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financial markets institutions

Questions and Answers of Financial Markets Institutions

State the relationship between the process of bank consolidation and the too-big-to-fail policy.
What is the difference between an inflationary and a recessionary scenario? How does the central bank deal with the two situations?
What are banking assets and how can they be sustained?
Describe the contribution of the Glass-Steagall Act towards the banking industry. Compare the Glass- Steagall Act with the Basel 1.
Explain the purpose of the Gramm-Leach-Bliley Act towards the banking industry. Compare the contribution of the Gramm-Leach-Bliley Act with Basel 2 and Basel 3.
Suppose you want to buy a stock, which will pay $1 dividend in next year, the price of this stock will be $55 in next year. How much are you willing to pay for this stock today, if your required rate
Why would economic growth affect the value of a stock?
There are a number of indexes that track the performance of the stock market. It is interesting to review how well they track along with each other. Go to http://bloomberg.com. Click the "Stocks" tab
Why do people invest in stocks? Is stock a riskier investment than bonds? Why or why not? How is preferred stock similar to bonds? To common stock?
What are the limitations of the generalized dividend model?
Sime Darby's stock price is currently $20.00. It is expected to pay a dividend of $0.80 a share in the current year. Stock analysts predict its price one year from now to be $24.50. Calculate the
To capture investor interests, Exchange Traded Funds (ETF) have become the latest market innovation. Since 1990, they have been actively traded in a form of basket of securities. What are the main
What is a present value of a stock, if the price for now is $40? Use a discount rate of 10% and period of 45 years. Please refer to the generalized dividend valuation method.
What is the motivation for buying foreign stocks?
Find the current market price of company's share, assuming D0 = $1.5, dividend growth rate 5% and required rate 12%. Use the Gordon Model for share value evaluation.
Langkasuka Holdings expects to pay an annual dividend of $1.50 per share and stock analysts expect the dividend to growth by 7% indefinitely. If Langkasuka Holdings' current share price is $25, what
Alfa international paid $2.00 annual dividend on common stock and promises that the dividend will grow by 4% per year. If the stock's market price for today is $20, what is required rate of return?
Patimas Computers is currently paying dividends of $0.50 a share. These dividends are expected to grow at a rate of 20% for the next two years and at a constant growth rate of 3% thereafter. What
A start-up technology company has projected earnings per share of $4.50. If the average technology industry P/E ratio is 30, what would the company's projected stock price be?
Refer to the previous exercise. What is the implicit required rate of return if dividends are expected to grow at a 5% annual rate?Data from previous exerciseA start-up technology company has
The average industry P/E ratio for IT companies is 27, what is a price of ABC share, if the expected dividend is 1.15 per share?
Suppose you are faced the following situation: you decide to buy company's share which is going to pay an annual dividend of $5 and promising the growth rate of 5%; You have estimated risk of the
The price of a 145-day commercial paper is $4,525. If the annualized discount rate is 5.25%, what will the commercial paper will pay at the day of maturity?
Your minimum discount rate bid of 0.35% for a $10,000 T-bill that matures in 91 days has been accepted. Calculate your annualized investment rate.
In this exercise we will practice collecting data from the Web and graphing it using Excel. Use the example on pages 50-52 as a guide. Go to https://fred .stlouisfed.org/series/DJIA, and select "10
In Web Exercise 1 you collected and graphed the Dow Jones Industrial Average. Now go to www.forecasts .org. Click on "Stock Market Forecast" and then on "Dow Jones Industrial Average" in the left
Using the data provided in the previous problem, calculate the price difference using the duration formulaData From Exercise 11Calculate the duration of a five-year bond with a face value of $1,000
Explain the relationship between risk-loving and riskaverse investors, and the strategy of diversification.
The demand curve and supply curve are estimated to be the same as in problem 4. Following a dramatic increase in the value of the stock market, many retirees started moving money out of the stock
A commercial banking system is usually regulated by central banks. For instance, the European Central Bank (ECB) requires holding minimum reserves for banks located in the Euro area. Branches located
Consider a central bank policy to maintain 9% reserves on deposits held by commercial banks. A bank, ALFA, currently has $10 million in deposits and holds $1 million in reserves at the central bank.
Go to www.federalreserve.gov/releases/h15/ update/. Define the federal funds rate. What is the current federal funds rate? Define the discount rate. What is the current Federal Reserve discount rate?
The Federal Open Market Committee (FOMC) meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are
It is possible to access other central bank Web sites to learn about their structure. One example is the European Central Bank. Go to www.ecb.int. On the ECB home page, find information about the
Suppose a bank currently has $150,000 in deposits and $15,000 in reserves. The required reserve ratio is 10% (so this bank holds no excess reserves). If there is a deposit outflow (i.e., someone
One risk facing financial institutions is losing reputation, and a key contributor to it is financial panic. For instance, the first signs of impending financial crises appeared in the United States
Refer to the previous problem. What would be the cost for this bank to comply with its required reserves if the bank decides to borrow from the Fed at a discount rate of 0.75%? Can you now explain
Can interest rates on bank deposits be negative? Explain the reasons for your answer. Can negative interest rates on deposit have an expansionary effect?
In many countries, especially with expected inflation, inflation targeting is the objective of central banks. Do you think this is always a good idea? Why or why not?
What is the main rationale behind paying negative interest rates to banks for keeping their deposits at central banks in Sweden, Switzerland, and Japan? What could happen to these economies if banks
Suppose your boss asks you to write a report with two conditions: It has to be clear (i.e., well written) and it has to be completed by the end of the day. Do these instructions constitute a dual
A central bank decides to issue a statement declaring that it will not try to eliminate asset-price bubbles. Can you think of a negative consequence of this statement for the central bank’s ability
Why would it be better to lean against credit-driven bubbles and clean after other types of asset bubbles crash?
Describe in your own terms the concept of macroprudential regulation. Why might this approach be an important element in preventing credit bubbles?
Up-to-date interest rates are available from the Federal Reserve at http://www.federalreserve.gov/ releases. Locate the current rate on the following securities:a. Prime rateb. Federal fundsc.
What is the main characteristic of money market transactions which enables it to have active secondary market?
Calculate the annualized discount rate and annualized investment rate on the purchase of 91-day T-bill, if the face value is $3,000 and purchase price is $2,900.
If a 15-year bond is supposed to mature in the next three months, is it considered to be a money market instrument?
What would be the annualized discount rate % and the annualized investment rate % if a Treasury bill was purchased for $9,360 maturing in 270 days for $10,000?
The Treasury conducts auctions of money market treasury securities at regular intervals. Go to http:// treasurydirect.gov/instit/instit.htm?upcoming and locate the schedule of auctions. When is the
What cost advantages does the money market have over the banking sector?
Suppose you want to earn an annualized discount rate of 2.5%. What would be the most you would pay for a 182-day Treasury bill that pays $10,000 at maturity?
What are the main purposes of money markets? Why is there a need for money markets?
What is the minimum discount rate you will accept if you want to earn at least a 0.25% annualized investment rate on a 182-day $1,000 T-bill?
How did asset-backed commercial papers contribute to the financial crises of 2007-2008?
Why are T-Bills a favorable money market instrument for the U.S. government? For investors?
The Eurodollar market dates back to the period after World War II, when started with the circulation of dollars overseas followed by the development of a separate, less-regulated market. Why did the
Calculate the price of a 180-day T-bill purchased at a 5% discount rate if the T-bill has a face value of $5,000.
What is meant by the Eurodollar market? Why is it an important source of financing? Discuss.
A commercial paper's annualized discount rate is 4.85%. Its face value is $18,000,000, and it matures in 72 days. What would its price be? What would its price be if it matures in 125 days?
How are interest rates usually settled for negotiable CDs?
The annualized yield is 4.5% for a 91-day T-bill and 5% for a 182 day T-bill. What is the expected rate for 91 T-bill from now?
How can you characterize the Treasury bill’s interest rates? How are investment rates different from mentioned interest rates?
What are the terms of federal funds? Why are these terms often misleading?
How does the Federal Reserve control interest rates on Fed funds? How are interest rates settled on Fed funds?
Why do commercial paper securities mature within 270 days or less?
You are considering buying a bond that matures in 10 years from today. The par value of the bond is $10,000 and the coupon rate is 7%. If the current market interest rates are 5%, what is the bond
Stocks tend to get more publicity than bonds, but many investors, especially those nearing or in retirement, find that bonds are more consistent with their risk preferences. Go to
Differentiate between primary and secondary capital markets. What is an initial public offering (IPO)?
What is the current yield to maturity on the zero coupon bond that has a face amount (or par value) of $1,000 and the current market price for the bond is $850? The bond matures in 4 years.
What two characteristics make bonds a more popular long-term alternative to investing in stocks?
An investor is considering two bonds. One is a corporate bond yielding 12%, and is currently selling at par. The marginal tax rate is 28%. The other is a municipal bond with a coupon rate of 9.50%.
Suppose a municipal bond offers a yield to maturity of 5% and a same maturity corporate bond offers a 4% yield. For which values of the marginal tax rate would an investor prefer to buy the corporate
A & B Corporation issued bonds for 10 years, with face value of $10,000 and a 6% annual coupon rate. What is the current market price of the bond if the market rate is 8%? Assume semi-annual payments.
What are restrictive covenants? Why are they associated with interest rates of bonds?
Suppose there are two bonds you are considering:a. If both bonds had a required rate of return of 10%, what would the bonds' prices be?b. Explain what it means when a bond is selling at a discount, a
Does it seem right to you that one could buy insurance on anyone who looks unhealthy? Why?
An investor has the following options:a. To buy a two-year $1,000 zero-coupon bond at a market price of $860.b. To buy a two-year $1,000 bond with an annual interest of 3% for $900.Assuming annual
Consider the following cash flows. All market interest rates are 12%.a. What price would you pay for these cash flows? What total wealth do you expect after 2.5 years if you sell the rights to the
Distinguish between an investment-grade bond and a junk bond.
Refer to the previous problem. How would your answer change if the market rate falls to 6%?Data From Previous ProblemA & B Corporation issued bonds for 10 years, with face value of $10,000 and a 6%
Consider two $10,000 face-value corporate bonds. One is currently selling for $9,980 and matures in 15 years. The other bond sells for $9,350 and matures in 3 years. Calculate the current yield for
What are the risks an investor would face when making an investment in corporate bonds?
A $1,000 par bond with an annual coupon has only one year until maturity. Its current yield is 7.621% and its yield to maturity is 12%. What is the price of the bond?
A one-year premium bond with a face value of $10,000 has been purchased for $11,150. What is the yield to maturity? What is the yield on a discount basis?
Sun Corporation has a convertible bond with face value of $1,000, coupon rate of 6%, and with annual payments for 5 years. The bond can be converted into 25 shares of common equity (currently trading
In what ways can the national central banks influence the conduct of monetary policy?
The following table lists the foreign exchange rates between the U.S. dollar and the euro (EUR) during February, 2014.Which day would have been the best day to convert $300 to euros? Which day would
How would banks benefit when interest rates fall?
How does a decline in the value of the pound sterling affect German consumers in the Eurozone?
How does an increase in the value of the U.S. dollar affect businesses in the Eurozone?
Why are stock market conditions usually newsworthy?
How can fluctuations in a foreign exchange rate affect domestic and foreign consumption? Looking at Figure 1.3, briefly discuss how the U.S. dollar exchange rates behave.Figure 1.3 Index (March 1973
Discuss the role of banks as financial institutions that fuel the economic growth of a nation.
How do you think financial institutions help financial markets to work?
“A robust financial market is one of the pillars of stable economic growth and financial sustainability for the future.” Discuss.
How can monetary policies created by a central bank affect financial markets and financial institutions?
What is a debt market and how does a bond work within it?
Why is there a need to manage risk in financial institutions?
What is the main function of financial markets? Who is usually better off in case of well-functioning markets? Explain your answer.

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