Institute of Banking Studies

M.A. Program in Banking and Finance

Second Semester 2012/2013

Macroeconomics for Bankers
Thursdays 4:30-7:30 pm
Dr. Hama! "A#ADA$
Minicase-2 Due: April 17 2014
%our com&an' is interested in ana('ing t!e )e!a*ior of interest rates and t!e mode(s used to
&redict interest rates in t!e future. As an initia( &ro+ect in t!is area, 'ou !a*e )een assigned t!e
task of creating a &resentation t!at -i(( s!o- t!e to& management team assigned t!is &ro+ect t!e
)asics of -!at affects interest rates and !o- e.ui(i)rium &rices c!ange o*er time. $!e )etter 'our
&resentation to t!is grou&, t!e more (ike(' 'ou are to )ecome a *oting mem)er of t!e team. $o
)egin 'our -ork, 'ou !a*e decided to identif' a series of .uestions t!at 'ou t!ink t!is team -i((
ask, inc(uding ta)(es and gra&!s t!at -i(( satisf' t!eir concerns a)out t!e fina( &resentation to t!e
/F0. %ou decide to start )' ans-ering t!e fo((o-ing .uestions, assuming t!at t!e face *a(ue of a
discount )ond is 11,000 and t!e time to maturit' is one 'ear.
1. 2!at is t!e e3&ected return for t!is )ond if t!e market &rice is
a. 14005
). 14605
c. 17005
d. 17605
e. 110005
2. If t!e market8c(earing &rice 9market e.ui(i)rium: of t!is )ond !as a return of 20; -!at is
t!e market &rice -!ere t!e .uantit' demanded e.ua(s t!e .uantit' su&&(ied5 9Hint< =se
t!e same e3&ected return e.uation, so(*e for P
d
.:
3. 2!ic! factors -ou(d cause t!e demand cur*e for )onds to s!ift5
>. 2!ic! factors -ou(d cause t!e su&&(' cur*e for )onds to s!ift5
6. ?3&(ain -!at t!e Fis!er effect is and !o- it -ou(d )e ref(ected in rising interest rates.
@. ?3&(ain t!e meaning and differences )et-een t!e (oana)(e funds frame-ork and t!e
(i.uidit' &reference frame-ork in estimating t!e e.ui(i)rium interest rate. 9Inc(ude t!e
effects of c!anges in income, &rice (e*e(s, and e3&ected inf(ation.:
A. Predict t!e su&&(' and demand c!anges for )onds and mone' t!at usua((' occur -it! t!e
fo((o-ing e*ents<
Bonds:
f. )usiness c'c(e e3&ansion -it! gro-ing -ea(t!
g. e3&ected rise in interest rates
!. increase in e3&ected rate of inf(ation
i. increased risk for )onds
+. increased (i.uidit' for )onds
k. !ig!er go*ernment deficits
Money:
(. increase in (e*e( of income
m. rise in t!e &rice (e*e(
n. income rising during an e3&ansion
o. &rice (e*e( increases