Question 1)

For each statement, state whether you believe the statement is true or false. Provide a brief explanation of your reasoning.

a) When we say a bank is engaging in asset transformation we mean in part that the bank is raising funds by selling low risk assets to depositors.

b) All else equal, if investors sell gold bars and deposit the proceeds in their checking account then M1 and M2 increase.

c) When a bank requires an extensive loan application process, this is designed primarily to prevent moral hazard.

Question 2)

Quick Answers. For each of the following you only need to provide a one or two-word response (choose one of the underlined phrases for each statement).

a) When giving consideration to a crypto-currency like Bitcoin, we can say that is or is not a store of value, one of the functions of money?

b) Raising funds for your startup through Kickstarter, a "funding platform", is direct or indirect finance?

c) Over the past 40 years, by total value of assets, commercial banks or mutual funds are collectively the largest in the United States?

d) Depository institutions such as commercial banks and credit unions have or don't have the same primary source of funds.

e) If unexpected inflation occurs, people would rather be lenders or borrowers?

f) Suppose a newly-issued corporate bond (a standard coupon bond) has a coupon rate of 3% and a yield to maturity of 4%, then we know that the bond's issuing price was lower or higher than the face value of the bond.

g) All else equal, as the price of a coupon bond goes down, the yield to maturity will increase or decrease?

h) In the liquidity preference framework, an increase in interest rates will increase or decrease the quantity demand for money?

i) All else equal, an increase in the default risk of a bond relative to alternative bonds will increase or decrease the yield to maturity of that bond?

j) All else equal, the liquidity of a bond decreases as the broker-dealer fees increase or decrease?

Question 3)

For each statement, state whether you believe the statement is true or false. Provide a brief explanation of your reasoning.

a) According to the liquidity preference framework, excess supply in the money market will eventually cause the price of bonds to rise.

b) When an individual buys a bond, their net worth instantly increases.

c) All else equal, for a standard coupon bond, the higher the yield to maturity, the lower the duration of the bond.

Question 4)

There is speculation that the Federal Reserve will soon raise interest rates.

a) Assume this is true, show how the Fed raising rates will be reflected in the money market and the short-term bond market using supply and demand. Be sure to label clearly.

b) Provide a brief written explanation of your answer to part a). Be sure to explain your reasoning for why you did what you did.

c) How will the long-term bond market be affected by the Fed's raising of rates? Briefly explain.