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business
financial markets institutions

Questions and Answers of Financial Markets Institutions

3. What was the market value of Amazon.com follow- ing its first day as a publicly held company?
2. Mr. Doerr of Kleiner Perkins Caufield & Byers. owned a significant number of shares. What was the market value of these shares at the end of the first day of trading?
1. What were the total proceeds from this offering? What part was retained by Amazon? What part by the investment bankers? What percent of the offer- ing is this?
13. Why do commercial banks object to brokerage houses' being allowed to offer many of the same services traditionally reserved for banks?
12. Is it possible to make money if you know that the price of a security will fall in the future? How?
11. What is the difference between a market order and a limit order?
10. What valuable service do dealers provide that facil- itates transaction trading and keeping the markets liquid?
9. What is the difference between a hostile takeover and a merger?
8. Why would an investment banker advise a firm to issue a security using best efforts rather than underwriting?
7. Is it better for a security issue to be fully subscribed or oversubscribed?
6. Why do investment banking firms often form syn- dicates for selling securities to the public?
5. Does the fact that a security has passed an SEC review mean that investors can buy the security without having to worry about taking a loss on the investment?
4. What are the primary services that an investment banker will provide a firm issuing securities?
3. What does it mean to say that investment bankers underwrite a security offering? How is this differ- ent from a best-efforts offering?
2. What law separated investment banking from com- mercial banking?
1. What was the motivation behind legislation separat- ing commercial banking from investment banking?
3. The Internet offers many calculators to help con- sumers estimate their needs for various financial services. When using these tools, you must remem- ber that they are usually sponsored by
2. An alternative to the financial goals calculation in problem is sites that offer calculators that let you input figures to compute your goals. Go to http://www.financialcale.com. Use each of the
1. There are many sites on the Web to help you com- pute whether you are properly preparing for your retirement. One of the better is offered by Quicken. You will find it at
9. Paul's car slid off the icy road, causing $2500 in damage to his car. He was also treated for minor injuries, costing $1300. His car insurance has a $500 deductible, after which the full loss is
8. An employee contributes $200 a year (at the end of the year) to her pension plan. What would be the total contributions and value of the account after five years? Assume that the plan earns 15%
7. When opening an IRA account, investors have two options. With a regular IRA account, funds added are not taxed initially, but are taxed when with- drawn. With a Roth IRA, the funds are taxed ini-
6. A client needs assistance with retirement planning. Here are the facts: The client, Dave, is 21 years old. He wants to retire at 65. Dave has disposable income of $2,000 per month. The IRA Dave
5. Kio Outfitters estimated the following losses and probabilities from past experience:What is the probability Kio will experience a loss of $5000 or greater? If an insurance company offers a loss
4. A home products manufacturer estimates that the probability of being sued for product defects is 1% per year per product manufactured. If the firm cur- rently manufactures 20 products, what is the
3. Your rich uncle dies, leaving you a life insurance policy worth $100,000. The insurance company also offers you an option to receive $8,225 per year for 20 years, with the first payment due today.
2. Assume that life expectancy in the United States is normally distributed with a mean of 73 years and a standard deviation of 9 years. What is the prob- ability that you will live to be over 100
1. Research indicates that the 1,000,000 cars in your city experience unrecoverable losses of $250,000,000 per year from theft, collisions, etc. If 30% of premiums are used to cover expenses, what
15. Why is Social Security in danger of eventually going bankrupt?
14. What is a pay-as-you-go pension plan?
13. Why have private pension plans grown rapidly in recent years?
12. Distinguish between defined-benefit and defined- contribution pension plans.
11. What is the purpose behind reinsurance?
10. What risks do property and casualty insurance poli- cies protect against?
9. What is the difference between term life insurance and whole life insurance?
8. How are insurance companies able to predict their losses from claims accurately enough to let them price their policies such that they will make a profit?
7. Are most insurance companies organized as mutu- als or stock companies?
6. Distinguish between independent agents and exclusive agents.
5. How do insurance companies protect themselves against losses due to adverse selection and moral hazard?
4. Distinguish between adverse selection and moral hazard as they relate to the insurance industry.
3. What is information asymmetry, and how does it affect insurance companies?
2. Why do insurance companies not allow people to buy insurance on personally unrelated risks?
1. Why do people choose to buy insurance even if their expected loss is less than the payments they will make to the insurance company?
investor in mutual funds?
2. The mutual fund industry publishes a fact book containing exhaustive data on the historic and cur- rent state of mutual funds. Go to http://www.ici. org/aboutfunds/factbook_toe.html.a. According
1. Morningstar is the best-known company that spe- cializes in analysis and review of mutual funds. There are a number of websites that report Morn- ingstar's results. Go to www.quicken.com/
12. Unhappy with the results, the new investor then sells the 389.09 shares. What is his profit? What is the new fund value?
10. To discourage short-term investing in its fund. the fund now charges a upfront load and a 2%back-end load. The same investor decides to put S50,tÅX) back into the fund. Calculate the new num-ber
9. Assume the new investor then sells the 420 shares What is his profit? What is the annualized return?The fund sens SOO shares of stock 4 to raise the needed funds Assume 250 trading days per year.
7. An investor sends the fund a check for $50,000. If there is no front-end load, calculate the new num- ber of shares and price per share. Assume the man- ager purchases 1800 shares of stock 3, and
5. A $1 million fund is charging a back-end load of 1%, 12b-1 fees of 1%, and an expense ratio of 1.9%. Prior to deducting expenses, what must the fund. value be at the end of the year for investors
4. A mutual fund reported year-end total assets of $1508 million and an expense ratio of 0.90%. What total fees is the fund charging each year?
3. A mutual fund offers "A" shares, which have a 5% upfront load and an expense ratio of 0.76 %. The fund also offers "B" shares, which have a 3% back- end load and an expense ratio of 0.87%. Which
2. A mutual fund charges a 5% upfront load plus reports an expense ratio of 1.34 %. If an investor plans on holding a fund for 30 years, what is the average annual fee, as a percent, paid by the
15. What regulatory changes are being considered to deal with abuses in the mutual fund industry?
14. What is market timing when referred to by mutual funds?
13. What is late trading when referred to by mutual funds?
12. What is the primary source of the conflict of inter- est between shareholders and investment man- agers?
11. What do 12b-1 fees pay and what is the maximum amount these fees can be?
10. What prompted the growth of money market mutual funds?
9. What distinguishes a hedge fund from other types of mutual funds?
8. How are deferred loads usually structured?
7. What is a load fund?
6. How does an index fund differ from an actively managed fund?
5. Discuss why a mutual fund family may find it ben- eficial to offer 50 or 60 different stock mutual funds.
4. Distinguish between an open- and closed-end mutual fund.
3. Considering the discussion of market efficiency from Chapter 6, discuss whether you should be will- ing to pay high fees to mutual fund investment managers.
2. What is meant by liquidity intermediation?
1. What features of mutual funds and the investment environment have led to mutual funds' rapid growth in the last two decades?
2. The Office of the Comptroller of the Currency is responsible for many of the regulations affecting bank operations. Go to http://www.occ.treas.gov/. Click on "Regulatory Information." Now click on
1. Go to http://www.fdic.gov/regulations/laws/ important/. This site reports on the most signifi- cant pieces of legislation affecting banks since the 1800s. Summarize the most recently enacted bank
Il.Oldhat borrows $5 _ 5 million in the Overnight federal funds market to meet its resources requirement.- WI-at is the new balance sheet for Oldhat? How capitalized is the bank?
10.The bad news about the mortgages is featured in the local newspaper, causing a minor bank run. $6 million in deposits is withdrawrc Examine the bank's condition,
9. Oldhat decides to invest $77 million in excess reserves in commercial loans. What be the impact on its capital ratio? Its risk-wedghted capitat
8. Congress allowed Oldhat to amortize the loss over the remaining life Of the mortgage. If this technique was used in the how would the transaction have been recorded? What would be the annual
7. Bank regulators force Oldhat to sell its mortgages to rec-ßnize the fair market value, What is the accounting transaction? How does this affect its capital position?
6. The next day. terrible news hits the mortgage mar-kets, and mortgage rates jump to 13%_ What is the marker value ot Oldhat's mortgages? What is Old-haft "market value" capita' ratio?
5. Calculate the risk-weighted assets and risk-weighted capital ratio of Oldhat's first day
4. Old'rat Financial started its first day Of operations with $9 million in capital, SI.•3fJ million in checkable deposits are received. The bank issues a $25 million commercial loan and another
1. Consider a failing bank. A deposit of $150,000 is worth how much if the FDIC uses the payoff method? The purchase and assumption method? Which is more costly to taxpayers?
15. How could market-value accounting for bank cap- ital requirements benefit the economy? How diffi- cult would it be to implement?
14. How could higher deposit insurance premiums for banks with riskier assets benefit the economy?
13. Do you think that removing the impediments to a nationwide banking system will be beneficial to the economy? Explain.
12. Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.
11. How do disclosure requirements help limit exces- sive risk taking by banks?
10. Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?
9. What steps were taken in the FDICIA legislation of 1991 to improve the functioning of federal deposit insurance?
8. What forms does bank supervision take, and how does it help promote a safe and sound banking system?
7. Why does imposing bank capital requirements on banks help limit risk taking?
6. What special problem do off-balance-sheet activi- ties present to bank regulators, and what have they done about it?
5. What are the costs and benefits of a too-big-to-fail policy?
4. What bank regulations are designed to reduce moral hazard problems created by deposit insur- ance? Will they completely eliminate the moral haz- ard problem?
3. What bank regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work?
2. If casualty insurance companies provided fire insur- ance without any restrictions, what kind of adverse selection and moral hazard problems might result?
1. Give one example each of moral hazard and adverse selection in private insurance arrangements.
2. Go to http://www.ncua.gov/. This is the home page of the National Credit Union Administration. Click on the history of the credit union industry.a. According to the NCUA, what features define a
1. Like banks, thrifts provide a great deal of summary information to the public. One of the most exten- sive sites for thrift information is at http://www. ots.treas.gov/. Select "Industry
20. How can the S&L crisis be blamed on the principal- agent problem?
19. Some advocates of campaign finance reform believe that government funding of political campaigns and restrictions on campaign financing might reduce. the principal-agent problem in our political
18. The FIRREA legislation in 1989 is the most com- prehensive thrift legislation since the 1930s. Describe its major features.

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