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Econ331: Money & Financial Institutions

For all questions, the process of how you arrive at an answer is as important as the answer itself. For full credit, you are therefore required to show all steps and work, clearly label graphs, and fully explain any answers that ask for an explanation

You can type your answers or write them by hand and scan them using the camera on your phone/tablet. In either case, submit the file as a single pdf document. If you type your answers, it is important to save as a pdf before submitting –equations often getjumbled between computers.

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. 𝐵”:𝑃𝑟𝑖𝑐𝑒=−0.6∗𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦+1140𝐵9:𝑃𝑟𝑖𝑐𝑒=𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦+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 afigure, and explain your answer. Label achfigure 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 effectson (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 allshifts).
4. In this question, you will look at the spread between riskless and risky bonds over timeby comparing the riskless rate on 10-year Treasury bonds to (riskier) 10-year Baa corporate bondsusing 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 linedescribing “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 toTreasuries). 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 yourgraph(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.