Chapter 2 describes on research methodologyDeskripsi lengkap
OFC 2nd unit notes
Cost accountingFull description
essential cell biologyFull description
1. InterestRateMovements. Explainwhyinterestrateschangedastheydidoverthepast year. ANSWER: Weak demand from firms and individuals, increased supply by gov’t and individuals
2. Interest Elasticity. Elasticity. Expla Explain in what what is meant meant by intere interest st elast elastici icity ty. . Would Would you you expect expect federalgovernmentdemandforloanablefundstobemoreorlessinterest-elasticthan householddemandforloanablefunds?Why? ANSWER ANSWER:Inte :Interes restelas telastic ticity ity ofsuppl ofsupplyrepr yrepres esent entsa sa change change inthe quant quantity ity ofloanab ofloanable le fundssuppli fundssuppliedin edin respons response e toa change change ininterestrates. ininterestrates. Interest Interest elastici elasticityof tyof demand demand representsachangeinthequantityofloanablefundsdemandedinresponsetoachange ininterestrates. Thefederal Thefederalgover governmen nmentdeman tdemandforloa dforloanabl nablefunds efundsshould shouldbelessinte belessinterest restelasti elasticthan cthan the the con consumer umer deman mand for loana anable ble fund unds, becau ecausse the the governm rnment’ ent’ss plann anned borrowingswilllikelyoccurregardlessoftheinterestrate.Conversely,thequantityof loanablefundsbyconsumersismoreresponsivetotheinterestratelevel. 3. Impact Impact of Governme Government nt Spending Spending. . If the federal federal governm government ent planned planned to expand expand the spaceprogram,howmightthisaffectinterestrates? ANSW ANSWER ER: : An expa expand nded ed spac space e prog progra ram m woul would d (a) (a) forc force e the the fede federa ral l gov governm ernmen ent t to increa increase se its budget budget defic deficit, it, (b) (b) poss possibl ibly y for force ce any firms firms invo involv lved ed in facili facilitat tating ing the programto programto borrowmorefunds. borrowmorefunds. Consequen Consequently tly,, thereis thereis a greaterdeman greaterdemandfor dfor loanable loanable funds. funds. Theadditional Theadditional spendin spending g could could cause cause higher higher income income andadditional andadditional saving. saving. Yet, this this impact impact isnot likel likely y tobe asgreat. asgreat. The likel likely y overa overall ll impact impact would would theref therefore ore be upwardpressureoninterestrates. 4. ImpactofaRecession. Explainwhyinterestratestendtodecreaseduringrecessionary periods periods.. Reviewhistori Reviewhistoricalinteres calinterest t rates rates to determi determine ne howthey react react to recessi recessionar onary y periods.Explainthisreaction. ANSWER ANSWER:Dur :During ingareces arecessi sion on,fir ,firms msandco andcons nsume umers rsredu reduceth cetheir eiramou amountof ntofborr borrowi owing. ng. Thedemandforloanablefundsdecreasesandinterestratesdecreaseasaresult. 5. Impa Impact ct of the the Econ Econom omy. y. Expl Explai ain n how how the the expe expect cted ed inte intere rest st rate rate in one one year year is dependentonyourexpectationofeconomicgrowthandinflation. ANSW ANSWER ER: : The The inte intere rest st rate rate in the the futu future re shou should ld incr increa easse if econ econom omic ic grow growth th and and inflationareexpectedtoris inflationareexpectedtorise,ordecreaseif e,ordecreaseifeconomicgrowt economicgrowthandinflatio handinflationareexpected nareexpected todecline. 6. ImpactoftheMoneySupply. Shouldincreasingmoneysupplygrowthplaceupwardor downwardpressureoninterestrates?
ANSWER ANSWER:Ifonebel :Ifonebeliev ieves es thathigh thathighermon ermoneysup eysuppl plygrow ygrowthwil thwillnotcau lnotcause se infla inflatio tiona nary ry expect expectati ation ons, s, the addit addition ional al suppl supply y of funds funds place places s downw downward ard press pressure ure on intere interest st rates.However,ifonebelievesthatinflationexpectationsdoeruptasaresult,demand forloanablefundswillals forloanablefundswillalsoincrease,and oincrease,andinterestrates interestratescouldincreas couldincrease(iftheincreasein e(iftheincreasein demandmorethanoffsetstheincreaseinsupply). 7. Impa Impact ct of Exch Exchan ange ge Rate Rates s on Inte Intere rest st Rate Rates. s. Assume that if the U.S. dollar stren treng gthen thenss, it can can place ace downwa wnward rd press essure on U.S. .S. inflat flatiion. Bas Based on this his information,howmightexpectationsofastrongdollaraffectthedemandforloanable funds funds in the Unite United d States States and U.S. U.S. inter interes est t rates rates? ? Is there there any reaso reason n to think think that that expectationsofastrongdollarcouldalsoaffectthesupplyofloanablefunds?Explain. ANSWER ANSWER:Asa :Asa stron strongU.S. gU.S. doll dollardam ardampen pensU.S. sU.S. inflat inflation ion,itcanredu ,itcanreducethe cethe demand demand for loanablefunds,andthereforereduceinterestrates.Theexpectationsofastrongdollar couldalsoincre couldalsoincreasethesuppl asethesupplyof yof fundsbecaus fundsbecauseit eit mayencourage mayencourage saving(the saving(thereisless reisless conc concer ern n to purc purcha hase se good goods s befo before re pric prices es rise rise when when infl inflat atio iona nary ry expe expect ctat atio ions ns are are reduced) reduced).. Inaddition,foreign Inaddition,foreign investo investorsmay rsmay investmore investmore funds funds inthe UnitedStatesif UnitedStatesif they they expe expect ct the the doll dollar ar to stre streng ngth then en, , beca becaus use e that that coul could d incr increa ease se thei their r retu return rn on investment. 8. Nomina Nominal l versu versus s Real Real Inter Interest est Rate. Rate. What What is the the diff differ eren ence ce betw betwee een n the the nomi nomina nal l interestrateandrealinterestrate?WhatisthelogicbehindtheFishereffect’simplied positiverelationshipbetweenexpectedinflationandnominalinterestrates? ANSWER ANSWER:Theno :Thenomin minalin alinter teres estrate trateisthequo isthequoted tedinter interest estrate, rate,while whilethereal therealinter interes est t rateisdefinedasthenomi rateisdefinedasthenominalinteres nalinterestrateminusth trateminustheexpectedrat eexpectedrateofinflatio eofinflation.Thereal n.Thereal interestraterepresentstherecentnominalinterestrateminustherecentinflationrate. Investor Investorsrequi srequireaposi reapositive tiverealret realreturn, urn,whichsug whichsuggest geststhat sthattheywil theywillonly lonlyinves investfunds tfunds ifthenominalinterestrateisexpectedtoexceedinflation.Inthisway,thepurchasing powerof powerof invested invested fundsincreas fundsincreasesovertime.As esovertime.As inflatio inflationrises,nomin nrises,nominalinteres alinterestrates trates should should rise rise as well well since since inves investor tors s would would requir require e a nomina nominal l return return that that exceed exceeds s the inflationrate. 9. RealInterestRate.Estimatethere RealInterestRate.Estimatetherealinterestrat alinterestrateoverthelastye eoverthelastyear.Iffinancial ar.Iffinancialmarket market partic participa ipants nts overe overesti stimat mate e inflat inflation ion in a parti particul cular ar perio period, d, will will real real inter interes est t rates rates be relativelyhighorlow?Explain. ANSWER: ANSWER:Av Averag eragein einflat flation ionov overt erthel helast astyea yearwa rwasab sabout out0% 0%(neg (negativ ativein einthe thefir first sthalf halfof of 2009 2009, , posit positive ive in the secon second) d). . No Nomin minal al intere interest st rates rates were were only only sligh slightly tly above above zero zero (about0.15%onaverage).Sorealinterestrateswerenearzero. 10.ForecastingInterestRates. Whydoforecastsofinterestratesdifferamongexperts? ANSWER:V ANSWER:Vario ariousfac usfactors torsmayin mayinflue fluencei nceinter nterestr estrates ates,and ,andchang changesin esinthes thesefact efactors orswill will affectinterestratemovements.Expe affectinterestratemovements.Expertsdisagree rtsdisagreeabouthowvariousfactors abouthowvariousfactorswillchange. willchange. Theyalsodisagreeaboutthespecificinfluencethesefactorshaveoninterestrates.
11. ImpactofStockMarketCrises. ImpactofStockMarketCrises.Durin During g periods periods inwhich investor investors s suddenl suddenly y become become fear fearfu ful l that that stoc stocks ks are are over overva valu lued ed, , they they dump dump thei their r stoc stocks ks, , and and the the stoc stock k mark market et experiencesamajordecline.Duringtheseperiods,interestratestendtodecline.Usethe loanablefundsframeworkdiscussedinthischaptertoexplainhowthemassiveselling ofstocksleadstolowerinterestrates. ANSW ANSWER ER:When :When inve invest stor orsshi sshift ft fund fundsout sout of stoc stocks ks, , they they mo move ve it into into mo mone neymark ymarket et securities,causinganincreaseinthesupplyofloanablefunds,andlowerinterestrates. 12. ImpactofExpectedInflation. ImpactofExpectedInflation.Howmightexpectat Howmightexpectationsofhighergl ionsofhigherglobaloilpric obaloilpricesaffect esaffect thedemand forloanablefunds forloanablefunds,, thesupplyof thesupplyof loanabl loanablefunds,andinteres efunds,andinterest t ratesin ratesin the United United States? States? Will this affect affect the interest interest rates rates of other other countrie countries s in the same way? Explain. ANSWER ANSWER: : The The expect expectati ation ons s of higher higher oil prices prices willcause willcause concer concernabout nabout the poss possibl ible e increase increase ininflation. ininflation. Sincehigherinflat Sincehigherinflationcanincreas ioncanincreaseinteres einterestrates,it trates,it will cause cause an expect expectati ation on of higher higher inter interes est t rates rates in the U.S. U.S. Firms Firms and gove governm rnmen ent t agenc agencies ies may borrow borrow mo more re funds funds now now befor before e prices prices increa increase se and before before intere interest st rates rates increa increase. se. Consum Consumers ers may use use their their savin savings gs now now to buy produ products cts befor before e the prices prices increa increase. se. Therefore,thedemandforloanablefundsshouldincrease Therefore,thedemandforloanab lefundsshouldincrease,thesupplyofloanablefunds ,thesupplyofloanablefunds shoulddecrease,andinterestratesshouldincreaseintheU.S.
Theimpactofhigherglobaloilpricesinothercountriesisnotnecessarilythesame.If thecountryproducesitsownoil,itcansettheoilpricesinitscountry.Ifitcanprevent high high oil oil pric prices es in its its coun countr try, y, then then the the pric prices es of prod produc ucts ts (gas (gasol olin ine) e) and and serv servic ices es (transportation)maynotbeaffected.Therefore,interestratesmaynotbeaffected. 13.GlobalInteractionofInterestRates. Whymightyouexpectinterestratemovements 13.GlobalInteractionofInterestRates.Whymightyouexpectinterestratemovements ofvariousindustrializedcountriestobemorehighlycorrelatedinrecentyearsthanin earlieryears? ANSWER ANSWER:Int :Intere erest strate ratesamo samong ngcoun countri triesar esareexp eexpect ected edtobemor tobemorehig ehighl hlycor ycorrel relate atedin din rece recent nt year years s beca becaus use e fina financ ncia ial l mark market ets s are are mo more re geog geogra raph phic ical ally ly inte integr grat ated ed. . More More internationalfinancialflowswilloccurtocapitalizeonhigherinterestratesinforeign countrie countries, s, which affects affects the supply supply and demand demand conditio conditions ns in each market. market. As funds funds leavea leavea countrywithlowintere countrywithlowinterestrates, strates, this placesupward placesupward pressure pressure onthatcountry’s onthatcountry’s interestrates.Theinternationalflowoffundscausedthistypeofreaction. 14. Impact Impact of War. A war tends tends to cause cause signific significant ant reaction reactions s in financia financial l markets. markets. Why would would a war in Iraq Iraq place place upwar upward d press pressure ure on U.S. U.S. intere interest st rates rates? ? Why might might some some investorsexpectawarlikethistoplacedownwardpressureonU.S.interestrates? ANSW ANSWER ER:A :A warin warin Iraq Iraq plac places es upwa upward rd pres pressu sure re on U.S. U.S. inte intere rest st rate ratesbec sbecau ause se it (1) (1) increasedinflationary increasedinflationaryexpectations expectationsintheUnitedStatesasoilprices intheUnitedStatesasoilpricesincreasedabrup increasedabruptly, tly, and (2) increase increased d the expected expected U.S. budget budget deficit deficit as governm government ent expendit expenditures ures were necessarytoboostmilitar necessarytoboostmilitarysupport.How ysupport.However,itmayalsocaus ever,itmayalsocausesomeanalys esomeanalyststorevise tstorevise theirforecastsofeconomicgrowthdownward.Theslowereconomyreflectsareduced corpo corporat rate e deman demand d for funds funds, , which which by itself itself place places s downw downward ard press pressure ure on intere interest st
rates rates. . Ifinflatio Ifinflation n was not not a concer concern,the n,the Fed may attemp attempt t toincreas toincrease e mo money ney suppl supply y growth growth tostimulate tostimulate theeconomy.However theeconomy.However,, theinflationar theinflationary y pressure pressure canrestrict canrestrict the Fedfromincreasingthemoneysupplytostimulatetheeconomy(sinceanystimulative policycouldcausehigherinflation). 15. ImpactofSeptember11. ImpactofSeptember11.OfferanargumentforwhytheterroristattackontheUnited OfferanargumentforwhytheterroristattackontheUnited Stateson Stateson Septemb September er 11, 2001 2001 could could have placeddownwar placeddownward d pressure pressure onU.S. interest interest rates.Offeranargumentforwhytheterroristattackcouldhaveplacedupwardpressure onU.S.interestrates. ANSW ANSWER ER: : The The terr terror oris ist t atta attack ck coul could d caus cause e a redu reduct ctio ion n in spen spendi ding ng rela relate ted d to trav travel el (airline (airlines, s, hotels) hotels),, and would would also also reduce reduce the expansi expansion on by those those types types of firms. firms. This reflectsadeclineinthedemandforloanablefunds,andplacesdownwardpressureon interest interest rates. rates. Converse Conversely, ly, the attack attack increase increases s the amount amount of governm governmentborrowi entborrowing ng neededtosupportawar,andthereforeplacesupwardpressureoninterestrates. 16.Im 16.Impact pact of Gov Governm ernment ent Spending Spending. . Jayhawk Jayhawk Forecast Forecasting ing Services Services analyzed analyzed several several factorsthatcouldaffectinterestrates factorsthatcouldaffectinterestratesinthefuture.Mostfactors inthefuture.Mostfactorswereexpectedtoplace wereexpectedtoplace downwardpressureonint downwardpressureoninterestrates. erestrates.Jayhawkalso Jayhawkalsofeltthatalthou feltthatalthoughtheannualbud ghtheannualbudget get deficitwastobecutby40percentfromthepreviousyear,itwouldstillbeverylarge. Thus,Jayhawkbelievedthatthedeficit’simpactwouldmorethanoffsettheothereffects andthereforeforec andthereforeforecastintere astinterestratesto stratesto increase increase by2 percent. percent. Commenton Commenton Jayhawk’ Jayhawk’s s logic. ANSWER ANSWER:A :A reduct reduction ion inthe defic deficitsho itshould uld freeup freeup somefun somefunds ds thathadbeen thathadbeen usedto usedto supportthegovernmentborrowings.Thus,thereshouldbeadditionalfundsavailableto satisfyotherborrowingneeds.Giventhissituationplustheotherinformation,Jayhawk shouldhaveforecastedlowerinterestrates. 17.DecomposingInterestRateMovements.Theinterestrateonaone-yearloancanbe 17.DecomposingInterestRateMovements.Theinterestrateonaone-yearloancanbe decompo decomposed sed into a one-year one-year risk-fre risk-free e (free (free from default default risk) risk) componen component t and a risk premi premium um that that reflec reflectsthe tsthe poten potentia tial l for defaul default t on the loan loan in that that year. year. A chang change e in economic economic conditio conditions ns canaffectthe risk-fre risk-free e rate andthe risk premium. premium. Therisk-free Therisk-free rateisnormallyaffectedbychangingeconomicconditionstoagreaterdegreethanthe riskpremium.Explainho riskpremium.Explainhowaweakerecono waweakereconomywilllik mywilllikelyaffectthe elyaffecttherisk-freeco risk-freecomponent, mponent, theriskpremium,andtheoverallcostofaone-yearloanobtainedby(a)theTreasury, and(b)acorporation.Willthechang and(b)acorporation.Willthechangeinthecostofborrowing einthecostofborrowingbemorepronounce bemorepronouncedfor dfor theTreasuryorforthecorporation?Why? ANSW ANSWER ER: : The The weak weaker er econ econom omy y will will like likely ly redu reduce ce the the risk risk-f -fre ree e comp compon onen ent t and and will will increasetheriskpremium.Theoverallcostofborrowingisreducedforaloantothe Treasuryandaloantoacorporation.Thereisapartialoffsettingeffectontheinterest rateoftheloantothecorporation.However,theTreasurydoesnothaveriskofdefault so ther there e is no effe effect ct on the the risk risk prem premiu ium m on a loan loan to the the Trea Treasu sury ry. . The The weak weaker er economy economy will have a more pronounc pronouncedimpact edimpact onthe interest interest rateof theloan to the Treasury,becausethereisnooffsettingeffect. 18.
For Forecast asting ing Inte nterest Rate Ratess Ba Bassed on Pre Prevaili iling Cond Condit itio ions ns.. Con Consider ider the prevailingconditionsforinflation(includingoilprices),theeconomy,thebudgetdeficit, and the Fed’s Fed’s mo monet netary ary polic policy y that that could could affect affect intere interest st rates rates. . Based Based on preva prevaili iling ng
condit condition ions, s, do you you think think intere interest st rates rates will will likel likely y incre increase ase or decrea decrease se durin during g this this semester?Offersomelog semester?Offersomelogictosupportyo ictosupportyouranswer.Whichfacto uranswer.Whichfactordoyouthinkwil rdoyouthinkwillhave lhave thebiggestimpactoninterestrates? ANSWER:
1. Characte Characterist ristics ics That Affect Affect Securit Security y Yields. Yields. Identify Identify the relevant relevant character characteristi istics cs of anysecuritythatcanaffectthesecurity’syield. ANSW ANSWER ER: : The There rele leva vant ntc cha hara ract cter eris isti tics csa are re: : 1. default risk 2. liquidity 3. tax status 4. maturity 2. Impact ImpactofC ofCredi reditRi tRisk skonY onYield ield. .Whateffectdoesahighcreditriskhaveonsecurities? Whateffectdoesahighcreditriskhaveonsecurities? ANSWER: ANSWER:Inve Investor storsr srequi equirea reahig higher herrisk riskpre premium miumon onsecu securiti rities eswith withahi ahighd ghdefau efaultr ltrisk. isk. 3. ImpactofLiqu ImpactofLiquidit idityonYield yonYield. .Discusstherelationshipbetweentheyieldandliquidity Discusstherelationshipbetweentheyieldandliquidity ofsecurities. ANSW ANSWER ER: : The The grea greate ter r the the liqu liquid idit ity y of a secu securi rity ty, , the the lowe lower r is the the yiel yield, d, othe other r thin things gs beingequal. 4. TaxEffectsonYields.Doinvestorsinhightaxbracketsorthoseinlowtaxbrackets TaxEffectsonYields. Doinvestorsinhightaxbracketsorthoseinlowtaxbrackets benefitmorefromtax-exemp benefitmorefromtax-exemptsecurities tsecurities?Why?Domunicip ?Why?Domunicipalbondsor albondsorcorporatebon corporatebonds ds offerahigherbefore-taxyieldatagivenpointintime?Why?Whichhasthehigheraftertaxyield?Iftaxesdidnotexis taxyield?Iftaxesdidnotexist,wouldTreasu t,wouldTreasurybondsoff rybondsofferahigherorloweryiel erahigherorloweryieldthan dthan municipalbondswiththesamematurity?Why? ANSWER ANSWER:Hig :High-t h-taxbra axbracke cketinv tinves estor torsben sbenefi efitmor tmorefro efromtax mtax-ex -exemp emptsec tsecuri uritie tiesbeca sbecause use theirtaxsavingsfromavoidingtaxesisgreater. Corporate bonds offer a higher before-tax yield, since they are taxable by the federal government. The municipal bonds may have a higher tax yield for investors subject to a high tax rate. For low-tax bracket investors, the corporate bonds would likely have a higher aftertax yield.
Iftaxesdid Iftaxesdid notexis notexist,Tre t,Treas asury ury bonds bonds would would offer offer aloweryiel aloweryieldthan dthan munici municipal pal bond bonds s becausetheyareperceivedto becausetheyareperceivedtoberisk-free. berisk-free.Thus,therequired Thus,therequiredreturnonTreas returnonTreasurybonds urybonds wouldbelowerthanonmunicipalbonds. 5. Pure Pure Expec Expectat tation ions s Theor Theory. y. Expla Explain in how how a yield yield curve curve would would shift shift in respo respons nse e to a suddenexpectationofrisinginterestrates,accordingtothepureexpectationstheory.
ANSW ANSWER ER: : The The dema demand nd for for shor shortt-te term rm secu securi riti ties es woul would d incr increa ease se, , plac placin ing g upwa upward rd (down (downwar ward) d) press pressure ure on their their prices prices (yiel (yields ds). ). The The demand demand for for long long-t -term erm secur securit ities ies would would decrease decrease,, placingdownwar placingdownward d (upward) (upward) pressure pressure on their their prices prices (yields (yields). ). If the yieldcurvewasoriginallyupwardsloped,itwouldnowhaveasteeperslopeasaresult of the the expe expect ctat atio ion. n. If it was was orig origin inal ally ly down downwa ward rd slop sloped ed, , it woul would d now now be mo more re horizontal(lesssteep),ormayhaveevenbecomeupwardsloping. 6. Forward Forward Rate. Rate. What What is the meani meaning ng of the forwa forward rd rate rate in the contex context t of the term term structureofinterestrates?Whymightforwardratesconsistentlyoverestimatefuture interestrates?Howcouldsuchabiasbeavoided? ANSWER: ANSWER:The Theforw forward ardrate rateis isthe theexpe expected ctedint interes erestra tratea teata tafutur futurepo epoint intin intime time.. If forw forwar ard d rate ratess are are esti estima mate ted d with withou out t cons consid ider erin ing g the the liqu liquid idit ity y prem premiu ium, m, it may may overe overest stima imate te the future future inter interes est t rates. rates. If a liquid liquidity ity premiu premium m is accou accounte nted d for for when when estimatingtheforwardrate,thebiascanbeeliminated. 7. Pure Expectations Expectations Theory. Assume Assume there is a sudden sudden expectati expectation on of lower lower interest interest ratesinthefuture.Whatwouldbetheeffectontheshapeoftheyieldcurve?Explain. ANSW ANSWER ER: : The The dema demand nd for for shor shortt-te term rm secu securi riti ties es woul would d decr decrea ease se, , plac placin ing g down downwa ward rd (upward)pressureontheirprices(yields).Thedemandforlong-termsecuritieswould increa increase, se, placi placing ng upward upward (down (downwar ward) d) press pressure ure on their their price prices s (yiel (yields ds). ). If the yield yield curvewasoriginallyupwardsloped,itwouldnowbemorehorizontal(lesssteep).Ifit wasdownwardsloped,itwouldnowbemoresteep. 8. LiquidityPremiumTheory. Explaintheliquiditypremiumtheory. ANSWER:Ifinv ANSWER:Ifinvesto estorsbel rsbelieve ievethatsecu thatsecuriti ritieswith eswithlarger largermaturi maturities tiesareless arelessliquid liquid,they ,they will requirea requirea premiumwhen premiumwhen investin investing g in such securiti securitiesto esto compens compensate. ate. This theory theory canbecombinedwiththeothertheoriestoexplaintheshapeofayieldcurve. 9. Impact Impact of Liquid Liquidity ity Premiu Premium m on Forwa Forward rd Rate. Rate. Expla Explain in how consi consider derati ation on of a liquiditypremiumaffectstheestimateofaforwardinterestrate. ANSWER: ANSWER:When Whencon consid siderin eringa galiq liquidi uidityp typremi remium,t um,thee heestim stimate ateofa ofafor forward wardint interes erestra trate te willbereduced. 10. SegmentedMarketsTheory. Ifadownward-slopingyieldcurveismainlyattributedto segmentedmarketstheory,whatdoesthatsuggestaboutthedemandforandsupplyof fundsintheshort-termandlong-termmaturitymarkets? ANSW ANSWER ER: : A down downwa ward rd-s -slo lope ped d yiel yield d curv curve e sugg sugges ests ts that that the the dema demand nd for for shor shortt-te term rm fundsishighrelativeto fundsishighrelativetothesupplyo thesupplyofshort-te fshort-termfunds,caus rmfunds,causingahighyie ingahighyield.Inaddi ld.Inaddition, tion, thedemandforlong-termfundsislowrelativetothesupplyoflong-termfunds,causing alowyield. 11.Se 11.Segme gmented nted Markets Markets Theory. Theory. If the segme segmente nted d market markets s theory theory causes causes an upwar upwarddsloping sloping yield yield curve, curve, what does this imply? imply? If markets markets are not complete completely ly segmente segmented, d,
shouldwedismissthesegmentedmarketstheoryasevenapartialexplanationforthe termstructureofinterestrates?Explain. ANSWER: An upward-sloped yield curve caused by segmented markets implies that the demand for short-term funds is low relative to the supply of short-term funds. In addition, the demand for long-term funds is high relative to the supply of long-term funds.