Economics homework， due 10/16

Requirements

Assignment:

Choose a current news article (no overlapping please) that relates to the topics covered in this module. [Note: please select an article that's current, no less than one year old.]

Read the discussion board to ensure the article is not being used by another student.

Post the article name and source to the discussion board.

Summarize the problem cited in the article and propose a solution if available.

Be sure to relate the problem and solution to the textbook and other readings for the week. Articles/topics not related to the weekly learning topics will not receive full credit.

In your replies, include an alternative solution and state your rationale.

Quantity:

Each student must make a minimum (for a chance at the best score – post early and often) of two posts for each discussion – one initial post and one reply to posts made by your peers.

The initial post must be approximately 200-250 words in length and made by Wednesday evening at 11:59 pm.

The reply post must be approximately 50-75 words in length and may be made anytime before Sunday evening when the week closes at 11:59 pm.

Quality:

All posts must be substantive, relevant, and respectful, and contribute value to the discussion. “I agree” types of posts are fine to make, but they do not count towards the minimum posting requirement.

Part 1: initial post (200-250 words and you can use other’s post as an example of your own post)

Topic: The Risk and Term Structure of Interest Rates

Part 2: reply to posts (50-75 words)

Other’s post:

Bond Payments Are a Test of U.S. Stance on Citgo

 

This article was written by Andrew Scurria and Ian Talley for the Wall street journal. The article is talking about the current situation in Venezuela. Currently the political opposition leaders it is struggling to stabilize the country even with the help of the United States. After getting a victory by gaining control of Citgo Petroleum Corp; which could be one of the biggest assets of the country. The next challenge that the opposition is facing is a bond payment of $900 million. According to people with knowledge of the matter the company does not have enough capital to make the payment. This has the opposition worry that the bondholders will force the company to foreclose. 

 

The article does not talk about what plans does the company has to improve the financial health of the company. Furthermore, the article does not say what steps is the company taking to try to make the payments. The only thing that we get from the article is that the company is trying to talk to the U.S treasury. They are asking the U.S treasury to change the sanctions. Citgo thinks if the U.S treasury changes the sanctions the bondholders will be kept at bay.

 

Reference:

Scurria, Andrew, and Ian Talley. “Bond Payments Are a Test of U.S. Stance on Citgo.” The Wall Street Journal, Dow Jones & Company, 4 Oct. 2019, https://www.wsj.com/articles/bond-payments-are-a-test-of-u-s-stance-on-citgo-11570148222?mod=searchresults&page=1&pos=7.

Write your reply:

Part 3 Answer questions:

For essay questions, briefly answer each with a paragraph or two.

Each paragraph should contain a minimum of three sentences.

Yes and no answers are not acceptable.

1. What was the connection between house price movements, the growth in subprime mortgages, and securities backed by these mortgages—on the one hand—and on the other hand—the difficulties encountered by some financial institutions during the 2007-2009 financial crisis?

2. Suppose that the interest rate on one-year bonds is currently 4 percent and is expected to be 5 percent in one year and 6 percent in two years.

a) Using the expectations hypothesis, compute the yield curve for the next three years. (20 points)

b) Provide a graph of the yield curve. (10 points)

3. According to the liquidity premium theory, if the yield on both one-and two-year bonds are the same, would you expect the one-year yield in one-year’s time to be higher, lower or the same?

Briefly explain your answer in about 50 words or more.

4. Suppose that the yield curve shows that the one-year bond yield is 3 percent, the two-year yield is 4 percent, and the three-year yield is 5 percent.

Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent.

a. What are the expected one-year interest rates next year and the following year? (15 points)

b. If the risk premiums were all zero, as in the Expectations Hypothesis, what would the slope of the yield curve be? (15 points)