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financial markets institutions

Questions and Answers of Financial Markets Institutions

Carol Chastain purchases a one-year discount bond with a face value of $1,000 for $862.07. What is the yield of the bond? $862.07 $1000 (1 +i)'
What is the relationship between bond price volatility and term to maturity? What is the relationship between bond price volatility and the coupon rate?
Explain why yields and prices of debt-instruments are inversely related.
What is the yield-to-maturity of a corporate bond with a 3-year maturity, 5 percent coupon (semi-annual payments), a $1,000 face value, if the bond sold for $978.30?
Find the price of a corporate bond maturing in 5 years that has a 5% coupon (annual payments), a $1,000 face value, and an AA rating. A local newspaper's financial section reports that the yields on
Write the equation which expresses the present value (or price) of a bond that has a 10% coupon(annual payments), a 5-year maturity, and a principal of $1,000, if yields on similar securities are 8%.
Julie Orzabal deposits $5,000 in a savings account offering 5.125% compounded daily. Assuming she makes no further deposits, what will be the balance in her account after 5 years?
Explain how the strong U.S. dollar has helped the Fed keep interest rates low.
Suppose that Brazil is worried that the local currency, the Real, is likely to depreciate sharply and reduce much needed foreign financial investment into the country. How could the Brazilian central
In financial markets, we occasionally observe negative interest rates. Reconcile the contradiction between the statement “The nominal rate of interest will never decline below zero” with the
Explain what is meant by the term negative interest rate. Why have we seen negative interest rates recently?
Explain what is meant by the realized rate of return. How does it differ from the real rate of interest?
Explain when the market rate of interest is equal to the real rate of interest.
Explain why it is important to adjust financial contracts for inflation. What is the relevant inflation factor?
What is the value of money? How does the value of money vary with aggregate price-level changes?
Explain how the market rate of interest is determined applying the loanable fund interest rate model.
Explain how the equilibrium real rate of interest is determined.
Explain what is meant by the term positive time preference for consumption. How does it affect the rate of interest?
Explain what the nominal rate of interest is and how it is related to the real rate of interest.
If the realized real rate of return turns out to be positive, would you rather have been a borrower or a lender? Explain in terms of the purchasing power of the money used to repay a loan.
An investor purchased a 1-year Treasury security with a promised yield of 10 percent.The investor expected the annual rate of inflation to be 6 percent; however, the actual rate turned out to be 10
Explain how forecasters use the flow-of-funds approach to determine future interest rate movements.
What is the track record of professional interest rate forecasters? What do you think explains their performance?
Under what conditions is the loss of purchasing power on interest in the Fisher effect an important consideration?
The following annual inflation rates have been forecast for the next 5 years:Year 1....................................3%Year 2....................................4%Year
The 1-year real rate of interest is currently estimated to be 4 percent. The current annual rate of inflation is 6 percent, and market forecasts expect the annual rate of inflation to be 8 percent.
What is the Fisher effect? How does it affect the nominal rate of interest?
If the money supply is increased, what happens to the level of interest rates?
What factors determine the real rate of interest?
In your opinion, what were the three most important factors that caused the 2008 financial crisis?
Explain why stable prices are so important to an economy.
Assume the Fed undertakes open-market operations and buys Treasury securities. Explain what should happen to interest rates. What is the expected change in nominal GDP?. How is nominal GDP then
What are the six goals the Fed is required by government legislation to achieve? Which two goals are the most important? Why?
What is the government expenditure equation? Explain the three budget positions.
Explain the fiscal policy stance that you would deploy if the economy were in a recession. How would you implement the policy?
What is fiscal policy? How does fiscal policy compare to monetary policy?
Why is the concept of a liquidity trap important in the conduct of monetary policy?
Why do security traders pay so much attention to the fed funds rate? Why is the fed funds rate so important?
What are technical factors? How do they affect the implementation of monetary policy?
What are some of the potential conflicts between goals of monetary policy? Explain.
Explain the concepts of frictional unemployment, structural unemployment, and the natural rate of unemployment. How do these affect what is considered full employment?
Given your answers to Question 7, what, if anything, would you expect to happen to:a. Housing investment b. Plant and equipment
What effects are decreases in reserve requirements likely to have on:a. Bank reservesb. Federal funds ratesc. Bank lendingd. Treasury bill ratese. The bank prime rate?Explain your answers.
What is the essential difference between the Keynesian and the Monetarist view of how money affects the economy?
If the Fed bought $3.5 billion in government securities and the public withdrew $2.0 billion from their transactions deposits in the form of cash, by how much would the monetary base change? By how
What would happen to the monetary base if the U.S. Treasury collected $4 billion in taxes, which it deposited in its account at the Fed, and the Fed bought $2.5 billion in government securities? Do
If the country went into a recession, would you expect banks to increase or decrease its holdings of excess reserves? Explain.
Why does the Fed want the ability to pay interest on reserve accounts?
What are the arguments that support having a strong and independent Federal Reserve Bank?
With respect to the financial system, what is meant by “too big to fail”? Why is it an important issue?
What were three important regulatory powers that the Fed gained from the passage of the Financial Regulatory Reform Act of 2010? Explain each briefly.
Why is the Federal Reserve Bank of New York granted special status? What is the special status?
The Fed decides to buy $10,000 of government bonds from Goldman Sachs. Using T-accounts show the complete transaction. Did the money supply increase or decrease? Explain.
Refer to the table in Question 13. Now suppose the Federal Reserve raised the reserve requirements on deposits between $14.5 million and $103.6 million to 5 percent and raised the reserve requirement
Northwest National Bank received new demand deposits (DD) of $1,650,000. The current reserve requirement is 6 percent. The bank has $80,000 in vault cash and $110,000 at the Federal Reserve that is
Explain how the Fed changes the money supply with an open-market purchase of Treasury securities.
A bank has $20,000 in reserves, $90,000 in bank loans, and $150,000 of deposits. If the reserve requirement is 10%, what is the bank’s reserve position? What is the maximum dollar amount of loans
Explain the sense in which the Fed is independent of the federal government. How independent is the Fed in reality? What is your opinion about the importance of the Fed’s independence for the U.S.
Explain why Regulation Q caused difficulties for banks and other depository institutions, especially during periods of rising interest rates.
Explain why the FOMC is the key policy group within the Fed.
What were the four goals of the legislation that established the Federal Reserve System? Have they been met today?
Explain why the Board of Governors of the Federal Reserve System is considered so powerful. What are its major powers and which is the most important?
What is quantitative easing? Why was it used by the Fed? Was it a success?
Explain why the banking system was so unstable prior to establishment of the Fed in 1914.
Describe two recent high profile ethical failures in finance. How do ethical failures impact the financial services industry and the economy as a whole?
Why is the financial system so highly regulated?
Explain the adverse selection problem. How can lenders reduce its effect?
Explain what is meant by moral hazard. What problems does it present when a bank makes a loan?
Why do corporations issue commercial paper?
Municipal bonds are attractive to what type of investors?
What is the difference between marketability and liquidity?
What are money center banks and why were they not allowed to engage in investment banking activities following the Great Depression?
Explain why direct financial markets are wholesale markets. How do consumers gain access to these important markets?
Explain why households are the principal SSUs in the economy.
Why are banks singled out for special attention in the financial system?
Explain the statement, "A financial claim is someone's asset and someone else's liability."
Metropolitan Nashville and Davidson County issues $25 million of municipal bonds to finance a new domed stadium for the Tennessee Titans. The bonds have a face value of $10,000 each, are somewhat
What steps should bank management take to manage credit risk in the bank’s loan portfolio?
Explain the differences between the money markets and the capital markets. Which market would General Motors use to finance a new vehicle assembly plant? Why?
How do financial intermediaries generate profits?
Explain the concept of financial intermediation.How does the possibility of financial intermediation increase the efficiency of the financial system?
Explain how you believe economic activity would be affected if we did not have financial markets and institutions.
Why are direct financing transactions more costly or inconvenient than intermediated transactions?
Explain the economic role of brokers, dealers, and investment bankers. How does each make a profit?
Does it make sense that the typical household is a surplus spending unit (SSU) while the typical business firm is a deficit spending unit (DSU)? Explain.
If the finance company you manage has a gap of +$5 million (rate-sensitive assets greater than rate-sensitive liabilities by $5 million), describe an interest-rate swap that would eliminate the
If the pension fund you manage expects to have an inflow of $120 million six months from now, what forward contract would you seek to enter into to lock in current interest rates?
If the portfolio you manage is holding $25 million of 6s of 2032 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over the
If you buy a $100,000 February Treasury bond contract for 108 and the price of the deliverable Treasury bond at the expiration date is 102, what is your profit or loss on the contract?
Futures are available on three-month T-bills with a contract size of $1 million. If you take a long position at 96.22 and later sell the contracts at 96.87, how much would the total net gain or loss
If your company has to make a 10 million euros payment to a German company in June, three months from now, how would you hedge the foreign exchange risk in this payment with a 125,000 euros futures
If the savings and loan you manage has a gap of -$42 million, describe an interest-rate swap that would eliminate the S&L’s income risk from changes in interest rates.
Suppose that you buy a call option on a $100,000 Treasury bond futures contract with an exercise price of 110 for a premium of $1,500. If on expiration the futures contract has a price of 111, what
To verify this further, examine the IPO for Blue Nile,Inc. It can be found on the SEC’s site at www sec.gov/Archives/edgar/data/1091171 /000089161804001024/v97093b4e424b4.htm. What was the offering
Refer back to the IPO of eBay presented in the problems for Chapter 13. What were the fees for eBay as a percentage of funds raised? Does a pattern emerge?
Why do commercial banks object to brokerage houses being allowed to offer many of the services traditionally reserved for banks?
Is it possible to make money if you know that the price of a security will fall in the future? How?
What valuable service do dealers provide that facilitates transaction trading and keeping the markets liquid?
Is it better for a security issue to be fully subscribed or oversubscribed?
Why do investment banking firms often form syndicates for selling securities to the public?

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