Money and Interest Rates 1 Money and Interest Rates Assignment 1.

Historical quotes of Procter & Gamble Company (The) Year May 2007 May 2008 May 2009 May 2010 May 2011 Price 63.48 66.05 51.94 61.09 66.86

Assignment 2. Nominal and Real Returns. Let us calculate the nominal rate of return from 2006 to present day. If we were to invest $10,000 in 2006 that would be 10000 / 63.48 = 157.53 shares. Now, to sell out shares at the current price of 66.86 would produce $10,532.45 in nominal total return. That results in (10,532.45 10,000) / 10,000 = 5.3% of nominal return. Now we need to adjust for inflation. The current inflation rate based on the consumer price index is 3.16%. Multiply by four years, that gives us approximately 12.64% of inflation since may 2007. 5.3% of nominal return minus 12.64% of inflation gives us -7.34% of real return. Even if we calculate the actual inflation rate (8.15%) we would still receive a negative value.[InflationData] Obviously, investing so much money into Procter & Gamble was a bad decision. However, given the current trend in stock prices, any of them would have been a bad decision. Assignment 3. Fed increases discount rate.

Money and Interest Rates 2 The increase in the discount rate will result in the stock prices going down. This is primarily due to not only the Fed's interest rate on short-term loans not being frequently used by the banks, but also because the Fed's rate often serves as a guideline for other banks to set their interest rates on their own loans to end consumers, known as the federal funds rate. As a result, this increases the rates of everything, from credit cards to home loans thus affecting businesses as well as consumers. Obviously, this hinders any possible progress of the businesses, with the prices per share being determines as the sum of expected future cash flows divided by the number of shares. If businesses are forced to pay more for their loans they will have less money left over from their profits thus decreasing their future cash flows, their stock price, and possibly even an entire index or two. This brings us to ponder why would the Federal Reserve want to do that? Usually, the Fed increases the discount rate in order to battle inflation by sacrificing an increase in the prices. However, by studying it's own press release on the matter we can quote The modifications are not expected to lead to tighter financial conditions for households and businesses. [Hamilton] So, the true reason as to why exactly did it do that on February 18, 2010, remain unknown. All that's left for us is to study the consequences. Bibliography/References InflationData.com. Capital Professional Services, LLC. Retrieved May 28, 2011, from http:// www.inflationdata.com/inflation/Inflation_Calculators/Inflation_Rate_Calculator.asp Hamilton J. D. Econbrowser: The Fed's discount rate hike Retrieved June 1, 2011, from http://www.econbrowser.com/archives/2010/02/the_feds_discou.html