Assignment1
1. A change in interest rate will affect the cost of borrowing, the income generated from tangible assets and stock’s value that the financial institution owns that will lead to profits or losses as a result.

2. The Federal Reserve’s Policies such as monetary policy could affect interest rates, inflation, and the supply of the money. These three factors are directly related to the profitability of financial companies. So the managers care so much about the Fed activities.

3. The family members are closed to you than a stranger. You could know the credibility of the family members but not the strangers. Under the asymmetric information, you can reduce the risk of being bad debt by borrowing the money to family members instead of the strangers.

4. The nominal interest rate=2%+6%=8%.
At the end of one year, I will have $1080 in account ($1000*1.08).
At that time, the stereo will sell for $1050*1.06=$1113. I don’t have enough money to buy it. I still need $33 ($1113-1180=$33) in order to buy it.

5.
Years Cash payment PV OF CP Weights Weighted maturity
1 60 56.07 5.76 0.06
2 60 52.41 5.38 0.11
3 1060 865.28 88.86 2.67 973.73 Duration 2.83
The expected price changes if interest rate drops to 6.75%:
%△P = -2.83*(-0.0025/1+0.07)=0.0066=0.66%

6. It will increase the interest rates if prices in the bond market become volatile,. Since the price volatility in bond market will increase the risks of investing bonds, the demand for bonds will fall and the demand curve will shift to left. As a result, the price of the bonds will drop and the interest rate will rise.

7. Interest rate will increase if a government has a large deficit. Since the government has to issue more bonds to cover its deficit, the supply for bonds will increase that will cause supply curve shifts to right. As a result, the price will drop and the interest rate will