Please show step by step if any calculations are required.
Answer the following questions:
1) How would economic transactions between suppliers of funds (e.g., households) and users of funds (e.g., corporations) occur in a world without FIs?
2) How did the boom in the housing market in the early and mid-2000s exacerbate FIs transition away from their role as specialists in risk measurement and management?
3) How does the liquidity premium theory of the term structure of interest rates differ from the unbiased expectations theory? In a normal economic environment, that is, an upward-sloping yield curve, what is the relationship of liquidity premiums for succesive years into the future? Why?
4) Calculate the future value in five years of $5,000 received today if your investments pay
a. 6 percent compounded annually
b. 8 percent compounded annually
c. 10 percent compounded annually
d. 10 percent compounded semiannually
e. 10 percent compounded quarterly
What do your answers to these questions tell you about the relation between future values and interest rates and between future values and the number of compounding periods per year?
5) How is duration related to the interest elasticity of a fixed-income security? What is the relationship between duration and the price of a fixed-income security?
6) Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return of 10 percent.
a. The bond has a 6 percent coupon rate.
b. The bond has a 8 percent coupon rate.
c. The bond has a 10 percent coupon rate.
d. What do your answers to part (a) through (c) say about the relation between coupon rates and present values?