Exam 5: The Cost of Money

If the Federal Reserve sells $50 billion of short-term U.S.Treasury securities to the public,other things held constant,what will this tend to do to short-term security prices and interest rates?

The nominal rate of interest is defined as the sum of the nominal risk-free rate of return and the expected inflation rate.

Carter Corporation has some money to invest,and its treasurer is choosing between City of Chicago municipal bonds and U.S.Treasury bonds.Both have the same maturity,and they are equally risky and liquid.If Treasury bonds yield 6 percent,and Carter's marginal income tax rate is 40 percent,what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

If you have information that a recession is ending,and the economy is about to enter a boom,and your firm needs to borrow money,it should probably issue long-term rather than short-term debt.

During or near peaks of business activity,yield curves that are flat or downward sloping (possibly with humps)often are prevalent.