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financial markets institutions

Questions and Answers of Financial Markets Institutions

What are typical reasons why MNCs expand internationally?
Explain why unfavorable economic or political conditions affect the MNC’s cash flows, required rate of return, and valuation.
Identify the more obvious risks faced by MNCs that expand internationally.
Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain how appreciation of the euro (the currency used in many European countries) would affect Plak’s
McCanna Corp., a U.S. firm, has a French subsidiary that produces wine and exports to various European countries.All of the countries where it sells its wine use the euro as their currency, which is
Anheuser-Busch, the producer of Budweiser and other beers, expanded into Japan by engaging in a joint venture with Kirin Brewery, the largest brewery in Japan. The joint venture enabled
The managers of Loyola Corp. recently had a meeting to discuss new opportunities in Europe as a result of the recent integration among Eastern European countries.They decided not to penetrate new
Birm Co., based in Alabama, is considering several international opportunities in Europe that could affect the value of its firm. The valuation of its firm is dependent on four factors: (1)expected
Yahoo! has expanded its business by establishing portals in numerous countries, including Argentina, Australia, China, Germany, Ireland, Japan, and the United Kingdom. It has cash outflows associated
Olmsted Co. has small computer chips assembled in Poland and transports the final assembled products to the parent, where they are sold by the parent in the United States. The assembled products are
Arlington Co. expects to receive 10 million euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next 10 years.The euro exchange rate is presently valued
Much of the attention to the credit crisis was focused on its adverse effects on financial institutions. Yet, many other types of firms were affected as well. Explain why the numerator of the MNC
Because of the low labor costs in Thailand, Melnick Co. (based in the United States) recently established a major research and development subsidiary there that it owns. The subsidiary was created to
MNCs tend to expand more when they can more easily access funds by issuing stock. In some countries, shareholder rights are very limited, and the MNCs have limited ability to raise funds by issuing
Blades, Inc., is a U.S.-based company that has been incorporated in the United States for 3 years. Blades is a relatively small company, with total assets of only\($200\) million. The company
In every chapter of this text, some of the key concepts are illustrated with an application to a small sporting goods firm that conducts international business. These “Small Business Dilemma”
1. Use this website to assess recent trends in direct foreign investment (DFI) abroad by U.S. firms.Compare the DFI in the United Kingdom with the DFI in France. Offer a possible reason for the large
Select one country (except the United States) and describe why that country was affected by the international credit crisis. For example, did its financial institutions invest heavily in
Select one MNC based in the United States or in any other country. Compare its financial performance in 2007 and in the first two quarters of 2008 to its performance since July 2008 when the crisis
Explain how the bankruptcy of Lehman Brothers had adverse effects on countries outside the United States.Some effects may be indirect, while others are more direct.
Explain how the financial problems of American International Group (AIG) had adverse effects on countries outside the United States. Some effects may be indirect, while others are more direct.
Select a country (except the United States)that was adversely affected by the international credit crisis, and explain how that country’s government responded to the crisis. Offer your opinions on
Describe the trend of exchange rates before the credit crisis, during the credit crisis, and after the crisis. Offer insight on why the exchange rates of particular currencies changed as they did as
Briefly explain how changes in various economic factors affect the U.S. current account balance.
Explain why U.S. tariffs will not necessarily reduce a U.S. balance-of-trade deficit.
Explain why a global recession like that in 2008–2009 might encourage some governments to impose more trade restrictions.
Effects of the Euro. Explain how the existence of the euro may affect U.S. international trade.
Currency Effects. When South Korea’s export growth stalled, some South Korean firms suggested that South Korea’s primary export problem was the weakness in the Japanese yen. How would you
Ben Holt, chief financial officer (CFO) of Blades, Inc., has decided to counteract the decreasing demand for Speedos roller blades by exporting this product to Thailand. Furthermore, due to the low
The website address of the Bureau of Economic Analysis is www.bea.gov.1.Use this website to assess recent trends in exporting and importing by U.S. firms. How has the balance of trade changed over
Suppose that for a given country the demand for imports can be expressed as IM = 1,250 + 0.05E and the demand for exports can be expressed as X = 750 − 0.08E, where E is the exchange rate (units of
Explain how the net interest margin (NIM) would respond to increased competition for funds by the financial intermediation industry.
Nice Horizon Bank has the following measures of bank profitability: EM = 14 and ROA = 1.05%.Gold Coast Bank’s measures are EM = 12.3 and ROA = 1.15%. Which bank has a higher ROE?
Refer to the previous problem. Calculate both banks’ net profit after taxes and equity capital if both banks’ assets are equal to $120 million.Previous problemNice Horizon Bank has the following
A bank is considering two investment portfolios composed of a mix of government securities (federal and municipal securities). The first portfolio has a return of 6% with probability 0.9 and returns
“The banking industry in Canada is less competitive than the banking industry in the United States because in Canada only a few large banks dominate the industry, while in the United States there
The Federal Reserve eliminated reserve requirements in March 2020. What effects should this have on the size of money market mutual funds?
How does the Dodd-Frank Act of 2010 compare to the Glass-Steagall Act of 1933?
A mutual fund charges a 4.2% front-end load. Determine the maximum annual expense ratio you will be willing to pay if you do not want to pay more than 1.7% in fees per year (assume you will hold the
As technology improves over time, fewer workers are needed to produce the same goods as before.Do you think this might have an implication for payas-you-go systems?
What is a pay-as-you-go pension plan?
Calculate the expected payoff of a game in which you can lose \($200\) with probability 0.3, win \($240\) with probability 0.5 and win \($700\) with probability 0.2.
Refer to the previous exercise. Suppose an individual prefers to play the game rather than to accept $200 with certainty. Is this individual risk averse or a risk lover?Previous exerciseCalculate the
Assume that the monthly payments faced by an insurance company are normally distributed with a mean of \($100,000\) and a standard deviation of \($12,000.\) Determine the probability that in a given
Ipora Bank conducts its business mostly by taking in deposits and then lending them out. Pando Bank earns its trade by helping corporations raise funds.If you want to open a checking account, which
Suppose you heard that an investment bank decided not to form a syndicate to underwrite an issue of securities. What does this piece of information tell you about the quality of the securities soon
Suppose you manage a pension fund and an investment bank contacts you to review the prospectus of a security issue that you know is currently undersubscribed.Assuming your research indicates that
Suppose the issue of 5,000,000 shares of stock was originally oversubscribed at a price of $15 per share.Calculate the money “left on the table” if you realize that the stock could have been
Xavi decides to short sell 10,000 shares of Guiness Co. stock, currently trading at \($7.00\) per share. Determine Xavi’s profits if Guiness stock trades at \($5.00\) per share at the moment in
Bluestar Airlines has physical assets valued at \($12,500,000,\) and according to industry experts, the net present value of its future earnings amounts to \($40.00\) per share. Assuming there are
The limit-order book for a security is as follows:The specialist receives the following, in order:• Market order to sell 300 shares • Limit order to buy 100 shares at 25.38 • Limit order to
Calculate the new interest rate if a bank realizes that the value of a mortgage increases from \($450,000\) to \($471,428.57,\) if the duration of the mortgage is 10 years and the interest rate used
A bank manager is worried because the income gap currently equals −\($35\) million and interest rates are expected to increase by 1.5%. Determine the amount of rate-sensitive assets if rate
A financial institution has rate-sensitive assets of \($392\) million. What is the maximum amount of ratesensitive liabilities this institution will decide to keep in its balance sheet if interest
The following financial statement for the First National Bank is for the current year. After you review the data, calculate the duration gap for the bank. First National Bank Duration Assets (in
Imagine at the next FOMC meeting, governors and voting presidents of the Federal Reserve System agree not to increase the federal funds rate target, but suggest to markets that there could be an
Leticia has to hedge the interest-rate risk of her holdings of $6,480,000 in Treasury bonds by buying or selling futures contracts. Determine the type of transaction and the price of each contract if
If the portfolio you manage is holding $25 million of 6s of 2043 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest- rate risk on these bonds over
Calculate the amount of futures contracts you need to sell to hedge the interest-rate risk on your holdings of \($4\) million of T-bonds. Assume each contract currently sells for $125,000.
Refer to the previous exercise. Determine your profit if at the expiration date the settle price of the contract is 135 points. Calculate the gain or loss in each position.Previous exerciseCalculate
Explain why you would be more or less willing to buy a share of Verizon stock in the following situations:a. Your wealth falls.b. You expect it (Verizon stock) to appreciate in value.c. The bond
Explain why you would be more or less willing to buy a house under the following circumstances:a. You just inherited $100,000.b. Real estate commissions fall from 6% of the sales price to 4% of the
In the aftermath of the global financial crisis, U.S. government budget deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for many years. Does this
How would the demand curve for corporate bonds be affected if news about accounting scandals in major corporations spread? What would be the effect on interest rates?
The chair of the Fed announces that interest rates will rise sharply next year, and the market believes him. What will happen to today’s interest rate on AT&T bonds, such as the 8(1/8)s of 2028?
Suppose that the volume of corporate bonds traded declines. What would be the impact on the corporate bond risk premium? Which characteristics of a corporate bond might be affected?
A municipal bond and a corporate bond of equal risk, liquidity, and maturity yield 6% and 10%, respectively.For which values of marginal tax rates would you prefer to buy the municipal bond?
Short-term (one-year) interest rates over the next 6 years will be 0.5%, 0.6%, 0.7%, 0.76%, 0.80%, and 0.84%. Using the expectations theory, what will be the interest rates on three-, four-, and
Short-term (one-year) interest rates over the next 3 years are expected to be 2%, 3%, and 3.55%. If you are ready to buy a three-year bond that yields 3%, what is your minimum required liquidity
Can you think of a reason why emerging market economies should be very careful when engaging in financial innovation and financial liberalization?
What are the fundamental differences between the styles of Greenspan and Bernanke and Yellen as chairs of the Fed? Do you think that the recent trend toward increased use of formal econometric
During the implementation of programs now known as QE programs, between 2008 and 2012, many forecasters claimed that these programs would result in high inflation rates in the future. In light of the
Describe at least two distinct benefits that money markets offer to their participants.
Explain why asymmetric information problems do not prevent money market participants from buying and selling money market instruments.
Explain why the U.S. Treasury has to make every possible effort to keep its T-bill auctions competitive.
The interest rate on negotiable CDs is usually very close to the T-bill interest rate; however, the gap between these rates increased substantially between March 2008 and mid-2009. Why do you think
Suppose the U.S. government defaults on its payments (i.e., cannot pay T-bills at their maturity date). What would be the effect on the T-bill rate?What would be the effect on the interest rates of
What would be the underestimation of your earnings as an investor if you use the discount rate instead of the investment rate to measure the return on your investment if you buy a \($5,000\) T-bill
A \($5,000\) commercial paper issued by CMF Corp. matures in 182 days and sells for \($4,995.\) The investment rate on same maturity T-bills is currently 0.1%.Would you state that commercial paper
Explain how the creation of TRACE relates to asymmetric information problems in the bond markets.
Why do you think that all companies that trade securities are required to be members of FINRA?
Calculate the price of a bond that matures in 8 years, has a face value of $5,000, and has a coupon rate of 2% (paid semiannually) if the market interest rate is 1%. What is the price of the bond if
A $5,000 corporate bond with an 8.625% coupon rate sells above par. Is the current yield higher, lower, or equal to the coupon rate? Is the current yield higher, lower, or equal to the yield to
A corporate bond sells at par and has a current yield equal to 5.625%. Another bond sells for \($10,075,\) has a face value of \($10,000,\) and has a coupon rate equal to 5.5%. Which bond has a
Discuss the benefits and potential risks of using the SDBK system in organized exchanges.
It is not uncommon for weather conditions to affect harvests differently across the world. How can you incorporate this information if you are a specialist in trading stock of food manufacturing
Sine Corp. stock sells for \($75.00\) and currently pays an annual dividend of \($2.50\) per share. Calculate analysts’ projected price one year from today if the expected one-year return is
ANCAP Oil Co. stock has a PE ratio equal to 22, whereas VRC Oil has a PE ratio equal to 20. Both firms’ earnings per share are \($1.12.\) Calculate both firms’ stock prices.In the IPO, eBay
Refer to the previous exercise. Calculate the premium paid by investors to hold ANCAP Oil Co.shares instead of VRC Oil shares. Which company do you think is a safer investment?In the IPO, eBay issued
Calculate the stock price of OSE Water Co. if the difference between the required rate of return on this investment and the expected growth rate of dividends is 3.6% and dividends per share are
Refer to the previous exercise. What is the implicit required rate of return if dividends are expected to grow at a 5% annual rate?Previous exerciseCalculate the stock price of OSE Water Co. if the
Calculate the dividend paid by a share of stock that you buy today for \($55\) and you expect to sell one year from today at \($56\) if you want to earn a one-year return equal to 3.5%.In the IPO,
Explain why it was so complicated to take out a mortgage loan to buy a house from a commercial bank in the 1870s.
Based on the history review of the mortgage market presented at the beginning of the chapter, can we say that the originate-to-distribute model is a recent business model?
Suppose you want to take out a loan to buy a house in town and you want to use your farm land as collateral, but you do not have the land title. Your family has lived there for 150 years, and
In which circumstances would it be appropriate to take out a second mortgage?
Which type of mortgage would you choose if you were an advanced student at the UCLA School of Medicine with the prospect of a $150,000 salary as soon as you graduate?
Compute the required monthly payment on a $150,000 30-year fixed-rate mortgage with a nominal interest rate of 8%. What is the balance due at the end of the first year?
Refer to problem 1. What is the total amount of interest paid over the life of the loan?Problem 1 Compute the required monthly payment on a $150,000 30-year fixed-rate mortgage with a nominal
Consider a \($180,000\) 30-year fixed-rate mortgage with a nominal interest rate of 6%. Suppose that after paying the first 12 monthly payments, the borrower decides that she cannot pay more than

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