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1、Chapter 13.How can a change in interest rates affect the profitability of financial institutions?A change in interest rates affects the cost of acquiring funds for financial institution as well as changes the income on assets such as loans, both of which affect profits. In addition, changes in inter
2、est rates affect the price of assets such as stock and bonds that the financial institution owns which can lead to profits or losses.7.How does a decline in the value of the pound sterling affect British consumers?It makes foreign goods more expensive and so British consumers will buy less foreign g
3、oods and more domestic goods.1.The following table lists foreign exchange rates between US dollars and British pounds during April.DateUS Dollars per GBPDateUS Dollars per GBP4/11.95644/181.75044/41.92934/191.72554/51.9144/201.69144/61.93744/211.6724/71.9614/221.66844/81.89254/251.66744/111.88224/26
4、1.68574/121.85584/271.69254/131.7964/281.72014/141.79024/291.75124/151.7785Which day would have been the best day to convert $200 into British pounds?Which day would have been the worst day? What would be the difference in pounds?Solution:The best day is 4/25. At a rate of $1.6674/pound, you would h
5、ave 119.95. The worst day is 4/7. At $1.961/pound, you would have 101.99, or a difference of 17.96Chapter 22.If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling anvil seller, should I take out a loan from Larry
6、 the Loan Shark at a 90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan-sharking?Yes, I should take out the loan, because I will be better off as a result of doing so. My interest payment wi
7、ll be $4,500 (90% of $5,000), but as a result, I will earn an additional $10,000, so I will be ahead of the game by $5,500. Since Larrys loan-sharking business can make some people better off, as in this example, loan sharking may have social benefits. (One argument against legalizing loan sharking,
8、 however, is that it is frequently a violent activity.)5.”Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets. ” Comment.This statement is false. Prices in secondary markets determine the prices that firms issuing sec
9、urities receive in primary markets. In addition, secondary markets make securities more liquid and thus easier to sell in the primary markets. Therefore, secondary markets are, if anything, more important than primary markets.6.If you suspect that a company will go bankrupt next year, which would yo
10、u rather hold, bonds issued by the company or equities issued by the company? Why?You would rather hold bonds, because bondholders are paid off before equity holders, who are the residual claimants.13.Why might you be willing to make a loan to your neighbor by putting funds in a savings account earn
11、ing a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate rather than lend her the funds yourself?Because the costs of making the loan to your neighbor are high (legal fees, fees for a credit check, and so on), you will probably not be able to earn 5% on the lo
12、an after your expenses even though it has a 10% interest rate. You are better off depositing your savings with a financial intermediary and earning 5% interest. In addition, you are likely to bear less risk by depositing your savings at the bank rather than lending them to your neighbor.Chapter 32.I
13、f there is a decline in interest rates, which would you rather be holding, long-term bonds or short-tern bonds? Why? Which type of bond has the greater interest-rate risk?You would rather be holding long-term bonds because their price would increase more than the price of the short-term bonds, givin
14、g them a higher return4.If mortgage rates rise from 5% to 10%, but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?People are more likely to buy houses because the real interest rate when purchasing a house has fallen from 3 percent (
15、=5 percent 2 percent) to 1 percent (=10 percent 9 percent). The real cost of financing the house is thus lower, even though mortgage rates have risen. (If the tax deductibility of interest payments is allowed for, then it becomes even more likely that people will buy houses.)7.Property taxes in DeKa
16、lb County are roughly 2,66% of the purchase price every year. If you just bought a $100,000 home, what is the PV of all the future property tax payments? Assume that the house remains worth $100,000 forever, property tax rates never change, and that a 9% discount rate is used for discounting.Solution:The taxes on a $10
