assume that the liquidity premium on a two-year security is 0.3 percent. Use this information to reestimate the one-year forward rate.

4. After-Tax Yield You need to choose between investing in a one-year municipal bond with a 7

percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which one would you invest in?

5. Deriving Current Interest Rates Assume

that interest rates for one-year securities are expected to be 2 percent today, 4 percent one year from now, and 6 percent two years from now. Using only pure expectations theory, what are the current interest rates on twoyear and three-year securities?

6. Commercial Paper Yield

a. A corporation is planning to sell its 90-day commercial paper to investors by offering an 8.4

percent yield. If the three-month T-bill’s annualized rate is 7 percent, the default risk premium is estimated to be 0.6 percent, and there is an 0.4 percent tax adjustment, then what is the appropriate liquidity premium?

b. Suppose that, because of unexpected changes in the economy, the default risk premium increases to 0.8 percent. Assuming that no other changes occur, what is the appropriate yield to be offered on the commercial paper?

1. Choose three economic indicators one of each type (leading, lagging, and coincident). Define the measure, explain the timing and source of reporting, provide current measure and trend over the last year.

2. Which financial statement shows the amount of bonds and money market instruments a company has issued or invested in?

3. In most current financial statement from question #2 – what are the dollar amounts of bonds and money market securities that amazon has issued? How much has amazon invested in money marked securities?