Quick Answers. For each of the following you only need to provide a one or two-w
ID: 1189619 • Letter: Q
Question
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?
Explanation / Answer
(a) Store of value associated with money is a directly related factor in terms of functions of money sicne money itself is a measure of store of value. The more money one has, the more value it has associated with it.
(b) Kickstarter is kind of an intermediary that aids people to start off their proejcts through fianance and aiding with with funds they cannot really afford. So Kickstarter's role is actually indirect finance.
(c) Commercial banks do contribute to the total assets stored in the country and it could be that these might be the largest in terms of assets.
(d) Commercial banks have primary sourceo f revenue through their customers/public that invests money in them. The same goes for credit unions since a lender of credit derives enough funds from the interest he/she earns from borrowers.
(e) During times of inflation, people prefer to be borrow more since the raise in overall prices prompts lenders to lend more money. So lenders are always more at a loss as compared to borrowers.
(f) Assuming a coupon of $1,000 with a coupon rate of 3% (yearly payment of $30) and a maturity period of 5 years, the return value wil be higher than the face value.
(g) Naturally the yield should decrease.
(h) As rates increase, demand for money decreases because that lowers the yeild of a bond or a security. This applies to the liquidity prefence theory.
(i) Risk directly influences the return of a bond. Higher the risk, higher is the yield to maturity.
(j) As the fees increase, the bond becomes more liquid.
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