Secondary Bond Market Simulation with Financial Meltdown Shock
In this bond market simulation, students take the role of banks who are buying and selling bonds in order to make profits and meet their capital requirements while maintaining their total asset value. After two normal rounds, the potential risks to some of the bonds is revealed with the bonds that lose their value determined by the roll of a die at the end of the third round. After the third round ends, any banks unable to make their capital requirements can be "bailed out" by the instructor acting as the Central Bank. In the fourth and (optional) fifth rounds, the trading proceeds as in rounds 1 and 2. Setup documents and tracking spreadsheet included.
Context for Use
Description and Teaching Materials
5 rounds (although simulation can stop after 4 rounds)
18 blue bonds to start (numbered small 1-6 on the back, 2 to each group), plus 13 orange bonds to start (see worksheet for distribution to groups)
40 x $10 million, 40 x $1 million (see worksheet for distribution to groups)
Instruction letters for each group (see examples in documentation)
10 letter envelopes (no.10) – 9 for groups and 1 for holding cash.
Spreadsheet to track end-of-round money for each group and the range of trade prices.
Die to roll to determine which bonds fail.
Timer to show round periods.
Individual student worksheet with tracking grid on one side, group discussion questions on the other.
In each round some banks have excess reserves, some banks have capital needs.
First round is 2 minutes, second round is 1 ½ minutes, third and fourth rounds are 1 minute.
After each round, record ending capital reserves of each bank and the high and low values of trades. Announce the average of the high and low as the price to be used for calculating total cash and asset values. Pay $1 million for each bond held.
After 2 rounds, announce that some of the blue bonds are bad and that at the end of the third round, a die will be rolled to determine which ones.
Capital reserve requirements rise for the third round to put additional stress on the system.
At the end of the third round, record ending capital reserves and total asset values. Roll a die three times to determine which bonds are viewed as bad. Talk with the class about the situation, ask what the central bank should do. Offer to buy the "troubled assets" for $7 million each before noting any penalties for non-achieving groups.
Run round four (and optional round five) with the additional liquidity provided by the troubled asset relief.
Secondary Bond Market Simulation with Financial Meltdown Shock (Microsoft Word 2007 (.docx) 180kB Dec2 13)
Secondary Bond Market Tracking Spreadsheets (Excel 2007 (.xlsx) 14kB Dec2 13)