Money and Banking Paper

1725 Words May 2nd, 2016 7 Pages
Short Answer Questions
In your own words, explain what a “bond” is. Assume the reader does not already know what a bond is. (15 points)
A Bond is a debt security that promises to make periodic payments for a specific period of time. Further, a bond has a structured face value and yield, and is the obligation of the issuer to pay those in exchange for liquidity now. Governments and companies sell bonds and terms can range from overnight to infinity.
What is the present value of a consol (aka perpetuity) that pays $10,000 per year? Use a discount rate of .99. Show your work. (15 points)
10,000/1-.99=10,000/.01=1,000,000
What is the relationship between bond yields and bond prices? (5 points) Why? (10 points)
The relationship is
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You purchase $1 million dollars of AAA mortgage-backed securities (MBS) early one morning on the advice of your investment advisor. Later in the day, you are shocked to discover that these MBS are backed (or “collateralized”) by subprime mortgages. Do you have reason to suspect that the rating agencies, your advisor, or both have defrauded you? Explain. (15 points)
The rating agencies did not defraud you, their interests are irrelevant.

You lease a condo on the beach for three years in order to rent it out. Is the condo an asset? (3 points) Would the condo lease be an asset if you planned to use it yourself? (3 points) What is the ce is maximum you would be willing to pay for the lease if your discount rate is .95 and you expect to receive $5,000 per year in (net) rental income? (9 points) Note: You do not have to calculate any specific numbers but can answer in the form of a mathematical expression.
An asset is something that pays its owner, a liability is something that you would pay out of pocket. If I am paying for a condo, it is not an asset. Even if I planned to rent it out, it becomes an asset because you are receiving money for it.
MAX PAY: 5,000+5,000(.95)+5000(.95)^2 P<15,000
What is meant by “free banking?” (7 points) Has the U.S. ever had this system? (3 points) Why doesn’t the U.S. practice free banking today? (Briefly!) (5 points)
Free banking is a national banking system without a central bank. The US has had this system

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