barryqiu
ECO303 – Money and Banking
Fall 2014
Hanyang University
Instructor:
Deokwoo Nam
College of Economics & Finance 606
Homework 1
(Due on September 19)
The following questions are selected from the problems at the end of chapters in the textbook.
Chapter 1
1. What is the typical relationship between interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
4. Why are financial markets important to the health of the economy?
6. What is the basic activity of banks?
9. Has the inflation rate in the United States increased or decreased in the past few years? What about interest rates?
10. If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to:
a. real output?
b. the inflation rate?
c. interest rates?
13. Why do managers of financial institutions care so much about the activities of the Federal Reserve
System?
Chapter 2
1. If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling salesman, should I take out a loan from Larry the Loan Shark at a
90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan sharking?
3. Why is a share of Microsoft common stock an asset for its owner and a liability for Microsoft?
4. If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
5. “Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets are.” Is this statement true, false, or uncertain?
6. For each of the following money market instruments, describe who issues the debt:
a. Treasury bills
b. Certificates of deposit
c. Commercial paper
d. Repurchase agreement
1/2
e. Fed funds
10. How
Fall 2014
Hanyang University
Instructor:
Deokwoo Nam
College of Economics & Finance 606
Homework 1
(Due on September 19)
The following questions are selected from the problems at the end of chapters in the textbook.
Chapter 1
1. What is the typical relationship between interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
4. Why are financial markets important to the health of the economy?
6. What is the basic activity of banks?
9. Has the inflation rate in the United States increased or decreased in the past few years? What about interest rates?
10. If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to:
a. real output?
b. the inflation rate?
c. interest rates?
13. Why do managers of financial institutions care so much about the activities of the Federal Reserve
System?
Chapter 2
1. If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling salesman, should I take out a loan from Larry the Loan Shark at a
90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan sharking?
3. Why is a share of Microsoft common stock an asset for its owner and a liability for Microsoft?
4. If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
5. “Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets are.” Is this statement true, false, or uncertain?
6. For each of the following money market instruments, describe who issues the debt:
a. Treasury bills
b. Certificates of deposit
c. Commercial paper
d. Repurchase agreement
1/2
e. Fed funds
10. How