Answer the questions1、What are the ways by which the money flows from individual surplus unitsto deficit units?financial markets facilitate the flow of funds from surplus units to deficit units. Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as money markets.Those that facilitate the flow of long-term funds are known as capital markets. Debt bond stock fund deritives2、How does the level of tax, do you think, affect the demand of household forloanable funds? (please explain by pictures)if tax rates on household income are expected to significantly decrease in the future, households might believe that they can more easily afford future loan repayment and thus be willing to borrow more funds. For any interest rate, the quantity of loanable funds demanded by households would be greater as a result of tax law adjustment. This represents an outward shift in the demand schedule.tax rates on household income (income tax decreases →the line of household demand moves right)3、What is the relationship between the government demand for loanable fundsand interest rate? (explain by pictures)Whenever a government’s planed expenditures cannot be completely covered by its incoming revenues from taxes and other sources, it demands loanable funds.The way to obtain fund: Municipal (state and local) governments issue municipal bonds to obtain funds, while the federal government and its agencies issue Treasury securities and federal agency securitiesInterest-inelastic (insensitive to interest rates): federal government expenditure and tax policies are generally thought to be independent ofinterest rate. Thus the federal government demand for funds is said to beInterest-inelastic, or insensitive to interest rates. In contrast, municipalgovernments sometimes postpone proposed expenditures if the cost offinancing is too high, implying that their demand for loanable funds issomewhat sensitive to interest rates.•Like the household and business demand, the government demand for loanable funds can shift in response to various events.Deficit increases →move rightExhibit 2.3 impact of increased government budget deficit on the government demand for loanable fundsThe federal government demand-for-loanable-funds schedule is Dg1, if newbills are passed that cause a net increase in the deficit of USD20 billion, thefederal government demand for loanable funds will increaseby that amount.The new demand schedule is Dg2.4、What are the economic factors that affect interest rates?1)Impact of Economic Growth on Interest Rates2)Impact of Inflation on Interest Rates3)Impact of the Money Supply on Interest Rates4)Impact of the Budget Deficit on Interest Rates5)Impact of foreign Flows of Funds on Interest Rates6)Summary of Forces that Affect Interest Rates5、Explain “crowding-out effect” please.The deficit might not necessarily place upward pressure on interest rates.Given a certain amount of loanable funds supplied to the market( through saving), excessive government demand for these funds tends to “crowd out” the private demand (by consumer and corporation) for funds. The federal government may be willing to pay whatever is necessary to borrow these funds, but the private sector may not. This impact is known as the crowding-out effect.6、What are the monetary policy tools?Open market operationsAdjustments in the discount rateAdjustments in the reserve requirement ratio7、What are the ways by which the money flows from individual surplus unitsto deficit units?8、How does the Fed use the monetary policy tools to adjust the money supply?（答案待定）1.Open Market OperationsThe buying and selling of government securities (through the Trading Desk) is referred to as open market operations.✓When the Fed issues securities, the commercial banks purchase those that are most attractive. The total funds decrease and the money supply falls.✓When the Fed purchase securities, the total funds increase, which representsa loosening of money supply growth.✓Adjusting the Discount RateThe interest rate that an eligible(有资格的) depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.To increase the money supply, the Fed can authorized a reduction in thediscount rate; to decrease the money supply, the Fed can increase thediscount rate.3.Adjusting the Reserve Requirement RatioReserve Requirement Ratio is the proportion of their deposit accounts thatmust be held as reserves.The lower the reserve requirement ratio, the greater the lending capacity ofdepository institutions, so a larger money supply.When the fed manipulates the money supply to influence economic variables, it must decide what form of money to manipulate. The optimal form of money should (1)be controllable by the fed and (2)have a predictable(可预测的) impact on economic variables when adjusted by the fed. The most narrow form of money, known as M1, includes currency held by the public and checking deposits(such as demand deposits, NOW accounts, and automatic transfer balances) at depository institutions.9、What are the differences between the general obligation bonds and revenuebonds both of which belong to municipal bonds?Like the federal government, state and local government frenquently spend more than the revenues they receive. To finance the difference, they issue municipal bonds, most of which can be classified as either General obligation bonds or revenue bonds. payments on General obligation bonds are supported by the municipal government’s ability to tax, whereas payments on revenue bond s must be generated by revenues of the project( tollway, toll bridge, state college dormitory, etc) for which the bonds were issued.Material: municipal bond10、What are the characteristics of corporate bonds?The bond indenture, trusteeCorporate bonds can be described according to a variety of characteristics. The bond indenture(契约) is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. It is very comprehensive( normally several hundred pages) and is designed to address all matters related to the bond issue ( collateral, payment dates, default provision, call provisions, etc)Sinking-Fund Provision(偿债基金准备)Bond indentures frequently include a sinking-fund provision, or a reqirement that the firm retire a certain amount of bond issue each year. This provision is considered to be an advantage to the remaining bondholders because it reduces the payments necessary at maturity.Protective Covenants(保护条款)Bond indentures normally place restrictions on the issuing firm that are designed to protest the bondholders from being exposed to increasing risk during the investment period. Those so called Protective Covenants frequently limit the amount of dividends and corporate officers’ salaries the firm can pay and also r estrict theamount of additional debt the firm can issue. Other financial policies may be restricted as well.10、What are the main differences between common stock and preferredstock?●The ownership of common stock entitles shareholders to a number of rights notavailable to other individuals. Normally, only the owner of common stock are permitted to vote on certain key matters concerning the firm,such as theelection of the board of directors, authorization to issue new shares of common stock, approval of amendments to the corporate charter, and adoption ofbylaws(附例).●Usually not allow for significant voting rights,The preferred stockholders have the priority to earn dividends compared with common stockholders .But a firm is not legally required to pay preferred stock dividends.11、What are the similarities and differences between forward contract andfuture contract?Futures and forward contracts are similar in the following ways: Both are derivative securities for future delivery. The parties agree today on price and quantity for settlement in the future.Both are used to hedge currency risk, interest rate risk or commodity price risk.They differ in these ways:Forward contracts are private, customized定制contracts between a bank and its clients depending on the client’s needs (OTC). There is no secondarymarket for forward contracts since they are private contractual agreements.Forward contracts are settled at expiration. Futures contracts are continually settled (mark to market)12、What are the risks of trading futures contracts?Market riskBasis riskLiquidity riskCredit riskPrepayment riskOperational risk13、What are the determinants of call option premiums?Market price of the underlying instrumentInfluence of the market price: the higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the call option premium, other things being equal.Volatility of the underlying instrumentInfluence of t he stock’s volatility: the greater the volatility of the underlying stock, the higher the call option premium, other things being equal.Time to maturity of the call optionInfluence of the call option’s time to maturity: the longer the call option’s time to maturity, the higher the call option premium, other things being equal14、What are the reasons that the Eurodollar market is attractive for bothdepositors and borrowers?the spread between the rate banks pay and the rate they charge is relativelysmall✓Only governments and large corporations participate in this market—lower risk✓Investors in the market avoid some costs (no deposit insurance, lower taxes, no government-mandated credit allocations)✓Eurodollar CDs are not subject to reserve requirements✓Less regulations and restrictions。