Spring_2011_Problem_Set_2

Spring_2011_Problem_Set_2 - Department of Economics Lehigh...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Department of Economics Professor O’Brien Lehigh University Spring 2011 Eco 29 Problem Set 2 1. If mortgage interest rates rise from 5 percent to 10 percent, but (at the same time) the rate of increase in housing prices which had been expected to be 2 percent per year is now expected to be 9 percent per year, are people more or less likely to buy houses? Briefly explain. 2. TIAA-CREF is the pension plan for college professors. In the early 1990s, a TIAA-CREF quarterly report included the following discussion of its first investments: “With assets of just more than $1 million in 1919, $700,000 was invested in what, at the time, was considered an ironclad investment: railroad bonds .... Some of [these] bonds were due in 1995, and [others] in 1997 – rest assured TIAA is not holding these bonds to maturity.” Assuming that by “ironclad” they mean low risk, was a portfolio loaded with these sorts of bonds in fact low risk? Explain. 3. Predict what will happen to interest rates on bonds if the public suddenly expects a large increase in stock prices. Briefly explain. 4. During the late 1970s Michael Milken convinced many investors that the yields on junk bonds more than compensated for their higher default risk. What do you think happened to the liquidity of these bonds as a result? 5. Suppose that the liquidity of medium-quality corporate bonds rises. Explain what will happen to the yields on medium-quality corporate bonds compared with U.S. Treasury bonds.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern