FIN350: Questions and Applications

Chapter 5: Questions and Applications 1, 6, 8, 14, and 24

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1. Impact of Monetary Policy: How does the Fed’s monetary policy affect economic conditions?

6. Fed Control: Why may the Fed have difficulty controlling the economy in the manner desired? Be specific.

8. Fed’s Control of Inflation: Assume that the Fed’s primary goal is to reduce inflation. How can it use open market operations to achieve this goal? What is a possible adverse effect of such action by the Fed (even if it achieves the goal)?

14. Interpreting the Fed’s Monetary Policy: When the Fed increases the money supply to lower the federal funds rate, will the cost of capital to U.S. companies be reduced? Explain how the segmented markets theory regarding the term structure of interest rates could influence the degree to which the Fed’s monetary policy affects long-term interest rates.

24. Monetary Policy during the Credit Crisis: During the credit crisis, the Fed used a stimulative monetary policy. Why do you think the total amount of loans to households and businesses did not increase as much as the Fed had hoped? Are the lending institutions to blame for the relatively small increase in the total amount of loans extended to households and businesses?

Chapter 6: Questions and Applications 3 and 9; Problems 1, 7, and 8

3. Secondary Market for T-Bills: Describe the activity in the secondary T-bill market. How can this degree of activity benefit investors in T-bills? Why might a financial institution sometimes consider T-bills as a potential source of funds.

9. Banker’s Acceptances: Explain how each of the following would use banker’s acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks, and (d) investors.

1. T-Bill Yield Assume an investor purchased a six-month T-bill with a $10,000 par value for $9,000 and sold it 90 days later for $9,100. What is the yield?

7. Required Rate of Return: A money market security that has a par value of $10,000 sells for $8,816.60. Given that the security has a maturity of two years, what is the investor’s required rate of return?

8. Effective Yield A U.S. investor obtains British pounds when the pound is worth $1.50 and invests in a one-year money market security that provides a yield of 5 percent (in pounds). At the end of one year, the investor converts the proceeds from the investment back to dollars at the prevailing spot rate of $1.52 per pound. Calculate the effective yield