05 Jun Question 1) Currently the yield on the 10 year
Question
1) Currently the yield on the 10 year treasury note is ~ 184 basis points (1.84%) above the yield on the 2 year treasury note. Although it is normal to see higher yields on longer term treasuries, these maturity yield differentials are substantially greater than the yield differentials that have been typical over the last 30 years (The yield spread between these two maturities has typically been around 60 to 80 basis points.)
a) Why are longer term treasury yields usually somewhat higher than yields on shorter term treasury notes. 2pts
b) What do the unusually large maturity yield differentials noted above suggest about investor expectations of future short term interest rates ? Explain your answer clearly. 4pts
2) Suppose the CFO of an American corporation with surplus cash flow has $100 million to invest and the corporation does not believe it will need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1 year CD deposits in US banks is 1 %, while the rate on 1 year CD deposits (denominated in Australian dollars) is currently 2.7 %. Suppose further that the exchange rate currently is (.9) Australian Dollars per US $.
What must the CFO expect about the Australian Dollar/US$ exchange rate 1 year from now if she chooses to invest in the US $ CD’s instead of the Australian CD’s? (Note: a specific numeric answer is required for full credit. Part credit can be earned for correctly identifying and discussing the issue here without a specific numeric answer.) 4pts.
3) Between February 2008 and Summer 2009 the Fed supplemented its open market operations with a greatly expanded program of direct lending (both overnight and short term 28 and 84 day loans) to commercial banks, investment banks, brokerage and primary dealer units of bank holding companies. It also agreed to accept a wider range of short term securities (instead of accepting only T-Bills) as collateral on these loans and even initiated a program to buy commercial paper from money market funds.
A) Explain why the Fed created all these extraordinary direct lending facilities, instead of simply relying on traditional open market purchases of Treasury securities. (hint: You may wish to look at Bernanke’s recent lecture series at GW university—particularly the 3rd in the 4 lecture series. A link to it is on the main Federal Reserve site page) 4 pts
B) As conditions in short term financial markets improved by summer of 2009 the Fed closed down its lending under these programs. However, throughout 2009 and in the first quarter of 2010 the Fed increased substantially its purchases of longer term mortgage backed securities and treasury notes from banks as it wound down its unusual lending loan facilities. Moreover, the Fed embarked on a renewed program of large scale purchases ($600 Billion total) of Treasury notes in the Fall of 2010, which it continued until June 30 of 2011. (these programs were called “Quantitative Easing”)
What is the effect of these programs on banks’ balance sheets? 2pts.
What would believers in the quantity theory of money (monetarists) expect to result from these large scale purchases of securities by the Fed? Explain your answer in a paragraph and discuss the concept of the velocity of circulation in your answer. 4 pts
C) Assume that at some point in the next year or two both lender & borrower confidence levels start to return to normal and financial and physical investment levels start to rise much more strongly than in the last 2 years.
What potential problem will the extraordinary growth in banks’ reserve deposits that has resulted from Quantitative Easing create then for the Fed? 2pts
How will the Fed’s relatively recent authorization to pay interest to banks on their reserve accounts at the Fed help the Fed deal with this problem? Explain. 2pts.
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.