Tutorial 2 (Chap 2 & 4)

Chapter 2: An Overview of the Financial System

Question 5
Suppose that Toyota sells yen-denominated bonds in Tokyo. Is this debt instrument
considered a Eurobond? How would your answer change if the bond were sold in New York?

Answer
If the Yen denominated bond is sold in Tokyo, then it is not considered a Eurobond. If the
bond is sold in New York, then it is considered as Eurobond.

Question 16
“In a world without information costs and transaction costs, financial intermediaries would
not exist.” Is this statement true, false, or uncertain? Explain your answer.

Answer
True. If there are no informational or transaction costs, people could make loans to each
other at no cost and would thus have no need for financial intermediaries.

Question 17
Suppose a few investors are looking for an invest- ment opportunity that will yield high
returns. They are willing to invest in private securities instead of government bonds.
However, their analyst found that currently most companies listed on the market and are
actively trading in securities are in trouble, which would make them risky investments. What
can you conclude from this situation? How would you advise the investors?

Answer
Chapter 4: The Meaning of Interest Rate

Question 1
Would $200, which is to be received in exactly one year, be worth more to you today when
the interest rate is 12% or when it is 17%?

Answer

Question 4
Do bondholders fare better when the yield to maturity increases or when it decreases?
Why?

Answer
When the yield to maturity increases, this represents a decrease in the price of bond. If the
bondholder were to sell the bond at a lower price, the capital gains would be smaller
(capital losses larger) and therefore the bondholder would be worse off.

Question 12
Interest rates were lower in the mid-1980s than in the late 1970s, yet many economists
have commented that real interest rates were actually much higher in the mid- 1980s than
in the late 1970s. Does this make sense? Do you think that these economists are right?