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Chapter 2: Q.20 (page 97)
If you were going to get a loan to purchase a new car, which financial intermediary would you use: a credit union, a pension fund, or an investment bank?
The consumer will choose pension fund as a priority for buying new car
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Suppose you have just inherited \(10,400 and are considering the following options for investing the money to maximize your return:
Option 1: Put the money in an interest-bearing checking account that earns 3%. The FDIC insures the account against bank failure.
Option 2: Invest the money in a corporate bond with a stated return of 6%, although there is a 10% chance the company could go bankrupt.
Option 3: Loan the money to one of your friend鈥檚 roommates, Ayesha, at an agreed-upon interest rate of 7%, but you believe there is a 7% chance that she will leave town without repaying you.
Option 4: Hold the money in cash and earn zero return.
a. If you are risk-neutral (that is, neither seek out nor shy away from risk), which of the four options should you choose to maximize your expected return? (Hint: To calculate the expected return of an outcome, multiply the probability that an event will occur by the outcome of that event and then add them up.)
b. Assume that Option 3 and Option 4 are your only choices. If you could pay your friend \)50 to find out extra information about Ayesha that would indicate with certainty whether she will leave town without paying, would you pay the $50? What does this say about the value of better information regarding risk?
Go to the St. Louis Federal Reserve FRED database, and find data on federal debt held by the Federal Reserve (FDHBFRBN), by private investors (FDHBPIN), and by international and foreign investors (FDHBFIN). Using these series, calculate the total amount held and the percentage held in each of the three categories for the most recent quarter available. Repeat for the first quarter of 2000, and compare the results.
Go to the St. Louis Federal Reserve FRED database, and find data on the total assets of all commercial banks (TLAACBM027SBOG) and the total assets of money market mutual funds (MMMFFAQ027S). Transform the commercial bank assets series to quarterly by adjusting the Frequency setting to 鈥淨uarterly.鈥� Calculate the percent increase in growth of assets for each series, from January 2000 to the most recent quarter available. Which of the two financial intermediaries has experienced the most percentage growth?
Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing market?
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?
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