Sample Essay Paper on Economics

  1. Interest rates play a key role in the growth of the economy of a country. High interest rates affect the economy negatively because they discourage people from borrowing. Low interest rates encourage people to borrow and this drives the economy of the country. This implies that the effect expected by a change in interest rates must first be identified before deciding the interest rate. Interest rate increases when inflation increases. This is because it must be higher than inflation rate for the financial institution, lending the money to make any profits. Expected inflation rate either encourages people to buy assets or dispose what they have. This is because as inflation rate rise, the prices of goods rise. Consequently, the prices of assets rise making those who invested in them a good return. People dispose their assets when inflation rate begins to fall and wait until it is projected to rise again. People also borrow more when interest rates are projected to reduce. This is because loan interest rates reduce making loans cheaper.
  2. Expected relative return

Risk

Liquidity

  • Inside money is the amount of money available in the economy that is issued by private institutions mainly financial institutions. This money is offered in terms of loans and is therefore owed to the financial institutions. Outside money is money available in the economy that is not owed to anyone inside the country. This includes gold and assets held in foreign currencies.
  • E
  • E
  • C
  • Closeness to redemption. This affects the price of a bond as it closes on maturity date. Most of the times the prices edge towards the nominal price at which the bond was issued. Therefore, closeness to redemption price has the effect of moving the price close to issue price, which might be an increase, or a drop in price based on previous bond prices.

Interest rate environment. The interest rate environment changes regularly throughout the financial year. This affects the risk free environment because the value of government bonds is always higher than that of corporate bonds. This affects the prices implying that as the interest rise and fall so does the value of bonds.

 Chance of a bond defaulting. The higher the chances of a bond defaulting, the higher the value of that bond because of the risky nature of that investment. The value may change as the credit risk of the bond changes over the bond lifetime.

  • i. a

ii. a

iii. b

iv. b

v. d

vi. a

vii. T

VIII. T

IX. B

X. B

  • I. A

II, A

III. D

IV. D

V. D.

VI. A

VII. C

  1.      10%, 9.2%, 8.4%, 7.6% and 6.8%
  1. Risk premium is the return in excess of the risk free market rates that is expected on a bond. When the prevailing market conditions deteriorate, the risk free market is affected. This effect shrinks the risk premium forcing the value of the bond to increase to cover the lost margin.
  2. Premium means the amount one gets on top of the invested value. It is the amount above the investment. The slope of a yield curve signifies the difference in yields of a bond in different interest rates.
  3. Stock prices fluctuate based on prevailing market conditions. During good economic times, stock prices increase because more people are able to buy while they drop during recession.
  4. 13%= 1/x

X=1/13%=7.6

Efficient market hypothesis states that the stock market prices always indicate the prevailing market conditions making it impossible to beat the market. It argues that the stock market is very efficient and therefore impossible to beat.

Rational expectancy theory states that people base their economic choices based on their rational outlook, information available, and their experiences.

  1. .

6%*2/12%=1

17.6

18   excess = 10% *500,000,000=5,000,000

Available reserve=$75M

Excess reserve= $75M- $5M=$70M

The bank holds on to the reserve which boosts its credit rating. The bank is well equipped to deal with losses that may arise from loan defaulting.

Deposit multiplier=1/required reserve ratio

=1/10%

=100/10=10. Deposit multiplier is $10

19. MBS is a bond whose payments are based on the payments of a collection of individual mortgages.

Alt-A loans are loans issued to borrowers that appear to have a good credit history.

Resecuritization is the process of tying a loan or a bond to another security. This is where a financial institution uses another form of security on top of the already existing on a certain loan.