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financial markets institutions
Questions and Answers of
Financial Markets Institutions
What is the relationship between the level of policy loans taken by policy owners and the level of interest rates in the general economy?
Why are annuities and life insurance often described as opposites? If they are opposites, when why do insurance companies marketing life insurance also commonly market life annuities?
Why did universal life insurance become popular in the 1980s? What explains the popularity of variable life insurance in the 1990s?
Term insurance becomes cost prohibitive for older in dividuals. However, the same insurance companies that do not offer term policies at advanced ages sell whole life insurance. How are these
What is meant by the phrase “adverse selection” in insurance? Although discussed in this chapter in connection with term insurance, adverse selection is a problem in all insurance markets. What
What are the primary sources of insurance regulation? What areas are regulated?
What problem is likely to develop for a stock life insurance company that issues participating policies?
To what extent do(1) The risk of unemployment(2) The risk of war satisfy the requirements of privatelyinsurable risks?
According to the law of large numbers, as the number of insureds increases, risk is reduced. However, as an insurance company writes more policies, it exposes itself to the potential for greater
What is the difference between pure risk and speculative risk? Provide an example of each of these types of risk.
Throughout this chapter, the role of insurance companies and pension funds as financial intermediaries was stressed. Discuss the financial intermediation process as it applies to insurance companies
What is the U.S. Central Credit Union? Why is it important to the future development of the credit union industry?
Compare and contrast the retail operations of a commercial bank with those of a typical credit union in operation today. Taking into account the expanded powers of credit unions, how will they
What are the advantages and disadvantages of the credit union common bond requirement?
What are share drafts? Why are they important to credit unions?
What are the major asset and liability accounts for credit unions?
How can finance companies manage their interest rate, liquidity, and credit risks? What are their advantages or disadvantages vis-à-vis depository institutions?
What effect have growing consumer credit regulations had on finance companies' lines of business? What about their future opportunities?
Why have second mortgages grown in popularity with finance company consumer lenders?
Why have finance companies shifted from consumer to real estate and business lending in recent years?
How do finance companies differ from banks and thrift institutions?
How have savings institutions altered their deposit and liability structures to reduce their interest rate risk exposure in recent years? Would you say they have totally eliminated their interest
What are(a) The major regulations(b) The major regulatory bodies that affect savings institution operations? How do these regulations and regulatory bodies affect them?
What changes in market interest rates can hurt savings institutions? Why? What can savings institutions do to minimize their problems? Explain the kind of market interest rate changes that might help
How did regulatory weakness contribute to some of the savings institutions’ problems?
What were the two major types of problems that caused savings institution failures during the 1980s?
Why were each of the U.S. thrift institutions started, and when? Why are they now greater competitors with commercial banks than they were originally?
Using the following data calculate the bank’s RWA, the bank’s regulatory capital and decide whether the bank is well capitalized, adequately capitalized, undercapitalized, or significantly
Explain why bank regulators are so concerned about capital adequacy for the banking system.
Why is capital adequacy more of a problem for commercial banks than for most other businesses?
What are risk-based capital standards? What are they designed to do?
How might possibilities for regulatory capture contribute to the large number of financial regulators and deposit insurance funds?
Why do banks and other financial institutions willingly comply with financial regulation, even though they may complain about it?
How can an effective lender of last resort prevent financial panics from developing? Why was the Fed unable to prevent the Great Depression of the 1930's?
Why did bank failures increase, with a lag, after deposit insurance became available to banks? What else contributed to the increase in bank failures in the 1980's?
What is moral hazard, and how is it created by deposit insurance?
Why has Congress passed more regulatory acts for financial institutions in recent years? Cite all acts passed since 1980 and the major provisions of each.
How do failing bank resolution policies differ between large and small banks? Why the difference?
What is the purpose of bank examinations? How do they differ from CPA audits?
Bank regulation is considered to be in the public interest. Thus, the more regulation the better. Explain why you agree or disagree with this statement.
How would you assess the success of consumer regulation? In what areas has it failed in stated objectives?
Which of the bank safety regulations enacted in the 1930's do you believe are most important in actually achieving bank safety? Which of the safety regulations would you classify as being anti
Although the FDIC does not grant charters for banks to operate, it is said to have enormous impact upon the charter process.Explain.
What are the major lessons that have been learned from past bank failures? Do you think that history can or will repeat itself?
Why are bank failures considered to have a greater impact upon the economy than other types of business failures? Do you agree with this conclusion?
In international lending, what is meant by the phrase “rescheduling of sovereign loans”? Why has rescheduling of loans become a problem to international lenders? What countries are involved?
Do you believe that the presence of foreign banks in the United States serves the public’s interest? In formulating your answer, consider the issues of bank safety and competition in banking
What risks must be evaluated in making international loans? Which of these are unique to international lending? How might these risks be reduced?
Consider a large syndicated loan to a firm with close ties to the government in a country with a large degree of political risk. As a large U.S. bank, explain why you might wish to have other
What is a syndicated loan? In what ways do large international loans differ from typical domestic loans? Define the term LIBOR.
What were the provisions of the International Banking Act? Are some of the provisions no longer relevant? If so, which ones? Explain.
Explain the motivation behind the International Banking Act of 1978.
What are the basic objectives of federal bank regulations as they apply to domestic banking? How are these basic regulatory objectives interpreted differently with respect to overseas banking? How do
What is an international banking facility? In what types of business activities can such entities engage? Why did the Federal Reserve Board create these new banking entities?
What is a shell branch? What functions do banking shell branches perform in U.S. overseas banking? Why are so many located in Caribbean island nations?
What are Edge Act corporations? What advantages do they afford American banks that wish to engage in international banking?
Why has the number of U.S. banks operating overseas declined in recent years?
How were the overseas expansions of U.S. non-financial corporations and banks related? Discuss the defensive follow-the-customer strategy in your response.
Why were U. S. banks slow to expand overseas? What changed to encourage overseas expansion?
How are fed funds loans and repurchase agreements similar? How do they differ? Which do you think should normally have a lower interest rate? Look up current fed funds rates and repurchase agreement
An American importer needs to pay £250,000 in 90 days and would like to use currency options to hedge the risk of appreciation of the pound. Should the importer buy a call or a put option on pound?
Which of the following bonds have the largest price risk and why? Note that the bonds are identical in all respects except for the size of the coupon.a. Zero-coupon bondb. Par bondc. Discount bondd.
Describe some of the recent trends affecting bank income statements. For example, has net interest income increased or decreased in recent years? What about other components of the income statement?
What are the major differences between large banks and small banks on the income statements? Why are there differences between the two groups of banks? For example, why is the net interest income
What is a contingent asset? What is a contingent liability? Provide an example of each.
What are the major benefits of getting assets off the balance sheet through either loan sales or securitization?
What do we mean by off-balance-sheet activities? If these things are not on the balance sheet, are they important? What are some off-balance-sheet activities?
What is the prime rate? Why do some banks make loans below the prime rate?
Define correspondent banking. Why do banks enter into correspondent relationships?
Explain why banks buy and sell federal funds. Also explain the role of the Federal Reserve System in the federal funds market. Show the T-accounts for a federal funds transaction.
Give the reasons banks hold Treasury securities and municipal bonds in their investment portfolios.
Distinguish between a line of credit and a letter of credit.
What are the advantages and disadvantages of using credit scoring to evaluate a loan application?
What are the important differences between investments and loans in a bank portfolio of assets?
What are the major uses of funds for a bank? What are the differences between large and small banks? Explain.
Define “bank capital”. What is the economic importance of capital to a firm?
Why are negotiable CDs and federal funds primarily sources of funds for very large banks?
What are borrowed funds? Give some specific examples. Have borrowed funds become more or less important as a source of funds for banks?
Why are deposits a more important source of funds for small banks than for large banks? Why are deposits considered a more stable source of funds for small banks than for large banks?
What is the primary goal of a commercial bank? Why may this goal be translated into maximizing the firm's stock share price?
You noticed the current spot exchange rate is $1.50/£ and the one-year forward exchange rate is $1.60/£. The one-year interest rate is 5.4% in dollars and 5.2% in pounds. Assuming you can borrow
An American exporter is expected to receive ¥10,000,000 in 180 days and would like to currency options to hedge the exchange rate risk. Should the importer buy a call or a put option on Japanese?
An American exporter is expected to receive ¥10,000,000 in 180 days and would like to sign a forward contract to hedge the exchange rate risk. Should the importer buy or sell yen through a forward
An American importer needs to pay £100,000 in 30 days and would like to sign a forward contract to hedge the exchange rate risk. Should the importer buy or sell pounds through a forward contract?
Suppose the spot exchange rate today is $1.5/£. The inflation rate is expected to be 3% in the United States and 5% in the United Kingdom each year over the next two years. What is the expected
Suppose the spot exchange rate today is $1.5/£. The inflation rate is expected to be 3% in the United States and 5% in the United Kingdom over the next year. What is the expected exchange rate in
Suppose the nominal interest rates are 5% in the United States and 2% in the United Kingdom this year. The inflation rate is 1.5% in the U.S. and 2% in the U.K. next year. Calculate the real interest
Suppose the spot exchange rate today is $1.5/£. The annual inflation rate is expected to be 3% in the United States and 5% in the United Kingdom over the next three years. The annual real interest
Suppose the spot exchange rate today is $1.5/£. The inflation rate is expected to be 3% in the United States and 5% in the United Kingdom over the next year. The annual real interest rate will be
Describe several of the factors which have promoted the internationalization of financial markets during the previous 15 years. Are any of these factors reversible?
How does inflation affect a country's spot and forward exchange rates? Why? Is it absolute inflation or inflation relative to other countries that is important?
How can central bank intervention affect the exchange value of a currency? Will the currency generally rise or fall if a central bank sells its home currency?
Will the domestic capital account be helped or hurt if foreign investment flows into the country increase?
Why do domestic governments often try to limit domestic flows of funds abroad for investment in foreign countries? How did such limitations in the United States contribute to the development of the
Explain the role that letters of credit and banker’s acceptances play in international transactions. Is a banker's acceptance a sight draft?Why or why not?
The newly industrializing countries (NIC) of the Far East such as Korea, Taiwan, and Hong Kong have dramatically increased their merchandise exports during the 1980s. Based on what you know about the
Assume that the United States and Canada are both initially in an economic recession and that the United States begins to recover before Canada. What would you expect to happen to the U.S. dollar
If the Japanese yen were to change from ¥100/$ to ¥90/$, would the U.S. balance of payments improve (become more positive) or not? Consider what effect the exchange rate change would have on both
If purchasing power parity applied to Big Macs, and a Big Mac cost $2.50 in the United States while the British pound cost $1.50 and €0.90 euros could be obtained for $1.00, how much would the Big
Why are international banks able to earn large fees from providing letters of credit and forward currency transactions?
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