Economics 3215 Assignment 2
Due Date: April 5, 2013 (to me or my office RC3016D by 5:00pm)
1. Go to the Globe and Mail’s Report on Business website at: http://www.globeinvestor.com/
Near the top of the page there is a list of options “My Watchlist”, “Markets”, “Funds + ETFS”, etc. Click
“Markets” and on the menu that appears below it click “Bonds”.
(a) The first column of the Bond page reports the name of the Issuer (borrower) while the second column
reports the type of borrower (Federal government - FEDGOV, Provincial government - PROV, Municipal
government --MUNI and corporate borrower -- CORP). Find a provincial government bond, a municipal
bond, a corporate bond from a major bank and a corporate bond from a borrower other than a bank (pick
bonds whose maturity dates are close to one another). Now find a Federal government bond with
approximately the same maturity date. Rank the bonds by yield. Which type of borrower can borrow most
cheaply? Which pays the most? What might account for the pattern observed?
(b) A real return bond makes payments that are adjusted for inflation and as a result its yield is a real
(inflation-adjusted) yield. In the bond table find a Federal government (FEDGOV) real return bond (it will
have RRB in the series column) with a yield that has not hit the 0 limit. Now find a Government of Canada
bond (Issuer: Canada and Bond-type FEDGOV but not an RRB) with roughly the same maturity date as
your real return bond. Report the yields for the two bonds. What does a comparison between the two yields
suggest about market expectations of inflation? Provide a calculation and explain.
(c) Go to the Financial Post website’s Market Data page:
Find the section on Money Markets and click on “Canadian and US Yields”. Report the yields on Canadian
and US Treasury Bills of the same term to maturity (also report the date your quote was taken) . If the
concept of “(uncovered) interest parity” is correct what does the data suggest will happen to the Canada-US
exchange rate in the near future? Explain. Make a prediction of how much the exchange rate will change
over the next 2 years -- show your calculations . (See discussion of interest parity in the text: pp. 219-221).
2. The Bank of Canada website (http://www.bankofcanada.ca/) provides some historical data. Go to the top
of the page and highlight “Rates and Statistics”. The resulting pull down menu gives you a few options
click on “Interest Rates”. Click on “Canadian Bonds” and scroll down the page. Report the most recent
yield for the 2-year, 3-year, 5-year, 7-year and 10-year Government of Canada bonds. Go back to the
interest rate page and click on “Treasury Bills” then scroll down the page and find the yield for a 1-year
Treasury Bill (use the yield reported for the date closest to that used for your bond yields).
(d) (i) Use the data collected in (c) to plot the yield curve for Government securities of 10-years to maturity
(ii) Assume that the expectations theory of the yield curve is correct. Based on the data (and the theory)
what does the “market” expect will be the yield on a 1-year Treasury Bill which will be issued one year in
the future? How about for a one-year Treasury Bill to be issued in two-year’s time? What is the expected
yield on a 2 year-bond that will be issued three-years from now? How about a five-year bond issued five
years in the future? Show your calculations.
3. 6. Go to the Office of the Superintendent of Financial Institutions website
(http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=3 ). In the “For Regulated Entities” box click on
“Banks”. At the bottom of the “Banks Section” page click on “Financial Data – Banks”. The first window
will say “Total All Banks” change this to the name of one of the big Canadian banks (Royal Bank, Bank of
Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce or Toronto Dominion ) – you can
change this by clicking on the arrow to the right of the window and then clicking the name of the desired
bank. The statement you need is quarterly so click the "Quarterly" button. In the box below "Quarterly" the
option “Summary Income Statement” should now be highlighted”. You can now click the “Submit”
button. This will retrieve the Statement for the bank you have chosen. Provide a printout of the statement
and then go through the statement and answer the following:
(a) How large was total interest income for your bank? What were the largest sources of interest income?
(b) How large were total interest expenses? What forms did these expenses take?
(c) Aside from interest income what were the three most important sources of income for your bank?
(d) What were the major non-interest expenses of your bank?
4. Chapter 14 of the text is concerned with financial regulation. Based on the chapter answer the following.
(a) What is a bank run? Explain why bank runs occur.
(b) (i) Describe the policies that the government adopts to deal with the problem of bank runs or similar
(ii) What problems do these safety net policies give rise to? Discuss how supervision and regulation
tries to deal with these problems.
5. Chapter 16 discusses the objectives and organization of three central banks (Bank of Canada, the US
Federal Reserve and the European Central Bank). Based on the chapter answer the following.
(a) Compare the objectives of the three central banks. What is each bank trying to achieve? How do their
(b) What is meant by central bank independence? How independent are the three central banks?
6. The Bank of Canada and Inflation Targeting.
(a) Go to the Bank of Canada website at: http://www.bankofcanada.ca/ . Highlight “Monetary Policy”
(upper left of the page). This will give you a pull down menu with links to various information pages.
Click on ‘Inflation”. Go through the page and answer the following.
(i) What is the Bank of Canada’s inflation target rate and the target range for inflation
(ii) Further down the same page you will see a link to data on consumer prices (CPI).
Click on the link and look at the measure of CPI inflation (% change in Total CPI). What were
the highest and lowest inflation rates reported since January 2000 and when did they occur?
(iii) Still using information in the table from (ii), define “Core CPI”. How does the time pattern and
range for Total CPI inflation compare to that of Core CPI?
(iv) The current inflation target range has been in place since December 1995. Based
on the data accessed in (ii) how successful has the Bank of Canada been in
attaining its target range since 2000? Explain.
(v) Go back to the inflation page. On the left of the page you will find a link to: “Why
Monetary Policy Matters: a Canadian Perspective”. This will take you to a paper by C. Ragan at
McGill (a PDF version of the same paper is available on the course website). Go to the section of the paper
“Canada’s inflation performance and why it matters”. You will find a graph showing Canadian inflation
rates 1966-2004. Describe how the inflation rate evolved over that period. How do inflation rates since
2004 (see the data from (iv)) compare to those 1966-2004?
(b) (i) Look at Ragan’s paper again. In sections “1.2 Why Focus on Inflation?” and “2.
Canada’s inflation performance and why it matters” he discusses why the central
bank focuses on inflation rates. Outline his arguments for this focus.
(ii) The arguments that inflation is costly and needs to be controlled could be used to argue for an
inflation target of 0% (this is sometimes called "price level targeting"). Go back to the Bank's
inflation page and click on the link to the Backgrounder:
“Why has Canada's inflation target been set at 2 per cent?”. What arguments does the Bank of
Canada make against a 0% target?
7. Go to Chapter 23 of the text “Monetary Policy and Financial Crisis”. Based on the chapter answer the
(a) List and describe the negative undercurrents that set the stage for the recent financial crisis.
(b) Describe what happened in the crisis.
(c) Describe how policy makers responded to the crisis.
8. In May 2009, John Murray (Deputy Governor of the Bank of Canada) gave a speech “When the
Unconventional Becomes Conventional: Monetary Policy in Extraordinary Times” (see the transcript at:
http://www.bankofcanada.ca/en/speeches/2009/sp190509.html -- a PDF version is available on the course
website). Use the speech to answer the following questions.
(a) Describe how central banks, like the Bank of Canada, conduct conventional monetary policy.
(b) Why were conventional methods considered to be of limited use during the crisis and current recession?
(c) Describe the three types of unconventional methods that central banks have resorted to.