Methods and integration: money, banking, and financial markets
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Assignment 1 MBF chapter 1 - 7
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Methods and integration: money, banking, and financial markets
Institution
Radboud Universiteit Nijmegen (RU)
Book
The Economics of Money, Banking and Financial Markets
Answers study book The Economics of Money, Banking and Financial Markets of Kent Matthews, Massimo Giuliodori - ISBN: 9780273731801, Edition: Druk 1, Year of publication: - (Assignment 1)
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1. If you want to invest in a company, you can choose between buying bonds or stock of that
company. What are the main differences between the two alternatives for an investor? Explain.
The main differences are that a bond is more secure than a stock. The bond assures you a certain yield
and the stock does not assure you a certain amount of dividend. A bond also assures you to get your
money back.
Answer sheet:
With stock you invest in the capital of the firm.
Your potential income is dividend which on the results of the firm.
The value of your investment is based on the expected future dividends → expected future
results
Potential average returns of investment likely to predict/ more volatile and more risky
With bonds the firm has a debt to you. For this reason you have less risk of losing your
investment, and you have more certainty concerning your returns.
This expected return is likely to be lower as compared to stock.
2. In the Netherlands, DUO is the organization that provides study loans to students. It is part of the
ministry of finance. Why would the interest rates be significantly higher if this was provided by
commercial banks instead of DUO?
Commercial banks have a different interest from DUO. DUO does not want to make any kind of profit
from students while commercial banks would not care. Commercial banks just want a high interest
rate, they cannot handle the big risk of students not paying the loan back. There is a big chance that
students will quit their study and won’t be able to pay the loan back.
Answer sheet:
Duo is guaranteed by the government → lower risk premium
Duo is financed using government bonds → lower interest rates
There is no ‘’adverse selection’’, Duo has economies of skill and risk pooling advantage
The government want their population to be well educated → more productive, higher
income, higher taxes
Therefore education is a positive externality
Low interest is indirect subsidy on education
3. There are three main functions of money. Do you think Bitcoins classify to be “money” according
to these criteria? Explain.
I do not think we can classify bitcoin to be money. You can calculate with it, but you cannot buy bread
with a bitcoin when walking into a grocery store. It is not internationally accepted as a measure of
exchange.
Answer sheet:
Medium of exchange: not accepted everywhere→ high transaction costs
Unit of account: could be, but value is quite volatile so not well suited
Store of value: value is very volatile
, 4. Explain why an efficient working financial system might lead to higher productivity and economic
growth in an economy.
An efficient working financial system is a secure system where every person trusts the financial
system. This means that people will trust banks with their money, they will trust they will be paid and
with the paid amount of money that they can buy goods. When there is trust in money and in the
financial market (no expected deflations etc) then there is room for consuming more. This will lead to
more products → more productivity (more needs to be produced).
Answer sheet:
Efficiënt transfer of funds from savers to borrowers. These borrowers have to be actors who
can have highest return on investment.
Optimal allocation of capital
If so, capital flows to most productive investment opportunities, this increases productivity,
this creates economic growth
* 5. The financial position of Dutch pension funds depend on the so-called “rekenrente”. This is the
interest rate that is used to discount all future obligations to the present. Explain why and how this
“rekenrente” influences the current financial position of pension funds.
This rekenrente influences the current financial position of pension funds because in this way they will
be prepared for the future situations.
Answer sheet:
Pensions have to calculate, based on the promised payouts per person and life expectancy,
how much money they have to payout in the future.
These future payouts are ‘’discounted’’ to the present to calculate the ‘’present value’’. They
do this using the ‘’rekenrente’’.
They compare this present value of future payouts to the amount of capital they have right
now.
This means that if:
the rekenrente is high, they need less capital right now
the rekenrente is low, they need more capital right now
Therefore the rekenrente influences the financial position of pension funds.
6. At this moment, the interest rate on most savings accounts are just above 0%. Explain why, if you
don’t withdraw or deposit any money, the real value of your savings account decreases over time.
The real value of your savings account decreases over time, because the value of money becomes less
in the future because of inflation. It might be that your money has increased with 0,001% but it is not
as much as it’s real value has decreased over time. You can now spend it on way less goods, than you
could before.
Answer sheet:
Interest on savings accounts in the Netherlands are between 0 and 0.5 percent
Inflation around 1.5% last year
This means that the real value of savings decreases over time
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