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financial markets institutions

Questions and Answers of Financial Markets Institutions

14. How can a stock market crash provoke a financial crisis?
13. Is a financial crisis more likely to occur when the economy is experiencing deflation or inflation? Explain your answer.
12. Explain how the separation of ownership and con- trol in American corporations might lead to poor management.
11. How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?
10. "The more collateral there is backing a loan, the less the lender has to worry about adverse selec- tion." Is this statement true, false, or uncertain? Explain your answer.
8. Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so? Why? 9. Rich individuals often worry that people will seek
7. How can the existence of asymmetric information provide a rationale for government regulation of financial markets?
6. Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why?
5. Do you think the lemons problem would be more severe for stocks traded on the New York Stock Exchange or for those traded over-the-counter? Explain your answer.
4. How do standard accounting principles required by the government help financial markets work more efficiently?
3. Would moral hazard and adverse selection still arise in financial markets if information were not asym- metric? Explain your answer.
2. Describe two ways in which financial intermedi- aries help lower transaction costs in the economy.
1. How can economies of scale help explain the exis- tence of financial intermediaries?
2. The International Monetary Fund stands ready to help nations facing monetary crises. Go to http://www.imf.org. Click on the tab labeled "About IMF." What is the stated purpose of the IMF? How many
1. The Federal Reserve publishes information on-line that explains the workings of the foreign exchange market. One such publication can be found at http://www.ny.frb.org/education/addpub/ usfxm/.
5. If the balance in the current account increases by $2 billion while the capital account is off $3.5 bil- lion, what is the impact on governmental interna- tional reserves?
4. If the dollar begins trading at $1.30 per euro, with the same interest rates given in Problem 3, and the ECB raises interest rates so that the rate on euro deposits rises by 1 percentage point,
3. If the interest rate is 4% on euro deposits and 2% on dollar deposits, while the euro is trading at $1.30 per euro, what does the market expect the exchange rate to be one year from now?
2. Again, the Federal Reserve purchases $1,000,000 of foreign assets. However, to raise the funds, the trad- ing desk sells $1,000,000 in T-bills. Show the effect of this open market operation using
1. The Federal Reserve purchases $1,000,000 of for- eign assets for $1,000,000. Show the effect of this open market operation using T-accounts.
20.provide a rationale for having an international lender of last resort like the IMP Has the IMF done a good job in performing the role Of the international lender of last resort?What steps should
IS. Why rnjght central banks in emerging-market COun•tries find that engaging in a lenderuof-last resort operation might be counterproductive? Does this
17. Discuss the pros and cons 01 capital controls on capital inflows.
16. Are capital controls on capital Outflows a good idea? Why or Why not?
15. "The abandonment of fixed exchange rates after 1973 has rneant that countries have pursued more independent monetary policies." Is this statement true, false, Or uncertain? Explain your answer.
14. Why is it that in a pure nexible exchange rate Sys-tem, the foreign exchange marker has no direct effects On the money supply? Does this mean that, the foreign exchange market has no effect on
13. "Inflation is not possible under the gold standard."Is this statement true, false. or uncertain? Explain your answer.
12. How can persistent US, balance-of-payments clencits stimulate world inflation?
"Bulancc•of-pævments deficits always cause a coun-to lose international reserves. [s this statement true, false. or uncertain? Explain your answer.
10. Why earl deficits foree some to implement a contractionary monetary policy?
9. "If a country wants to keep its exchange rate from changing, it must give up some control over Its money supply." Is this Statement true, or uncertain? Explain Vour answer
8. How can a large surplus con-tribute ro the Inflation rate?
7. If a par exchange rate was ur«iervalued during the Bretton Woods fixed exchange rate regime, What kind Of intervention wculd that coun-bank be forced to undertake, and what effect would it have
6. Wtut is the exchange rate between dollars and euros one dollar is convertible into ounce Of gold and one euro is convertible into ounce Of gold?
5. Under the gold standard. if Britain became more productive relative to the United States, what would happen to the money supoiy the two countries? Why would the changes in the money supply help
. An American banks borrowing Of Eurodollars Why does a deficit for the United States have a different effect on its inter, national reserves than a balance-of-payments deficit for the Netherlands?
'3. For each of the following, identify in which parr of the balance-of-payments account it appears (Cur-rent account, capital account. or method of financ-ing) and whether it is a receipt or a
2. Il the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the vention, what will be the impact on internationai reserves, the money supply, and the exchange rate?
1. If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting open market operatic_m to sterilize the intervention. what will be the impact on international
2. International travelers and businesspeople fre- quently need to accurately convert from one cur- rency to another. It is often easy to find the rate needed to convert the U.S. dollar into another
1. The Federal Reserve maintains a website that lists the exchange rate between the U.S. dollar and many other currencies. Go to http://www.federal reserve.gov/releases/H10/hist/. Go to the his-
16. Short-term interest rates are 2% in Japan and 4% in the United States. The current exchange rate is 120 yen per dollar. If you can enter into a forward exchange rate of 115 yen per dollar, how
15. Short-term interest rates are 2% in Japan and 4% in the United States. The current exchange rate is 120 yen per dollar. What is the expected forward exchange rate?
14. A one-year CD in Europe is currently paying 5%, and the exchange rate is currently 0.99 euros per dollar. If you believe the exchange rate will be 1.04 euros per dollar one year from now, what is
13. If the price level recently increased by 20% in Eng- land while falling by 5% in the United States, how much must the exchange rate change if PPP holds? Assume that the current exchange rate is
12. The current exchange rate between the Japanese yen and the U.S. dollar is 120 yen per dollar. If the dollar is expected to depreciate by 10% relative to the yen, what is the new expected exchange
11. The current exchange rate between the United States and Britain is $1.825 per pound. The six- month forward rate between the British pound and the U.S. dollar is $1.79 per pound. What is the per-
9. The Brazilian real is trading at 0.375 real per U.S. dollar. What is the U.S. dollar per real exchange rate? 10. The Mexican peso is trading at 10 pesos per dol- lar. If the expected U.S.
8. In 1999, the euro was trading at $0.90 per euro. If the euro is now trading at $1.16 per euro, what is the percentage change in the euro's value? Is this an appreciation or depreciation?
7. The New Zealand dollar to U.S. dollar exchange rate is 1.36, and the British pound to U.S. dollar exchange rate is 0.62. If you find that the British pound to New Zealand dollar were trading at
6. If the Canadian dollar to U.S. dollar exchange rate is 1.28 and the British pound to U.S. dollar exchange rate is 0.62, what must the Canadian dol- lar to British pound exchange rate be?
5. The six-month forward rate between the British pound and the U.S. dollar is $1.75 per pound. If six- month rates are 3% in the United States and 150 basis points higher in England, what is the
4. The current exchange rate is 0.93 euro per dollar, but you believe the dollar will decline to 0.85 euro per dollar. If a euro-denominated bond is yielding 2%, what return do you expect in US
3. An investor in Canada purchased 100 shares of IBM on January 1 at $93.00 per share. IBM paid an annual dividend of $0.72 on December 31. The stock was sold that day as well for $100.25. The
2. An investor in England purchased a 91-day T-bill for $987.65. At that time, the exchange rate was $1.75 per pound. At maturity, the exchange rate was $1.83 per pound. What was the investor's hold-
1. A German sports car is selling for 70,000 euros. What is the dollar price in the United States for the German car if the exchange rate is 0.90 euros per dollar?
15. If there is a strike in France, making it harder to buy French goods, what will happen to the value of the euro?
14. If the European central bank decides to contract the money supply in order to fight inflation, what will happen to the value of the U.S. dollar?
13. If expected inflation drops in Europe so that inter- est rates fall there, predict what will happen to the U.S. exchange rate.
12. If Americans go on a spending spree and buy twice as much French perfume, Japanese TVs, English sweaters, Swiss watches, and Italian wine, what will happen to the value of the U.S. dollar?
11. If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 60 miles to the gallon, what will hap- pen to the U.S. exchange rate?
10. If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. exchange rate.
9. If several European governments unexpectedly announce that they will be imposing higher tariffs on foreign goods one year from now, what will hap- pen to the value of the euro today?
8. If the British central bank prints money to reduce unemployment, what will happen to the value of the pound in the short run and the long run?
7. The president of the United States announces that he will reduce inflation with a new anti-inflation program. If the public believes him, predict what will happen to the U.S. exchange rate.
6. In the mid- to late 1970s, the yen appreciated rel- ative to the dollar even though Japan's inflation rate was higher than America's. How can this be explained by an improvement in the
5. If the demand for a country's exports falls at the same time that tariffs on imports are raised, will the country's currency tend to appreciate or depreci- ate in the long run?
4. If the European price level rises by 5% relative to the price level in the United States, what does the theory of purchasing power parity predict will hap- pen to the value of the euro in terms of
3. Check in a newspaper the exchange rates for the foreign currencies listed in the "Following the News" box on page 320. Which of these currencies have appreciated and which have depreciated since
2. "A country is always worse off when its currency is weak (falls in value)." Is this statement true, false, or uncertain? Explain your answer.
1. When the euro appreciates, are you more likely to drink California or French wine?
2. One of the more difficult decisions faced by home-owners is whether it pays to refinance a mortgage loan when rates have dropped. GO to http://interest.com and click on "Mortgage Calculators."
1. You may be looking into acquiring a home in the near future One common question you may have is how large a mortgage loan you Car. afford. GO to http:ffinterest.com and Click On 'Mortgage
18. Rusty Nail owns his house free and clear, and it's worth $400,000. To finance his retirement, he acquires a reverse annuity mortgage (RAM) from his bank. The RAM provides a fixed monthly pay-
17. Consider a growing equity mortgage on a $250,000 mortgage with yearly payments. The stated inter- est rate on the mortgage is 6%, but this only applies to the first annual payment. Thereafter,
16. Consider a 30-year graduated-payment mortgage on a $250,000 mortgage with yearly payments. The stated interest rate on the mortgage is 6%, but the first annual payment is calculated assuming a 3%
15. Consider a shared-appreciation mortgage (SAM)on a $250,000 roortgage mth yearly paynvents.rent market mortgage rates are high, running at 13%, 10% of which is annual inflation. Under the terms of
14. A mortgage on a house worth $850,000 requires what down payment to avoid PMI insurance?
IS. mortgage options are available; a 30.year fixed-rate Inan at 6% uhth no discount points. and a 30-year fixed •rate loan at 5.75% with points If you are planning on living in the house ror 12
12. T.vo mortgage options are available; a 30-year fixed-rate loan at 6% with no discount points, and a 311-year fixed-rate loan at with 1 discount point. How long do you have to stay in the house
ll. 'lh•vo mortgage options are available: a 15-year fixed-rate Ic•.an at with AD discount roinLS, and a 15•year fixed-rate loan at 575% With I discount point. Assuming you will not pay Off the
9. Consider a 30-year fixed-rate mortgage for $500,000 at a nominal rate of 6%. What is the dif- ference in required payments between a monthly payment and a bimonthly payment (payments made twice a
8. A 30-year variable-rate mortgage offers a first-year teaser rate of 2%. After that, the rate starts at 4.5%, adjusted based on actual interest rates. The maxi- mum rate over the life of the loan
7. Consider a 5-year balloon loan for $100,000. The bank requires a monthly payment equal to that of a 30-year fixed-rate loan with a nominal annual rate of 5.5%. How much will the borrower owe when
6. Consider a 30-year fixed-rate mortgage of $100,000 at a nominal rate of 9 %. What is the duration of the loan? If interest rates increase to 9.5% imme- diately after the mortgage is made, how much
5. Consider a 30-year fixed-rate mortgage for $100,000 at a nominal rate of 9%. An S&L issues this mortgage on April 1 and retains the mortgage in its portfolio. However, by April 2, mortgage rates
4. Consider a 30-year fixed-rate mortgage for $100,000 at a nominal rate of 9%. If the borrower pays an additional $100 with each payment, how fast will the mortgage be paid off?
3. Consider a 30-year fixed-rate mortgage for $100,000 at a nominal rate of 9%. If the borrower wants to pay off the remaining balance on the mort- gage after making the 12th payment, what is the
2. Compute the face value of a 30-year fixed-rate mort gage with a monthly payment of $1100, assuming a nominal interest rate of 9%. If the mortgage requires 5% down, what is the maximum house price?
1. Compute the required monthly payment on an $80,000 30-year fixed-rate mortgage with a nomi- nal interest rate of 5.80%. How much of the pay- ment goes toward principal and interest during the
15. Describe how a mortgage pass•through works.
13. The reverse annuity mortgage (RAM) allows retired people to live Off the equity they have in their homes Without having to sell the home.Explain how a RAM works What is a securitized mortgage?
12. Many banks offer lines of credit that are secured by a second mortgage (or herl) on real property These loans have been very popular among bank cus-tomers, Why are homeowners so Willing to pledge
1I The monthly payments on both graduated-payment loans and loans increase over time.Despite this similarity, the two types Of loans have different purposes What is the motivation behind each type Of
10. Interpret what is meant when a lender quotes the terms on a loan as - floating With the T-bill plus 2 with caps or 2 and 6."
9. Distinguish between conventional mortgage loans and insured mortgage loans.
S. Lenders tend not to be as flexible about the fications required of mortgage customers as they can be for other types of bank loans. Why is this so?
7. unnat kind of Insurance do lenders usually require of borrowers who have less than an loan-to-value ratio?
6. What is the purpose Of requiring that a borrower make a down payment before receiving a loan?
5. Umat isa lien, and when is it used in mortgage lend-

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