Q1 (6 points): Why are financial intermediaries crucial to an economy? Q2 (6 points): Describe how...
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Q1 (6 points): Why are financial intermediaries crucial to an economy? Q2 (6 points): Describe how over-the-counter markets work. What are some differences between an organized exchange and an over-the- counter market? Q3 (9 points): Consider a bond that promises the following cash flows. The required discount rate is 12%. Year Promised Payments 0 1 2 3 4 160 170 180 230 You plan to buy this bond, hold it for 2 years, and then sell the bond. a. What total cash will you receive from the bond after the 2 years? Assume that periodic cash flows are reinvested at 12%. b. If all market interest rates drop to 11% (including your reinvestment rate) immediately after buying this bond, what will be the impact on your total cash flow after 2 years? How does this compare to part (a)? c. Assuming all market interest rates are 12%, what is the duration of this bond? Q4 (8 points): What effect will a sudden increase in the volatility of gold prices have on interest rates of bond markets, using the supply- and-demand for bonds framework (draw the figure with clear marks). Q5 (8 points): Using the supply-and-demand for bonds framework (draw the figure with clear marks), show what effect a large central government deficit might have on interest rates of bond markets. Q6 (7 points): Explain why the liquidity premium theory is so widely accepted. Q7 (8 points): Government economists have forecasted one-year T- bill rates for the following five years as follows: Q1 (6 points): Why are financial intermediaries crucial to an economy? Q2 (6 points): Describe how over-the-counter markets work. What are some differences between an organized exchange and an over-the- counter market? Q3 (9 points): Consider a bond that promises the following cash flows. The required discount rate is 12%. Year Promised Payments 0 1 2 3 4 160 170 180 230 You plan to buy this bond, hold it for 2 years, and then sell the bond. a. What total cash will you receive from the bond after the 2 years? Assume that periodic cash flows are reinvested at 12%. b. If all market interest rates drop to 11% (including your reinvestment rate) immediately after buying this bond, what will be the impact on your total cash flow after 2 years? How does this compare to part (a)? c. Assuming all market interest rates are 12%, what is the duration of this bond? Q4 (8 points): What effect will a sudden increase in the volatility of gold prices have on interest rates of bond markets, using the supply- and-demand for bonds framework (draw the figure with clear marks). Q5 (8 points): Using the supply-and-demand for bonds framework (draw the figure with clear marks), show what effect a large central government deficit might have on interest rates of bond markets. Q6 (7 points): Explain why the liquidity premium theory is so widely accepted. Q7 (8 points): Government economists have forecasted one-year T- bill rates for the following five years as follows:
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