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By charlenewen Mar 23, 2014 496 Words
1. Interest rate can affect both of the income and the price of assets of the financial instruments.If the interest rate goes higher,the amount of financial instruments’loan and their acquiring funds will get less.Meanwhile,the price of stock and bonds that any financial instruments had owned will go down.Conversely,the sentence above also established.So that a change in interest rate can affect the profitability of financial institutions. 2. The Federal Reserve System is the central banking system,which is responsibility for setting policy on monetary matters such as the management of interest rates and the quantity of money,also referred to as the money supply which can affect interest rates,inflation,and business cycles,all of which have a major impact on financial markets and institutions.So the managers of financial institutions care about the activities of the Federal Reserve System quite much. 3. Because the essence of adverse selection problem is the lender-savers are not quite aware of the product they would buy.In other words,I’m known my family member who is kind of reliability well than a stranger I know him or her nothing at all,so I reckon there will be a higher probability to take back my funds.So due to the asymmetric information between me and the stranger,I prefer to make a loan to my family member rather than a stranger. 4. (1)According to the formula

i=ir +πe
i=2%+6%=8% So the nominal rate is 8%
(2)1000×(1+8%)=1080 So I will have $1080 at the end of year. (3)1050×(1+6%)=1113 And 1113>1080 So I can’t afford the stereo. 5. year cash present value(PV) time weighted PV time weighted PV of Payments of cash payments of payments payments dividedbyprice 1 60 56.07 56.07 0.06

2 60 52.41 104.81 0.11 3 1060 865.28 2595.83 2.67 Total 1060 973.76 2.83 So the bond duration is 2.83 years.

6. Interest rate will rise.Because when the price in the bond market become volatile,the riskiness of bonds will rise,so that the demand for bonds will fall and the demand curve will shift to the left.When the equilibrium bond price falls,the interest rate will rise. 7. The large federal deficit indicate the riskness of bonds go up,so the shift will make the demand curve shift to the left,and the equilibrium bond price will fall,the interest rate will rise. 8. Because risk premiums are relative to default risk.And a bond with default risk will always have a positive risk premium,and an increase in its default risk will raise the risk premium.During business cycle recession,more corporations will go bankrupt,they might be more likely to suspend interest payments on its bond,the default risk on its bonds would be quite high,so the risk premiums would increase simultaneously.Conversely,the sentence above also established.So the risk premiums is anticyclical. 9. According ro the formula:

int = [it+iet+1+iet+2。。。。。。+iet+(n-1)]/n
So the interest rate of three year bond is 9%,the interest rate of six year bond is 11.25% 10. LP=4.5%-(3%+4%+5%+5.5%)/4
So the LP on this bond is 0.125%

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