Money & Financial Institutions

Type answers for the following questions:
1. The demand curve and supply curve for one-year discount bonds with a face value of $1,000 are represented by the following equations. ܤ”:ܲݎ݅ܿ݁=−0.6∗ܳݑܽ݊ݐ݅ݕݐ+1140ܤ9:ܲݎ݅ܿ݁=ܳݑܽ݊ݐ݅ݕݐ+700What is the equilibrium interest rate?
2. Use the graphical bond market model to answer the following questions. In each case, support your answer with a figure, and explain your answer. Label a figure clearly. What is the effect of an increase in wealth on interest rates? What is the effect of a decrease in expected inflation on interest rates? Why
does an expectation of an upcoming interest rate hike by the Federal Reserve cause bond prices to fall?
3. In 2010 and 2011, the government of Greece risked defaulting on its debt due to a severe budget crisis.
Set up one bond market graph for U.S. Treasury bonds, and a second bond market graph for comparable-maturity Greek debt. Use these graphs to show the effects on (a) the interest rate on U.S.
Treasury bonds, and (b) on the interest rate on Greek bonds. Explain your answer. (Clearly label your figures: first set up the initial equilibrium, and then clearly label all shifts).
4. In this question, you will look at the spread between riskless and risky bonds over time by comparing the riskless rate on 10-year Treasury bonds to (riskier) 10-year Baa corporate bonds using FRED.

a. Go to the FRED website, and search for the “10-year Treasury constant maturity rate”. Select monthly data.
Go to edit graph, and add a line describing “Moody’s 10-year seasoned Baa corporate bond yield”.
Change the dates, so you’re looking at 2002 to the present. Download the graph and submit with your assignment.

b. Let’s look at the same data a different way. Specifically, look at the credit spread (the
yield on Baa bonds relative to Treasuries). In a new window, search for “Moody’s seasoned Baa corporate bond yield relative to yield on 10-year Treasury constant maturity”. Again, use monthly data and show 2002 to the present.

c. Describe your graph(2-3 sentences). In your description, address:

i. The relative levels of the two series over time.

ii. What happened to the credit spread (the return on riskier
bonds –i.e. Baa corporate bonds –relative to less risky securities –i.e. Treasuries) during the crisis.