1. What is the meaning of moral hazard, and why is it an important concept for financial institutions?
2. Review the information found on page 27 of the textbook, Table 2.1. What are the key roles of depository institutions, contractual savings institutions, and investment intermediaries? Explain each of them in detail.
3. What does it mean when we refer to the idea of risk sharing?
4. If you are an investor, why do you want to invest in the security market? Why do you want to invest in the stock market?
5. What is meant by the term "market equilibrium", and why is this important within the study of supply and demand for the Bond Market?
6. If Wilma borrows $5,000 from her brother (at 5% interest per year) and the loan matures in 10 years, how much will she have to pay annually to pay the loan off in 10 years? How much will she have to pay annually to pay the loan off in four years? (Show all work/calculations/formulas. You may use a financial calculator, but must identify your methodology.)
7. What are the three factors that affect supply in the Bond Market, and how do they correlate to the downward or upward shift of the supply curve?
8. What are the differences between real and nominal rates? Explain why this is important to induce action on the part of borrowers and lenders?
9. What are the differences between real and nominal rates? Explain why this is important to induce action on the part of borrowers and lenders?
10. If the default risk of corporate bonds decreases, what will happen to the demand for corporate bonds, the price of corporate bonds, the demand for treasuries, and the price for treasuries? Also, explain what direction the demand curve moves for corporate bonds and treasuries (either to the left or to the right).
Your response should be at least 200 words in length for all ten questions. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.