Econimics questions again. HELP me people :p

[Lady Blue03]

It is imperative that I understand these two questions, because they are questions on the final that I am doing right at this moment-

First:
5. Suppose you have $20,000 to invest in a bond; you then hear a rumor that that the fed is about to lower the discount rate dramatically. Would you rather invest now or wait until it goes down? Explain fully.

Now I know you're supposed to wait to deposit until they drop, but I can't remember why [img]tongue.gif[/img]

7. Under what circumstances can a budget deficit, not immediately financed by printing new money, still be inflationary? Explain fully.

And thats the other-which im drawing a blank on. I need these answers, or at least understand where the questions coming from. There are only 12 ?s on the exam after all [img]tongue.gif[/img]

I've noticed about 0% of the people here are economically savvy, so I hope I'm not wasting my time [img]tongue.gif[/img]

HUGE thanks to anyone who can help

[Calaethis Dragonsbane]

Try google? Try your notes? You DID take notes right?

[Vaskez]

Sorry my areas are networking, engineering maths, programming, computer architecture and digital circuit design [img]tongue.gif[/img]

[Bungleau]

Gods... economics was ages ago, and I tried to put it out of my brain every time... it hasn't helped [img]smile.gif[/img]

Okay, let's see what I can dig out of the grey-cell repository...

Originally posted by Lady Blue03: It is imperative that I understand these two questions, because they are questions on the final that I am doing right at this moment- First: 5. Suppose you have $20,000 to invest in a bond; you then hear a rumor that that the fed is about to lower the discount rate dramatically. Would you rather invest now or wait until it goes down? Explain fully. Now I know you're supposed to wait to deposit until they drop, but I can't remember why [img]tongue.gif[/img] Bond rates and something else march in opposite directions... I think the something else is interest rates. So if interest rates (the discount rate) go down, then bondholders will have to pay more to get people to loan them money (which is what a bond is). So by waiting for the discount rate to go down, the rate of return on your bond should go up, and you make more money. It may be related to net present value and other similar things... if it's a $1000 bond paying 12%, then when the discount rate drops, it may be that you can buy it more cheaply. Unfortunately, I don't remember more of the details, but I do specifically remember the "marching in opposite lockstep" thing. That's probably at the heart of this question. 7. Under what circumstances can a budget deficit, not immediately financed by printing new money, still be inflationary? Explain fully. This isn't M1/M2/M3 money again, is it? I just read somewhere that that was either discredited or thrown out as a 1980s way of thinking... If not, let's think about what happens. The government runs at a deficit -- say, one billion dollars. It's going to pay that money though, so it has to come from somewhere. What the government does is to borrow money from the treasury department in the form of US T-bonds and T-bills. That money's not free, though; there's interest on it. The more interest being paid, the less money available for other things, and the greater the demand for money. That leads to people who loan money being able to charge more interest, which kicks off the inflation thing. And thats the other-which im drawing a blank on. I need these answers, or at least understand where the questions coming from. There are only 12 ?s on the exam after all [img]tongue.gif[/img] I've noticed about 0% of the people here are economically savvy, so I hope I'm not wasting my time [img]tongue.gif[/img] HUGE thanks to anyone who can help

Am I economically savvy? Idunno... perhaps I've just fallen into that 0%. Hopefully I won't cause you to fail [img]smile.gif[/img] Good luck.

[Night Stalker]

Well, Jen, I can answer the first question.

Bond prices and intrest rates are inversely proportional. (Remember "buying" a bond is the same as you lending an entity money for a specified term. The yield is your intrest.)

When either of them change, the other must go in the opposite direction in order to maintain a zero sum at the moment of the change.


For example let's say you purchase a $1000 bond at 10%. After one year, your investment is worth $1100. Now considder a month later someone else purchases the same bond, only the share price is now $900. In order for both investments to have relative value, the intrest rate must go up (it's the same bond remember).

Conversely if the intrest rate goes down, the share price will rise. If you wait and buy, you will be buying a depreciated investment. For short term, you would be better served buying now and take advantage of the price difference. If looking for the longer term, if you expect the intrest rate to go back up, you would be better served buying the higher premium after the intrest rate dropped. For when the intrest rate climes again, you will be earning intrest on a higher premium.

Ex the bond is now $1000 at 10%. After the rate change it is say ... $1100 but only 9% return. When the rate returns to 10% you will be earning 10% on $1100 instead of only $1000.

It all depends on your investment time frame and wether you are bearish or bullish about the intrest rate.

You would be served very well checking out The Mottly Fool. They are a dedcated investors education site. They would be better able to describe bonds and currency markets much better than I.

[ 05-19-2004, 10:52 PM: Message edited by: Night Stalker ]

[Vaskez]

Damn, I thought I was studying a complicated subject, but economics looks like a bit of a nightmare give me networking protocols, C++ programs and digitial circuits any time [img]tongue.gif[/img]

[Lady Blue03]

Aaah thanks a ton you guys, that is precisely what I was looking for *hugs*

And checking google didn't work [img]tongue.gif[/img]

[The Hierophant]

Economics = just more pseudo-science.

Drop out of your classes and study something that doesn't involve trying to artificially apply scientific mathematical formulae and inconsequential, abstract numbers to what is essentially just pure, untrackable chaos (ie: the flow of worldly resources)

Silly humans... [img]smile.gif[/img]

[Lady Blue03]

Originally posted by The Hierophant: Economics = just more pseudo-science. Drop out of your classes and study something that doesn't involve trying to artificially apply scientific mathematical formulae and inconsequential, abstract numbers to what is essentially just pure, untrackable chaos (ie: the flow of worldly resources) Silly humans... [img]smile.gif[/img]

Oh yes, seeing as if I don't take the class I have to take some other equally abstract and difficult class because it's required GE stuff that I need to take to graduate [img]tongue.gif[/img]

edit: and why stop now, that was the last test I'll ever have to take for econ ever...that is if I pass the class [img]tongue.gif[/img]

[ 05-20-2004, 03:09 AM: Message edited by: Lady Blue03 ]

[The Hierophant]

[img]smile.gif[/img]
Fair enough. Good luck with your test (or has it already been? In which, I hope you had good luck ).