#15 Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for homes by
consumers?-The Fed influences interest rates, which affect the rate paid by homeowners on mortgages. When the Fed reduces interest rates, it reduces the monthly payment to be made on new mortgages. Thus, it may increase the demand for homes by consumers. If it increases interest rates, it may reduce the demand for homes.If expected interest rates to go down, less people would consider buying a new home. Less demand, decrease in the demand- buyers market. Youd want an adjustable rate mortgage.
If expected interest rates to go up, more people would want to lock in the cost of borrowing at a lower rate. People would be looking for homes, which leads to a higher demand- sellers market. Youd want a fixed rate mortgage.
Money market characteristics (straight out of powerpoint)- securities with maturity of <1, Issued in the primary market by the Treasury, corporations, financial intermediaries in order to obtain short-term financing. Commonly purchased by households, corporations, govts. Can be sold in the secondary market. Liquid
Types: T-Bills, Commercial Paper, Negotiable CDs, Repos
T-Bills- characteristics, calculate yield, discount, secondary market- issued by US govt. Sold in increments of $1000. Maturity <1. Sold at discount from par value- no coupon rate. Default free. Highly liquid.
Formula: Newly issued= (Par- Purchase Price)/ Par * 360/n
Secondary Market= (Selling Price- Purchase Price)/Purchase Price* 365/n
Price= Par Value/(1+RRR)
Auctions- competitive and non-competitive- competitive- requires bidder to specify both quantity and yield bidder desires to pay for securities. Non-competitive- just specify the quantity to be purchased. Guarantees the bidder to get this amount.
Commercial Paper- characteristics, calculate yield- short term debt of well-known creditworthy firms; unsecured; provide liquidity for the companies; purchased at a discount, yield is higher than TBills, element of credit risk
Negotiable CDs- characteristics, calculate yield- CD issued by large commercial bank or depository institution. Minimum $100k. Matures <1 year. Large secondary market- provides liquidity. Higher rates than the Tbills.
Formula: (selling Price-Purchase Price+Interest)/Purchase Price
Assume an investor purchased a six-month T-bill with a $10,000 par value for $9,000 and sold it ninety days later for $9,100. What is the yield? Secondary Market
($9,100 –$9,000)/ $9,000 *365/90= 4.51%
You paid $98,000 for a $100,000
T-bill maturing in 120 days. If you hold it until matu-
rity, what is the T-bill yield? What is the T-bill