金融市场习题

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金融市场习题.

Moral hazard: The risk that one party to a transaction will engage in behavior that is undesirable from the

other party's point of view.

Yield to maturity: The interest rate that equates the present value of payments received from a credit

market instrument with its value today.

Option contracts: Contracts that give the purchaser the option to buy or sell the underlying financial

instrument at a specified price, called the exercise price or strike price, within a specific period of time.

Capital market: A financial market in which longer-term debt (maturity of greater than one year) and

equity instruments are traded.

If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term

bonds? Why? Which type of bond has the greater interest-rate risk?

You would rather be holding long-term bonds because their price would increase more than the price of the

short-term bonds, giving them a higher return.

What effect will a sudden increase in the volatility of gold prices have on interest rates? Interest rates would rise. A sudden increase in people's expectations of future real estate prices raises the

expected return on real estate relative to bonds, so the demand for bonds falls. The demand curve Bd shifts

to the left, and the equilibrium interest rate rises.

What characteristics define the money markets?

The money markets can be characterized as

having securities that trade in one year or less,

are of

large denomination, and are very liquid.

1.Why are finance markets important to the health of the economy?

Because they channel funds from those who do not have a productive use for them to those who do, thereby

resulting in higher economic efficiency.

2.When interest rate rise, how might businesses and consumers change their economic behavior? Businesses would cut investment spending because the cost of financing this spending is now higher, and

consumers would be less likely to purchase a house or a car because the cost of financing their purchase is

higher.

3.How can a change in interest rates affect the profitability of financial institutions?

A change in interest rates affects the cost of acquiring funds for financial institutions

as well as changes the

income on assets such as loans, both of which affect profits. In addition, changes in interest rates affect the

price of assets such as stock and bonds that the financial institution owns which can lead

to profits or losses.

4.Is everybody worse off when interest rates rise?

No. People who borrow to purchase a house or a car are worse off because it costs them more

to finance

their purchase; however, savers benefit because they can earn higher interest rates on their savings.

5.What effect might a fall in stock prices have on business investment?

s shares means that it can raise a smaller amount of funds, and so investment in

'The lower price for a firm

plant and equipment will fall.

6.What effect might a rise in stock prices have on consumers' decisions to spend?

Higher stock prices mean that consumers' wealth is higher and so they will be more likely

to increase their

spending.

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