Explain the link between well-performing financial market

Assignment Help International Economics

Reference no: EM132852255

Question 1

a). What is the real interest rate if the nominal interest rate is 8% and the expected inflation rate is 10% over the course of a year? What is the economic implication of your answer?

b). What is the yield to maturity on a one-year, $1,000 Treasury bill with a current price of $900?

c). When interest rates decrease, how might businesses and consumers change their economic behavior?

Question 2

2). Assume that you just hit the R1Omillion jackpot in the Gauteng Province Lottery, which promises you a payment of R1 million every year for the next 10 years. You are clearly excited, but have you really won R10 million? Show by calculation why you could be a victim of false advertising. Assume an interest rate of 10%.

a). What is the present value of $250 to be paid in two years if the interest rate is 15%?

b). Briefly distinguish between yield and yield to maturity.

c). If interest rates decline, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?

d). What is one of the reasons for inflation in your country or any country you are familiar with? Provide empirical evidence to support your answer.

Question 3
3) Explain why you would be more or less willing to buy a share of Microsoft stock in the following situations:
i. Your wealth falls.
ii. You expect the stock to appreciate in value.
iii. The bond market becomes more liquid.
iv. You expect gold to appreciate in value.
v. Prices in the bond market become more volatile.
a) Some economists suspect that one of the reasons economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?
b) Explain the link between well-performing financial markets and economic growth. Name one channel through which financial markets might affect economic growth and poverty.
c) Is everybody worse off when interest rates rise? Explain your answer
d) When interest rates decrease, how might businesses and consumers change their economic behavior?

Reference no: EM132852255

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