Gallaway
ECO 305

Homework #1

All homework is to be typed. Hand-written graphs and equations are acceptable as long as they are neat

  1. Explain how money reduces various transactions costs compared to a barter system.
  2. List the component parts for each of the 3 measures of money. Go to the Federal Reserve's home page and find recent statistics.  State the recent measures for each component part.
  3. What are the differences between money markets and capital markets?
  4. Explain the differences between how interest is earned on treasury bills and treasury notes.

  5. Consider a bond due in 2005 (2 years to maturity) with a face value of $10,000, paying an annual coupon of $600.  If you can purchase  the bond for $10,640 today, what is the annual yield to maturity? If you paid $10,900 for the same bond, what would the annual yield to maturity be?  What is the relationship between a security's price and its yield?

  6. How can borrowers and lenders both be made better off by financial intermediaries even though the intermediary is making a profit at their expense?

  7. Using a discount rate  of  5%, calculate the present value of a twenty year bond with a face value of $10,000 and annual coupon payments of  $600.  Show your work and be sure to include the face value in the final payment.
  8. Show this same calculation using a discount rate of 10%.  What is the difference in present value?  Comparing the two examples, what is the difference in the discounted coupon payments in the first year, fifth year, tenth year, and twentieth year?  Is there a trend?  Why?
  9. Use the loanable funds model to explain how expected inflation affects nominal interest rates.
  10. If you were an econometrician trying to verify the Fisher Hypothesis by using statistical techniques to estimate B , what is the range of values would you expect for B ?  Explain