Assignment Purposes/Learning Outcomes:
Examine the role of the financial system in the economy and the rationale for financial intermediation.
Demonstrate an awareness of the variety of financial instruments.
Assignment questions: Total grade – 10 points
All over the world, the financial system is among the most heavily regulated sectors. By giving reasons, explain in detail why such regulations are needed for this sector. (2 points)
What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? 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? (2 points)
Suppose an economy is passing through the expansionary phase of the business cycle. Using supply demand model of bonds, graphically examine.
Impact on shift of demand and supply curves of the bonds
Impact on price of bonds and expected interest rates.
Based on your finding advice an investor, in such an economic condition, whether to invest in long-term bonds or short-term bonds and why? (4 points)
(Note: In case finding difficulty in drawing online graph, students can draw graph manually and can use scan copy.)
What are the factors an average investor must consider when facing a choice of whether to buy and hold an asset or whether to buy one asset rather than another. Also explain how changes in these factors influence quantity demanded of an asset. (2 points)