Exam I Misc Flashcards
Aside from a change in expected inflation and interest rates, a change in ___, ___, and ___ also shifts the bond demand curve.
Wealth, Relative Risk of Bonds and Relative Liquidity of Bonds
The three elements that shift the bond supply curve are a change in ___, ___, and ___.
Business Conditions, Expected Inflation and Gov’t Borrowing
Bankers call their inexpensive sources of funds ___, and borrowings/large time deposits ___.
Core Deposits, Purchased Funds
Higher short term rates raise the rates banks pay on ___ and have (more/less) effect on rates received on assets, so interest expense (rises/falls) by (more/less) than interest income, and profits (are higher/fall).
Pay on Liabilities, Less Effect, Interest expense rises by More than interest income, and profits fall.
The rate-sensitivity gap is ___. When interest rates change, the effect on a bank’s profits is (inversely related/equal to/proportional to/the same as) its rate sensitivity gap, expressed as: ___
Rate Sensitive Assets - Rate Sensitive Liabilities; Proportional to; Change in Profits=(change in rate)x(rate-sensitivity gap)
To push the rate-sensitivity gap to zero, banks can use risk-reduction techniques such as ___ and ___.
Loan sales and floating interest rates
Loans from one bank to the other are called ___ whereas a loan from the Fed to a bank is called a ___.
Federal Funds (or Overnight Loans), Loan from Fed=Discount Loan
Give an example of a repurchase agreement or repo.
A bank makes a repo agreement with a pension fund. The bank sells the pension fund a security, such as a Treasury bill, and agrees to buy it back later at a higher price. This deal is equivalent to a loan, because the bank receives cash temporarily. The security is collateral for the loan, and the increase in the security’s price is interest.
A decrease in a bond’s price can simultaneously cause and increase in its YTM and a negative rate of return. Explain how.
Increase in YTM because a bond’s price and yields are inversely related and a negative return because bondholders suffer capital losses.
Capital requirements are imposed to ___.
To keep capital high enough to keep insolvency risk low.
The Dodd-Frank Act required bank regulators to establish new ___.
Capital requirements
M1 includes ___, ___ and ___.
Currency in circulation, checking deposits and traveler’s checks
The monetarists led by Friedman advocated ___, and that the Fed should increase money at a ___ rate, and allowing rate to ___ in response to money Dx shifts.
Advocated money targeting, increase money at a slow and steady rate, allowing rates to fluctuate.
The Accord of 1951 was ___. The Fed pledged to ___, and supported ___ after the war ended, despite the fact that the CPI rose and the economy was in recession. Truman replaced the then chairman of the Fed ___ with Thomas ___ for opposing this policy. Then this guy was replaced by William ___.
An agreement between the US Treasury and Fed that restored independence to the Fed. Pledged to keep the interest rate on T-bills fixed, and supported gov’t borrowing. Truman replaced Marriner Eccles with Thomas McCabe. Then he was replaced by William McChensey.
If the 3 year yield is 3% and the 4-year yield is 3.25%, what is the implied 1-year forward rate in year-4?
4-Year Yield=(1stYrYield + 2ndYrYield + 3rdYrYield + 4thYrYield)/4 … or … 4YrYield= (3x3YrYield + 4thYrFWD Rate)/4 … or …4thYrFWD Rate =4x4thYrYield - 3x3YrYield … here = 4(3.25%)-3(3%)=(13%-9%)=4%
