BEC Q5

Question 1

What are interest rate derivatives

Answer 1

These protect buyers from risks associated with changed in interest rates

Question 2

What is quantitative easing

Answer 2

Thi sis when the the Fed buys securities to ass liquidity to the economy

This is done when short term interest rates are already close to zero.

Question 3

What are some of the aspects of Globalization

Answer 3

• Its been happening for many decades
• More savers have internationally diversified portfolios which reduces home bias
• it has led to more companies operating international
• It has led to increased international trade occurring within companies

Question 4

What happened in the 2000’s

Answer 4

There was an increase in lending flows from developing countries to developed countries

The Chinese government bought US treasuries

Question 5

What are TIPS Treasuries

Answer 5

These are inflation protected securities

-The principle of a TIPS increases with inflation and decreases deflation s measured by the CPI

So if you have a conventional bond at 3% for 10 years and a TIPS Treasury of 1% for 10 years the inflation rate expected in the next 10 years is 3-1 or 2%

Question 6

What happens with deflation and how do you combat it

Answer 6

This is when there is a general decrease in the price level of goods and services.

• people will defer spending and investment and this damages the economy
• If you increase the money supply - this is an inflationary act and will combat deflation

Question 7

What should the government do to combat unemployment

Answer 7

• increase expenditures
• lower taxes
• increase government spending
• running deficits is standard

Question 8

How do you calculate GDP

Answer 8

\+ Consumption by household
\+ Investment
\+ government spending
\+ net exports 
=GDP

Question 9

What type of firm can employ predatory pricing

Answer 9

oligopoly - they can afford to do it - monopolistically competitive can not

Question 10

What is transfer pricing

Answer 10

It is the process of setting prices that are charged for the transfer of goods or services between related parties - like department of a large entity

In international trade it refers to the price charged by one entity to a related entity as goods or services are transferred across international borders

Question 11

What are the classic signs of a recession

Answer 11

• inventories grow as consumer stop spending
• unemployment increases
• businesses slow production
• business stop investment in capital projects
• lower interest rates
• lower stock market

Question 12

What are the classic signs of stagflation

Answer 12

High inflation -

slow economic growth

high unemployment

Question 13

What are repatriation restrictions

Answer 13

these represent restrictions on bringing money into the US

You want to consider these as part of your cash flow analysis

Question 14

What are american depositary receipts

Answer 14

These are instruments that represent the securities of a foreign company trading in the US

Question 15

What is a default risk premium

Answer 15

This is usually added on to the interest rate on a note or loan

It is the extra amount a borrower will pay to compensate a lender for assuming the risk of default

Question 16

What happens when average credit card debt increases 4% from a year ago

Answer 16

It will probably have a contracting effect on the economy as a whole

This would have a positive impact for a company who is offering a bargain product line sales units

Question 17

What is the impact if the average duration of employment increased 4 weeks from a year ago

Answer 17

This is a common trailing indicator of business cycle changes

An increase signifies recovery or expansion in the economy as a whole

Customers with increase income spend more on normal goods

Question 18

What is the impact if average duration of employment decreased by 4 weeks from a year ago

Answer 18

It signifies a contraction of the economy

• Sale of normal goods generally contract during a period

Question 19

What does it mean if there is no change in employment weeks

Answer 19

This implies a stable economy

normal goods sales remain constant

Question 20

What is the impact of an increase in housing permits

Answer 20

This indicates that residential construction will increase

This heralds an expansive period (not recessionary or stable)