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Question 1 (10 pts)

Consider a bond issued today with a $30,000 face value (F), 20 year maturity (m), and a coupon rate of 6.0 % (c) that pays annually. The relevant benchmark or market rate of interest is 8%. This question is about the price of the bond.

  • Can we expect the price of the bond today to be above or below its face value?
  • Does your answer in a) depend on the maturity of the bond? (2 pt)
  • In which year did the market rate of interest for a US bond with a 10-year maturity exceed 6.0% for the last time ? (4 pts) (please consult any actual database to answer this question)

(4 pts)

Question 2 (10 pts) (Intergovernmental Fiscal Relations)

What are the two principles that govern the assignment of spending responsibilities to different levels of government (e.g. Federal, state and Local). Explain each principle in your own words. For each of the three levels of government (federal, state, and local) name two typical spending responsibilities.

Question 3 (10 pts)

State-owned enterprises can exist for a variety of reasons including when market failure or governance failure is prevalent. Please list three possible reasons and briefly explain how they can lead to the presence of state-owned enterprises.

Question 4 (10 pts)

A Budget Process in Public Financial Management often serves the following purposes (see also Mikesell):

  • fiscal discipline and control
  • response and alignment to strategic priorities;
  • efficient implementation of the budget.

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.

Question 5 (10 pts)

Assume the following: In 2030, 90% of the outstanding bonds issued by the United States, showed a maturity of less than four years. The comparable share for all OECD member countries was 60% at that time. Please provide short answers to the questions below.

  • If interest rates rise, who is less vulnerable to higher interest payments:
  • Is a treasurer who is lengthening the average maturity of outstanding bonds expecting interests rates in the near to medium-term to rise or to fall? Please add one sentence to explain your answer.
  • 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 to what it is today or ii) rise compared to its level today?

The US or the OECD as a whole?

Question 6 (10 pts)

Please list three PFM (Public Financial Management) areas that can be affected by SOEs (State-owned Enterprises)? Briefly describe the possible impact in your own words.

Also, please explain recent trends in the prevalence of State-OwnedEnterprises. .

Question 7 (15 pts)

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.

Question 8 (15 pts)

Referring to question 7, please ascribe 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 (quoted below), 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).

“(S)ocietal needs, not just conventional economic needs, define markets” (Michael Porter – and Mark R. Kramer, Creating Social Value, Harvard Business Review 2011, HBR Reprint R1101C, p. 6).

Question 9 (10 pts)

Many countries use the instrument of a “Treasury Single Account” (TSA).

  • Please describe what a “Treasury Single Account” does. (8pts)
  • Is a Treasury Single Account part of a country’s Cash Management or Debt Management? (2pts)
 
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