Homework correction

« International Banking: Homework 1 1.

Simple Questions and Problems (a) Mishkin (9th Edition), Chapter 1, problems 1, 2, 5, 9, 12, 15 (p. 19) 1.

(Omitted). 2.

The data in Figures 1, 2, 3, and 4 suggest that real output, the inflation rate, and interest rates would all fail. 5.

(Omitted). 9.The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average.

The interest rate on Baa corporate bonds is higher on average than the other interest rates. 12.

It makes foreign goods more expensive, so British consumers will buy fewer foreign goods and more domestic goods. 15.

When the dollar increases in value, foreign goods become less expensive relative to American goods; thus you are more likely to buy French-made jeans than American-made jeans.

The resulting drop in demand for American-made jeans because of the strong dollar hurts American jeans manufacturers.

On the other hand, the American company that imports jeans into the United States now finds that the demand for its product has risen, so it is better off when the dollar is strong. (b) Mishkin (9th Edition), Chapter 2, problems 2, 3, 5, 6, 7, 10, 12 (p.

51) 2.

Yes, I should take out the loan, because I will be better off as a result of doing so.

My interest payment will be $4,500 (90% of $5,000), but as a result, I will earn an additional $10,000, so I will be ahead of the game by $5,500.

Since Larrys loan-sharking business can make some people better off, as in this example, loan sharking may have social benefits.

(One argument against legalizing loan sharking, however, is that it is frequently a violent activity.) 3.

Yes, because the absence of financial markets means that funds cannot be channeled to people who have the most productive use for them.

Entrepreneurs then cannot acquire funds to set up businesses that would help the economy grow rapidly. 1 5.

This statement is false.

Prices in secondary markets determine the prices that firms issuing securities receive in primary markets. In addition, secondary markets make securities more liquid and thus easier to sell in the primary markets.

Therefore, secondary markets are, if anything, more important than primary markets. 6.

You would rather hold bonds, because bondholders are paid off before equity holders, who are the residual claimants. 7.

Because you know your family member better than a stranger, you know more about the borrowers honesty, propensity for risk taking, and other traits.

There is less asymmetric information than with a stranger and less likelihood of an adverse selection problem, with the result that you are more likely to lend to the family member. 10.

They might not work hard enough while you are not looking or may steal or commit fraud. 12.

True.

If there are no information or transactions costs, people could make loans to each other at no cost and would thus have no need for financial intermediaries. (c) Mishkin (9th Edition), Chapter 3, problems 2, 4, 6, 11, 14 (p. 65-66) (Omitted.) (d) Mishkin (9th Edition), Chapter 4, problems 2, 5, 6, 8, 11, 12, 14 (p.

88) 2.

No, because the present discounted value of these payments is necessarily less than $10 million as long as the interest rate is greater than zero. 5.

$2,000 + $100/(1 + i) + $100/(1 + i)2 + .

.

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+ $100/(1 + i)20 + $1,000/(1 + i)20 . 6.

25% = ($1,000 $800)/$800 = $200/$800 = 0.25. 8.

If the interest rate were 12 percent, the present discounted value of the payments on the government loan are necessarily less than the $1,000 loan amount because they do not start for two years.

Thus the yield to maturity must be lower than 12 percent in order for the present discounted value of these payments to add up to $1,000. 11.

You would rather own the Treasury bill, because it has a higher yield to maturity.

As the example in the text indicates, the discount yields understatement of the yield to maturity for a 2 one-year bill is substantial, exceeding one percentage point.

Thus the yield to maturity on the one-year bill would be greater than 9%, the yield to maturity on the one-year Treasury bond. 12.

You would rather be holding long-term bonds because their price would increase more than the price of the short-term bonds, giving them a higher return. 14.

People are more likely to.... »