FIN 203 (HELP UC)

Tutorial 9 Answers - chapter 5 rose and marquis
referred to textbooks
Question 1:
1. facilitates the flow of current savings into investment that promote economic growth
2. reallocates the funds to projects with high returns
3. Equate the money supply with demand for investments (Liquidity Preference Interest Rate theory)
4. An important policy tool for monetary policy

Question 2
Risk free rate = rate that is earned without default risk.
this risk free rate is a part of the other interest rates, where the risk free rate is anchored to interest rate and the difference is the risk premium.
for example
CAPM => ke = Rf + (Beta)(Rm - Rf)
where
Rf = risk free rate or return
Rm - Rf = risk premium
ke = cost of equity

Q3 refer to text...
assumptions of the classic theory
- ignores the FI ablilty to create credit
- ignores the income impact on investment demand and savings supplied

Q4 refer to text for full explanation
assumption of preference liquidity theory
- income is stable
-constant inflation ( which is impossible, in real world)
- aggregate supply and demand of money is considered

Q5 refer to text..
It is a more popular theory among finance practicioners and practical to be used...eg high liquidity, low interest rate

Q6
Future interest rate is a predictor to the future prevailing spot interest rate..assumes a strong form market efficiency, speculation will not result in abnormal profit, rational investors maximise returns by incorporating all info

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