Questions and Answers of Cost Of Capital In Managerial Finance

Explain why the ECB is likely to be one of the world's most important central banks.
How is the ECB similar to the Federal Reserve and in what ways is it different from the Fed?
When we use the term ECB, what is meant?
What is the Federal Reserve's primary job (that is, its principal role or function)?
List the principal functions of the Federal Reserve System today and explain why each of these functions is important.
What is meant by monetary policy transparency?
What duties are assigned to the manager of the System Open Market Account?
What are the Federal Reserve banks expected to do in serving the public and the banking system?
What are the principal responsibilities assigned to the Board of Governors of the Federal Reserve System? To the Federal Open Market Committee?
In what ways did the early Federal Reserve System differ from the Federal Reserve we see today?
What major problems in the late nineteenth and early twentieth century led to the creation of the Federal Reserve System? How did the creation of the Fed help solve these problems?
What are the principal channels through which central banks, including the Federal Reserve System, work to influence the economy and achieve their goals?
To what extent are the principal goals of central bank monetary policy consistent or inconsistent with each other? What does a central bank do when the goals it wishes to pursue directly conflict
What are the principal goals central banks pursue in order to carry out monetary policy?
What functions do central banks perform in a market-oriented economy? Explain why each function is important in the functioning of a market-oriented economic system.
A note traded in the commercial paper market will mature in 15 days. The dealer will sell it to you at $98.35 on a $100 basis. What is the note's discount rate of return?
A new issue of 90-day commercial paper is available from a dealer in New York City at a price of $97.60 on a $100 basis. What is the bank discount yield on this note if held to maturity?
JP Morgan Chase Bank is short cash reserves in the amount of $225 million-a condition expected to last for the next five business days-and is weighing (a) securing a loan in the domestic federal
Calculate the bank discount rate (DR) attached to a 60-day, $1 million CD selling in the secondary market for $990,000.
What is the coupon-equivalent yield to maturity (YTM) on a 30-day negotiable CD promising an annualized interest return (i) of 5.95 percent?
If Sterling Corporation purchases a $5 million bank CD that matures in 90 days and promises an interest return of 6.25 percent, how much in total will Sterling receive back when this CD matures?
What are the principal investment characteristics of federal agency securities? Which groups of investors are attracted to them and why?
What is the difference between a government-sponsored agency and a federal agency?
Federal agencies active in the financial markets were usually set up to aid so-called disadvantaged sectors of the economy. Identify these sectors and give some examples.
Explain what credit enhancements are. What is asset-backed commercial paper? How have these devices aided growth of the paper market?
How is commercial paper rated? Why does its rating matter?
Who are the principal investors in commercial paper? Why do the types of investors you have named find commercial paper attractive?
What are the principal disadvantages of commercial paper to an issuer? To buyers?
What are the principal advantages accruing to a company large enough to tap the commercial paper market for funds? Make a list of these advantages.
Why do some investors find commercial paper unsatisfactory for their needs?
Describe the functions that dealers perform in the functioning of the commercial paper market. In what market segment are they most active? Least active?
Why is commercial paper attractive to such money market investors as banks, insurance companies, money market funds, and industrial companies?
What do we mean by the term commercial paper?
What are the advantages and disadvantages of the banker's acceptance as an investment instrument?
Explain why acceptances historically have been attractive to exporters and importers of goods moving between different countries. Why has the volume of acceptances declined in recent years?
What exactly is a banker's acceptance?
Evaluate the Eurocurrency markets from a social point of view. What are their major benefits and costs to the public and to market participants? In your opinion, should these markets be more closely
What role do Eurodollar deposits play in reserve management operations of U.S. banking firms? What are the advantages of Eurodollar borrowings over other sources of reserves for banks? The
What are the principal sources of Eurocurrency deposits? Make a list.
Can Eurocurrency deposits be destroyed? How can this happen?
Describe the process by which Eurocurrency deposits are created. What happens to the total volume of domestic bank reserves and deposits in the process of creating Eurocurrency deposits?
Define the term Eurodollar. Can a U.S. bank create Eurodollars? How?
What is the Eurocurrency market and why is it needed?
What is a variable-rate CD? A brokered CD? Is it likely that depository institutions will continue to develop and bring forward new types of CDs in the future? Why?
What is the difference between a prime- and a nonprime-rated CD? Which carries the higher interest rate? Why?
What is meant by the term multitiered market?
What factors appear to influence the interest rate offered on CDs issued by a depository institution?
When were CDs first offered in the money market? Why were CDs developed?
What is a large negotiable CD?
Why has the federal funds market become so important to the United States' central bank, the Federal Reserve System, in carrying out the government's monetary policy operations?
Describe the process of legal reserve position adjustment that depository institutions go through. What role does the federal funds market play in helping depository institutions manage their
Who are the principal lenders active in the federal funds market? Why do they find this market a good place to lend money?
Who are the principal borrowers active in the federal funds market? Why are they attracted to this market for the funds they require?
Define the term federal funds. Why are federal funds so important to the functioning of the money market?
Adam is returning to college in the fall and has $5,000 saved for his tuition, with $2,500 to be paid at the beginning of September and $2,500 to be paid at the beginning of next January. He is
Determine which of the following statements are true and which are false. For those that are false, identify and correct what makes them false.a. Government securities dealers rely principally on
What causes the positions that dealers hold in securities to change over time?
To what types of risk is each form or source of dealer income subject? How might a dealer handle these different forms of risk exposure?
In what different ways do security dealers generate income and make a profit?
What is a repurchase agreement (RP)? Explain what an RP's role is in financing the operations of security dealers.
What is a demand loan? How does it help security dealers obtain the financing they need?
Explain why security dealers are essential to the smooth functioning of the securities markets and especially the money market.
Who are the principal buyers of Treasury bills today? Make a list of the key factors that you believe motivate these investors to buy bills.
What is the "normal" or "typical" shape of the yield curve for T-bills? What other shapes have been observed and why do you think these occur?
Explain how a Treasury auction works in the United States. Can you find some advantages stemming from this type of sale?
What are the various types of Treasury bills? How do they differ?
Why have governments found Treasury bills such an effective instrument for raising new funds?
Explain why Treasury bills are so popular with investors (savers) all over the world.
What has been the principal cause of periods of rapid growth in the volume of Treasury bills? Identify one such period and explain.
What are the principal financial instruments traded in the money market? What common characteristics do these instruments possess?
Is the money market predominantly a wholesale or retail marketplace? How do you know?
Which of these two types of funds-federal funds versus clearinghouse funds- are most important in the money market and why is this so?
What are federal funds and how do they differ from clearinghouse funds?
How do money markets around the world differ from one another?
What is the difference between the actual maturity and the original maturity of a financial asset? Why is this difference important in the money market?
Define the following types of risk: (a) market risk; (b) default risk; (c) inflation risk; (d) currency risk; and (e) political risk. Which of these risks are minimized by purchasing money market
Who are the principal borrowers and lenders in the money market?
What are the principal goals usually pursued by money market investors?
Explain why there is a critical need within the financial system to have money market instruments available to anyone who can afford them.
What exactly do we mean by the term money market?
How can investors hedge possible changes in U.S. monetary policy?
What are economic futures contracts? Please give an example.
For what specific kinds of securities is there now an active futures market? Who issues these securities?
What is basis? Explain how the basis for a futures contract relates to trading risk.
How do the spot (cash) markets differ from futures (forward) markets?
What is the basic purpose of futures trading in securities? Where is most futures trading carried out?
Which type of hedge named above works best in an environment of rising interest rates? Of falling interest rates? Illustrate both cases using a payoff diagram.
Define and explain the use of the following: (a) long hedge; (b) short hedge; and (c) cross hedge.
When is a partner to a swap in long position? A short position? To what kinds of risk is each exposed?
What risks are associated with swap contracts? Can any of these risks be reduced?
What are interest rate swaps? Why were these instruments developed?
What is interest rate hedging? What is its goal?
What is an implied forecast? Give an example.
How do long- and short-term interest rates behave over the course of the economic business cycle? Why do you think they behave this way?
Suppose you could forecast market interest rates and asset prices correctly on a consistent basis. What obvious advantages would this give you?
Why are interest rates and asset prices so difficult to forecast accurately?
What does interest rate structure refer to? What does the structure of interest rates tell us about the difficulties involved in forecasting interest rates?
Convertibles typically carry lower yields than nonconvertibles of the same maturity and risk class. Can you explain why?
What does convertibility refer to? Why are convertibles called hybrid securities?
Explain the relationship between a taxpayer's marginal tax rate and after-tax returns on corporate and municipal bonds. Would municipals be a worthwhile investment for you today? Explain why or why

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