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business
financial markets institutions

Questions and Answers of Financial Markets Institutions

2. The major distinction between money markets and capital markets?
3. What the major instruments traded in the capital markets are?
4. What happens to the dollar value of a U.S. investor’s holding of British pounds if the pound appreciates (rises) in value against the dollar?
5. What derivative security markets are?
6. The three major reasons that suppliers of funds would not want to directly purchase securities?
7. What the asset transformation function of FIs is?
8. What delegated monitoring function FIs perform?
9. What the link is between asset diversification and the liquidity of deposit contracts?
10. What maturity intermediation is?11. Why the need for denomination intermediation arises?
12. The two major sectors that society has identified as deserving special attention in credit allocation?
13. Why monetary policy is transmitted through the banking system?
14. The payment services that FIs perform?
15. What the trends are in the growth of global financial markets since the 1990s ?
3. How does the location of the money market differ from that of the capital market? ( LG 1-2 )
4. Which of the money market instruments has grown the fastest since 1990? ( LG 1-2 )
5. What are the major instruments traded in capital markets?( LG 1-2 )
6. Which of the capital market instruments has grown the fastest since 1990? ( LG 1-2 )
7. If a U.S. bank is holding Japanese yen in its portfolio, what type of exchange rate movement would the bank be most concerned about? ( LG 1-3 )
8. What are the different types of financial institutions?Include a description of the main services offered by each.( LG 1-5 )
9. How would economic transactions between suppliers of funds(e.g., households) and users of funds (e.g., corporations) occur in a world without FIs? ( LG 1-6 )
10. Why would a world limited to the direct transfer of funds from suppliers of funds to users of funds likely result in quite low levels of fund flows? ( LG 1-6 )
11. How do FIs reduce monitoring costs associated with the flow of funds from fund suppliers to fund investors? ( LG 1-6 )
12. How do FIs alleviate the problem of liquidity and price risk faced by investors wishing to invest in securities of corporations?( LG 1-6 )
13. How do financial institutions help individuals to diversify their portfolio risks? Which financial institution is best able to achieve this goal? ( LG 1-6 )
14. What is meant by maturity intermediation? ( LG 1-6 )
15. What is meant by denomination intermediation? ( LG 1-6 )
16. What other services do FIs provide to the financial system?( LG 1-6 )
17. Why are FIs regulated? ( LG 1-8 )
18. What events resulted in banks’ shift from the traditional banking model of “originate and hold” to a model of“originate and distribute?” (LG 1-6, LG 1-7, LG 1-8)
19. How did the boom in the housing market in the early and mid-2000s exacerbate FIs transition away from their role as specialists in risk measurement and management? (LG 1-6, LG 1-7, LG 1-8)
20. What countries have the most international debt securities outstanding? ( LG 1-8 )
21. What countries have the largest commercial banks? ( LG 1-8 )
LG 2-1. Know who the main suppliers of loanable funds are .
LG 2-2. Know who the main demanders of loanable funds are .
LG 2-3. Understand how equilibrium interest rates are determined .
LG 2-4. Examine factors that cause the supply and demand curves for loanable funds to shift .
LG 2-5. Examine how interest rates change over time .
LG 2-6. Know what specific factors determine interest rates .
LG 2-7. Examine the different theories explaining the term structure of interest rates .
LG 2-8. Understand how forward rates of interest can be derived from the term structure of interest rates .
LG 2-9. Understand how interest rates are used to determine present and future values .
1. Who the main suppliers of loanable funds are ?
2. Who the major demanders of loanable funds are ?
3. What happens to the equilibrium interest rate when the demand for loanable funds increases ?
4. What happens to the equilibrium interest rate when the supply of loanable funds increases ?
5. How supply and demand , together , determine interest rates ?
6 . What the difference is between inflation and real interest rates ?
8 . What term structure of interest rates means ?
9 . What the three explanations are for the shape of the yield curve ?Discuss each and compare them .
10 . What a forward rate is ?
11 . How an implied forward rate can be obtained from current short- and long-term interest rates ?
12 . The difference between simple interest and compounded interest ?
13 . What should happen to the future value of an annuity stream of cash flows as interest rates increase ?
14 . How an EAR differs from a simple rate of return ?
1. Who are the suppliers of loanable funds? ( LG 2-1 )
2. Who are the demanders of loanable funds? ( LG 2-2 )
3. What factors cause the supply of funds curve to shift? ( LG 2-4 )
4. What factors cause the demand for funds curve to shift?( LG 2-4 )
14. You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning two years from today,
33. What is the value of a $5,500, 4 year cash flow moved to year 8 when interest rates are 10 percent? ( LG 2-9 )
34. If an ounce of gold, valued at $700, increases at a rate of 7.5 percent per year, how long will it take to be valued at$1,000? ( LG 2-9 )
35. If a house valued at $150,000 grows to a value of $270,000 in seven years, what annual return did it earn? ( LG 2-9 )
36. What is the present value of annual $500 payments made for the next 15 years if interest rates are 11 percent? ( LG 2-9 )
38. At retirement, you have saved $800,000 in your employer’s savings plan. They have offered to convert this money to an annual payment of $70,000 for the next 30 years. What is the interest rate
41. Calculate the effective annual return on an investment offering a 12 percent interest rate, compounded monthly.( LG 2-9 )
42. A car dealer is advertising a loan with monthly payments and a 9.9 percent nominal rate. What is the loan’s EAR?( LG 2-9 )
1. What is the most recent dollar value of the U.S. national debt?Go to the United States Treasury Web site and find the latest information available on the size of the U.S. national debt.Go to the
2. Calculate the percentage change in the U.S. national debt since June 24, 2010.Go to the United States Treasury Web site and find the latest information available on the size of the U.S. national
LG 3-1. Understand the differences in the required rate of return , the expected rate of return , and the realized rate of return .
LG 3-2. Calculate bond values.
LG 3-3. Calculate equity values.
LG 3-4. Appreciate how security prices are affected by interest rate changes.
LG 3-5. Understand how the maturity and coupon rate on a security affect its price sensitivity to interest rate changes .
LG 3-6. Know what duration is.
LG 3-7. Understand how maturity , yield to maturity , and coupon rate affect the duration of a security .
LG 3-8. Understand the economic meaning of duration
1 . The difference between a required rate of return and an expected rate of return ?
2 . The difference between the coupon rate on a bond and the realized rate of return on a bond ?
3 . The difference between a zero - coupon bond and a coupon bond ?
4 . What the differences are among a discount bond , a premium bond , and a par bond ?
5 . How the difference between the yield to maturity on a bond and the coupon rate on the bond will cause the bond to sell at a premium or a discount ?
6. How stock valuation differs from bond valuation ?
7 . The difference between constant growth in dividends and supernormal growth in dividends ?
9. What happens to the fair present value of a bond when the required rate of return on the bond decreases ?
10 . What happens to a bond ’ s price as it approaches maturity ?
11 . What happens to a bond ’ s price sensitivity for a given change in interest rates as its time to maturity increases ?decreases ?
12 . Whether a high or low coupon rate bond experiences a larger price change if interest rates increase ?
13 . Whether a high or low coupon rate bond experiences a larger price change if interest rates decrease ?
14 . When the duration of an asset is equal to its maturity ?
15 . What the denominator of the duration equation measures ?
16 . What the numerator of the duration equation measures ?
17 . What the duration of a zero -coupon bond is ?
18 . Which has the longest duration : a 30 - year , 8 percent yield to maturity , zero - coupon bond , or a 30 - year , 8 percent yield to maturity , 5 percent coupon bond ?
19 . What the relationship is between the duration of a bond and its interest elasticity ?
2. What is the economic meaning of duration? ( LG 3-8 )
3. How is duration related to the interest elasticity of a fixedincome security? What is the relationship between duration and the price of a fixed-income security? ( LG 3-8 )
2. Refer again to the bond information in Problem 1. You expect to hold the bond for three more years, then sell it for$990. If the bond is expected to continue paying $75 per year over the next
41. You have discovered that when the required return of a bond you own fell by 0.50 percent from 9.75 percent to 9.25 percent, the price rose from $975 to $995. What is the duration of this bond? (
1. Calculate the percentage change in the 10-year T-bond and Aaa- and Baa-rated corporate bonds since June 2010.Go to the Federal Reserve Board’s Web site and get the latest rates on 10-year T-bond
2. Calculate the current spread of Aaa- and Baa-rated corporate bonds over the 10-year T-bond rate.How have these spreads changed over the last two years?Go to the Federal Reserve Board’s Web site

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