Author Question: Suppose the nominal yield during the next two years was expected to remain at 10, but the yield on a ... (Read 53 times)

sam.t96 · **on:** Jun 30, 2018

Suppose the nominal yield during the next two years was expected to remain at 10, but the yield on a one-year security was 10 and on a two-year security was 12. Investors would:
a. Borrow for one year, invest for two years, and at the end of the first year, roll over the loan.
b. Probably do nothing, because markets are efficient, which means there is no way to arbitrage them.
c. Borrow for two years, invest for one year, and then roll over the investment at the end of the first year.
d. Borrow for two years and invest for two years, but at the end of the first year, re-borrow and re-invest at the market rate.
e. Borrow for one year and invest for one year, but at the end of the first year, re-borrow and re-invest the borrowed funds at the expected rate.

Question 2

Assume the government reduces government spending. What is the first round effect on the components of the balance of payments (assume low international capital mobility and fixed exchange rates; also assume that before the government action all the components were 0)?
a. Current international transactions balance and reserves account become positive; net nonreserve international borrowing/lending balance becomes negative.
b. Current international transactions balance becomes positive; net nonreserve international borrowing/lending balance and reserves account become negative.
c. Net nonreserve international borrowing/lending balance becomes positive; current international transactions balance and reserves account becomes negative.
d. Net nonreserve international borrowing/lending balance and reserves account become positive; current international transactions balance becomes negative.
e. Reserves account becomes positive; current international transactions balance and net nonreserve international borrowing/lending balance become negative.