FIN350: Questions and Applications

Chapter 5: Questions
and Applications 1, 6, 8, 14, and 24

1. Impact of Monetary Policy: How does the
Fed’s monetary policy affect economic conditions?

6. Fed Control: Why may the Fed have
difficulty controlling the economy in the manner desired? Be specific.

8. Fed’s Control of Inflation: Assume that
the Fed’s primary goal is to reduce inflation. How can it use open market
operations to achieve this goal? What is a possible adverse effect of such
action by the Fed (even if it achieves the goal)?

14. Interpreting the
Fed’s Monetary Policy: When the Fed increases the money supply to lower the
federal funds rate, will the cost of capital to U.S. companies be reduced?
Explain how the segmented markets theory regarding the term structure of
interest rates could influence the degree to which the Fed’s monetary policy
affects long-term interest rates.

24. Monetary Policy
during the Credit Crisis: During the credit crisis, the Fed used a
stimulative monetary policy. Why do you think the total amount of loans to
households and businesses did not increase as much as the Fed had hoped? Are
the lending institutions to blame for the relatively small increase in the
total amount of loans extended to households and businesses?

Chapter 6: Questions
and Applications 3 and 9; Problems 1, 7, and 8

3. Secondary Market
for T-Bills: Describe the activity in the secondary T-bill market. How can
this degree of activity benefit investors in T-bills? Why might a financial
institution sometimes consider T-bills as a potential source of funds.

9. Banker’s
Acceptances: Explain how each of the following would use banker’s
acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks,
and (d) investors.

1. T-Bill Yield
Assume an investor purchased a six-month T-bill with a $10,000 par value for
$9,000 and sold it 90 days later for $9,100. What is the yield?

7. Required Rate of
Return: A money market security that has a par value of $10,000 sells for $8,816.60.
Given that the security has a maturity of two years, what is the investor’s
required rate of return?

8. Effective
Yield A U.S. investor obtains British pounds when the pound is worth $1.50 and
invests in a one-year money market security that provides a yield of 5 percent
(in pounds). At the end of one year, the investor converts the proceeds from
the investment back to dollars at the prevailing spot rate of $1.52 per pound.
Calculate the effective yield