...term structure of interest rates. What are the effects of rise in risk and expectations on the formation of long term rates? Interest rate within an economy is subject to many factors and as a result varies in relativity of those. The major factors are time period: short term Vs. long term investments, the degree of risk to which its exposed (AAA rated, mortgages, default, zero coupon…). Term structure of Interest rate is a significant tool for investors of bonds but also for policy makers, in terms of having an overview of whether to invest in short or longer term securities. This essay will go on to explain the term structure of interest rate how it is used by investors, the different theories and hypothesis behind it but also how the creation of long term rates effects its relation to risk. The term structure of interest rates also called the yield curve shows the relationship between interest rate and time to maturity of bonds, it is a common method of bond valuation. A graph is used to represent this relationship in relation to long term interest rates and short term interest rates where the maturity of an investment (x axis ) is compared to the interest rate (y axis) showing the yield (rate return) on bonds with the different maturity length. Term structure of interest usually refers to zero coupon bonds which are bonds without coupons (weekly interest rate payments on the bond) which are sold at its face value requiring as a result a fixed interest rate. The...
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...Tutorial Questions ------------------------------------------------- Tutorial 1 – Assumed Knowledge Revision ------------------------------------------------- Questions are to be attempted prior to attending the tutorial 1. Classify each of the following items into one of the five categories: Asset, Liability, Equity, Revenue, or Expense. Item | Category | Motor vehicle | | Interest expense | | Rent received | | Bank overdraft | | Retained profits | | Trade Payables | | Stock on Hand | | Cash | | Brand names | | Dividend paid | | 2. a) What is depreciation? b) Where does depreciation appear on the balance sheet? 3. a) Solve the equation b) Verify your answer. 4. a) What is working capital? b) What is the definition of net working capital? c) Can net working capital have a negative value? Explain. 5. a) What is 18% of 675? b) Increase 834 by 68.3%. 6. Calculate EPS given the following information: Profit before tax = $430,000 Sales = $1,120,000 Tax rate = 30% Number of shares outstanding = 530,000 7. a) Explain what is meant by a “tax deduction”? b) A tax deduction is deducted directly from your amount of tax payable. True or False? Tutorial Questions ------------------------------------------------- Tutorial 1 – Additional Revision ------------------------------------------------- Questions are to be attempted prior to attending the tutorial 1. Solve the equation ...
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...Market: How the Term Structure Reacts to Monetary Polic Introduction Behavior of term structure is a major source of interest rate risk and influences the decision making process of the participants in money market and government securities (G-Sec) market regarding holding and trading. Monetary policy is a major determining factor of term structure. The first quarter of the current financial year found hikes in monetary policy rates in India to be followed by upward shifts in the domestic term structure, which adversely affected the G-Sec portfolios of the market participants. This paper wants to find out how term structure responds to monetary policy actions in India. Literature Review There are a number of studies in USA on how term structure responds to the expectations about the central bank’s monetary policy actions. Cook et al (1989) found that changes in the federal funds target rate (FFTR) in the 1970s caused large movements in short term interest rates, moderate movements in medium term rates, and small movements in long term rates. Kuttner (2001) estimated that the bond rate’s response to expected changes in monetary policy is negligible, while their response to unexpected changes is significant. Faust et al (2002), as reported by Goukasian et al (2006), using prices from federal funds futures contracts derived the unexpected component of Federal Reserve policy decisions and assessed their impact on the future trajectory of interest rates. 1 Goukasian et...
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...Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones) Chapter 9 Properties and Pricing of Financial Assets Multiple Choice Questions 1 Properties of Financial Assets 1) Which of the below is NOT one of the eleven properties of financial assets? A) moneyness B) multiplicity and denomination C) reversibility D) cash flow Answer: B Comment: The eleven properties of financial assets are (1) moneyness, (2) divisibility and denomination, (3) reversibility, (4) cash flow, (5) term to maturity, (6) convertibility, (7) currency, (8) liquidity, (9) return predictability, (10) complexity, and (11) tax status. Diff: 2 Topic: 9.1 Properties of Financial Assets Objective: 9.1 the many key properties of financial assets: moneyness; divisibility and denomination; reversibility; cash flow and return; term to maturity; convertibility; currency; liquidity; return predictability or risk; complexity; and tax status 2) Which of the below is NOT one of the eleven properties of financial assets? A) convertibility B) currency C) liquidity predictability D) tax status Answer: C Comment: The eleven properties of financial assets are (1) moneyness, (2) divisibility and denomination, (3) reversibility, (4) cash flow, (5) term to maturity, (6) convertibility, (7) currency, (8) liquidity, (9) return predictability, (10) complexity, and (11) tax status. Diff: 2 Topic: 9.1 Properties of Financial Assets Objective: 9.1 the many key properties of financial assets: moneyness; divisibility...
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...bank), According to the decision of China’s central bank, your esteemed bank starts cutting the interest rates effectively on Feb 28, 2015. I fully agree with this decision. Why? First, the lower interest rate helps those financial institutions, mainly commercial banks, can absorb more deposits in the future, thus they can ensure that loans remain relatively stable or even a rapid growth. Also, this reflects that China’s central bank reduce the cost of capital in order to encourage or stimulate more business credits and ease the borrowers pressures from the repayment. Secondly, it expands the upper limit of the deposit rates on its floating range. It also helps depository financial institutions can be more flexible to secure more financial resources, according to their own deposit base and the required deposit target. Moreover, it will not occur the so-called “interest rate’s war”, which means that various financial institutions need to consider their cost-effectiveness to set their deposit interest rates, so they can ensure that profits have existed. Those can ensure that banks and the interbank market due are highly liquid, secure the economic growth would not be stalled, and also this interest rate adjustment plays a good guiding role at the benchmark rate: since it further consolidate that the social cost of financing will reduce, it helps to adjust the economic structure and the transformation and upgrading of the appropriate monetary and financial environment, which...
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...#:_________________________________________ 1. You would be given 4 or 5 questions similar to the ones found in this practice exam. You are, however, responsible for all material covered in the course whether or not that material is covered in this exam. 2. You will have 3 hours to write this exam. 3. Answer all questions in the spaces provided. Please write legibly. 4. Use of calculator is permitted, but please show how answers were obtained. A numerical answer without an explanation will be given a grade of zero. 1 1. Robinson Crusoe (RC) lives only two periods (today and tomorrow). He prefers to consume the same amount of money in each period, but his income stream is $500 today and $110 tomorrow. Assume that RC can borrow and lend at an interest rate of 10%. a) Graphically show all the possible combinations of consumption today and tomorrow available to RC. On this graph indicate how much he will spend today and how much he will spend tomorrow. ANSWER In general C 0 = 500 + C C 110 − 1 = 600 − 1 1.10 1.10 1.10 If C 0 = C1 = C then C = 600 − in other words, C , 1.10 1 ⎞ ⎛ C ⎜1 + ⎟ = 600 . ⎝ 1.1 ⎠ Therefore, C = 314.29 . If C 0 = 0 , then 0 = 600 − C1 , therefore C1 = 660 . Similarly, if C1 = 0 then 1.10 C 0 = 600 − 0 = 600. 1.10 (0, 610) C1=0 Consumption 700 Tomorrow (C1) (C 600 500 400 (314.29, 314.29) C1=C2=C 300 200 100 (600,0) C2=0 0 0 100 200 300 400 500 600 700 Consumption Today (C0) (C 2 b) An insurance company offers the following...
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...1. Agency problems – why they arise, ways to reduce them (board of directors for ex.) • Corporations are owned by shareholders that want managers to maximize their wealth. • Agency problems arise due to the separation of ownership and management * Managers may have conflicts of interest with shareholders (maybe they want to maximize their own wealth rather than the shareholders wealth) – This is called an Agency Problem because the managers are acting as agents for the shareholders. Examples of agency problems: 1. Purchasing private jets for personal use 2. Overindulging in expense account dinners 3. Avoiding risky projects because they are worried about the security of their jobs 4. Manipulating accounting earnings to increase their compensation Reducing Agency Problems The goal is to align the interests of managers and shareholders. This can be accomplished through: • Compensation plans tied to the performance of the firm (assuming of course that the reporting of the numbers is not fraudulent!). It is best is performance is measured by stock value or other cash flow measure. • The Board of Directors oversees management and can fire them -problems with the board of directors lack of independence arises here. Oftentimes the Board and top management are part of (as they call it) “the old-boy network”. They are related, or play golf together, their families know each other, they socialize together, and most likely they all make money off of each other...
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...During the early years of the life stage of a typical corporation, the:Answer | Selected Answer: | corporation is a heavy provider of financial assets | Correct Answer: | firm is unable to establish a strong position with respect to its financial assets | | Question 2 2 out of 2 points | | | Greater potential savings would result from a (n):Answer | | | | | Selected Answer: | shift to more middle-aged families | Correct Answer: | shift to more middle-aged families | | | | | Question 3 2 out of 2 points | | | A saver who chooses securities as a savings medium and desires maximum safety of principal buys:Answer | | | | | Selected Answer: | government bonds | Correct Answer: | government bonds | | | | | Question 4 2 out of 2 points | | | Capital formation refers to the:Answer | | | | | Selected Answer: | creation of physical productive facilities | Correct Answer: | creation of physical productive facilities | | | | | Question 5 2 out of 2 points | | | When current savings of an economic unit exceed its direct investment in real assets, this is referred to as:Answer | | | | | Selected Answer: | savings surplus | Correct Answer: | savings surplus | | | | | Question 6 2 out of 2 points | | | Which of the following is the most liquid form of savings?Answer | | | | | Selected Answer: | cash balances | Correct Answer: | cash...
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...ECO 316 Entire Course In this archive file of ECO 316 Entire Course you will find the next documents: ECO-316 Week 1 Chapter 1 Introducing Money and the Financial System.pdf ECO-316 Week 1 Chapter 2 Money and the Payments System.pdf ECO-316 Week 1 Chapter 3 Overview of the Financial System.pdf ECO-316 Week 1 Chapter 4 Interest Rates and Rates of Return.pdf ECO-316 Week 1 Chapter 5 The Theory of Portfolio Allocation.pdf ECO-316 Week 1 Chapter 6 Determining Market Interest Rates.pdf ECO-316 Week 1 DQ 1.doc ECO-316 Week 1 DQ 2.doc ECO-316 Week 2 Chapter 10 Information and Financial Market Efficiency.pdf ECO-316 Week 2 Chapter 11 Reducing Transactions Costs and Information Costs.pdf ECO-316 Week 2 Chapter 12 What Financial Institutions Do.pdf ECO-316 Week 2 Chapter 7 Risk Structure and Term Structure of Interest Rates.pdf ECO-316 Week 2 Chapter 8 The Foreign-Exchange Market and Exchange Rates.pdf ECO-316 Week 2 Chapter 9 Derivative Securities and Derivative Markets.pdf ECO-316 Week 2 DQ 1.doc ECO-316 Week 2 DQ 2.doc ECO-316 Week 3 Assignment Impacts on Liquidity.doc ECO-316 Week 3 Chapter 13 The Business of Banking.pdf ECO-316 Week 3 Chapter 14 The Banking Industry.pdf ECO-316 Week 3 Chapter 15 Banking Regulation Crisis and Response.pdf ECO-316 Week 3 Chapter 16 Banking in the International Economy.pdf ECO-316 Week 3 Chapter 17 The Money Supply Process.pdf ECO-316 Week 3 Chapter...
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...Requirements help to maintain a stable banking system and ensure banks are able to conduct day-to-day check clearing and cash withdrawal transactions. These requirements are also policy tools that the Federal Reserve can use to control the money supply. The most important role is to provide structure and stability to the banking system. 2 My actions would affect growth by placing holds on money transactions such as holds and loans. It’s more important to increase economic growth as opposed to decreasing, ensuring lower unemployment levels. 3 When the economy remains at a constant level or declines, the ability to support the population fails. Economic growth relates to the size and quality of the economy. Growth is measured as the change in the GDP after subtracting inflation. 4 Using reserve requirements would require close monitoring on bank holds and money. Scenario 2 In 150 to 200 words, explain your reasoning for the way you are planning on using the Discount Rate. Be sure to address the following: 1. How the Discount Rate can affect the economy 2. How your action will affect economic growth 3. Why it is important to slow economic growth 4. Your rationale for the use of the Discount Rate At the end of the game, you will be provided with this information to give to your instructor. Answer: Type your response here... 1 to slow down an economy,...
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...Bond prices, interest rates, spot rates Ex: a bond gets issued at $1000 par value, with a coupon rate of 10%. The bond will expire in 5 years. We know that the coupon payments are $100 (10% of par value). The payments happen at the end of each year. So at the end of year 1, the bondholder gets $ Now, the interest rate goes up. WHY WOULD THE INTEREST RATE GO UP? IS IT THE CENTRAL BANK THAT DETERMINES THAT THIS INTEREST RATE MOVE UP? IS THIS INTEREST RATE (FOR ONLY ONE PERIOD) THE SAME AS THE SPOT RATE? ALSO, UNTIL BEFORE WE STARTED TALKING ABOUT SPOT RATES WE ALWAYS ASSUMED THAT “INTEREST RATES WERE THE SAME EACH YEAR”. DOES THIS MEAN THAT THE TERM STRUCTURE OF INTEREST RATES IS FLAT? What happens to the bond? The coupon payments are still going to be the same ($100 at the end of each year). But the yield to maturity changes. What is the YTM? * It is the total return you will receive if you hold the bond until maturity * The rate of return anticipated on a bond if held until the end of its lifetime. * It’s considered a long-term bond yield expressed as an annual rate. * The YTM calculation takes into account the bond’s current market price (PV of all of the bond’s cash flows), par value, coupon interest rate, and time to maturity. * It assumes that all coupon payments are reinvested at the same rate as the bond’s current yield (WHAT DOES THIS ACTUALLY MEAN? IF YOU SELL IT BEFORE IT MATURES, THEN YOU DON’T GET THAT ACTUAL YIELD? IS IT BECAUSE SINCE...
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...Title: LIBOR scandal and where do we go from here? A brief about LIBOR: London Interbank Offered Rate or LIBOR is a set of indices that represent the interest rates in the London money market. In simple terms, these are the rates at which various banks in London borrow funds from each other. It may happen that due to excessive withdrawals than deposits, a bank faces shortage of funds on a short term basis. So the bank has to borrow from its rival bank to cover this shortage of cash. On the other hand the bank with a surplus of cash can make an extra profit by lending its money to another bank. But in essence, LIBOR is much more than just an indicator of interbank borrowing rates in the local London money market. Since its inception in 1986 it has grown to become one of the most important benchmark interest rates with financial instruments worth nearly 800 trillion US$ using the reference of LIBOR in some way. It is daily calculated by the private British Banker’s Association (BBA) and published by Thomson Reuters on every business day. LIBOR rates are measured in 10 different currencies for 15 different periods (overnight to one year).Every day each of the 16 banks in London informs the BBA about the rate it is charged to borrow money. LIBOR rate is calculated by discarding the top 25% and the bottom 25% of the submitted interest rates and by taking the mean of the remaining middle 50% of the data.[Fig-1]. Since London is located in a prime time zone, it is able to access...
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...influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services. Structure of the FOMC The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a...
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...000 in working capital. The projected after-tax cash flows from the project are DM 20,000,000 for the next two years, in addition to DM5,000,000 from the liquidation of working capital in two years. The spot exchange rate (S$/DM) is $0.6500/DM1 . The interest rate in the U.S. (RUS ) is 6 percent per year while the German interest rate (RDM ) 11 percent per year. Assuming that the firm has a WACC of 12%, showing all calculations indicate whether the project should be accepted. Solution Predicted Exchange Rates If the real rate of interest is the same in all countries (due to the international mobility of capital) the International Fisher Effect implies that differences in nominal interest rates will signal differences in the expected rates of inflation across countries. Given that RUS is 6 percent per year and that the German interest rate RDM is 11 percent per year, we would expect the expected rate of inflation in Germany to be roughly 5 percent greater than the expected rate of inflation in the US. Relative Purchasing Power Parity implies that the expected changes in exchange rates should reflect differences the expected rates of inflation in the two countries in question, = [ ]N where E( S$/DM(t+n) ) denotes the exchange rate...
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...Corporate Financial Management and Modeling Paper Data Analysis about 90-day U.S. Treasury Bill Rate and Civilian Employment-Population Ratio 1.1 Abstract This data set contains 132 monthly observations, from January 2002 to December, 2012, using three different rates: three-month Treasury bill rate from the secondary market, the implied three-month forward rate of interest computed by pure expectation, and civilian employment- population ratio. 2.1 Data Description Date is in the format of YYYY-MM-DD. 3MTB is the 3 month Treasury bill rate from secondary market, Civil EM-PO ratio is civilian employment- population ratio, 6MTB is the 6 month Treasury bill rate from secondary market, 3MFR is the implied three-month implied forward rate of interest computed by pure expectation, 3MFR is computed from the formula (1+6MTB) 0.5=(1+3MTB)0.25*(1+3MFR) 0.25 The descriptive statistics of data are showed as followed: |Civil EM-PO ratio | |3MTB | |Mean |61.18787879 | |Mean |1.636666667 | |Standard Error |0.169935661 | |Standard Error |0.14591768 | |Median |62.3 | |Median |1.13 ...
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