Finance Professional Development Homework Questions Answers
Question # 00072340
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Updated on: 05/23/2015 12:26 PM Due on: 05/23/2015
1. What are the principal assets of households? Why are they so important for the overall
level of economic activity (or real GDP)?
2. What happened to the value of these assets during the great credit crisis of 2007-2009?
3. How does a subprime mortgage differ from a traditional mortgage?
4. What is a CDO? What can turn a CDO into a toxic asset?
5. What are the functions or roles played by the rate of interest in the economy and financial
system? Can you explain why each function is important to the well-being of individuals,
businesses, and governments?
6. In the classical theory of interest rates, whatforces determine the market rate of interest?
What assumptions does the classical theory of interest rest upon?
7. Carefully explain why bond yields and bond prices are inversely related? What does this
relationship tell you about the market value of a bond on a day when interest rate rise?
Would you want to be managing a portfolio of bonds on that day? Why or why not?
Professional Development Questions
1. The collapse of the bubble in the housing marketin the United States was a precipitating
factor in the worldwide credit crisis of 2007-2009.Discuss the following aspect of the U.S.
housing market.
a.What role was Fannie Mae, Freddie Mac, and Ginnie Mae originally intended to play
in the housing market?
b.What are the differences between a conventional and a subprime mortgage?
c.What factors enable the housing bubble to occur?
d.What were the implications for the U.S. economy of the collapse of the housing
bubble? Why did these events ensue?
2. The economy moves through business cycles, with periodic expansions, when economic
activity is higher than average, and economic slowdowns, which, if severe enough, can
lead to a recession. During expansion periods the volumeof loanable funds available from
the financial system tends to increase and real interest rates tend to rise. With this
information in mind, explain the following:
a. Why does the demandfor loanable funds tend to increase during expansions?
b. Why does the supplyof loanable funds tend to increase during expansions?
c. Does the supply of loanable funds tend to increase by moreor lessthan the demand
for loanable funds during economic expansions? How do you know?
3. You plan to borrow $2,000 to take a vacation and want to repay the loan in a year. The
banker offers you a simple interest rate of 12 percent with repayments in two equal
installments, 6 months and12 months from now.
What is your total interest bill? What is the APR? Would you prefer an add-on interest rate
with one payment at the end of the year? If the bank applied the discount method to your
loan, what are the net proceeds of the loan? What is your effective rate of interest rate?
level of economic activity (or real GDP)?
2. What happened to the value of these assets during the great credit crisis of 2007-2009?
3. How does a subprime mortgage differ from a traditional mortgage?
4. What is a CDO? What can turn a CDO into a toxic asset?
5. What are the functions or roles played by the rate of interest in the economy and financial
system? Can you explain why each function is important to the well-being of individuals,
businesses, and governments?
6. In the classical theory of interest rates, whatforces determine the market rate of interest?
What assumptions does the classical theory of interest rest upon?
7. Carefully explain why bond yields and bond prices are inversely related? What does this
relationship tell you about the market value of a bond on a day when interest rate rise?
Would you want to be managing a portfolio of bonds on that day? Why or why not?
Professional Development Questions
1. The collapse of the bubble in the housing marketin the United States was a precipitating
factor in the worldwide credit crisis of 2007-2009.Discuss the following aspect of the U.S.
housing market.
a.What role was Fannie Mae, Freddie Mac, and Ginnie Mae originally intended to play
in the housing market?
b.What are the differences between a conventional and a subprime mortgage?
c.What factors enable the housing bubble to occur?
d.What were the implications for the U.S. economy of the collapse of the housing
bubble? Why did these events ensue?
2. The economy moves through business cycles, with periodic expansions, when economic
activity is higher than average, and economic slowdowns, which, if severe enough, can
lead to a recession. During expansion periods the volumeof loanable funds available from
the financial system tends to increase and real interest rates tend to rise. With this
information in mind, explain the following:
a. Why does the demandfor loanable funds tend to increase during expansions?
b. Why does the supplyof loanable funds tend to increase during expansions?
c. Does the supply of loanable funds tend to increase by moreor lessthan the demand
for loanable funds during economic expansions? How do you know?
3. You plan to borrow $2,000 to take a vacation and want to repay the loan in a year. The
banker offers you a simple interest rate of 12 percent with repayments in two equal
installments, 6 months and12 months from now.
What is your total interest bill? What is the APR? Would you prefer an add-on interest rate
with one payment at the end of the year? If the bank applied the discount method to your
loan, what are the net proceeds of the loan? What is your effective rate of interest rate?
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Solution: Finance Professional Development Homework Questions Answers