Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both.
Responses should be at least 75 words for each question.
1) The annualized interest rate on a three-year security today is 9 percent, and the annualized interest rate on a two-year security is 7 percent. Estimate the one-year forward rate two years from now.
2) Two investment alternatives are presented to you, and you can only choose one: 1) invest in a one-year municipal bond with a 5 percent yield or, 2) a one-year corporate bond with an 8 percent yield. Your applicable federal income tax rate is 28 percent and no other differences exist between these two securities, which one would you invest in?
3) Interest rates for one-year securities are expected to be 4 percent today, 7 percent one year from now and 8 percent two years from now. Considering the pure expectations theory covered in the textbook, what are the current interest rates on two-year and three-year securities?
4) Based on material in the textbook, what are some factors that influence the shape of the yield curve? What are some ways financial market participants use the yield curve to make decisions?
5) Analysts predict there will is an expectation of increasing interest rates in the future. What would be the effect on the shape of the yield curve? Explain.
6) Describe the primary objectives of the Federal Open Market Committee and the means by which it attempts to achieve these objectives.
7) What is the Beige book and why do market participants pay attention to it?
8) Is it the role of the Fed or Congress to determine the fate of large financial institutions that are near bankruptcy?
9) Does the Federal Reserve directly or indirectly influence equity security prices? Based on your response, do equity market participants focus on current Fed actions or the expected ones when it comes to pricing equity securities?
10) Visit the Consumer Financial Protection Bureau’s website. Identify one policy objective and its effects on consumers and businesses.