Assignment 1.pdf

Assignment 1.pdf - Econ 3607 A Monetary and Financial...

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Econ 3607 A Monetary and Financial Institutions Assignment 1 Due in Class on Feb. 6, 2018 1. If higher leverage is associated with greater risk, explain why the process of deleveraging (reducing leverage) can be destabilizing. 2. An unusual development in the wake of the 2007-2009 financial crisis was that nominal interest rates on some financial instruments turned negative. In which of the following examples would the nominal interest rate be negative? In each case explain your choice clearly. a. The real interest rate is 2 percent and the expected inflation rate is 1 percent. b. The real interest rate is zero and the expected inflation rate is 2 percent. c. The real interest rate is 1 percent and the expected inflation rate is minus 2 percent. d. The real interest rate is minus 2 percent and the expected inflation rate is 3 percent 3. Assuming that the current interest rate is 3 percent, compute the present value of a five-year, 5 percent coupon bond with a face value of \$1,000. What happens when the interest rate goes to

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• Spring '14

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