Home » (Monetary Policy) Explain the “Taylor Rule.’’

(Monetary Policy) Explain the “Taylor Rule.’’

University of Miami Financial Institutions

Professor Indraneel Chakraborty Fall 2020

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Final Exam

 

Please read the exam instructions carefully. After you read the instructions please print your name and student ID and sign the exam at the bottom and on the answer booklet.

1. Please do not discuss the examination with anyone else.

2. This exam book has 7 short answer questions (15 points each for 6 questions and 25 points for one question) worth a total of 115 points.

3. The exam is administered under the University’s rules of academic conduct; the Code of Academic Integrity applies. Discussing the questions with anyone who has not taken the test will violate the Code of Academic Integrity, and such cases will be dealt with extremely stringently.

 

First 3 Letters of Last Name: QUI

Name (Print): Erick Quinones Perez

E-mail ID: [email protected]

 

 

Best of luck!

 

 

 

 

1. (Monetary Economics and Finance)

a) What is the velocity of money?

b) What is the reason behind the decline in the velocity of money in recent years? (15 points)

 

 

 

2. (MBS/ABS) a. You have a client who is interested in purchasing fixed income securities with high interest rate risk. Unfortunately, all you have available on your balance sheet to sell is an MBS which does not have sufficient duration risk according to him. Can you tranche the MBS somehow to meet his demand? Please explain in some detail.

b. You want to bet that the default rates on mortgages are going to increase. How can you place such a bet in the mortgage markets? Explain your strategy in some detail. (15 points)

 

 

3. (MBS/ABS) a. Does high volatility in long term interest rates increase prepayment risk? Explain, why or why not.

b. If the long term interest rates come down, would the value of an MBS security increase or decrease? Please explain. (15 point

4. (MBS/ABS) Consider a bank that has a pool of current fixed rate mortgages that are worth $100 million, yield a WAC of 3.8%, and have a WAM of 360 months with 125 PSA. What are the cash flows for the first two months? Estimate the beginning balance for month 3. (25 points)

 

 

5. Separated by over 3,000 nautical miles and five time zones, money and foreign exchange markets in both London and New York are very efficient. The following information has been collected from the respective areas:

 

Assumptions   London   New York
Spot exchange rate ($ per £)   1.2914   1.2914
One-year Treasury bill rate (respective countries)   0.100%   1.090%
Expected inflation rate   Unknown   2.400%

 

 

a. What do the financial markets suggest for inflation in U.K. next year?

b. Estimate today’s one-year forward exchange rate between the dollar and the pound. (15 points)

 

7. (Monetary Policy) Explain the “Taylor Rule.’’ (15 points)

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