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financial markets institutions

Questions and Answers of Financial Markets Institutions

What are money market mutual funds? In what assets do these funds typically invest? What factors caused the strong growth in this type of fund over various periods from 1992 through 2009? (LG
Using the data in Table 17–2, discuss the growth and ownership holdings over the last 36 years of long-term funds versus money market funds. (LG 17-2) LO.1
How does the risk of short-term funds differ from that of long-term funds? (LG 17-2) LO.1
What are the economic reasons for the existence of mutual funds? (LG 17-1) LO.1
What are the principal demographics of household owners of mutual funds? (LG 17-2) LO.1
What is the difference between an open-end mutual fund and a closedend fund? What is the difference between an open-end mutual fund and a unit investment trust? (LG 17-3) LO.1
What is the difference between an open-end mutual fund and an ETF closed-end fund? What is the difference between an open-end mutual fund and a unit investment trust? (LG 17-3) LO.1
What change in regulatory guidelines occurred in 2009 that had the primary purpose of giving investors a better understanding of the risks and objectives of a mutual fund? (LG 17-4) LO.1
What are the three components of the return that an investor receives from a mutual fund? (LG 17-5) LO.1
How is the net asset value (NAV) of a mutual fund determined? What is meant by the term marked-to-market daily? (LG 17-5) LO.1
How might an individual’s preference for a mutual fund’s objective change over time? (LG 17-4) LO.1
What is the difference between a load fund and a no-load fund? Is the argument that load funds are more closely managed and therefore have higher returns supported by the evidence presented in Table
What is a 12b-1 fee? Suppose that you have a choice between two mutual funds, one a load fund with no annual 12b-1 fees, and the other a no-load fund with a maximum 12b-1 fee. How would the length of
Why did the proportion of equities in long-term mutual funds increase from 38.3 percent in 1990 to 70.0 percent in 2007 and decrease back to 55.5 percent in 2008? How might an investor’s preference
Who are the primary regulators of the mutual fund industry? How do their regulatory goals differ from those of other types of financial institutions? (LG 17-6) LO.1
Discuss the improper trading abuses and improper assignment of fees for which mutual funds were prosecuted in the early 2000s. (LG 17-6) LO.1
How have global mutual funds grown relative to U.S.-based mutual funds? (LG 17-7) LO.1
What is a hedge fund and how is it different from a mutual fund? (LG 17-8) LO.1
What are the different categories of hedge funds? (LG 17-8) LO.1
What types of fees do hedge funds charge? (LG 17-8) LO.1
What is the difference between domestic hedge funds and offshore hedge funds? Describe the advantages of offshore hedge funds over domestic hedge funds. (LG 17-8) LO.1
An investor purchases a mutual fund for $50. The fund pays dividends of $1.50, distributes a capital gain of $2, and charges a fee of $2 when the fund is sold one year later for $52.50. What is the
Open-end Fund A has 165 shares of ATT valued at $35 each and 30 shares of Toro valued at $75 each. Closed-end Fund B has 75 shares of ATT and 72 shares of Toro. Both funds have 1,000 shares
A mutual fund has 300 shares of General Electric, currently trading at$30, and 400 shares of Microsoft, Inc., currently trading at $54. The fund has 1,000 shares outstanding. (LG 17-5)a. What is the
Suppose today a mutual fund contains 2,000 shares of J.P. Morgan Chase, currently trading at $64.75, 1,000 shares of Walmart, currently trading at $63.10, and 2,500 shares of Pfizer, currently
An investor purchases a mutual fund share for $100. The fund pays dividends of $3, distributes a capital gain of $4, and charges a fee of$2 when the fund is sold one year later for $105. What is the
Suppose an individual invests $20,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 2.5 percent of the amount invested and is deducted from the original
What is the most recent value for Total Net Assets and Number of Funds? LO.1
How has each of these changed since 2016 as reported in Table 17–1? LO.1
Most mutual fund companies offer more than one type of fund. LO.1
Some mutual funds are covered by private insurance and/or by implicit or explicit guarantees from mutual fund management companies. LO.1
Morningstar’s Active/Passive Barometer: A New Yardstick for an Old Debate, Morningstar Manager Research, June 2015. LO.1
SPDRs, Standard & Poor’s Depository Receipts, hold a portfolio of the equity securities that comprise the Standard & Poor’s 500 Composite Stock Price Index. SPDRs seek investment results that,
We omit any fees that the mutual fund company charges for managing the mutual fund.These fees and their impact on returns are discussed later in the chapter. LO.1
Another kind of load, called a back-end load, is sometimes charged when mutual fund shares are sold by investors. Back-end loads, also referred to as deferred sales charges, are an alternative way to
That is, $10,000 = $10,409.085/(1 + i)2 = > i = 2.02%. LO.1
It might be noted that, as many European countries move away from state-sponsored pension plans to privately funded pension plans and retirement vehicles, the rate of growth in mutual funds in these
However, data deficiencies in the reporting and collection of hedge fund returns somewhat reduce confidence in all measures of hedge fund performance. Further, the inability to explain returns of
Describe the difference between a private pension fund and a public pension fund. (LG 18-1) LO.1
Describe the difference between an insured pension fund and a noninsured pension fund. What type of financial institutions would administer each of these? (LG 18-1) LO.1
Describe the difference between a defined benefit pension fund and a defined contribution pension fund. (LG 18-2) LO.1
What are the three types of formulas used to determine pension benefits for defined benefit pension funds? Describe each. (LG 18-2) LO.1
What have the trends been for assets invested in defined benefit versus defined contribution pension funds in the last three decades? (LG 18-2) LO.1
Describe the trend in assets invested in 401(k) plans in the 1990s through 2010s. (LG 18-3) LO.1
What is the difference between an IRA and a Keogh account? (LG 18-3) LO.1
Describe the different pension funds sponsored by the federal government. (LG 18-4) LO.1
What are the major assets held by private pension funds in 1975 versus 2016? Explain the differences. (LG 18-1) LO.1
How do the financial asset holdings of defined benefit pension funds differ from those of defined contribution pension funds? Explain the differences. (LG 18-2) LO.1
Describe the issues associated with the long-term viability of the Social Security fund. (LG 18-4) LO.1
What was the motivation for the passage of ERISA? (LG 18-5) LO.1
Describe the major features of ERISA. (LG 18-5) LO.1
What types of pension reforms have countries tried as their populations age and contributions to pension funds decrease? (LG 18-6) LO.1
An employer uses a career average formula to determine retirement payments to its employees. The annual retirement payout is 5 percent of an employee’s career average salary times the number of
An employee with 25 years of service at a company is considering retirement at some time in the next 10 years. The employer uses a final pay benefit formula by which the employee receives an annual
Using a Spreadsheet to Calculate Pension Benefit Payments: Your employer uses a career average formula to determine retirement payments to its employees. You have 20 years of service at the company
Using a Spreadsheet to Calculate Pension Benefit Payments: Your employer uses a final pay formula to determine retirement payments to its employees. You have 20 years of service at the company and
Your company sponsors a 401(k) plan into which you deposit 12 percent of your $60,000 annual income. Your company matches 50 percent of the first 5 percent of your earnings. You expect the fund to
Using the information in Problem 7, and assuming all variables remain constant over the next 25 years, what will your 401(k) fund value be in 25 years (when you expect to retire)? (LG 18-3) LO.1
Your company sponsors a 401(k) plan into which you deposit 10 percent of your $120,000 annual income. Your company matches 75 percent of the first 10 percent of your earnings. You expect the fund to
Using the information in Problem 9, and assuming all variables remain constant over the next 15 years, what will your 401(k) fund value be in 15 years (when you expect to retire)? (LG 18-3) LO.1
How has the flow of funds to defined benefit and defined contribution pension funds changed since 2016 as reported in Figure 18–2? LO.1
Is the flow of funds into these two types of pension funds currently positive or negative? Why would these trends occur? LO.1
A GIC is a long-term liability issued by insurance companies. A GIC guarantees not only a rate of interest over some given period but also the annuity rate on a beneficiary’s contract(see Chapter
The employee will have to pay taxes on the funds as he withdraws funds during retirement. However, the tax rate is likely to be lower and tax payments are delayed by several years. LO.1
In reality, the employee has a larger number of possible choices in terms of fund asset allocation. LO.1
For simplicity, we assume that the employee’s contribution remains constant over the 30 years. Realistically, as an employee’s salary increases over his or her working years, contributions to the
Individuals over 50 years of age can contribute $6,500 per year. If an employee’s earnings exceed the limit, he or she can still invest in an IRA. However, the contribution is not tax
Keogh contribution caps are linked to the cost of living. In 2016, the cap was $53,000. LO.1
Self-employed individuals contribute at twice the rate of employees because employers pay a matched amount. The combined rate of the employee and employer is equal to the self-employment contribution
To the extent that regulation restricts the asset and liability activities of a firm or FI, these restrictions are similar to imposing an “implicit” premium or tax on the activities of the
Underfunded plans pay a surcharge of $9 per participant per $1,000 of underfunding. LO.1
What is credit risk? Which types of FIs are more susceptible to this type of risk? Why? (LG 19-1) LO.1
What is the difference between firm-specific credit risk and systemic credit risk? How can an FI alleviate firm-specific credit risk? (LG 19-1) LO.1
Which type of cash withdrawal presents very little liquidity risk?Which type of cash withdrawal is a source of significant liquidity risk for DIs? (LG 19-1) LO.1
What is reinvestment risk? How is reinvestment risk part of interest rate risk? If an FI funds short-term assets with long-term liabilities, page 602 what will be the impact on earnings of a decrease
How can interest rate risk adversely affect the economic or market value of an FI? (LG 19-1) LO.1
How does a policy of matching the maturities of assets and liabilities work (a) to minimize interest rate risk and (b) against the assettransformation function for FIs? (LG 19-1) LO.1
Corporate bonds usually pay interest semiannually. If an FI decided to change from semiannual to annual interest payments, how would this affect the bond’s interest rate risk? (LG 19-1) LO.1
Consider again the two bonds in Question 13. If the investment goal is to leave the assets untouched until maturity, such as for a child’s education or for one’s retirement, which of the two
What two factors provide potential benefits to FIs that expand their asset holdings and liability funding sources beyond their domestic borders? (LG 19-1) LO.1
If the Swiss franc is expected to depreciate in the near future, would a U.S.-based FI in Bern City, Switzerland, prefer to be net long or net short in its asset positions? Discuss. (LG 19-1) LO.1
If you expect the Swiss franc to depreciate in the near future, would a U.S.-based FI in Basel, Switzerland, prefer to be net long or net short in its asset positions? Discuss. (LG 19-1 ) LO.1
What is country or sovereign risk? What remedy does an FI realistically have in the event of a collapsing country or currency? (LG 19-1) LO.1
What is the difference between technology risk and operational risk?How does internationalizing the payments system among banks increase operational risk? (LG 19-1) LO.1
Characterize the risk exposure(s) of the following FI transactions by choosing one or more of the following: (LG 19-1)a. Credit riskb. Interest rate riskc. Off-balance-sheet riskd. Foreign exchange
Why can insolvency risk be classified as a consequence or outcome of any or all of the other types of risks? (LG 19-2) LO.1
A financial institution has the following market value balance sheet structure: (LG 19-1)a. The bond has a 10-year maturity, a fixed-rate coupon of 10 percent paid at the end of each year, and a par
Consider the following income statement for WatchoverU Savings Inc. (in millions): (LG 19-1)a. What is WatchoverU’s expected net interest income at year-end?b. What will be the net interest income
How has the charge-off rate changed since 2016 as reported in Figure 19–1? LO.1
Compare the charge-off rate of C&I loans with real estate and credit card loans. Which has changed the most since 2016? LO.1
What is the total reserve funds held by DIF and the reserve ratio? LO.1
How have these values changed since 2016 as reported in the chapter? LO.1
Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement? (LG 13-7) LO.1
Disregarding the capital conservation buffer, what is the bank’s capital adequacy level (under Basel III) if the par value of its equity is$225,000, surplus value of equity is $200,000, retained
Using the Tier I leverage-ratio requirement, what is the bank’s minimum regulatory capital requirement to keep it in the adequately capitalized zone? (LG 13-7) LO.1
To be adequately capitalized, what are the bank’s CET1, Tier I, and total risk–based capital requirements under Basel III? (LG 13-7) LO.1
What is the bank’s risk-adjusted asset base? (LG 13-7) LO.1
What is the contribution to the asset base of the following items under the Basel III requirements? (LG 13-7)a. $10 million cash reserves.b. $50 million 91-day U.S. Treasury bills.c. $25 million cash
Third Fifth Bank has the following balance sheet (in millions), with the risk weights in parentheses. (LG 13-7)In addition, the bank has $20 million in commercial direct-credit substitute standby
Third Bank has the following balance sheet (in millions), with the risk weights in parentheses. (LG 13-7)The cumulative preferred stock is qualifying and perpetual. In addition, the bank has $30

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