Assignment 1: Textbook Questions
The following Course Outcome is assessed in this assignment:
GF500-4: Evaluate the different types of financial institutions.
Please work on the following assignment to further your knowledge regarding financial institutions, interest rates, and financial markets. Throughout your career you will be exposed to financial institutions.
Review and complete the following:
Unit 1 - Assignment 1
· Chapter One: Question 16 (Page 60 of PDF)
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 services 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 Two: Question 13 and Problem 1 and 2 (Question 13 page 79 of PDF) (Problem 1 & 2 page
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?
2. 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 Three: Question 20 and Problem 4 and 5 (Question 20 page 105 of PDF)
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 percent 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?
Also answer the below question of the Point/Counter-Point Exercise
Point/Counter-Point: Should a Yield Curve Influence a Borrower’s Preferred Maturity of a Loan?
Point: Yes. If there is an upward-sloping yield curve, a borrower should pursue a short-term loan to capitalize on the lower annualized rate charged for a short-term period. The borrower can obtain a series of short-term loans rather than one loan to match the desired maturity.
Counter-Point: No. The borrower will face uncertainty regarding the interest rate charged on subsequent loans that are needed. An upward-sloping yield curve would suggest that interest rates will rise in the future, which will cause the cost of borrowing to increase. Overall, the cost of borrowing may be higher when using a series of loans than when matching the debt maturity to the time period in which funds are needed.
Who Is Correct? Use the Internet to learn more about this issue. Offer your own opinion on this issue.
Directions for Submitting your Assignment
One Word® file, including a title page, should be submitted to the Dropbox for the Unit 1 Assignment. The Questions and Applications and Point-Counter Point Activity should be answered in paragraph form fully addressing each aspect of the question or scenario presented.
Any problems should be done in Excel® and pasted into the Word® document using the “Paste Special-Excel Worksheet Object” feature. This will allow the instructor to double click on the students work to see the formulas and calculations used to answer the selected problems.