Assignment 1 1

Due Friday, 15 September 2017 at the beginning of class

1. (5 pts.) Define a financial intermediary.

2. (5 pts.) What is the typical relationship between interest rates on three-month Trea-
sury Bills, long-term Treasury bonds, and Baa corporate bonds?

3. (5 pts.) What is the basic activity of banks?

4. (5 pts.) Can you think of any financial innovation in the past ten years that has af-
fected you personally? Has it made you better off or worse off? Why?

5. (5 pts.) Since 2007, has the inflation rate in the United States increased or decreased?
What about the growth rate of money (M2)? What has happened to the 10-year Trea-
sury interest rate since 2007?

6. (5 pts.) Go to www.forecasts.org/data/index.htm and click on FFC Home at the top

of the page. Click on the S&P 500 Stock Market Forecast.

a What is the S&P 500 forecast to be in February 2018?

b Calculate the percentage change in the S&P 500 that this forecast implies over
the next six months? (Show your work and tell me what day you used as your
start date to calculate this percentage.)

c Click on “Our Accuracy” link. What does the site say its average forecast error
is over the last five years?

d How is the forecast error computed? Can you find which forecast value the site
is using to compute its forecast error?

7. (5 pts.) If you suspect that a company will go bankrupt next year, which would you
rather hold, bonds issued by the company or equities issued by the company? Why?

University of Montana, Econ 313: Money & Banking, Fall 2017 Taylor
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8. (5 pts.) How can the adverse selection problem explain why you are more likely to
make a loan to a family member than to a stranger?

9. (10 pts.) An excellent source of information about financial institutions is the U.S. Flow
of Funds report produced by the Federal Reserve. Go to www.federalreserve.gov/releases/z1
and go the most recent release. Go to the “Level tables” and find the page with the
results for life insurance companies (L.116).

(a) What is the value of total financial assets held by life insurance companies in the
first quarter of 2017 (2017 Q1)?

(b) What is the total value of corporate and foreign bonds held by life insurance com-
panies at the end of 2015?

(c) What percentage of life insurance companies’ assets are held in corporate and
foreign bonds?
(d) What percentage of life insurance companies’ assets are held in mortgage loans
and agency- and GSE-backed securities?
(e) Why would a life insurance company be concerned about the financial stability
of major corporations or the health of the housing market?

10. (5 pts.) Why do loan sharks worry less about moral hazard in connection with their
borrowers than some other lenders to?

11. (5 pts.) One of the factors contributing to the financial crisis of 2007-2009 was the
widespread issuance of subprime mortgages. How does this demonstrate adverse selec-
tion?

12. (5 pts.) How can the provision of several types of financial services by one firm be
both beneficial and problematic?

13. (5 pts.) In 2008, as a financial crisis began to unfold in the United States, the FDIC
raised the limit on insured losses to bank depositors from $100,000 per account to
$250,000 per account. How would this help stabilize the financial system?

University of Montana, Econ 313: Money & Banking, Fall 2017 Taylor