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Fin350 Questions And Applications 2

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

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

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

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

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

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

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

3. Secondary Marketfor T-Bills: Describe the activity in the secondary T-bill market. How canthis degree of activity benefit investors in T-bills? Why might a financialinstitution sometimes consider T-bills as a potential source of funds.

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

1. T-Bill YieldAssume 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 ofReturn: 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’srequired rate of return?

8. EffectiveYield A U.S. investor obtains British pounds when the pound is worth $1.50 andinvests 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 fromthe investment back to dollars at the prevailing spot rate of $1.52 per pound.Calculate the effective yield

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