Home Work 2 - Financial Markets and Institutions (MGT 470)...

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Financial Markets and Institutions (MGT 470) Interest Rates, and Money Markets Homework Assignment II (Solutions) Please solve the following problems using either TVM formulas or the financial calculator. Show all your formula work. If you use the calculator, show the relevant calculator inputs. Where MS Excel is used, please either cut and paste the spreadsheet where it belongs or staple the printout directly from MS Excel in the proper question order. Always highlight or underline the final answer to each question. Note that some questions require a written answer, not just a number. 1. What factors cause the supply of funds curve to shift? Provide a brief definition of each factor. Factors that affect the supply of funds include total wealth risk of the financial security, future spending needs, monetary policy objectives, and foreign economic conditions. Wealth. As the total wealth of financial market participants (households, business, etc.) increases the absolute dollar value available for investment purposes increases. Accordingly, at every interest rate the supply of loanable funds increases, or the supply curve shifts down and to the right. The shift in the supply curve creates a disequilibrium in this financial market. As competitive forces adjust, and holding all other factors constant, the increase in the supply of funds due to an increase in the total wealth of market participants results in a decrease in the equilibrium interest rate, and an increase in the equilibrium quantity of funds traded. Conversely, as the total wealth of financial market participants decreases the absolute dollar value available for investment purposes decreases. Accordingly, at every interest rate the supply of loanable funds decreases, or the supply curve shifts up and to the left. The shift in the supply curve again creates a disequilibrium in this financial market. As competitive forces adjust, and holding all other factors constant, the decrease in the supply of funds due to a decrease in the total wealth of market participants results in an increase in the equilibrium interest rate, and a decrease in the equilibrium quantity of funds traded.
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Risk. As the risk of a financial security decreases, it becomes less attractive to supplier of funds. Accordingly, at every interest rate the supply of loanable funds decreases, or the supply curve shifts up and to the left. The shift in the supply curve creates a disequilibrium in this financial market. As competitive forces adjust, and holding all other factors constant, the decrease in the supply of funds due to an increase in the financial security=s risk results in an increase in the equilibrium interest rate, and a decrease in the equilibrium quantity of funds traded. Conversely,
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Home Work 2 - Financial Markets and Institutions (MGT 470)...

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