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financial markets institutions

Questions and Answers of Financial Markets Institutions

4. What are discount points, and why do some mort-gage borrowers choose to pay them?
3. What features contribute to keeping long-term mortgage interest rates low?
2. Most mortgage loans once had balloon payments;now nost Current mortgage loans fully amortize.What is the difference between a balloon ban and an amortizing loan?
I. What distinguishes the mortgage rnarkets from other capital markets?
2. There are a number of indexes that track the per- formance of the stock market. It is interesting to review how well they track along with each other. Go to http://bloomberg.com. Click on the
1. Visit http://www.forecasts.org/data/index.htm. Click on "Stock Index" at the very top of the page.. Review the indices for the DJIA, the S&P 500, and the NASDAQ composite. Which index appears most
17. The projected earnings per share for Risky Ven- tures, Inc., is $3.50. The average PE ratio for the industry composed of Risky Ventures' closest com- petitors is 21. After careful analysis, you
16. Compute the price of a share of stock that pays a $1 per year dividend and that you expect to be able to sell in one year for $20, assuming you require a 15% return.
15. An index had an average (geometric) mean return over 20 years of 3.8861 %. If the beginning index value was 100, what was the final index value after 20 years?
13. For 2003, Microsoft, Inc., reported earnings per share of around SO.75. If Microsoft is in an inclus-t" with a PE ratio ranging from 30 to 40, what is a reasonable price range Mvcrosort•:'
12. Analysts are projecting that CB Railways Will have earnings per share or $3.90. (f the average inclus-try PE ratio is about 23, What [s the current price Of CB Rai Ways?
11. Nat-T-Cat Industries just went public. As a growing firm, it is not expected to pay a dividend for the first five years. After that, investors expect Nat-T-Cat to pay an annual dividend of $1.00
10. Macro Systems just paid an annual dividend of $0.32 per share. Its dividend is expected to dou- ble for the next four years (D, through D), after which it will grow at a more modest pace of 1%
9. Gordon & Co.'s stock has just paid its annual divi- dend of $1.10 per share. Analysts believe that Gor- don will maintain its historic dividend growth rate of 3%. If the required return is 8%,
8. In September of 2004, Microsoft, Inc., was trading at $27.29 per share. At that time, Microsoft was paying an annual dividend of $0.32 per share, which is double its 2003 dividend of $0.16 per
7. Huskie Motors just paid an annual dividend of $1.00 per share. Management has promised shareholders to increase dividends at a constant rate of 5%. If the required return is 12%, what is the
6. LaserAce is selling at $22.00 per share. The most recent annual dividend paid was $0.80. Using the Gordon Growth Model, if the market requires a return of 11%, what is the expected dividend growth
5. In September of 2004, Microsoft, Inc., was trading at $27.29 per share. At that time, Microsoft was paying an annual dividend of $0.32 per share, and analysts had set a one-year target price
4. Suppose Soft People, Inc., is selling at $19.00 and currently pays an annual dividend of $0.65 per share. Analysts project that the stock will be priced around $23.00 in one year. What is the
2. common statistics in IPOs are undeppriGO»g and money me tab/Æ?. is defined as percentage change between the offering price and the ti„rsl. day closing price Money left or, Ghe table IS the
I. If the investment bankers retained $1.25 per share as fees, what was the net proceeds to eBay? What was the market eapiLaLizatic1[' Of the new shares Of eBay?
6. Review the list of firms now included in the Dow Jones Industrial Average listed in Table 3. How many firms appear to be technology related? Dis- cuss what this means in terms of the risk of the
5. What distinguishes stocks from bonds?
4. What is the National Association of Securities Deal- ers Automated Quotation System (NASDAQ)?
3. Discuss the features that differentiate organized exchanges from the over-the-counter market.
2. Identify the cash flows available to an investor in stock. How reliably can these cash flows be esti- mated? Compare the problem of estimating stock cash flows to estimating bond cash flows. Which
1. What basic principle of finance can be applied to the valuation of any investment asset?
1. 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. One site that will
15. A ten-year $1000 par value bond has a 9% semi- annual coupon and a nominal yield to maturity of 8.8%. What is the price of the bond?
14. A 20•year $100() par value bond has a annual coupon, The bond is callable after tenth year for a call premium Of If the bond IS trading with a yield to call Of 6.2396, What IS the yield to
13. A severpwear. SIOOO par bond has an annual coupon and is cut•rentCv yielding The bond can be called in two years at a call price of Whar is [he bond yielding, assuming it wfl] be called(known
12. A One-year discount bond with a face value Of was purchased for S900. What is the yield to maturity? What is the yield on a discount basis?
Il. A par bond with an annual coupon has only one year until maturity. its Current yield is 6 713%, and its yield to maturity is 10%. What is the price Of the bond?
10. A ten-year. SIOOO par value bond with a 5% annual coupon is trading to yield What is the current yield?
9. Assume the debt in the previous question is ing at $ 10-33. How can you earn a riskless profit from this situation (arbitrage)?
8. M&E, Inc., has an outstanding convertible bond.The bond can be converted into 20 shares of corn.(non equity (currently trading at S52/share). The bond has five years Of IVInaining maturity. a S
7. If the municipal bond rate is 4.25% and the corpo-rate Oond rate is what is the marginal tax rate, assuming investors are indifferent between the two bOnds?
6. The yield on a corporate bond is I O•S. and it is Cur•rently selling at par. The marginal tax rate is 20%.A par value municipal bond With a coupon rate Of 8.50% is available. utiich security
4. A two-year $1000 par zero-coupon bond is cur- rently priced at $819.00. A two-year $1000 annu- ity is currently priced at $1712.52. If you want to invest $50,000 in one of the two securities,
2. A zero-coupon bond has a par value of $1000 and matures in 20 years. Investors require a 10% annual return on these bonds. For what price should the bond sell? (Note: Zero-coupon bonds do not pay
1. A bond makes an annual $80 interest payment (8% coupon). The bond has five years before it matures, at which time it will pay $1000. Assuming a dis- count rate of 10%, what should be the price of
11. Describe the two ways whereby capital market securities pass from [he Issuer to the public
10. What is the document called that. lists the terms of a bond+
9. What is a sinking fund? Do investors like bonds that contain this feature?
8. A call provision on a bond allows the issuer to redeem the bond at will. Investors do not like call provisions and so require higher interest on callable bonds. Why do issuers continue to issue
7. In addition to Treasury securities, some agencies of the government issue bonds. List three such agen- cies, and state what the funds raised by the bond issues are used for.
6. As interest rates in the market change over time, the market price of bonds rises and falls. The change in the value of bonds due to changes in interest rates is a risk incurred by bond investors.
5. The U.S. Treasury issues bills, notes, and bonds. How do these three securities differ?
4. A bond provides information about its par value, coupon interest rate, and maturity date. Define each of these.
3. Distinguish between the primary market and the secondary market for securities.
2. What are the primary capital market securities, and who are the primary purchasers of these securities?
1. Contrast investors' use of capital markets with their use of money markets.
2. The Treasury conducts auctions of money market treasury securities at regular intervals. Go to http://www.publicdebt.treas/gov/of/ofaucrt.htm and locate the schedule of auctions. When is the next
1. Up-to-date interest rates are available from the Federal Reserve at http://www.federalreserve. gov/releases. Locate the current rate on the fol- lowing securities:a. Prime rateb. Federal fundsc.
13. Ii the Treasury also received $750 mjllion in non-competitive bids, who will receive T-bills, in what quantity, and at what price?
11.paper, and 3.5% for IS2-day commercial paper.Umat is the expected g I uv comrnercial paper rate days from now?Assume that of a Treasury bill aucton was sold for $998 per $10(X) par value, was sold
10. The annualized yield is 3% for 91-day commercial
9. The annualized yield on a particular money mar-ket instrument, IS 375%, The face value is $200,000 and it matures in 51 days, What is its price? u•hat would be me price if it had 71 days
S. HOW much would you pay for a Treasury bill that matures in one year and pays S 10,000 (f you require a 396 return?
7. The price Of $8000 face value commercial paper is$79.30. If the annualized yield is 4%, when will the paper mature?
6. How much would you pay for a Treasury bill that matures one year and pays $ 10 W) if you require a 1.8% retum?
5. The price Of 182•day commercial paper is $7840 If the annualized yield is •i, 04%, What the paper pay at rnaturity?
4. What is the annualized yield on a 'h•easurw that you purchase for $9900 that will mature [n 91 days for $10,000?
g. If you want to earn an annualized yield of 3.5%, what is the most you can pay for a 91.day Trea.Stay bill that pays $5000 at maturitv?
2. What is the annualized yield on a 'freasury bill that you purchase for $9940 that Will mature in 91 days for $10,000?
I. What would be your annualized yield on the pur-chase Of a 182-day Treasury bill ror $492.5 that pays 95000 at maturity?
15. Why are bankerS acceptances so popular for inter-national transactions?
13. Does the Federal Reserve directly set the federal funds interest rate?Who issues commercial paper and for what pur•pose?
12. Who issues federal funds, ard what is the usual purpose of these funds?
11. Distinguish between competitive bidding and non-competitive bidding for Teasury securities
10. Which of the rroney market securities is the most liquid and considered the most risk-free?
9. Why are more funds from property and casualty insurance companies tinn funds from Life insurance cornpames invested in the money markets?
8. What purpose initially motivated Merrill Lynch to Offer money market mutual runds to its customers?
7. Why do businesses use the money markets?
6. Why does the U.S. government use the money mar kets?
5. Wnat was the purpose motivating regulators to impose interest ceilings on bank savings accounts?What impact did this eventually have on the money markets?
4. Distinguish between a term security and a demand Security.
3. Why do banks not eliminate the need for money
2. Is a Treasury bond issued 29 years ago with six months remaining before it natures a money mar.ket instrument?
I. What characteristics define the money markets?
2. is possible access other central bank websites to learn about their structure One example is the European Central Bank (ECB). GO to http://www.eeb.int/ On me ECB home page, locate the link to the
l. The Federal Open Market Committee (FOMC)about every six weeks to assess the state Of the economy and to determine What actions the central bank should take. The minutes of these meetings are
8. The trading desk at the Federal Reser,'e sold in T-bills to the public. the current reserve requirement is 8.0%, how much could the money supply change?
7. A bank currently holds in excess reserves.the current reserve requirement is 12.5%, row much could the money supply change? How could this happen?
6. the required reserve ratio is 10%, how much or a new $10,000 deposit can a bank lend9 What is the potential impact on the money supply? Recall from introductory macroeconomics that the money
5. The short-term nominal interest rate is with an expected inflation of Economists forecast that next year's nominal rate will increase by 100 basis points. but inflation WIII fall to I What is the
4. Use T-accounts to show the effect of the Federal being paid back a $500,000 discount loan from a bank.
3. The Federal Reserve wants to increase the supply Of reserves, so it purchases $1 million dollars worth Of bonds from the public. Show the effect of this open market operation using T-accounts
l. Consider a bank TO maintain ofdeposits as reserves. The bank currently has SIO million in deposits and holds in excess reserves What is the required reserve on a new deposit of 50,000?
20. Why might the Fed say that it wants to control the money supply but in reality not be serious about doing so?
19. Which is more likely to produce smaller fluctua- tions in the federal funds rate, a nonborrowed reserves target or a borrowed reserves target? Why?
18. How can bank behavior and the Fed's behavior cause money supply growth to be procyclical (ris- ing in booms and falling in recessions)?
17. "When the economy enters a recession, either a free reserve target or an interest-rate target will lead to a slower rate of growth for the money sup- ply." Explain why this statement is true.
16. "The failure of the Fed to control the money sup- ply in the 1970s and 1980s suggests that the Fed is not able to control the money supply." Do you agree or disagree? Explain your answer.
15. How have the Federal Reserve's concerns about the value of the U.S. exchange rate affected monetary policy?
14. Why is pegging the nominal interest rate problem- atic for a central bank?
13. How did the Fed's failure to perform its role as the lender of last resort contribute to the decline of the money supply in the 1930-1933 period?
12. Excess reserves are frequently called idle reserves, suggesting that they are not useful. Does the episode of the rise in reserve requirements in 1936-1937 bear out this view?
11. Explain why the rise in the discount rate in 1920 led to a sharp decline in the money supply.
9. "Discounting is no longer needed because the pres-ence Of the FDIC eliminates the possibility of bank panics, " Is this statement true, false. Or uncertain?Explain your answer

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