Financial Market and Instruments

I need assistance with the uploaded document. It consists of 3 different parts explaining what to do and a total of 30 page report is needed. The 30 page report will include answers to the 19 questions asked in the document as well as a minimum of APA Standard 15 scholarly references.

EconomicAnalysis Project

Note that the project should be approximately 30 pages and a minimum of 15 scholarly references are required.

Please ensure that the project conforms to the APA standard. Also note, your project will be subject to a Turn-It-In / UNICHECK examination and results should not exceed 25% unoriginality.

Good luck!

Interest Rate Forecasts and Investment Decisions

This problem requires an understanding of how economic conditions affect interest rates and bond yields. Your task is to use information about existing economic conditions to forecast U.S. and Canadian interest rates. The following information is available to you.

1. Over the past six months, U.S. interest rates have declined and Canadian interest rates have increased.

2. The U.S. economy has weakened over the past year while the Canadian economy has improved.

3. The U.S. saving rate (proportion of income saved) is expected to decrease slightly over the next year; the Canadian saving rate will remain stable.

4. The U.S. and Canadian central banks are not expected to implement any policy changes that would have a significant impact on interest rates.

5. You expect the U.S. economy to strengthen considerably over the next year but still be weaker than it was two years ago. You expect the Canadian economy to remain stable.

6. You expect the U.S. annual budget deficit to increase slightly from last year but be significantly less than the average annual budget deficit over the past five years. You expect the Canadian budget deficit to be about the same as last year.

7. You expect the U.S. inflation rate to rise slightly but still remain below the relatively high levels of two years ago; you expect the Canadian inflation rate to decline.

8. Based on some events last week, most economists and investors around the world (including yourself) expect the U.S. dollar to weaken against the Canadian dollar and against other foreign currencies over the next year. This expectation was already accounted for in your forecasts of inflation and economic growth.

9. The yield curve in the United States currently exhibits a consistent downward slope. The yield curve in Canada currently exhibits an upward slope. You believe that the liquidity premium on securities is quite small.

Questions

1. Using the information available to you, forecast the direction of U.S. interest rates.

2. Using the information available to you, forecast the direction of Canadian interest rates.

3. Assume that the perceived risk of corporations in the United States is expected to increase. Explain how the yield of newly issued U.S. corporate bonds will change to a different degree than will the yield of newly issued U.S. Treasury bonds.

Fed Watching

This problem requires an understanding of the Fed (Chapter 4) and monetary policy (Chapter 5). It also requires an understanding of how economic conditions affect interest rates and securities’ prices (Chapters 2 and 3). Like many other investors, you are a “Fed watcher” who constantly monitors any actions taken by the Fed to revise monetary policy. You believe that three key factors affect interest rates. Assume that the most important factor is the Fed’s monetary policy. The second most important factor is the state of the economy, which influences the demand for loanable funds. The third factor is the level of inflation, which also influ- ences the demand for loanable funds. Because monetary policy can affect interest rates, it affects economic growth as well. By controlling monetary policy, the Fed influences the prices of all types of securities. The following information is available to you.

■ Economic growth has been consistently strong over the past few years but is beginning to slow down.

■ Unemployment is as low as it has been in the past decade, but it has risen slightly over the past two quarters. ■ Inflation has been about 5 percent annually for the past few years.

■ The dollar has been strong.

■ Oil prices have been very low.

Yesterday, an event occurred that you believe will cause much higher oil prices in the United States and a weaker U.S. economy in the near future. You plan to determine whether the Fed will respond to the economic problems that are likely to develop. You have reviewed previous economic slowdowns caused by a decline in the aggregate demand for goods and services and found that each slowdown precipitated a stimulative policy by the Fed. Inflation was 3 percent or less in each of the previous economic slowdowns. Interest rates generally declined in response to these policies, and the U.S. economy improved. Assume that the Fed’s philosophy regarding monetary policy is to maintain economic growth and low inflation. There does not appear to be any major fiscal policy forthcoming that will have a major effect on the economy. Thus the future economy is up to the Fed. The Fed’s present policy is to maintain a 2 percent annual growth rate in the money supply. You believe that the economy is headed toward a recession unless the Fed uses a very stimulative monetary policy, such as a 10 percent annual growth rate in the money supply. The general consensus of economists is that the Fed will revise its monetary policy to stimulate the economy for three reasons:

(1) it recognizes the potential costs of higher unemployment if a recession occurs,

(2) it has consistently used a stimulative policy in the past to prevent recessions, and

(3) the administration has been pressuring the Fed to use a stimulative monetary policy. Although you will consider the economists’ opinions, you plan to make your own assessment of the Fed’s future policy. Two quarters ago, GDP declined by 1 percentage point. Last quarter, GDP declined again by 1 percentage point. Thus there is clear evidence that the economy has recently slowed down.

Questions

4-1. Do you think that the Fed will use a stimulative monetary policy at this point? Explain.

5-2. You maintain a large portfolio of U.S. bonds. You believe that if the Fed does not revise its monetary policy, the U.S. economy will continue to decline. If the Fed stimulates the economy at this point, you believe that you would be better off with stocks than with bonds. Based on this information, do you think you should switch to stocks? Explain.

Asset Allocation

This problem requires an understanding of how economic conditions influence interest rates and security prices (Chapters 6, 7, 8, and 9). As a personal financial planner, one of your tasks is to prescribe the allocation of available funds across money market securities, bonds, and mortgages. Your philosophy is to take positions in securities that will benefit most from your forecasted changes in economic conditions. As a result of a recent event in Singapore, you expect that in the next month investors in Singapore will reduce their investment in U.S. Treasury securities and shift most of their funds into Singapore securities. You expect that this shift in funds will persist for at least a few years. You believe this single event will have a major effect on economic factors in the United States, such as interest rates, exchange rates, and economic growth in the next month. Because the prices of securities in the United States are affected by these economic factors, you must determine how to revise your prescribed allocation of funds across securities.

Questions:

6-1. How will U.S. interest rates be directly affected by the event (holding other factors equal)?

7-2. How will economic growth in the United States be affected by the event? How might this influence the values of securities?

8-3. Assume that day-to-day exchange rate movements are dictated primarily by the flow of funds between countries, especially international bond and money market transactions. How will exchange rates be affected by possible changes in the international flow of funds that are caused by the event?

9-4. Using your answer to (1) only, explain how prices of U.S. money market securities, bonds, and mortgages will be affected.

10-5. Now use your answer to (2) along with your answer to (1) to assess the impact on security prices. Would prices of risky securities be affected more or less than those of risk-free securities with a similar maturity? Why?

11-6. Assume that, for diversification purposes, you prescribe that at least 20 percent of an investor’s funds should be allocated to money market securities, to bonds, and to mortgages. This allows you to allocate freely the remaining 40 percent across those same securities. Based on all the information you have about the event, prescribe the proper allocation of funds across the three types of U.S. securities.(Assume that the entire investment will be concentrated in U.S. securities.) Defend your prescription.

12-7. Would you recommend high-risk or low-risk money market securities? Would you recommend high-risk or low-risk bonds? Why?

13-8. Assume that you would consider recommending that as much as 20 percent of the funds be invested in foreign debt securities. Revise your prescription to include foreign securities if you desire (identify the type of security and the country).

14-9. Suppose that, instead of reducing the supply of loanable funds in the United States, the event increased demand for them. Would the assessment of future interest rates be different? What about the general assessment of economic conditions? What about the general assessment of bond price?

Stock Market Analysis

This problem requires an understanding of the different methods for valuing stocks. As a stock portfolio manager, you spend most of your day searching for stocks that appear to be undervalued. In the last few days, you have received information about two stocks that you are assessing, Olympic stock and Kenner stock. Many stock analysts believe that these stocks are undervalued because their price-earnings ratios are lower than the industry average. Olympic, Inc., has a PE ratio of 6 versus an industry PE ratio of 8. Its stock price declined recently in response to an announcement that its quarterly earnings would be lower than expected because of expenses from recent restructuring. The restructuring is expected to improve Olympic’s future performance, but its earnings will take a large onetime hit this quarter. Kenner Company has a PE ratio of 9 versus a PE ratio of 11 in its industry. Its earnings have been decent in recent years, but it has not kept up with new technology and may lose market share to competitors in the future.

Questions

15-1. Should you still consider purchasing Olympic stock in light of the analysts’ arguments about why it may be undervalued?

16-2. Should you still consider purchasing Kenner stock in light of the analysts’ arguments about why it may be undervalued?

17-3. Some stock analysts have just predicted that the prices of most stocks will fall because interest rates are expected to rise, which would cause investors to use higher required rates of return when valuing stocks. The analysts used this logic to suggest that the present value of future cash flows would decline if interest rates rise. The expected increase in interest rates is due to expectations of a stronger economy, which will result in an increased demand for loanable funds by corporations and individuals. Do you believe that stock prices will decline if the economy strengthens and interest rates rise?