1. Interest Rate Movements. Explain why interest rates changed as they did over the past year.
ANSWER: This exercise should force students to consider how the factors that influence interest
rates have changed over the last year, and assess how these chan
Assume that the yield curves in the United States, France, and Japan are flat. If the U.S. yield curve then
suddenly become so positively sloped, do you think the yield curves in France and Japan would be
affected? If so, how?
ANSWER: The yield curves in
b. P(T / H)=P(T)=0.5
c. P(TT)=P(T) times P(T)= (0.5)(0.5)=0.25
d. P(TH)=P(T) times P(H)=(0.5)(0.5)=0.25
e. We first calculate P(TH)=0.25, then calculate P(HT)=(0.5)(0.5)=0.25. To find the probability of
either one occurring,
2. Impact of Credit Risk on Yield. What effect does a high credit risk have on securities?
ANSWER: Investors require a higher risk premium on securities with a high default risk.
6. Forward Rate. What is the meaning of the forward rate in the context of t
11. Impact of Expected Inflation. How might expectations of higher global oil prices affect the demand
for loanable funds, the supply of loanable funds, and interest rates in the United States? Will this
affect the interest rates of other countries in the
10. Marketability. Commercial banks use some funds to purchase securities and other funds to make
loans. Why are the securities more marketable than loans in the secondary market?
ANSWER: Securities are more standardized than loans and therefore can be mo
5. The Beige Book. What is the Beige book and why is it important to the FOMC?
ANSWER: The Beige book is a consolidated report of regional economic conditions in each of the 12
districts. This book is sent to FOMC members before their meeting so that they