What interest rate should bond buyer pay for risk-less bond

Assignment Help Macroeconomics
Reference no: EM131097199

1. Predict what will happen to interest rates on a corporation's bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future.

2. What was the Glass-Steagall Act?

3. Rank the following securities in terms of their risk level from most risky to least risky:

a) US treasury bond
b) A rated corporate bond
c)"Junk" bond
d) Aa rated corporate bond
e) US treasury note

4. What is the primary role for each of the following agencies?

a) Federal Reserve
b) FDIC
c) Office of the Comptroller of the Currency
d) NCUA
e) CFPB

5. Investors perceive a 20% likelihood that USAirways will go bankrupt and default on its debt. Suppose that the interest rate on a 15 year treasury bond is 3%. What would the interest rate on USAirways bonds need to be in order to make investors indifferent between them and Treasury bonds?

6. Categorize each of the following as a reason that the FDIC or the Fed was created

a) To insure the stability of the banking system
b) To insure the credibility of bank deposits
c) To prevent bank runs

7. Suppose you have an asset which pays 20% if the economy is strong, 2% if the economy is average but loses 5% if the economy goes into recession. Further you know that there is a 20% chance for a strong economy, 70% chance for average growth and a 10% chance for a recession. What is the expected return on this investment?

8. What can cause a sound bank to fail? (Hint: what do I mean by a "sound" bank?)

9. Suppose you purchase a call option on a stock. The strike price is $75 and the option contract costs $3. What is your total profit (or loss) in dollars if the trading price of the stock is:

a.) $50 e.) $75
b.) $60 f.) $78
c.) $70 g.) $80
d.) $72 h.) $85

10. What is the response to the moral hazard problem of deposit insurance?

Excel Problem: For this problem, you must produce your graphs using excel.

11. With the underlying outcome price on the x-axis and the security-holder's outcome on the y-axis graph the payoffs for the following derivatives: a) call option with exercise price of $50 and option price of $3 b) put option with exercise price of $50 and option price of $3 c) futures contract to buy at $50 and contract price of $3 d) auto insurance with $300 premium and $500 deductible

12.The point of this game is that diversification is a good thing. It is also a justification for expected value pricing.

The game consists of bond buyers, bond insurers, and two types of bond issuers: risky and safe. The game unfolds in two stages. In the first stage risky bond issuers are able to insure their bonds against default. In the second stage the bonds are sold to bond buyers. The market interest rate is 6%.

In the first stage, the Risky Issuers need to issue a bond to finance their operations. They have a 15% chance of default. They have the option to insure the bond against default. If they purchase insurance they pay an insurance premium (a fee) to the insurer. Then if the bond issuer defaults on the bond then the insurer will pay to the buyer the principle amount of the bond ($100).

The insurer and the risky bond issuer need to negotiate/calculate a fair price for the insurance. Considering the information given, what price should bond issuer pay for this insurance premium?

In the second stage of the game, the bond issuers turn around and try to sell the bonds to the bond buyers. There are two types of bonds. First, some bond issuers are risk free. Second, are the risky bonds which may or may not be insured against default.

The Bond Buyers have $100 to invest. The market interest rate is 6%. If they buy a riskless bond they will earn the full interest. Considering the information given, what interest rate should a bond buyer pay for a risk-less bond?

If they purchase a risky bond and it does not default, then they will receive the full negotiated interest. If they purchase an uninsured risky bond and it default, then they will receive nothing. Considering the information given, what interest rate should a bond buyer pay for an uninsured risky bond?

If they purchase an insured risky bond and it defaults then they will get their principle ($100) from the insurance company but no interest. Considering the information given, what interest rate should a bond buyer pay for an insured risky bond?

Reference no: EM131097199

Questions Cloud

Determine the purpose of health services research : Determine the purpose of health services research. Describe an effective approach. "Complex Problems or Simple Solutions? Enhancing Evidence-Based Economics to Reflect Reality," pages 162-172.
Each submarket and the price charged in each : A monopolist has two distinct, identifiable subgroups in its market. The market demand function for group A is Qa = 1000 – 4Pa and that for group B is Qb = 500 – Pb. With total cost given by C = 100Q, find the amount sold to each submarket and the pr..
Pioneer trial ultramarathon : ABC Inc., sponsors the "Pioneer Trial Ultramarathon," with an advertised first price of $10,000. The rules require the competitors to run 100 miles from the floor of Blackwater Canyon to the top of the Pinnacle Mountain. The rules also provide that A..
Find the subgame perfect nash equilibrium in this game : Consider a duopoly with differentiated goods in which firms choose prices sequentially. Suppose firm 1 chooses its price p1 first. Then, having observed p1, firm 2 chooses its price, p2. Find the subgame perfect Nash equilibrium (SPE) in this game.
What interest rate should bond buyer pay for risk-less bond : The market interest rate is 6%. If they buy a riskless bond they will earn the full interest. Considering the information given, what interest rate should a bond buyer pay for a risk-less bond?
What could cause rise in inflation : When inflation occurs some economic agents gain and some lose. Who would gain and lose if deflation occurs? Why? What will happen to interest rates and investment according to Keynesian and Classical/ Monetarist theories? Is inflation still a possibl..
How much consumer surplus does each type of customer gain : A monopolist produces a good at zero marginal cost. It knows that two equal sized subgroups exist in the market for its produce, but cannot differentiate between them by sight. Group I value quality of service highly. Why may these have been suggeste..
Code of ethics say about financial conflicts of interest : Sharon Gillespie, a new buyer at Visionex, Inc., was reviewing quotations for a tooling contract submitted by four suppliers. She was evaluating the quotes based on price, target quality levels, and delivery lead time promises. As she was working, he..
Stacey and betsy are contestants on game show : Stacey and Betsy are contestants on a game show. They each select a wrapped box from four choices. They know that one box contains $100 and the other three boxes contain $1000, $10000, $100000. Stacey agrees to trade. Did Betsy’s husband give her goo..

Reviews

Write a Review

Macroeconomics Questions & Answers

  Inflation targeting be a good policy

Why might it be difficult for the Fed to formally adopt inflation targeting?  Would inflation targeting be a good policy for the Fed in the present economic environment

  In using the taylor rule

In using the Taylor Rule as a guideline for monetary policy, what are the pros and cons of using forecasted values of inflation and output rather than observed values of these variables?

  Describe the present economic crisis situation in europe

Describe the present economic crisis situation in Europe.  Why has it been so difficult for the Europeans to find a solution to this problem?   Comment on what implications the crisis may have for the rest of the world if Europeans are not able to ag..

  Long-term federal government budget problems

Question:. Explain why there are long-term Federal government budget problems. Explain why the base-line forecast of the CBO is misleading.

  Derive and compare demand curve

Question based on Derive and compare demand curve,  Derive Ambrose's demand function for peanuts. How does it compare with Johnny's demand curve for peanuts?

  Problem based on utility function

Problem based on  Utility Function - Problem,  Answer and explain the following using a diagram which is completely labeled.

  Laffer curve : tax rate and tax revenue

Question based on Laffer Curve : Tax Rate and Tax Revenue,  Do raising tax rates necessarily raise tax revenue? What factors affect how tax revenue changes when tax rates change?

  Problem - income elasticity of demand

Problem - Income Elasticity of Demand,  Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior; YED= +0.5 and YED= -2.5

  Positive balance of payment

Question Positive Balance of Payment: "Things will look good for the US if we could just get to where we are consistently running a positive Balance of Payments."

  Effect of recession on the investment curve

Comment on the effect of a recession on the investment curve (only) and on the level of savings, investment, and the equilibrium real interest rate in the financial crisis that hits United States first starting in fall 2007.

  Affect of falling domestic investment on trade surplus and

How will a fall in domestic investment affect the trade surplus and net capital outflows in the domestic economy, the trade deficit and capital inflows in the rest of the world.

  Crises in the banking sector and bank run

Banking crises crisis decreases depositors' confidence in the banking system. What would be the effect of a rumor about a banking crisis on checkable deposits in such a country?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd