Questions and Answers of Cost Of Capital In Managerial Finance

What are the comparative risks faced by investors in choosing between general obligation bonds and revenue bonds? What advantage(s) do revenue issues offer the investor?
Revenue bonds issued by state and local governments and public agencies have grown more rapidly than other types of state and local government securities in recent years. Several different kinds of
Give a concise definition of each of the following state and local government securities, and explain how each is used: Tax-anticipation notes Bond-anticipation notes Revenue bonds Special assessment
Why is the condition of the economy of special importance to state and local governments in planning their revenues and expenditures?
For what principal reasons do state and local governments borrow money?
What are the principal sources of revenue for state and local governments today? Where do they spend the bulk of their incoming funds?
Can you foresee any serious problems on the horizon as state and local governments work to deal with the rapid growth of public demands on their budgets?
The market for state and local government debt has been among the most rapidly growing financial markets over the past half century. Why has this growth occurred?
List the principal holders of the United States' public debt. What trends seem to be under way in the ownership of federal securities?
What problems exist when you try to measure the true size of the government's debt? Do you have any suggestions on how to deal with this measurement problem?
Describe the types of securities that make up the public debt of the United States. What portions of this debt can the U.S. Treasury Department most closely control?
What is meant by the term crowding-out effect? What does recent research suggest about the link between government deficits, interest rates, and inflation?
Describe the possible effects of retiring government securities on the financial system and the economy.
Describe the possible impacts of government borrowing upon the financial system and the economy.
List (from largest to smallest) the principal sources of federal government revenue. What are the principal federal spending programs?
Explain how fiscal and debt management policy might be used to help fight inflation and unemployment. Can you see any weaknesses or potential problems with the use of these policy tools?
What exactly is fiscal policy? Debt management policy?
Based on your reading of this chapter, how has globalization of the financial sector impacted the regulatory agencies that oversee financial institutions?
Why might there be a need for fewer regulatory agencies in the financial sector today?
What new disclosure rules have recently appeared? Do you think these disclosure requirements help or hurt financial institutions? Why or why not?
What trends are reshaping financial institutions' regulation today? Why has capital regulation become so important?
Which particular government agencies regulate the following financial institutions: credit unions, savings and loan associations, savings banks, insurance companies, finance companies, investment
What types of market data will be used more intensively in the future to aid the regulators of financial firms?
What are the Basel I and Basel II Agreements? What is their purpose?
How will Gramm-Leach-Bliley affect the disclosure of financial information and the privacy rights of the customers of financial-service firms? Do you think additional legislation is needed in this
How will Gramm-Leach-Bliley likely affect the structure of the banking and financial-service industries? Why?
What are the principal features of the Financial Services Modernization (Gramm- Leach-Bliley) Act? Why was it passed?
How is the nature of government regulation of financial institutions changing today? What is the new focus of recent regulation? Why do you think this change is occurring?
What agencies are responsible for the regulation and supervision of commercial banks? What aspects of banking does each agency regulate and supervise?
What impact does regulation appear to have upon the availability and cost of financial services to the public? Upon financial institutions themselves?
What are the principal purposes or goals of financial institutions' regulation?
In the concluding section of this chapter, several major trends affecting all financial institutions today were discussed. Identify these trends. Which ones do you see as long-term trends likely to
What functions do security brokers and dealers perform within the financial system? Why are these security companies so important to the money and capital markets?
What are investment banks? Why are they important to the economic and financial system? What risks do they face?
A growing sector within the general finance company industry consists of small-loan companies, which include pawnshops, rent-to-own stores, title loan firms, and check-cashing companies? What do
What role do finance companies play in supplying funds to the financial marketplace? How many different kinds of finance companies are there?
What is happening to the mix of services offered by life insurers and property- casualty insurance companies? Why?
What factors influence the premiums insurers charge their policyholders?
Compare and contrast the asset portfolios of life insurance companies with the asset portfolios of property-casualty insurers. Explain any differences you observe.
Against what kinds of risk do life insurance companies protect their policyholders? What about property-casualty insurers?
What are the principal assets acquired by pension funds? What factors guide their selection of assets to hold? What problems has the pension industry run into in recent years?
What is the principal function of pension funds? Explain why these institutions have been among the most rapidly growing financial institutions in recent years. Do you expect their growth to be
Define the following terms:a. Open-end companyb. Closed-end companyc. Bond fundd. Money market fund g. Global fundse. Growth funds h. Index fundsf. Balanced funds i. Hedge funds
What advantages do investment companies (mutual funds) offer the small saver? Why has their growth been so erratic in recent years?
If you are a small saver, what advantages do money funds appear to offer you relative to banks and credit unions? What are their disadvantages?
Exactly how are money funds different from banks and credit unions in their behavior and the assets they hold?
How and why did money market funds begin to appear during the 1970s? What factors have contributed to their recent growth?
What advantages do credit unions have over banks? What disadvantages?
What services do credit unions offer that compete with the services offered by banks and other thrift institutions? Why are bankers' groups in particular concerned about the expansion of credit
Credit unions are one of the fastest-growing financial intermediaries in the United States and in many other parts of the world as well. What explains this rapid growth?
What solutions have been developed to deal with the savings and loan and savings bank industries' problems and to strengthen their performance in the twenty-first century?
Why did the savings and loan industry and some savings banks get into serious trouble during the 1980s and 1990s?
What exactly are mutuals? How do these institutions differ from stockholder- owned depository institutions?
How did savings and loans get started? How does the history of savings and loans compare with the history of savings banks? Which is the oldest institution?
Why is money creation and destruction of importance in the pursuit of public policy?
How do banks destroy money?
What are the dangers of money creation by banks?
Is the ability of banks to create money of significance for the economy and the creation of jobs?
How are banks able to create money?
What are the most popular measures of bank performance? What do they measure?
Why are banks so sensitive to liquidity risk? How do they raise cash to meet liquidity needs?
How do banks control risk in their loans and in their investment portfolios?
What is the net interest margin? The noninterest margin? Why are they important?
What are a bank's principal revenue and expense items?
What benefits do standby credit letters provide for banks and their customers?
Explain how securitization of loans helps a bank raise new funds.
What new sources and uses of funds have been developed in banking recently?
What are the principal uses of commercial bank funds? Major sources of funds?
What changes are under way in bank technology? With what effects?
How numerous are bank failures and what seem to be their most important causes? Why are bank failures different from the failures of other businesses and how are they resolved today?
What is consolidation in banking? What appears to be driving this trend?
Four dominant movements in the structure of U.S. banking in recent years have been:a. The spread of branch banking.b. The growth of holding companies.c. The rise of interstate banking.d. The
In what ways are commercial banks of special importance to the money and capital markets and the economy?
What is meant by policy inertia? What is the rationale behind the policies that produce it? What are the principal limitations of monetary policy?
Describe the trade-offs that appear to exist among key economic goals. How do these trade-offs appear to influence the central bank's ability to achieve economic goals?
How could the Fed cause changes in the rate of inflation? In unemployment and economic growth?
What are the principal economic goals of the Federal Reserve System? How do they relate to the natural rate of unemployment and the GDP gap?
If the Federal Reserve wishes to put upward pressure on market interest rates, what would it be most likely to do? How would it proceed to push the federal funds rate in an upward direction? How
What is interest-rate targeting? Which interest rate does the Federal Reserve focus upon in its conduct of monetary policy?
Explain how margin requirements affect the financial system. Why is this policy tool not frequently used?
What is moral suasion? Do you belive this tool can be effective?
Why do you think reserve requirements and discount rates are not widely used policy tools at many central banks around the world? Are reserve requirements and the discount rate a general credit
How does the reserve requirement tool affect the ability of deposit-type financial institutions to create money? What are the principal advantages and disadvantages of the reserve requirement tool?
How and why does a depository institution borrow from the central bank? Explain what may happen when a central bank changes its discount or lending rate. What are the principal advantages and
Explain the difference between defensive and dynamic open market operations?
Explain the difference between an RP and a straight (or outright) open market transaction. Why is each used? What is a runoff? An agency operation?
Describe the relationship between the SOMA manager and the FOMC. What is a policy directive and what is a policy statement? What policy target does the Federal Reserve use?
Why are open market operations increasingly the most popular monetary policy tool? What are the principal effects of open market operations on the financial system?
Suppose the Federal Reserve uses data to estimate the currency-deposit ratio to be 0.90, the ratio of liquid savings assets to transaction deposits to be 8.00, and the excess reserves ratio to be
If households' currency-deposit ratio is 1.25, and they desire to maintain $9.25 in liquid savings assets for each dollar in their checking accounts, what must the banks' excess reserves ratio be if
Suppose that households wished to maintain $1.00 in pocket money (currency and coin) and $10.00 in liquid savings assets (small CDs, money funds, and savings accounts) for every $1.00 in their
In the text it was stated that the FOMC meets at least eight times each year on preannounced dates in order to set monetary policy. What would happen if an emergency situation developed in the
What special status is awarded to the president of the Federal Reserve Bank of New York (FRBNY) in the determination of U.S. monetary policy? Why is this so?
As discussed in this chapter, the Federal Reserve has two policymaking groups: the Board of Governors and the Federal Open Market Committee (FOMC). Describe the composition of each of these groups,
Why should a central bank like the Federal Reserve worry about money and credit growth?
In what ways can a central bank influence the money and credit creation process?
What factors reduce the money-creating abilities of the banking system?
Why are deposit-type intermediaries able to create money? What factors increase the deposits the banking system can create with any given injection of new reserves?
What are legal reserves? Required reserves? Excess reserves? Why are these concepts important?
What is/are the principal target(s) of monetary policy?

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