Questions for June 8:

Define: nominal yield, current yield, and yield to maturity.

Define nominal and real interest rates. Why might the actual real interest rate differ from the expected real interest rate? Would this possible difference be of more concern to you if you were considering making a loan to be paid back in one year or a loan to be paid back in 10 years?

Consider Irving Fisher. (Literally.) Explain the Fisher Hypothesis. Under what circumstances would the lender benefit in terms of purchasing power when interest rates and inflation rates differ?

What is the Prime Rate and the London Interbank Offer Rate.

When a bond is exchanging hands in the bond market, we are seeing two goods being exchanged: the bond and the use of funds. Explain.

What factors affect bond demand and supply? Why does the bond supply curve slope up and the bond demand curve slope down in the bond market diagram?

How is the bond market related to the loanable funds market? If bond prices are currently above equilibrium, what can we infer about the pressure on interest rates in the loanable fund market?

Why is the interest rate on a U.S. Treasury bond usually less than that on a corporate bond? What factors affect the interest rate paid on a bond?

Define: default risk, default premium, liquidity risk, and liquidity premium. During the late 1970s, Michael Milken convinced many investors that the yields on junk bonds more than compensated for their higher default risk. What do you think happened to the liquidity of these bonds as a result?

At the start of the recession in 2000, interest rates on lower-rated corporate bonds rose relative to the interest rate on Treasury bonds. Why did this happen? Why did it happen? What is this phenomenon called?

Explain the significance of Moody's, MorningStar, and Standard & Poors to the financial system. How are they related to Underwriters Laboratories?

Define: Segmented Markets, Expectations, and Preferred Habitat theories. Explain what each predicts about the slope of the yield curve.

June 7 questions:

Here is a product that will make you wonder how long it will be when textbooks are sold in a similar manner.

Differentiate between the primary and secondary, money and capital, and cash and derivative ways to analyze financial markets. What goods are associated with each?

Why do firms use derivative markets?

Why are money market assets typically more liquid than capital market assets? Does the relative illiquidity of capital market assets have any consequences for the banking system?

What factors explain the need for financial markets? (We discussed four today.) Who is more likely to use a stock broker (ceteris paribus): an active college professor in Alabama or a retired college professor in Florida? Why?

What are the benefits to savers and borrowers if financial markets communicate all available information about financial instruments via their prices?

Here is an interesting recent story about moral hazard. How does U.S. foreign aid promote moral hazard? What are some ways that ailing countries can be helped without creating it?

What factors do savers consider when deciding where to put their money (besides rates of return, of course). What are the reasons for government regulation of financial markets?

Differentiate between Treasury Bills, Treasury Bonds, Treasury Notes, and Treasury Auctions.

Differentiate between a simple loan, an discount loan, a fixed payment loan, and a coupon bond. What are present value calculations?

How does a discount bond differ from a simple loan? What is the main difference between a coupon bond and a fixed payment loan?

Why do governments create fiat currencies? Do they help promote an optimal amount of money? Explain.

Define price. Explain the price system that exists under barter and why it is problematic. How does the emergence of a money commodity from barter improve the market system?

Why do economists study the money supply? (Discuss the four reasons covered in class.)

Define: C, M1, M2, M3, and L. How are they related in terms of aggregation and in terms of liquidity?

Define liquidity. Rank the following assets in terms of liquidity, from most to least liquid: money market mutual fund, demand deposit, corporate stock, dollar bill, house, gold, checkable deposit.

How is income related to saving and investment?

Define the loanable funds market and the production possibilities frontier as discussed today in class. What happens to each if (for instance) an economy is characterized with many productive baby boomers entering retirement?

Why do financial markets exist? What are financial instruments? Explain financial markets role in providing risk sharing, liquidity, and increases in information. Why are risk sharing, liquidity, and information valued by savers and borrowers?

Do banks and other financial intermediaries like high interest rates? Why or why not?

June 5 questions:

Why do we study Money & Banking?

What is money? Explain the four definitions of money discussed in class.

What nakes a dollar bill money? What nakes a personal check money? What factors, if changed, would affect your willingness to accept a dollar bill or a check as money?

What is barter? Explain the double coincidence of wants problem that exists in barter.

Explain the six stages of money's evolution. What is the relationship between use and exchange value as money evolves?

Define: commodity money, commodity standard, and fiat money.

What are the "money-ish" qualities of gold and silver?

Explain how the modern banking developed during the time of the goldsmith bankers. Why would some goldsmith bankers engage in fraud?

Why might a $20 Federal Reserve Note be more desirable as a form of money than a $20 gold coin from the point of view of an individual? How about from the point of view of the government?

Define seigniorage. How can it be increased?

Explain the U-shaped cost of exchange curve.

Why might you lend money to individuals and businesses in your city through a local bank rather than directly?

Why would someone keep money is his or her pocket (or under the mattress, or in a home safe...) when the bank pays interest?

Suppose that a primitive economy uses rare stones as its money. Suppose that the number of stones declines as stones are accidentally destroyed or used as weapons. What happens top the value of stones over time? What would be the consequence if someone discovered a large amount of new stones? Also, in what ways might the stones have superior money-ish qualities than (say) tobacco?