fin 5131

The City of Atlanta wants to issue bonds to raise $55 million for infrastructure projects it plans to complete over the next year; however, it needs to make sure that the bonds are easily placed. As a result, they decide to pay City Financial Bank $1 million to back the bonds in an attempt to make the bonds easier to place.

Standby Letters of Credit

Suppose there is a change in the tax law that discourages households from saving money.

Supply <<

Suppose Germany's government imposes a tax law that encourages households to save more money

Supply >>

____ is (are) not a component of the Fed as it exists today.

The U.S. Department of Commerce

Which of the following are properties of federal funds? Check all that apply.

The federal funds rate is usually higher than the risk-free T-bill rate. Most loan transactions have a maturity of 1 to 7 days.

Standby Letters of Credit

can help financial market participants strengthen their borrowing position with potential lenders. If the borrower does not meet its interest and principal obligations, the bank backing the borrower will. The bank charges the borrower a fee in exchange for backing its financial obligations.

The intent of federal funds transactions is to

correct short-term fund imbalances experienced by banks.

If analysts expect that the demand for loanable funds will decrease and the supply of loanable funds will increase, they would most likely expect interest rates to ____ and prices of existing bonds to ____

decrease; increase

Loan Commitments

financial market participants that will require a certain amount of funding at some point in the future—but aren't sure when—can lock in a specific loan amount and interest rate in exchange for paying a bank a small fee and telling them exactly what their plans are for the loan.

Which of the following equations best exemplifies the Fisher effect?

iR = i - E(INF)

An expected ____ in economic growth tends to place ____ pressure on bond prices.

increase; downward

If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____.

increase; increase

Forward Currency Contracts

is an agreement between a financial market participant and a bank to exchange one currency for another at a certain date in the future for a predetermined exchange rate. The reason this is an off-balance sheet activity is because banks will simultaneously purchase and sell forward currency contracts so that they will purchase a certain amount of currency from one financial market participant, while instantly turning around and selling the same currency to a different financial market participant for a profit.

Consider the countries of Cyprus and Lithuania, both of which are part of the European Union and use the euro as their domestic currency. In 2017, Cyprus had an inflation rate of 0.68%, and Lithuania had an inflation rate of 3.72%. Suppose at the end of 2017, the European Central Bank (ECB) implements a monetary policy designed to slow economic growth in order to reduce inflationary pressure across the Eurozone. Given the inflation rates of Cyprus and Lithuania in 2017, Cyprus would benefit less from this monetary policy than Lithuania. As a result, Cyprus should consider using fiscal policy to solve its local economic problems.

less; Cyprus

An investor's required rate of return on a bond, k, is determined by the prevailing risk-free rate and the credit risk premium .

prevailing risk free rate; credit risk prem

The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value.

required rate of return; coupon rate; discount

An off-balance sheet activity entered into by banks that backs a customer's obligation to a third party is known as a(n):

standby letter of credit

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly became more important, the yield curve would now have a(n) ____ (assuming no other changes).

upward slope

Mathematically, the general price movement of bonds can be modeled as which of the following?

ΔPb=f(ΔINF,ΔECON,ΔMS,ΔDEF)

Mathematically, the general price movement of bonds can be modeled as which of the following?

ΔPb=f(ΔRf,ΔRP)

Mathematically, the general price movement of bonds can be modeled as which of the following?

ΔPb=f(Δk)

An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in four years is 9 percent, what will the market value of the bonds be then?

$56,935,022

Which of the following is true?

The primary credit lending rate is set at a level above the federal funds rate.

Which of the following are typical repurchase agreement maturities? Check all that apply.

1 day to 15 days, 1 month, 3 months, 6 months

Which of the following are typical Euronote maturity lengths? Check all that apply.

1 month, 3 months, 6 months

There are __ members of the Federal Open Market Committee.

12

Which of the following are typical negotiable certificate of deposit (NCD) maturity lengths? Check all that apply.

2 weeks to 1 year

Suppose you have a bond with a $1,000 par value, a 10 percent coupon rate (that pays interest annually), three years to maturity, and a 10 percent yield to maturity. The bond's duration is:

2.736

Now suppose you want to measure the impact of a change in the prevailing bond yields on bond prices. If the duration of a bond is 2.736 years and the prevailing bond yield is 12 percent, then the bond's modified duration is:

2.736 / 1 + .12 = 2.736 / 1.12 = 2.443

Using the traditional percentage change formula, the new price of the bond reflects a decrease in the price of the bond by 3.398 percent , from which it can be seen that if an investor relies on modified duration to estimate the percentage change in the price of a bond, they will tend to overestimate the price decrease associated with an increase in rates.

3.398; overestimate

Which of the following are typical banker's acceptance maturity lengths? Check all that apply.

30 to 270 days

Which of the following are typical Treasury bill maturities? Check all that apply.

4 weeks 13 weeks 26 weeks 52 weeks

Which of the following are typical federal fund loan denominations? Check all that apply.

5 million or more

Using the modified bond duration of 2.443 years, if you anticipate bond yields will increase by 1.4 percentage points, then the price of the bond will decrease by:

=-DUR x change y = -2.443 * 1.4 = -3.420%

Which of the following is one of the reasons that the demand curve for loanable funds is downward sloping?

A higher real interest rate makes borrowing more expensive.

Which of the following are characteristics of Eurodollar securities? Check all that apply.

A secondary market for Euro-commercial paper exists. Euronote maturities are normally 1 month, 3 months, or 6 months. A secondary market for Eurodollar CDs exists.

Which of the following are characteristics of negotiable certificates of deposit (NCD)? Check all that apply.

Their denominations are typically in multiples of $1,000,000. They provide a return in the form of interest along with the difference between the secondary market selling price and the original purchase price.

Which of the following are characteristics of commercial paper? Check all that apply.

Their maturities are normally between 20 and 45 days but can be as short as 1 day or as long as 270 days. They are typically used to finance a firm's investment in inventory and accounts receivable. Firms are the most common investors in these securities.

Which of the following statements is true about banks in the United States?

There are approximately 5,000 banks as compared to approximately 14,000 in 1985.

Which of the following are characteristics of Treasury bills? Check all that apply.

They are virtually free of credit (default) risk. Common investors in these securities are households, firms, and financial institutions.

Commercial banks and savings institutions

Bank holding companies (entities that hold one or more banks) issue commercial paper. Commercial banks and savings institutions issue negotiable certificates of deposit (NCDs), borrow and lend funds in the federal funds market, buy and sell repurchase agreements, and purchase T-bills. Commercial banks create banker's acceptances.

An investor that distributes funds in their portfolio to short-term bonds in case they need to sell them quickly to obtain cash and distributes funds in their portfolio to long-term bonds to achieve high yields in the portfolio EX:An investor knows they will need liquidity in their portfolio to pay for their child's college tuition next year but also wants to invest in long-term bonds because interest rates are expected to decrease in the future.

Barbell

First Guaranty Bank wants to borrow funds to purchase a $22 million building for its new branch location and wants to issue long-term securities to cover the financing of the new branch location.

Bond Issuance

Glass Builder Inc. wants to put $750,000 in an interest-earning account for five years and doesn't plan on withdrawing the funds until the end of the fifth year, but doesn't mind withdrawing them if the financial institution no longer wants them midway through the five-year period.

Callable CD

Engage in repurchase agreements

Commercial banks and saving institutions

Hoosier Bank sells insurance to Mortgage Backed Security investors to protect their MBSs against a potential default.

Credit Default Swaps

True or False: The major use for bank funds is real estate loans.

True

True or False: The majority of all United States bank liabilities are made up of deposit accounts.

True

When the bond's coupon rate is less than the bondholder's required return, the bond will trade at

DISCOUNT

Suppose the federal government runs a deficit, and that the U.S. Treasury issues Treasury securities in order to make up the difference in tax revenue and expenditures.

Demand >>

Van is an 18-year-old high school student who wants to put $700 in an account that allows him to write checks and make payments using a debit card. He is not interested in collecting interest on funds in the account.

Demand Deposit

____________ are offered to bank customers who desire to use debit cards and write checks against their account.

Demand deposit accounts

Suppose Congress institutes an investment tax credit, which gives a tax break to any business constructing a new facility or purchasing a new piece of equipment.

Demand shifts >>

Injection Molding Inc. borrows $130,000 to finance the purchase of injection molds for its next production cycle.

Demand; Business

A federal government runs a budget deficit and needs to issue bonds in order to compensate for the difference between tax revenue and government expenditures.

Demand; Federal Government

Which of the following are ways that commercial banks use the funds they receive? Check all that apply.

Engage in repurchase agreements. Provide installment loans to support individuals' major purchases, such as vehicles, kitchen appliances, and home remodels.

Diligence Bank has a shortage of funds and wants a temporary source of funds for two days to make up the difference. They have great relationships with banks outside of the United States and want to borrow funds from Deutsche Bank in Germany.

Eurodollar Borrowing

True or False: Countries that are part of the eurozone are allowed to implement their own monetary policies at any given time. Thus, any participating country can solve local economic problems with either fiscal or monetary policies.

False

True or False: The most common way for U.S. commercial banks to expand internationally is by establishing agencies in other countries.

False

Component of the Fed

Fed Advisory Council Board of Governors National Banks

New Horizon Bank has a shortage of funds and wants a temporary source of funds for two days to make up the difference. They want to pay an interest rate that's similar to rates on Treasury securities and don't want to borrow from their Federal Reserve district bank or a source outside of the United States.

Federal Funds Market

Issue commercial paper

Finance companies; commercial banks and saving institutions

A bond's coupon rate determines the interest-based return that a bond will pay, and a bondholder's required rate of return reflects the return that a bondholder would like to receive from the investment.

Will; would like

Suppose Larry purchases a 30-day commercial paper with a par value of $1,000,000 for a price of $997,000. If Larry holds the commercial paper until maturity, and you assume a 360 day year, then the annualized yield is:

Ycp= 1m-997000/997000 * 360/30 = 3.61%

Suppose Teresa (a U.S. investor) purchases a 25-day Euro-commercial paper with a par value of 10,000,000 Brazilian reals for a price of 9,960,000 Brazilian reals. If the real is worth $0.21, the spot rate is anticipated to be $0.224700 per real at the end of maturity, and Teresa holds the Euro-commercial paper until then, assuming a 360 day year, the effective yield is:

Yf = 10m - 9960000 /9960000 * 360/25 = 5.78% Ye = (1 + .0578) * (1 + .224700-.21 / .21)-1 = 13.18%

Interest Rate Swaps

If two parties agree to engage in an interest rate swap, a bank acts as an intermediary by guaranteeing that the payments will be made on time in exchange for a transaction fee. If either party defaults on the obligation, the bank steps in and makes the payment on their behalf.

Suppose Darnell purchased an NCD a year ago on the secondary market for $993,000 and redeems it today upon maturity for $1,000,000 plus $38,000 in interest. The annualized yield on this NCD is:

Yncd= 1m - 993000 + 38000/ 993000 = 4.53%

If the real interest rate was large during the last year, then

actual inflation was less than the nominal interest rate.

Invest in money market securities to maintain liquidity in their investment portfolios

Insurance companies and pension funds

An investor that distributes funds in their portfolio in a way that capitalizes on forecasted changes in interest rates. EX: An investor that revises their bond portfolio to concentrate on short-term bonds, because they believe interest rates will increase in the future.

Interest Rate

Miracle Solutions Company and Silo Company each want to exchange interest rate payments; however, both companies want to ensure the other's payments are guaranteed. As a result, they both pay Clover Financial Bank 3% to guarantee payments are made.

Interest Rate Swaps

Insurance companies and pension funds

Invest in money market securities to maintain liquidity in their investment portfolios.

Credit Default Swaps

Investors who are concerned about their debt securities defaulting might purchase insurance, called credit default swaps, to protect their investment. Banks offer the insurance in exchange for periodic payments for the insurance.

Finance companies

Issue commercial paper

An investor that evenly distributes funds to bonds in their portfolio across several different maturity classes. EX: An investor creates a bond portfolio that has 33.33% of the funds invested in bonds with five years until maturity, 33.33% of the funds invested in bonds with 10 years until maturity, and 33.33% of the funds invested in bonds with 20 years until maturity.

Laddered

Lincoln Bank signs an agreement with Pixel Company to loan them $1 million, at a time specified by Pixel Company within the next six months, to finance their new facility, with an interest rate of 6.5 percent. Pixel Company pays Lincoln Bank $10,000 in exchange for locking in the interest rate today.

Loan Commitments

An investor that estimates their future cash outflows and then develops a bond portfolio that will generate enough coupon and principal payments to cover those outflows. EX: A retiree living off the income from their portfolio to supplement social security payments.

Matching

Which of the following are properties of banker's acceptances? Check all that apply.

Maturities on banker's acceptances typically range from 30 to 270 days. Banker's acceptances are commonly used when an exporter is selling goods to an importer with an unknown credit rating. The return on banker's acceptances is typically higher than the return on a T-bill.

Which of the following are typical commercial paper denominations? Check all that apply.

Minimum 100,000; multiples of 1 million so 733million but not 12,400,000

____ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month).

Money market deposit accounts (MMDAs)

Use proceeds from shares sold to invest in banker's acceptances

Money market mutual funds

The LIBOR scandal in 2012 involved

banks falsely reporting the interest rates they offered in the interbank market.

Which of the following are characteristics of repurchase agreements? Check all that apply.

Most repo transactions are backed by government securities. The size of the repo market is approximately $5 trillion

Suppose Dina requires a 6 percent annualized return on a one-year Treasury bill with a $1,000 par value. The price that Dina is willing to pay is:

P= 1000/(1+.06)1=1000/1.06=943.40

When the bond's coupon rate is equal to the bondholder's required return, the bond will trade at

PAR

When the bond's coupon rate is greater than the bondholder's required return, the bond will trade at

PREMIUM

Carlos wants to put $1,200 in an account to start a college fund but doesn't want the ability to write checks and make payments using a debit card.

Passbook Savings

Which of the following are reasons why commercial banks have been consolidated over the past few decades in the United States? Check all that apply.

Passed in 1994, the Riegle-Neal Interstate Banking and Branching Act began allowing banks to expand their branches across state lines.

Money market mutual funds

Purchase T-bills, commercial paper, NCDs, repurchase agreements, and banker's acceptances.

Suppose Teresa initially purchased securities at a price of $49,000,000 while agreeing to sell them back to the original owner at a price of $50,000,000 at the end of a 6-month period. Assuming a 360 day year, the yield (or repo rate) on this repurchase agreement is:

Repo Rate = 50m - 49m / 49m * 360/180 = 4.08%

Flow Financial Bank wants to temporarily sell $100 million worth of its Treasury bills, with an agreement to buy them back in one year for $102 million.

Repurchase Agreements

Deborah wants to put a small amount of money in an interest-earning account for three years, doesn't plan on withdrawing the funds, and wants them to stay in the account until the end of the third year.

Retail CD

The federal government announces that it will be running a larger budget deficit this year than it's run in the previous few years.

Risk Free Rate: Yes Credit Risk: No Change in Bond: Decrease

The producer price index indicates that prices may soon increase by as much as 1.5 percent.

Risk Free Rate: Yes Credit Risk: No Change in Bond: Decrease

The Federal Reserve announces that it plans to increase the reserve requirement.

Risk Free Rate: Yes Credit Risk: No Change in Bond: Undeterminable

The U.S. announces that it expects the unemployment rate will increase from 5 percent to 6 percent within the year, indicating that the economy will be weakening.

Risk Free Rate: Yes Credit Risk: Yes Change in Bond: Undeterminable

Suppose Caroline wants to earn a return of 16.00 percent and is offered the opportunity to purchase a $1,000 par value bond that pays a 14.00 percent coupon rate (distributed semiannually) and has three years remaining to maturity.

SEMI ANNUAL: 8% N = 6 I = 8 FV = 1000 PMT = 70 = 14%/2 = 7% * 1000

Which of the following is one of the reasons that the supply curve for loanable funds is upward sloping?

A higher real interest rate makes saving more appealing.

Suppose you learn that in 2021 there are plans for the federal government to institute a $20 per hour minimum wage across the country, and as a result, the average household income in the country will rise.

Assuming there are no other changes to SA or GA, the projected net demand for loanable funds (ND) will be positive , placing downward pressure on interest rates.

Which of the following is not considered a reliable measure for monitoring and controlling the money supply, due to its volatility? Check all that apply.

M1

M1

M1 includes currency (like the money in Paolo's checking account) and checking deposits (like demand deposits, negotiable order of withdrawal accounts, and automatic transfer balances).

Which of the following does the Fed use as a reliable measure for monitoring and controlling the money supply? Check all that apply.

M2 and M3

Which of the following are the Federal Open Market Committee responsible for? Check all that apply.

Manipulating the money supply through open-market operations

Which of the following are ways that the Federal Reserve influences the U.S. economy through its monetary policies? Check all that apply.

The Fed can decrease the Fed funds rate in an attempt to stimulate the economy. Using open-market operations to sell securities, the Fed can decrease the money supply, thereby increasing interest rates and subsequently reducing the rate of inflation.

Which of the following securities is most likely to be used in a repo transaction?

Treasury bill

Burke Co. is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. It believes that a 0.3 percent credit risk premium and a 0.2 percent liquidity premium are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 8 percent. Based on this information, Burke should offer ____ percent on its commercial paper

a. 8.5

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

about 12.5 percent

Which of the following is not an off-balance sheet activity for commercial banks?

consumer loans

Quantitative easing was motivated by the theory that

control of the short-term Treasury rate is not necessarily sufficient to improve liquidity in the debt security markets.

Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities.

credit default swap contracts

In response to criticism of the ratings they assigned before the credit crisis, credit rating agencies now a. are paid through fees assessed on the purchasers of bonds. b. are depending more on sensitivity analysis in which they assess how creditworthiness may change in response to abrupt changes in the economy. c. are not allowing employees who work in the agency's sales and marketing departments to influence the ratings that the agency assigns. d. B and C

d. B and C

As interest rates increase, long-term bond prices

decrease by a greater degree than short-term bond prices

A criticism of the Fed's actions during the credit crisis is that it

focused too much on financial institutions.

Assume that the value of a financial institution's liabilities equals that of its assets. If the durations of its asset portfolio are ____ than the durations of its liability portfolio, then the market value of the assets is ____ interest-rate sensitive than the market value of the liabilities.

greater; more

When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.

higher; lower

The repeal of a previously existing tax credit causes borrowers to demand less loanable funds. Because the quantity of loanable funds demanded is now less than the quantity of loanable funds supplied, there is downward pressure on interest rates. This change in interest rates causes a(n) decrease in the quantity of loanable funds supplied.

less; less than; downward; decrease

This change causes savers to supply more loanable funds. Because the quantity of loanable funds supplied is now greater than the quantity of loanable funds demanded, there is downward pressure on interest rates. This change in interest rates causes a(n) increase in the quantity of loanable funds demanded.

more; greater than; downward; increase

If the federal government needs to borrow less funds, this borrowing reflects a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds.

no change; decrease

Subordinated notes and bonds are examples of

secondary capital.

An increase in inflation could put _______ pressure on interest rates and _______ pressure on prices of money market securities.

upward; downward

If the economy strengthens, there is ____ pressure on interest rates. If the Federal Reserve decreases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected).

upward; upward

Which of the following instruments has a highly active secondary market?

banker's acceptances

According to the segmented markets theory, if most investors suddenly preferred to invest in long-term securities and most borrowers suddenly preferred to issue short-term securities, there would be

downward pressure on the yield of long-term securities.

Many financial institutions rely heavily on debt to fund their operations, and they are interconnected by virtue of financing each other's debt positions. Therefore, if one institution cannot pay its debts, it may create cash flow problems for several other institutions. The risk created by this situation is known as

systemic risk.

There are several steps involved in the Federal Reserve's monetary policy decision-making process

1. Two weeks prior to the FOMC meeting, FOMC members receive the Beige Book, which is a report of regional economic conditions from each of the 12 Federal Reserve banking districts 2. One week prior to the FOMC meeting, FOMC members receive expert analyses of the economy and economic forecasts based on information in the Beige Book 3. In the FOMC meeting, staff members make presentations about current economic conditions and recent economic trends. 4. FOMC members, including both voting and nonvoting members, discuss what the Fed's monetary policy should be, based on the presentations given by the staff members. 5. Voting members of the FOMC vote on whether the federal funds rate target should increase, decrease, or remain the same. 6. Voting members of the FOMC vote on how to communicate the chosen monetary policy to the public. 7. The FOMC issues a clear and detailed statement that summarizes its decision about the selected target federal funds rate. 8. The minutes for the FOMC meeting are provided to the public and made accessible on Federal Reserve websites. 9. If the FOMC determines that a change in its monetary policy is appropriate, its decision is forwarded to the Trading Desk at the New York Federal Reserve District Bank through a statement called the policy directive. 10. The manager of the Trading Desk instructs traders who work at that desk on the amount of Treasury securities to buy or sell in the secondary market.

An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

about 12.6 percent

Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will decrease, their actions may cause the yield curve to

become inverted.

Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bond will be ____ its par value.

below; below

The most common method that the Federal Reserve would use to change market interest rates is to

buy or sell Treasury securities in the secondary market.

Canada's government imposes a tax law that makes any savings during the year exempt from personal income taxes.

Supply; Household

Gilberto deposits a $1,500 paycheck into a savings account at the local credit union.

Supply; Household

The federal funds rate is the interest rate charged on short-term loans between_____________.

depository institutions

The Federal Advisory Council makes recommendations to the Fed about

economic and banking issues.

In general, securities with ____ credit risk and _______ liquidity will offer higher yields.

higher; lower

When the Fed initiated a program to purchase commercial paper, one of its primary goals was to

increase activity in the market for commercial paper and boost the confidence of investors in commercial paper.

When there are expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.

increase; decrease

Assume that foreign investors who have invested in U.S. securities decide to increase their investment in U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.

increase; downward

If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

increase; increase

If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.

increase; purchase

Assume that the Treasury issues a large number of Treasury bonds. This action will ____ the demand for funds in the market and place ____ pressure on the yield of Treasury bonds.

increase; upward

A bond with a 10 percent coupon rate pays interest semiannually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?

$951

Suppose in a hypothetical economy, the nominal interest rate is 6% and the expected inflation rate is 1%.

6 = i, 1 = E(INF), 6-1=5

Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.

6.99

Assume an investor's tax rate is 20 percent. The before-tax yield on a security is 10 percent. What is the after-tax yield?

8.00 percent; Y after = Y before (1- Investor's tax rate)

Which of the following is one of the reasons that the demand curve for loanable funds is downward sloping?

A lower real interest rate makes borrowing less expensive.

Which of the following is one of the reasons that the supply curve for loanable funds is upward sloping?

A lower real interest rate makes saving less appealing.

Suppose you learn that over the next couple of years, dozens of companies that work in product fulfillment are planning on opening new facilities in major cities around the country, that will result in a projected DA increase of $6 billion. Additionally, you learn that the government plans to lower taxes, resulting in a projected SAincrease of $2 billion.

Assuming there are no other changes to SASA or DA, the projected DA will be greater than the projected SA, placing upward pressure on interest rates.

____ is a short-term debt instrument issued only by well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

Commercial paper

An investment tax credit effectively lowers the taxes paid by firms that purchase new equipment or build a new manufacturing facility. Suppose the government repeals a previously existing investment tax credit.

Demand <<

Suppose the government enacts a first-time home buyer tax credit, available for just two years, that gives people who are purchasing a home for the first time a $10,000 tax credit.

Demand >>

Argentina's government wants to obtain financing by issuing Argentina Treasury bills to U.S. investors.

Demand; Foreign

Poornima borrows $27,500 to finance the purchase of a 2019 Toyota Camry.

Demand; Household

North Texas Municipal Water District issues millions of dollars in bonds to help finance the upgrade of its water treatment plants.

Demand; Municipal government

During the 2008 credit crisis, Lehman Brothers defaulted on commercial paper that it issued, causing investors to be concerned about more firms defaulting on their commercial paper issuances. Because investors were concerned about consumers defaulting on these loans, the secondary market became inactive. As a result, the Federal Reserve engaged in Lehman Brothers by purchasing commercial paper to increase liquidity in the market for these securities.

Lehman Brothers; secondary; quantitative easing; purchasing; increase

M2

M2 includes everything in M1 plus savings deposits, money market deposit accounts (MMDAs), overnight repurchase agreements (selling bonds with the intention of buying them back at a higher price the next day), and Eurodollars lasting less than one day (U.S. dollars deposited into an international bank account with the intention of withdrawing the money the next day).

M3

M3 includes everything in M2 plus institutional money market mutual funds, large time deposits, repurchase agreements (selling bonds with the intention of buying them back at a higher price sometime in the future), and Eurodollars lasting more than one day (U.S. dollars deposited into an international bank account with the intention of withdrawing the money sometime in the future).

Individual Retirement Accounts (IRAs) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is an increase in the maximum contribution, from $5,000 to $8,000 per year.

Supply >>

Suppose the federal government runs a surplus and the Federal Reserve purchases bonds from banks with the excess funds.

Supply shifts >>

The U.S. government runs a budget surplus and purchases $1 billion worth of bonds from banks with the excess funds.

Supply; Federal government

Which of the following are organizational components of the Fed? Check all that apply.

The Federal Advisory Council Board of Governors Federal Reserve Banks

Which of the following conditions would place the most downward pressure on interest rates?

an increase in the supply of loanable funds and a decrease in the demand for loanable funds

As a result of less favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve.

decreased; inward

The Federal Open Market Committee is directly responsible for controlling ____________.

money supply growth

If economic conditions become more favorable, then

there would be additional acceptable business projects

Money market instruments are securities

with maturities of one year or less

Bank loans designed to support a firm's ongoing business operations are called

working capital loans.

The ___________curve represents the relationship between the maturity and the annualized yield of Treasury debt securities.

yield

Quantitative easing is an example of non-traditional monetary policy, which is generally used when interest rates are near zero.

non-traditional; near zero

Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were suddenly higher than U.S. rates. For a given foreign interest rate level, foreign demand for U.S. funds is ____ related to U.S. interest rates.

more; inversely

Assume that you derive the one-year forward interest rate without considering liquidity. Assuming that liquidity affects the yield, the forward interest rate that you derived would _____________ the market's expectation of the future interest rate.

overestimate

If the Fed initiates a program to purchase long-term Treasury securities, it is most likely attempting to

reduce long-term interest rates

As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____.

savings deposits and small time deposits; large time deposits and short-term borrowings