Money, Banking, and International Finance ( PDFDrive )

Kenneth R. Szulczyk

Answers to Chapter 7 Questions

1.Both a notes payable and corporate bond are loans to the corporation. However, a bond is standardized and allows investors to buy and sell them in the secondary markets, while a bank usually grants a notes payable.

2.Bonds are a liability that could lower a corporation's tax burden. Furthermore, the bondholders do not vote at a corporation’s stockholders meeting and thus, do not compete with the stockholders over control of a corporation. Consequently, stockholders could earn a higher dividend if a corporation uses bonds to expand operations.

3.We adjusted the calculation already for the annual yield to maturity of the discount bond,

4.We calculated: PV0 = FV = $100 = $1,666.67

i0.06

7.Money market securities have maturities less than a year. Thus, when the interest rate changes, the money market securities swing less in market value as compared to the capital market securities.

8.When the interest rate decreases, subsequently, the value of bonds becomes greater. Thus, you should buy bonds now and resell them for a higher price when the interest rate decreases. However, if you are wrong, then you lose money, or you could be holding onto the bonds for a while.

YTM, equaling 3.57%.

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supplying money, i.e. loanable funds. If a business issues bonds, then it demands money, i.e. loanable funds.

10.World's interest rate is higher. Thus, investors would loan their surplus funds abroad to earn the greater interest rate.

11.World's interest rate is lower. Thus, businesses and the government would borrow the cheaper funds from foreign investors.

Answers to Chapter 9 Questions

1.Investors are usually risk averse. Thus, investors increase their demand for the low-risk bonds and decrease their demand for the high-risk ones. Consequently, bond prices increase for the lower-risk bonds but decrease for the higher-risk bonds. Furthermore, the interest rates are lower for the low-risk bonds and higher for the high-risk bonds.

2.Investors prefer to hold liquid securities. Thus, investors increase their demand for the highly liquid bonds and decrease their demand for the low liquid ones. Consequently, bond prices increase for the liquid bonds but decrease for the non-liquid bonds. Moreover, the interest rates are lower for the liquid bonds and higher for the non-liquid bonds.

3.Investors prefer to invest in securities that entail low information costs. Thus, investors increase their demand for the low information cost bonds and decrease their demand for the high information cost ones. Consequently, bond prices increase for the bonds with low information costs but increase for the high information cost bonds. Furthermore, the interest rates are lower for the bonds with low information costs and higher for the other bonds.

4.Investors prefer to invest in securities that have lower taxes. Thus, investors increase their demand for the tax-exempt bonds and decrease their demand for the taxed ones. Consequently, bond prices increase for the tax-exempt bonds but decrease for the taxed bonds. Moreover, the interest rates are lower for the tax-exempt bonds and higher for the taxed bonds.

5.Term structure of the interest rates is an entity offers a large variety of securities with different interest rates. Thus, the securities have the same risk, liquidity, information costs, and taxes. However, the interest rates still differ with long maturity interest rates tend to be higher than shorter maturities.

6.Three theories are segmented markets theory, expectations theory, and preferred habitat theory. Segmented markets theory is investors prefer to invest in specific bond markets, and each bond market has its own supply and demand. Expectations theory is for investors to invest in longer-term securities; they expect the interest rate to be greater, causing a positively sloping yield curve. Preferred habitat theory is investors prefer a certain bond.

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form but at a slower rate. The Great Recession would still have occurred, but the effects would not have been as harmful and severe.

Answers to Chapter 11 Questions

1.The Fed's assets are the discount loans and holdings of U.S. government securities while its liabilities are bank reserves and currency in circulation.

2.Money multiplier shows how the money supply changes, when the monetary base changes. Consequently, the public, banks, and the Fed all influence the money multiplier.

3.We calculated:

4. We calculated:

5.We calculated this below. Do not include the first $1,000 because the person converted a $1,000 of currency into a bank deposit.

Deposits = Reserves 1 = $900 1 = $9,000 rr 0.1

6.We calculated this below. Do not include the first $5,000 because the person withdrew $5,000 from his checking account and converted it into cash.

Deposits = Reserves 1 = $4,500 1 = $45,000 rr 0.1

7.Currency-to-deposit ratio represents the portion of money held by the public as currency. An increase in wealth, higher interest rates, lower risk from bank failures, and an increase in illegal activities will decrease this ratio.

8.This occurred during the 2008 Financial Crisis. The Federal Reserve granted $2 trillion in loans. However, the banks held onto this money and did not increase loans. Thus, the multiple deposit creation ceased to work. Purpose of the bailout was to get the U.S. banking system to start lending again.

9.Banks and the public can thwart a Fed's action by changing their behavior. Banks can hold excess reserves while the public influence the currency to deposit ratio.

10.We calculated both the M1 and M2 money multipliers below:

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10.Developed countries like the United States and Europe want strong currencies. It attracts foreign investors. China and the Asian tigers maintain weak currencies, boosting their export industries. A weak currency creates jobs and wealth.

11.A weak dollar means $1 can purchase fewer foreign currencies, while a strong dollar means $1 can buy more foreign currencies. If the U.S. dollar is strong, subsequently, the U.S. customers buy more imports while the U.S. export industry ships and sells fewer goods to foreign countries. Strong dollar makes foreign products cheaper, and U.S. products become more expensive. Consequently, the U.S. trade deficit worsens.

12.As the Federal Reserve buys or sells foreign currencies, the Fed's assets and liabilities change. Thus, the monetary base and money supply changes. Unsterilized transactions do not offset the change in the money supply when the Fed intervenes in the foreign exchange market, while sterilized transactions, the Fed uses open-market operations to offset any potential change in the money supply as it intervenes in the foreign exchange market.

Answers to Chapter 13 Questions

1.The Federal Reserve has 12 Federal Reserve banks.

2.Each region of the country is economically different. Thus, each Federal Reserve Bank tailors its services for each unique region. Furthermore, the power of a central bank is dispersed among the 12 Fed banks.

3.The Federal Reserve System has 12 Fed banks. Every national bank must purchase stock in its regional Fed bank and can vote for three directors from the banking. Furthermore, the Board of Governors can choose three directors and approves the choice of the Fed's bank president. Finally, businesses can elect the last three directors.

4.The Board of Governors manages the Federal Reserve System. The Board has seven members whom the U.S. President appoints with Senate approval.

5.The Fed raises its own funding independent of the U.S. government. Moreover, the members of the Board of Governors have staggered terms, so one President cannot change the entire board at once. Finally, the U.S. government cannot completely audit the Fed.

6.The Federal Open Market Committee puts monetary policy into action. They determine open-market operations, while the Board of Governors controls the FOMC.

7.Chairman advises the President and informs Congress on Fed's actions. Finally, the financial analysts pay close attention to the chairman’s policies and speeches.

8.Consequences could be disastrous because the country reverses the gains for a single currency. For example, the Greek government has severe budget problems, where the

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5.A defensive transaction offsets unexpected changes in the money supply like bad weather slowing down the check clearing process. A dynamic transaction is the Fed implements monetary policy as specified in the general directive.

6.The Fed has complete control over the quantity of securities it can buy or sell. Thus, it can change the money supply by a little or a lot, easy to correct mistakes, and implement monetary policy quickly.

7.If the Fed decreases the discount rate, then the Fed encourages banks to borrow more from the Fed. A lower discount rate is expansionary monetary policy because it could inject more funds into the banking system, expanding the money supply. If the Fed raises the discount rate, subsequently, it implements contractionary monetary policy.

8.The Fed could grant adjustment credit, seasonal credit, or extended credit.

9.The Fed could audit the bank more, could impose fines on the bank, or stop lending to a bank.

10.The Federal Reserve cannot force banks to accept loans. The Fed could lower the discount rate, but banks might not increase their borrowings from the Fed.

11.When the Fed conducts monetary policy, the policy affects the federal funds rate first. If the federal funds rate rises, then the Fed may be pursuing contractionary monetary policy. If the federal funds rate drops, subsequently, the Fed may be using expansionary monetary policy.

12.Changing the reserve requirements changes the money multipliers. Thus, even a small change in the reserve requirement could have a large impact on the money supply.

13.One benefit is the government could eliminate deposit insurance. Banks would hold all deposits. Furthermore, the money multipliers will be one, and the Fed has exact control over the money supply. However, this stops banks from being financial intermediaries. They connect savers to borrowers. Banks are critical to finance mortgages and lend to businesses and households.

14.The Fed's goals are price stability, high employment, economic growth, financial market and institution stability, interest rate stability, and foreign-exchange market stability.

15.Information, administrative, and impact time lags. Economy could be leaving a recession. By the time monetary policy influences an economy, the economy is already growing, and the monetary policy causes the economy to grow quickly, creating inflation.

16.Although the Fed has six goals, it cannot control them. However, the Fed uses targets because it has better control over them and in turn, the targets influence the goals.

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