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coupon rate of 5.5 % (c) that pays annually. The relevant benchmark or market rate of
a) Can we expect the price of the bond today to be above or below its face value? (2 pts)
Yes, we can expect today’s price of the bond to be above or below the face value. Since the
market interest rate is different from the coupon rate, the bond will be sold at a price less than its
The answer in “a” to extent depend upon year to maturity but not exactly. The year to maturity
only plays a role in discounting the overall value of the bond. No matter increase or decrease in
time to maturity, the present price of the bond is always less than the overall future price of the
bond which includes the coupon value due to discounting. However, the year to maturity has no
c) In which year did the market rate of interest for a US bond with a 10-year maturity exceed
The market rate of interest for a US bond with a 10-year maturity exceed 5% for the last time in
2007.
2. The Prime Minister of the European country of Elysia, which is suffering from high debt,
low growth, troubled banks, and high unemployment, has just dismissed every senior staff in
the Ministry of Finance’s Debt Management Division and hired you as a bond consultant.
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The country needs to issue a bond very soon to roll over outstanding bond issues that are
coming due shortly. Write for the Prime Minister an approximately 8 to 10-sentence broad
overview of some of the main parameters and considerations surrounding the issuance of this
new bond, including telling her what maturity and coupon you would advise and what rating
the bond is likely to receive. The semiannual coupon on 10-year US Treasury bonds is 4.25%.
(Notes: no calculations are needed, as your recommended coupon, maturity, and rating will
Country of Elysia is a capitalist economy with public sector contribution major portion of
country’s GDP is suffering from high debt, low growth, troubled banks and high unemployment.
The country is heading toward financial crisis and overcoming it, the country requires the
financial source to recover and invest in a productive sector that creates employment and
generates positive revenue. Since the country is already in debt and is unable to pay it, the
country needs a new source of funding. Issuing of the bond at the reliable rate is the only
solution to source the funds. Since, the country is unattractive for investor currently and is highly
in debt, the only way to lure the investor is to issue a bond at a rate higher than 10 year US
Treasury bond. Since, the current coupon rate of US Treasury bond is 4.25%, the investors are
estimated to invest at a higher coupon rate of 6%, 1.75% more. Also, the year to maturity for
bond could be 10 years since the country requires long-term investment to revitalize financially
(O'Brien and Srivastava). Hence, given the seriousness of the condition, Elysia should issue 2.5
iv. Underwriting
a. Municipal Bonds: Municipal bonds are those securities which exist in the form of debt
security issuance by the municipality, the state of the country for the purpose of financing
expenses of a capital nature. These are excluded from the federal tax systems in most of the
states and also from a local system of taxed. It is also applicable to those places where the bonds
The most known uses of issued municipal bonds are funding of construction expenses like that of
bridges, buildings for education or highways. The beneficial implications of tax are the main
reasons for their popularity, especially among those individuals with brackets of high-income
tax.
b. Credit Enhancement: Credit enhancement is the method through which there is an attempt by
the Company towards debt and credit reliability improvement. Through this method, there is a
reassurance to the lender that there will be honoring of the credit obligations of the borrower.
This reassurance may exist in the form of new collateral, guarantees from third parties or
insurance procedures. This phenomenon decreases the risk of default on a debt and thus
increases the ratings of credit and lowers the relevant rates of interest.
d. Underwriting: Underwriting is the official process through which there is the rise of
Corporations responsible for security issuance. Alternatively, it may also be taken as the
The one who undertakes the underwriting process is the underwriter. It is the firm or person who
is the risk taker in writing his or her name for the total risk amount accepted at a pre-specified
premium.
4. A Budget Process in Public Financial Management often serves the following purposes
How can the usage of Medium-Term Budget Frameworks (MTBFs) enhance – or impede –
these three functions? Please reply with at least six sentences to each of the three functions.
Medium-term budgetary frameworks (MTBFs) are the arrangements of a financial nature that are
made to provide the government to outspread the fiscal policy horizon and taking it further than
the budgetary calendar of annual nature. MTBFs includes the preparation, implementation, and
checking or monitoring the budgetary plans for multiple years that includes the projection of
both income and expenditure along with the budgetary balance (Public Finance and
Management).
MTBFs will enhance the financial discipline and control. MTBFs is very useful in ensuring the
financial discipline as it makes more ostensible effects and influences of various policies that the
government is executing on the balances of the government in the year to come. The control is
facilitated by providing the base for monitoring. It provides the benchmark on various budgetary
parameters. These benchmarks can be used to assess various budgetary developments that occur
over time. To sum up, a well-made MTBF reflects the effect of budget commitments made in the
past as well as the effects of new policy that will be implemented in the future.
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MTBFs will also enhance the response and alignment of the public budget to the strategic
priorities. MTBFs are very important arrangements for the public debt management. Public debt
management is the process that establishes and implements the strategy to manage the debt of the
government to meet the financing needs of the government effectively. MTBFs will identify the
priorities that have strategic importance to the financial progress of the country. It links the
budget to various sectorial priorities and strategic plans and builds a phase of decision making
regarding various priorities of expenditure in the budget. Various ministries and government
agencies are involved in the budget-making and implementation process that will make it easier
MTBFs are very important in the budget implementation as well. MTBFs have made the
since the budgetary priorities are identified by MTBFs, it makes it easier for the implementation
of the budget. MTBFs also makes an arrangement for capacity building of budget implementing
bodies of the government so that the budgets can be implemented easily and effectively. It also
increases the transparency and accountability in the implementation of the budget, and it
5. Assume the following: In 2030, 80% of the outstanding bonds issued by the United States
showed a maturity of less than five years. The comparable share for all OECD member
countries was 50% at that time. The average maturity of all outstanding bonds in the US in
2030 will be 60 months, up from 50 months in 2020. Please provide short answers to the
questions below.
a) If interest rates rise, who is less vulnerable to higher interest payments: The US or the
OECD as a whole?
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In the case of interest rates rise, the US will be less vulnerable to the higher interest payments.
As stated in the situation, the average maturity of all outstanding bonds in the US in 2030 will be
60 months, which is more than the maturity in 2020. If the interest rate rises, then the US will
still get the opportunity to use the funds collected from the outstanding bonds at the cheaper rate
i.e. the cost of the bond will be less. So, if the interest rate rises, the US will be less vulnerable to
higher interest payments as it has a huge share of the outstanding debt as compared to other
OECD countries.
interests rates in the near to medium-term to rise or to fall? Please add one sentence to
expecting the interests rates to rise in the near to midterm. We can say this because if we issue
the short term bonds now, it will be matured soon and in the case if interest rate is higher, then
the bond issuer have to pay more if they want to issue new bond. So, if we issue the long term
bond now, then we can use the fund at the cheaper rate even if the interest rate rises in near
future.
c) When interest rates for bonds with very long maturities (e.g., 30 years) are very similar to
interest rates for bonds with shorter maturities (e.g., 10 years), is it an indication that i)
inflation will remain similar as it is today or ii) rise compared to its level today?
It is an indication that the inflation will remain similar or may fall as it is today because when
inflation rises, then the investor will expect the higher interest rate on their investment.
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6. Explain in your own words in at least eight sentences the advantages and drawbacks of
financing being provided by federal funds for programs that are the traditional responsibility
One of the major advantage of financing through federal fund in programs which are
responsibility of the region, province or state is that, huge monetary funds will be granted in just
one proposal ensuring the adequate availability of the budget. Also, those programs and projects
will gain the credibility and public exposure which will add the advantage of the good
promotion. This will help the program to receive other aid from the private sources and other
government.
However, there are drawbacks as well. The programs might suffer hardships as the government
funding are generally of the reimbursement system and hence for the programs that lack
financing will have to suffer a lot in preparing convincing proposals. Apart from that,
government funding comes with clauses and conditions that could be overweight for a project
like the need for high-level auditors, attorney, and professionals. Also impose of other extra
activities that don’t align with the project program could be another burden that the project might
face. Also, it can be said that the federal funds are a double edged sword as the grant is free but
not easy to deal with. Also, the chance of fraud, misuse and abuse of authority are there while
working on government fund. Hence, federal funds has both its advantages and disadvantages
7. The town of Rockville wants to build a new connector highway that will let residents get on
the Capitol Beltway quicker. It will build the highway on vacant public forestland. As the
Chief Financial Officer for Rockville, give the town supervisors an overview of how you will
conduct a cost-benefit analysis of the project. You don’t need to show numbers, and will need
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to show just one formula, and please use bullet point statements rather than long sentences.
The point is to explain (i) the steps in cost-benefit analysis, (ii) some of the costs and benefits
you will take into account and (iii) how you will measure them, and finally, (iv) how you will
make the decision whether or not the town should do the project.
i. For a cost-benefit analysis of a project, which is just at its initiation phase, there are three
major steps involved: Estimating the intervention net impacts, estimating the social costs and
benefits trade-off in monetary terms and calculating the intervention cost-benefit analysis
refers periods.
However, for a long-lived project, the following steps may be involved in a lot more detail,
Since this is a big state level project, there are a number of costs associated, and once the project
is complete, the benefits are higher. Some of the major costs to be considered in this project are:
- Potential loss
Cost of raw materials, labor, and other construction materials: Price analysis
Infrastructure development because of greater accessibility and the development quotient of the
The decision on whether or not to accept the project depends on the cost-benefit analysis, which
- Net Present Value: If the NPV is greater than 0 or positive, the project is considered suitable
- Internal Rate of Return: If the IRR is greater than the cost of capital on the project, the
8. Recalling Benedicta’s dilemma for being asked to pay $4 for a diagnosis as described in
the contribution by Jim Yong Kim et al. in “Public Debt and Private Suffering in Peru”,
please compare the context that led to this encounter with the text “Adjustment and Disease”
in the same article (pp. 137-139). Compare the argument about privatization with the remarks
made by John Williamson in his speech, The Washington Consensus as Policy Prescription
for Development. What would you do differently, if anything? Please explain on one page
your reasoning.
Benedicta was sick, and she was thought to have Tuberculosis. To diagnose the disease, she went
to the nearest public hospital but she was asked to pay $4 for the diagnosis. Even though the
government had declared the TB checkups to be free, she was asked to pay for the diagnosis.
The context that led to this encounter was the growing economic liberalization. In the name of
economic liberalization and globalization, many services are being privatized, one being the
health service. The government has left many services on the hand of private sectors to be
delivered to the public, theoretically known as “cost shifting” or “cost sharing” (Kim). Due to
this, the many socio-economic functions that were paid by the government in the past are now in
the hands of the private sectors and the government now do not pay for those functions. The
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government now do not take the responsibility for originating and executing the policies related
to the health. The massive cut down in the spending of the public health sector, execution of the
fees and many measures of cost recovery were introduced to make the public health sector a self-
sustaining sector in terms of finance. This made Benedicta face the situation.
The text “Adjustment and Disease” do support the same view. This article states that “when the
stabilization programs are implemented then it will reduce the consumption capacity of the
middle income and low-income groups, and they have the loudest demand for the
compensation.” The privatization of the services have created a serious problem, and it leads to
“irreversible physical deterioration”. The government should wisely distribute its scarce financial
resources so that it do not create a problem in the purchasing power of the poor. So, the
privatizations of the health services done in Peru has created the problem in the life of the poor
which was clearly visible. Benedicta was also the poor, and she was not able to afford the health
service. Since the health service was already privatized in the Peru, Benedicta was made to pay
contradictory to the views presented in the “Public Debt and Private Suffering in Peru”. While
John Williamson strongly argues that privatization is necessary for the balanced growth of the
country, the article “Public Debt and Private Suffering in Peru” refutes this argument. The
articles claims that privatization will bring the imbalance in the society and the poor peoples in
the society are going to get hard time due to privatization (Williamson). If I have to take some
measures, then I would take a mids way between complete privatization and complete
socialization. The basic and fundamental facilities that no citizens of the country needs should be
privatized while other facilities can be privatized. However, the government should keep its
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monitoring system to ensure that none of the citizens are deprived of their basic needs in the
name of privatization.
9. Referring to question 8, please describe proper roles – in your view – for the state, society,
enterprises, and citizen when deciding to privatize or not and by making a reference to the
following texts from the encyclical “Caritas in Veritate”, No 58, and Michael Porter as well as
to the article by Jim Yong Kim et al. (see question 8). Use other references, too, if you wish to
do so. The principle of subsidiarity must remain closely linked to the principle of solidarity
and vice versa, since the former without the latter gives way to social privatism, while the
latter without the former gives way to paternalist social assistance that is demeaning to those
in need. (CiV, No. 58). “societal needs, not just conventional economic needs, define markets”
(Michael Porter - and Mark R. Kramer, Creating Social Value, Harvard Business Review
Privatization reduces the role of the government. The projects initiated by the government later
The government should provide necessary regulatory, legal, and security environment for the
private sector to undertake its functions. It is the major function that should be performed by the
state. Apart from that, a guarantee of property rights, free property disposal, and seizure of the
results that rises from its use, the assistance and security of contractual responsibilities are to be
addressed.
Secondly, functions of suppliers of quality goods and services from the government like security,
basic health, and clean drinking water, water for other purposes, education, and sanitation are
other issues to be addressed. Thirdly, provision of goods and services, like lower development
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level, failures of markets, and size of the local market that are small, and extensive costs of
Role of enterprises:
Privatization and corporate sectors both nowadays are playing an important role in
comprehending socio-economic rights. The style of approaching to economic and social rights
by these have good penetration at the private and public law level. Political division has also
been privatized and replicated resembling this new economic and social transformation that is
providing extra space is created on the boundary of which the tensions that are already quite
obvious in the government system’s difficulties with human rights, may be replayed. China and
Role of Society:
Without the acceptance of the social characters regarding privatization, there can be no
privatization. Thus, the role of society in privatization cannot be underestimated. The enterprises
that go under privatization are there to serve the society and thus are maintained as inseparable
parts of it. When that organization goes into privatization, it is necessary that the society be able
to connect with the Company in the same previous way, in fact in more improved ways. The role
of the society in this process may be in understanding the need for the privatization and acting
Role of citizens:
Citizens are not just the consumer of the final goods produced by an enterprise; they are also the
producers of funds for the Company. The role of citizens in privatization exists in the form of
being the responsive shareholders in case the venture requires any budgeting and also in being
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the guides of their interests by keeping continuous track of the activities of the Company. The
participatory and regulatory roles of the citizens becomes crucial in scenarios of privatization.
10. Many countries use the instrument of a “Treasury Single Account” (TSA).
The Treasury Single Account (TSA) is a very fundamental system for cash management that is
used by the government. The government, to solve its errors in cash management and have a firm
control to manage its resources in the form of cash. TSA have many benefits that enhances the
2. TSA consolidates the cash resources of the government and optimizes the use of those
3. Government can correctly determine the amount of cash balance it has in its custody at
4. Government can make the optimal decisions while it opts to use its cash resources
5. TSA is a very important tool for the government to boost the effectiveness of the public
(2pts)
Yes, TSA is a very important part of country’s cash management or debt management because it
is a unified bank accounts of the government through which the government determines its cash
levels, cash utilization and make the decisions for the optimal utilization of its cash resources.
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Works Cited
Jarrow, Robert A. Modeling Fixed-Income Securities and Interest Rate Options. Stanford:
Kim, Jim Y. "Public Debt and Private Suffering in Peru." Dying for Growth: Global Inequality
and the Health of the Poor. Monroe: Common Courage Press, 2000. Print.
O'Brien, John, and Sanjay Srivastava. Bond Valuation and Bond Tutor. Cincinnati: South-
Porter, Michael, and Mark Kramer. 'How To Reinvent Capitalism And Unleash A Wave Of
Foundation, 1999. Print.