ECON230 Regent University Week 5 Joan Assets and Liabilities Case Study

Assignment 5- For questions 1,2,3,4,5, 8 (10pts each) show detailed calculations for your answers. For questions 6-7 (20 points each) explain the question asked in detail and clear terms.

1. Joan has the following assets and liabilities:

Credit card balance	$1,000
Cash	$200
Government bonds	$3,000
Checking	$300
Car loan balance	$10,000
Car	$15,000

What is Joan’s money demand?

A) $200

B) $300

C) $500

D) $1,500

2) Jim has the following assets and liabilities:

Credit card balance	$1,000
Cash	$500
Government bonds	$3,000
Checking	$750
Car loan balance	$10,000
Car	$15,000

What is Jim’s money demand?

A) $500

B) $750

C) $1,250

D) $3,250

3) Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600.

If the Federal Reserve wants to lower the interest rate to 4 percent, it must ________ the money supply to ________.

A) increase; 800

B) decrease; 800

C) increase; 1,000

D) decrease; 400

4) Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600.

If the Federal Reserve wants to raise the interest rate to 8 percent, it must ________ the money supply to ________.

A) increase; 800

B) decrease; 800

C) increase; 400

D) decrease; 400

5. In Tivland, currency held by the public is 2,000 niara, bank reserves are 300 niara, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 niara in reserves from the Central Bank through discount window lending, then the money supply in Tivland will ________, assuming that the public does not wish to change the amount of currency it holds.

A) increase to 3,133niara

B) increase to 4,100niara

C) increase to 4,667niara

D) decrease to 1,900 niara

6)If the Federal Reserve wants to lower interest rates via open market operations, should it buy bonds or should it sell bonds? EXPLAIN (20POINTS)

7. How can the federal reserve bank use monetary policy to control the two economic issues of inflation and unemployment?EXPLAIN. (20 POINTS)

8. Not all investors are interested in accepting extra risk in order to receive a higher return. Investors can be classified as risk adverse, risk neutral, or risk seeking. To determine the risk associated with an investment, calculations are made to determine the risk-free rate and the risk premium associated with the investment.

	Security 1	Security 2	Security 3
Risk-free Rate of Interest	3.00%	3.00%	3.00%
Various Risk Rates
Interest Rate Risk	1.00%	1.50%	1.25%
Credit Risk	0.50%	0.25%	0.25%
Inflationary Risk	0.50%	0.50%	0.50%
Liquidity Risk	0.25%	0.25%	0.50%
Market Risk	0.50%	0.50%	0.50%
Business Risk	1.25%	0.50%	1.50%
	Security 1	Security 2	Security 3
(a)Risk Premium
(b)Nominal Rate of Interest
© Expected Annual Return*
QUESTIONS: Fill in the blank spaces for risk premium, nominal rate of interest and expected annual return. (10 points) Resources Finance formulas. (n.d.). Risk premium. Retrieved from http://www.financeformulas.net/Risk-Premium.html Investopedia. (n.d.). Types of investment risks. Investopedia. Retrieved from http://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/types-investment-risks.asp

Summary of Question 7 question

1. The risk-free rate of return is the theoretical rate of return of an investment with zero risk like Treasury bonds offered by the Federal Reserve bank. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. In theory, the risk-free rate is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the risk-free rate.
2. What Is the Nominal Interest Rate?

Interestis the money that a lender receives from a borrower in exchange for the borrower’s use of the lender’s money (called the principal). The nominal interest rateis the rate of interest that is reported on loan documents and investment accounts that are not adjusted for inflation. You should keep in mind, however, that a sophisticated lender takes the expected rate of inflation into account when determining the interest rate it will charge on a loan.

1. The risk premium is the minimum amount of money that a person is willing to accept as compensation for taking on a risky or volatile investment.

A risk premium is a sort of hazard pay for your investments. Riskier investments – typically the more volatile ones – have to provide investors with the potential for higher gains than those that are risk-free, in order to convince the investors, the risk is worthwhile.

Types of Risk Premium

There are a few categories of risk premiums.

• Liquidity Risk Premium
• Default Risk Premium
• Country Risk Premium
• Market Risk Premium
• Equity Risk Premium

1. Expected Annual return shows how an investment performs over a period of time.

The annual return is a percentage, so companies are able to compare the return on two investments with different initial cash flows.

 

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