Fin 310 exam two

Lags

The delay between when an economic proble, occurs and when the policy intended to fix it acutally impacts the economy. Three types (recognition, implementation, and imapct lag)

recognition lag

The time it takes for policymakers to realize that an economic problem (like a recession or high inflation) exists

Implementation lag

The time between recognizing the problem and actually passing or enacting a policy (this is usually shorter for Monetary policy than for Fiscal policy).

Impact Lag

The time it takes for the policy, once implemented, to actually affect the economy (e.g., it takes time for lower interest rates to result in more consumer spending

How does a strong dollar affect US exports

It makes them more expensive for foreigners, typically decreasing the volume of exports

How does a weak dollar affect us imports?

it makes them more expensive for us consumers, typically decreasing the volume of imports

What is the maturity for T-Bills, T-Notes, and T-bonds?

bills: 1 year, notes: 2-10 years; Bonds: more than ten years

When are intrest payments made for treasury notes and bonds?

Semiannually (every 6 months)

Define “flight to quality”

when investors move funds from risk assets to safe haven assets (like treasuries) during a crisis, driving tresury prices up and yields down

• when this happens, demand for treasuries goes up which causes treasury prices to risk and treasury yields to fall

what formula is used to caluclate the effective yield of a foreign bond?

ye = (1 + if) * (1 + g) - 1, where if is the foreign interest rate and g is the % change in currency value.

If you hold a Japanese bond and the Yen weakens against the Dollar, what happens to your effective yield?

The effective yield decreases because the currency depreciation ($g$) is negative.

True or False: It is possible to have a negative effective yield on a bond that pays a positive interest rate.

True. If the foreign currency depreciates more than the interest rate earned, the total return will be negative.

Money market products

money market instruments are short term debt securities characterized by high liquidity and very low default risk

Treasury bills

short term obligations of the US government. less risky (backed by gov). sold through weekly auctions(primary market) or traded among investors(secondary market)

Commercial paper

Unsecured, short term promissory notes issued by credit worthy corporations to finance short term liabilities (like payroll)

Negotiable certificates of deposit (NDCs)

Certificates issued by large commercial banks as a source of short term funds. How they are bought:”negotiable” meaning they can be sold in the secondary market before they mature

Maturity= 2 weeks to 1 year

Prices= min denomination is 100k

Repurchase agreements (repos)

One party sells securities (usually Treasuries) to another with an agreement to buy them back at a specific price and date. It is essentially a collateralized short-term loan.

how bought/sold= negotiated directly between institutional entities (banks , fed)

Maturity= most are over night or very st
91-15 days)

Nankers acceptances

A draft issued by a bank that indicates a promise to pay a certain amount at a future date. These are primarily used to facilitate international trade.

maturity= 30-180 days