Finance Tut 2 - Tut 2 PDF

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Finance Tut 2 Question – Why are direct financial markets also known as wholesale markets? Why don’t small businesses raise funds through direct financing 1. Direct financial markets are where large firms transact in large sizes. So, it is also known as a wholesale market. a. Insufficient capacity b. Lack of reputation c. Lack of expertise Question – what effect does each of the following - An increase in corporate tax - An increase in income tax rates for individuals - A decrease in the demand for goods and services - A decrease in government deficit Have on the real interest rate, all other things constant (ceteris paribus)? Explain briefly 2. - Corporate tax is tax charged to companies. Lower interest rate as lower interest in spending - Income tax increase would increase the interest rate as the demand for money decreases - Decrease in demand for goods and services would decrease the interest rate as there is a smaller demand for money in the market - A decrease in government deficit would decrease the interest rate as the demand for money would decrease Question – Suppose you borrow @2,000 from your friend, agreeing to pay her back the amount borrowed plus 6% nominal interest 1 year from now. The inflation over this 1-year period is expected to be 3.5% a) What is the total amount that you will have to pay back 1 year later? b) What is the real interest rate using both versions of Fisher equation? c) If the nominal interest on the loan is fixed and the expected inflation rate increases by 1%, calculate the real rate of interest using the simplified Fisher equation. What does it mean from your perspective 3. a) 2000 (1 + 6%) = 2120 b) Simplified version o r = 6% - 3.5% = 2.5% - full version o r = (1+i)/(1+trianglePe) – 1 o = (1+0.06)/(1+0.035) – 1 = 2.42% c) TrianglePe = 3.5% +1% =4.5% R = 6% - 4.5% = 1.5%...