Homework Questions

1- Explain how the Treasury uses the primary market to obtain adequate funding for the U.S. government.

2 - Who issues commercial paper? Which types of financial institutions issue commercial paper? Why do some firms create a department that can directly place commercial paper? Which criteria affect the decision to create such a department?

3 - Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why?

4 - Explain how each of the following would use banker’s acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks, and (d) investors.

5 - If bond yields in Japan rise, how might U.S. bond yields be affected? Why?

6 - Explain how the credit crisis that began in 2008 affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds.

7 - Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.

8 - Determine the direction of bond prices over the last year and explain the reason for it.

9 - What is the general relationship between mortgage rates and long-term government security rates? Explain how mortgage lenders can be affected by interest rate movements. Also explain how they can insulate themselves against interest rate movements.

10 - Why is the 15-year mortgage attractive to homeowners? Is the interest rate risk to the financial institution higher for a 15-year mortgage or a 30-year mortgage? Why?