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financial markets institutions

Questions and Answers of Financial Markets Institutions

Compare the performance of the emerging markets in Southeast Asia and the developed markets in Western Europe in light of the recent global economic downturn.
In May 2017, the world's first bond linked to the U.N. Sustainable Development Goals (SDG) had been issued by the World Bank, which helped it raise €163 million from investors in France and Italy
How are Eurodollars similar to Eurobonds? How are these related to Eurocurrencies?
What are the risks and rewards of investing in the stock market as compared to the bond market?
Explain the problem of adverse selection created by asymmetric flow of information. Use an example to illustrate your answer.
Lisa is planning to purchase a new house and is looking for a home loan that will give her the lowest interest rate. Discuss how she can be affected by asymmetric information and adverse selection.
How does the presence of asymmetric information in the direct selling market lead to consumers not buying the products?
What is an adverse selection? How is it usually created in financial markets?
“Financial intermediaries play a crucial role in an economic crisis–they are responsible for both causing the market to crash and then helping it recover from the crisis.” Is this statement
How do financial intermediaries solve the problem of adverse selection?
What is a main function of investment banks? Do such banks accept deposits and provide loans?
What is the main purpose of financial regulation? What kind of instruments may a government use to protect the economy and country from financial panic?
What is the concept of present value? What is discounting?
Calculate the present value of a $1,000 zero-coupon bond with six years to maturity if the yield to maturity is 7%.
Investigate the data available from the Federal Reserve Bank of St. Louis FRED database at http:// research.stlouisfed.org/fred2/. Then answer the following questions.a. What is the difference in the
Analyze the risk profiles of short-term bonds and long-term bonds during economic instability and fluctuating interest rates.
Consider a bond with an 8% annual coupon and a face value of $1,000. Complete the following table: Years to Maturity TFTGH 5 7 10 11 Yield to Maturity 6 8 9 11 12 Current Price
A lottery claims its grand prize is $20 million, payable over 40 years at $500,000 per year. If the first payment is made immediately, what is the grand prize worth? Use an interest rate of 12%.
What is the yield to maturity? Why it is considered as a good measure of interest rates?
Property investment constitutes a large and longterm commitment to an individual. Describe the outcome of taking a property loan during fluctuating interest rates.
Consider a coupon bond which has a $1,000 par value and a coupon rate of 20%. The bond is currently selling for $2,300 and has 16 years to maturity. Calculate the bond’s yield to maturity.
You are willing to pay $31,250 now to purchase a perpetuity that will pay you and your heirs $2,500 each year, forever, starting at the end of this year.If your required rate of return does not
Calculate the yield to maturity on the bond that has a price of $1,000 and pays $50 dividend for the life of the bond. What will happen if the dividend is $25 instead of $50?
Suppose you bought a land that costs $500,000 today. You will need to continue to pay tax on the land, and the rate is 3% of your purchase. Calculate the PV of your payment, using a 10% discount
Suppose that you want to take out a loan at a bank that wants to charge you an annual real interest rate equal to 5%. Assuming that the expected rate of inflation during the life of the loan is 2%,
Anna bought a bond with a par value of $10,000 and a coupon rate of 8% at par. After a year, she was able to sell her bond for $11,000. Calculate the rate of return on Anna's investment. What is the
Suppose that you have a bond with a face value of $1,000 and a coupon rate of 8% for one year and that you buy another one after one year. What will be your gain if the interest rate increases up to
Consider a bond that promises the following cash flows. The yield to maturity is 12%.You plan to buy this bond, hold it for 2.5 years, and then sell the bond.a. What total cash will you receive from
Calculate the duration of a five-year bond with a face value of $1,000 and a coupon rate of 8%. Assume that the current interest rates are 10%. What will your answer be if the current interest rates
Financial institutions hold a portfolio comprising the following securities:10 million bond with duration 4 years 20 million securities with duration 6 years 40 million bonds with duration 5
One of the largest influences on the level of interest rates is inflation. A number of sites report inflation over time. Go to the Federal Reserve Bank of St.Louis, FRED database Web site at
Sally owns a $1,000-par zero-coupon bond that has six years of remaining maturity. She plans on selling the bond in one year and believes that the required yield next year will have the following
Explain the buy, hold, and sell strategies Sam should implement when dealing in BMW shares on the New York Stock Exchange.
Increasing prices erode the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to the Federal Reserve
What are the determinants for an average investor when facing a choice of investing in either properties or shares?
Calculate the yield to maturity for a corporate bond issued by DaimlerChrysler with the price of $800.20, where the bond has a maturity of 11 years, a face value of $1,000, and the annual interest
A $1,000-par value bond issued by Verizon has a coupon rate of 9.5%. The bond has 20 years left to maturity and the market's required yield to maturity for similarly rated debt was 6.5%. What is the
Amanda, a financial analyst, wants to hedge against the low interest rates charged by banks on her savings account. Advise Amanda.
A bond issued by Toyota has 30 years to maturity with a face value of $1,000. The market's required yield to maturity for a similarly rated debt was 8.5% per annum. The coupon rate is 10.5%. Toyota
Investors with risk-loving characteristics will purchase securities with higher expected returns, lesser risks, and more liquidity. Do you agree with this statement? Discuss.
The demand curve and the supply curve are estimated to be the same as in problem 4. As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a
For items 6–13, answer each question by drawing the appropriate supply-and-demand diagrams.In the aftermath of the global financial crisis, U.S. government budget deficits increased dramatically,
For answer each question by drawing the appropriate supply-and-demand diagrams.How would the demand curve for corporate bonds be affected if news about accounting scandals in major corporations
Suppose Great Britain leaves the Eurozone, causing a recession in Europe. Considering that the Eurozone is a big commercial partner of the United States, how do you think this might affect the bond
What is the relationship between a corporate bond rating and a risk premium?
Assuming that the expectations theory is the correct one of the term structure, calculate the interest rates in the term structure for maturities one to six years:a. 4%, 4%, 5%, 6%, 6%, 6%b. 5%, 5%,
The amount of additional interest investors receive due to the various risk premiums changes over time. Sometimes the risk premiums are much larger than at other times. For example, the default risk
What is default risk and risk premium? How can default risk influence interest rates?
Refer to the previous problem. Assume that instead of the expectations theory, the liquidity premium theory takes place. What will be your answer to parts a and b, if the following liquidity premiums
Figure 5.7 shows a number of yield curves at various points in time. Go to www.treasury.gov, and in the “Resource Center” at the top of the page click on “Data and Charts Center.” Find the
“Corporate bonds and stocks are a bad combination of investments as both have different characteristics that do not complement each other.” Discuss.
Investment companies attempt to explain to investors the nature of the risk the investor incurs when buying shares in their mutual funds. For example, go to https://personal.vanguard.com/us/funds/
Describe the relationship between bond prices and interest rates during a recession.
Consider the decision to purchase either a five-year corporate bond or a five-year municipal bond. The corporate bond is a 14% annual coupon bond with a par value of $1,000. It is currently yielding
Debt issued by Southwest Airways currently yields 24%. A municipal bond of equal risk currently yields 16%. At what marginal tax rate would an investor be indifferent between these two bonds?
One-year T-bill rates are expected to steadily increase by 250 basis points per year over the next nine years. Determine the required interest rate on a five-year T-bond and a nine-year T-bond if the
The one-year interest rate over the next eight years will be 4%, 5.5%, 6%, 8.5%, 10%, 11.5%, 14%, and 15.5%. Using the expectations theory, what will be the interest rates on a four-year bond, a
How will a reduction in tax rates affect an individual’s prefernce for municipal bonds compared to Treasury bonds? What conclusion can you draw regarding tax rates and interest rates on securities?
The one-year interest rate over the next 10 years will be 3%, 4.5%, 6%, 7.5%, 9%, 10.5%, 13%, 14.5%, 16%, and 17.5%. Assume that investors prefer holding short-term bonds so that a liquidity premium
Predict what will happen to interest rates on corporate bonds if governments adopt a new regulation that guarantees payment of principal in case of default in order to encourage investment in
Suppose that the expectations theory is true and that you can buy a three-year bond with an interest rate of 6% or three consecutive one-year bonds with interest rates of 4%, 5%, and 6%. Which option
If the current interest rate on one-year bonds is 6%, you may expect an increase in interest rates by 1% in the following year. Predict what interest rate would be suitable now for two-year bonds.
Suppose you are asked to make a loan for 10% from one year for now; you decided to compare interest rates with Government bonds and make at least 2% premium over that. One year bond has 5% and two
One-year T-bill rates over the next five years are expected to be 4%, 5%, 6%, 6.5%, and 8%. If fiveyear T-bonds are yielding 35.5%, what is the liquidity premium on this bond?
Assume that you make investment decisions based on the expectations theory. Based on research, you have obtained the following information about certain market interest rates:You can borrow at 5% and
Predict the one-year interest rate three years from today if interest rates are 3.5%, 4.0%, 4.5%, and 5% for bonds with one to four years to maturity and liquidity premiums are 0%, 0.1%, 0.25%, and
Verizon Wireless has just announced a 2-for-1 stock split, effective immediately. Prior to the split, Verizon Wireless had a market value of $10 billion with 200 million shares outstanding. Assuming
Visit http://research.stlouisfed.org/fred2/. Click on "Category," then "Financial Indicators," then "Stock Market Indexes." Review the indices for the DJIA, the S&P 500, and the Wilshire 5000 Market
The efficient market hypothesis is often referred to in financial markets. To test this hypothesis, which states that prices of securities fully reflect all available information, market participants
If the public expects the Microsoft Corporation to increase $10 a share this quarter and it actually increases $6, which is still one of the largest gains in the history of the company, what does the
Tessa is an avid follower of the technical analysis method. How can she convince her friends to use this method of stock investing?
Sam is in the market for a used motorbike. At a usedbike shop, Sam roughly knows that the price of a used-motorbike is between $40,000 and $48,000. If Sam believes that the dealer knows as much about
You wish to hire Melissa to manage your Kansas operations. The profits from the operations depend partially on how hard Melissa works, as follows:If Melissa is lazy, she will surf the Internet all
Sam now decides to go to a different town to search for a used motorbike and believes that the dealer knows more about the used-motorbikes than him. How much do you think that Sam is willing to pay?
You own a house worth $800,000, situated on the banks of a river. If the river floods moderately, the house will be completely destroyed. This happens about once every 80 years. If you build a
Describe the conflicts of interest that occur in banks in Europe.
Which specific asymmetric information problem do credit-rating agencies help to reduce in the bond market? Explain the effect of the subprime mortgage crisis on the trustworthiness of these agencies
Explain the problem faced by an accounting firm when they offer more than one service to a client, which is also known as the “Chinese Wall.”
Discuss the principal–agent problems that occur in multinational corporations.
Discuss the problem of adverse selection using the U.S. subprime mortgage crisis as example.
Lucia, Cecilia, and Julia have to do a midterm project. While Lucia works hard on the project for two weeks, Cecilia and Julia do not even answer the phone. The project is a success and everybody
What triggered the global financial crisis of 2007–2009?
Describe the situation where banks were reluctant to lend to the public, which caused the economy to deteriorate.
How did off-balance-sheet items contribute to the global financial crisis in year 2007?
How did credit default swaps lead to the downfall of one of the major investment banks?
Compare the sustainability of an investment bank and a retail bank during the global financial crisis.
Deregulation of the financial services industry in the United States and the United Kingdom led to the global financial crisis of 2007. Discuss.
“British banks and the British economy as a whole experienced the credit crunch in 2007.” Discuss.
“Bank bailouts built the momentum of the global financial crisis.” Discuss.
“Unemployment spiraled at an alarming rate due to the global financial crisis and exacerbated the crisis altogether.” Discuss.
Should central banks be privately or publicly owned? Explain.
How will growth impact the structure of the European Central Bank’s (ECB) decision-making bodies?
Why is the European Central Bank (ECB) governed by three different bodies?
Why have some countries rejected the single currency despite being full members of the European Union?
Compare the structure and independence of the European System of Central Banks and the Federal Reserve System.
What are the expected consequences of Brexit on the Bank of England?
The structure and the policy of the People’s Bank of China (PBoC) differentiate it from traditional models of central banking systems. What are the main differences? What are the consequences of
By how much an interest rate should be changed to restore equilibrium is an important decision for a central bank. Do you think that the interest rate should be set based on judgment or by increased
People in general welcome actions that maintain effective communication and that promote transparency, and in particular when they involve public or quasi-public institutions. Can you think of a
William does not feel comfortable with the current level of the European Central Bank’s independence. Put yourself in William’s shoes and state an argument against the current level of the

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