NAME 330 Worksheet 1 Draw the Bond market Be sure to label everything Show what happens before and after a decrease in the desire of people to save rather than spend their income What happens to Bond prices Interest Rates lending 2 Draw the Bond market Be sure to label everything Show what happens before and after an increase in the ease one can buy and sell bonds For example with the internet now it can all be done electronically from your home What happens to Bond prices Interest Rates lending 3 Interest rates are currently 2 a year I promise to pay you 4000 in 10 years How much should you be willing to pay for that promise today SHOW YOUR WORK 4 A 3 year Coupon Bond has a Face Value of 1000 and a coupon rate of 10 Market Rates for bonds like this are currently 6 What should this bond sell for 5 You are confidant that interest rates are going to fall 2 percentage points across the board between today and next year Your grandma just gave you 10 000 for next year s tuition The yield to maturity on a 1 year discount bond is 5 and has a price of 10 000 The yield to maturity on a 10 year discount bond is 3 and has a price of 10 000 SHOW YOUR WORK a What does the 1 year bond pay in a year b What does the 10 year bond pay in 10 years c What is the 10 year bond worth a year from now if interest rates fall as you predict d Which bond should you buy 6 If total deposits 250 And reserve requirement ratio r is 1 and total reserves 5 and total currency 1 25 a What is e b what is c 7 Derive the Money Multiplier m Remember a MS m MB b MB Total Reserves C c Total Reserves RR ER d MS C D e C C D f e ER D g r RR D 8 Using the numbers in question 1 what is m 9 Using the numbers in question 1 what is MS 10 If Banks raise their Excess reserves to 25 What is the new e 11 If the Federal Reserve wants to maintain the same supply of money how much worth of Bonds will then need to buy 12 If total deposits 300 And reserve requirement ratio r is 1 and total reserves 50 and total currency 6 a What is e b what is c c what is m d what is MB e what is MS 13 The Federal Reserve has set the discount rate at 2 It pays 1 on Reserves The current Federal Funds Rate is 1 5 a Draw the Federal Funds Market 14 Imagine private banks decide the economy is looking good and decide to greatly increase their lending In fact they decide to hold no excess reserves a What is the new e b What is the new m c If the Federal Reserve wishes to maintain the MS at the level it was before all this new lending what should the new MB be d How does the Federal Reserve Achieve this goal e Graph the Federal Funds Market after these changes 15 Draw the money market 16 Show on the graph above what happens to the money market if the economy RGDP expands before any action by the Federal Reserve 17 Now add to the graph what the Fed will do with the Money Supply in response to the growing economy 18 How does the Fed Actually do what you showed 19 Draw the Federal Funds Market with a Federal Funds rate of 3 a discount rate of 5 and the Fed paying 0 on reserves 20 Now add to this picture what happens to the Demand for borrowed reserves as the economy grows Hint Think about what happens to lending in a good economy 21 Now add to the Federal Funds Market what would happen to the supply of reserves given what the Fed Does in questions 3 4 22 Draw the Money Market of the United States Before and after a large decrease in excess reserve ratio What happened to the Price Level INCREASE DECREASE No CHANGE What could the Federal Reserve have done about this to maintain stable prices 23 Draw the foreign exchange market for Dollars priced in Euros with an equilibrium exchange rate of 1 Euro to 2 Show what happens if Europe becomes a more attractive vacation destination 24 Draw the foreign exchange market for Yen priced in dollars with an equilibrium exchange rate of 100 Yen to 1 Show what happens if the Japanese economy s productivity grows faster than the United State s 25 Draw the foreign exchange market for Peso s priced in dollars with an equilibrium exchange rate of 20 Peso s to 1 Show what happens if real interest rates on Mexican bonds rise relative to American bonds 26 You are offered 1000 next year 500 the year after and 250 the year after by purchasing a bond today You can currently earn 5 elsewhere What is the most that you should pay for this bond assuming no default risk Show your work 27 A bond pays your 1701 10 years from today Its current price is 1121 What is the yield to maturity on this bond 28 Assume 3 years from now the interest rate on similar bonds is 2 How much is your bond worth 3 years from now 29 If you sold it at that point 3 years from now what would your rate of return be 30 An increase in WEALTH affects demand or supply of bonds 31 And it shifts left or right 32 An increase in EXPECTED RETURNS affects demand or supply of bonds 33 And it shifts left or right 34 An increase in RISK affects demand or supply of bonds 35 And it shifts left or right 36 An increase in LIQUIDITY affects demand or supply of bonds 37 And it shifts left or right 38 An increase in EXPECTED PROBABLITY OF INVESTMENT OPPORTUNITY affects the demand or supply of bonds 39 And it shifts left or right 40 An increase in GOV DEFICITS affects the demand or supply of bonds 41 And it shifts left or right 42 List the Short Run and Long Run Effects of Exchanges Rates 43 What is to global pool of money 44 Describe securitization and mortgage back securities 45 Under the expectation theory of interest rates if people believe that this year 1 year bond has a return of 1 and next year a 1 year bond has a return of 2 and the year after a 1 year bond has a return of 3 What should interest rates on a 3 year bond be today 46 If the 3 year bond rate is 3 instead what is the liquidity premium 47 Under the expectation theory of interest rates if the return on a 1 year bond today is 5 and the return on a 2 year bond is 3 What do …