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  1. (10 points) Research and find three (3) articles that discuss bitcoin. Is bitcoin money? Use the six (6) properties that make assets liquid (Chapter 2) to analyze bitcoin and explain whether or not bitcoin would make a good money supply asset.

  2. (15 points) Assume that the country of Alphania has one bank. Its monetary base is $24,000,000, the reserve requirement is 10%, and the currency requirement is 40%. The bank lends out all of its excess reserves in parts (a) and (b). SHOW ALL WORK WHEN ANSWERING THE FOLLOW QUESTIONS. (You may use a spreadsheet, but it must establish how you solved the problem.)

    1. How many loans can the bank make? How many demand deposits can the bank create? What is the total money supply? How much of the money supply is cash?

    2. What happens to the money supply, if the monetary base is $24,000,000, the reserve requirement is 10%, and the currency requirement decreases to 20%? Calculate the new loans, demand deposits, money supply, and cash.

    3. What happens to the money supply if the monetary base is $24,000,000, the reserve requirement is 10%, the currency requirement is 20%, and the bank keeps excess reserves equal to 10% of its demand deposits? Calculate the new loans, demand deposits, money supply, and cash.

    4. What happens to the money supply, if the monetary base is $24,000,000, the reserve requirement is 10%, the currency requirement is 20%, the excess reserve requirement is 10%, and the bank gains $1,200,000 in reserves due to positive foreign trade balances with the country of Betania? Calculate the new loans, demand deposits, money supply, and cash.

  3. (15 points) Bozo Bozo, the Greatest Clown that Ever Lived, works for Ring Ding Circus. However, Bozo has been giving clown lessons on the side. His lessons were so popular that he opened the Bozo Bozo School of Greatest Clowns. The school has grown and he now owns a 40,000 sq. ft. building and employs 15 teachers, but the demand for clown lessons is outstripping his ability to provide lessons. He needs to expand, but, because he's a Real Bozo, he knows nothing about how or where to get additional financing. One of his friends suggested that he "take the school public." Having taken Dr. Furfero's money and banking course, you are an expert on business financing. Bozo comes to you for some advice. What is information would you can give Bozo about financing an expansion? How would you advise Bozo on the issue of "going public"?

  4. (15 points) Bozo Bozo may be the Greatest Clown that Ever Lived, but he is a Real Bozo when it comes to bonds. One of his friends has suggested that he buy a 7.0%–coupon bond with a face value equal to your birth date, e.g. $yym,mdd.00, and six (6) years to maturity. Through the following exercises, explain to Bozo how bonds and bond pricing work. SHOW ALL WORK WHEN ANSWERING THE FOLLOW QUESTIONS. (You may use a spreadsheet, but it must establish how you solved the problem.)

    How much should Bozo pay for the bond,

    1. if the average 6–year market rate of interest is 7.0%?
    2. if the average 6–year market rate of interest is 9.0%?
    3. if the average 6–year market rate of interest is 5.0%?

    Assume that the relevant market interest rate drops to 5.0% immediately after Bozo's purchases the 7.0%–coupon bond and stays at 5.0% for the remaining life of the bond. How much will a buyer pay Bozo for the bond...

    1. after one year?
    2. after two years?
    3. after three years?
    4. after four years?
    5. after five years?

  5. (15 points) Bozo Bozo may be the Greatest Clown that Ever Lived, but he is a Real Bozo when it comes to saving decisions. Choose to explain the answers to ONE (1) of the following questions to Bozo:

    1. (15 points) Bozo Bozo knows absolutely nothing about securities or the financial markets. He is earning $5.5 million each year from Ring Ding Circus, but he has all of his saving stored in bank CDs earning an average of 1.0%. Having taken Dr. Furfero's money and banking course, you are an expert on securities and the financial markets. Bozo comes to you for some advice. Using your knowledge of risk and return, diversification, and the theory of portfolio allocation, what would you advise Bozo on redeploying his saving from CDs to securities?

    2. (15 points) Bozo Bozo knows nothing about securities or trading. Bozo heard recently that he can trade online for $2 a trade. Read The Wolf Hunters of Wall Street: An Adaptation From 'Flash Boys: A Wall Street Revolt,' by Michael Lewis and Dark markets may be more harmful than high-frequency trading. Having taken Dr. Furfero's money and banking course, you are an expert on securities and trading. Bozo comes to you for some advice. Using your knowledge of risk and return and the Efficient Markets Hypothesis (all 3 versions), advise Bozo about trading online for $2/trade.

  6. (15 points) Suppose that you have the following information about BellSouth Telephone bonds:

    SymbolNameYield
    BLST 19BELLSOUTH TEL 6 1/4% NTS 5/15/194.28%
    BLST 20BELLSOUTH TEL 6 3/8% NTS 6/15/203.69%
    BLST 24BELLSOUTH TEL 5 7/8% DEB 01/15/245.63%
    BLST 31BELLSOUTH TEL 7% DEB 10/01/316.71%
    BLST 34BELLSOUTH TEL 6 3/8% DEB 06/01/346.73%
    BLST 41BELLSOUTH TEL 7 5/8% DEB 5/15/417.34%
    BLST 51BELLSOUTH TEL 5.85% DEB 11/15/517.88%
    BLST 99BELLSOUTH TEL 7% DEB 12/1/997.52%
    BLST A48BELLSOUTH TEL 7 7/8% DEBS 8/1/487.63%
    BLST F15BELLSOUTH TEL 7% NTS 02/01/154.76%
    BLST J16BELLSOUTH TEL 6 1/2% NTS 6/15/164.70%
    BLST J38BELLSOUTH TEL 8 1/4% DEBS 7/1/387.88%
    BLST J39BELLSOUTH TEL 7 1/2% DEB 6/15/397.30%
    BLST O39BELLSOUTH TEL 6 3/4% DEB 10/15/396.90%
    BLST ZR99BELLSOUTH TEL DEB 12/15/990.10%

    [NOTE: In the Symbol column, BLST = BellSouth, # = year, letter = month, and ZR = zero coupon bond. In the Name column, % = coupon rate, NTS = notes, and DEB(S) = debenture bond(s).]

    Draw a yield curve from this data. (You may use a spreadsheet to generate the yield curve, but it must establish how you solved the problem.) Explain the shape of this curve using the expectations hypothesis, the segmented markets hypothesis, and the preferred habitat hypothesis.

  7. (10 points) Financial intermediaries are financial institutions that intermediate credit — they take money from surplus income units, mix it up, and give it out to deficit spending units. Why would a surplus income unit prefer to give money to a financial intermediary rather then buy claims directly from the deficit spending units in the financial markets? How does intermediation increase liquidity and reduce risk for surplus income units.

  8. (10 points) When Dr. Furfero was in school, one of her professors was fond of saying that a strong dollar is good for the US. Well, the dollar is currently rising, but no one is cheering. Why not? Diagram a market for the US dollar and show it (1) rising and (2) falling against the currencies of its major trading partners. Explain the relationship between the (1) strength and (2) weakness of the dollar to US production, employment, and inflation.
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