gf500 unit 1 assignment textbook questions 1

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Chapter 1

16. Comparing Financial Institutions Classify the types of financial institutions mentioned in this chapter as either depository or nondepository. Explain the general difference between depository and nondepository institution sources of funds. It is often said that all types of financial institutions have begun to offer ser- vices that were previously offered only by certain types. Consequently, the operations of many financial institutions are becoming more similar. Nevertheless, performance levels still differ significantly among types of financial institutions. Why?

Chapter 2

13. Global Interaction of Interest Rates Why might you expect interest rate movements of various industrialized countries to be more highly correlated in recent years than in earlier years?

  • Nominal Rate of Interest Suppose the real interest rate is 6 percent and the expected inflation rate is 2 percent. What would you expect the nominal rate of interest to be?
  • Real Interest Rate Suppose that Treasury bills are currently paying 9 percent and the expected inflation rate is 3 percent. What is the real interest rate?

Chapter 3

20. Assessing Interest Rate Differentials among Countries In countries experiencing high inflation, the annual interest rate may exceed 50 percent; in other countries, such as the United States and many European countries, annual interest rates are typically less than 10 percent. Do you think such a large difference in interest rates is due primarily to the difference between countries in the risk-free rates or in the credit risk premiums? Explain.

4. After-Tax Yield You need to choose between investing in a one-year municipal bond with a 7 per- cent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which would you invest in?

5. Deriving Current Interest Rates Assume that interest rates for one-year securities are expected to be 2 percent today, 4 percent one year from now, and 6 percent two years from now. Using only pure expectations theory, what are the current interest rates on two-year and three-year securities?

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