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Questions and Answers of
Financial Markets Institutions
Does the fact that a security has passed an SEC review mean that investors can buy the security without having to worry about taking a loss on the investment?
What are the primary services that an investment banker will provide a firm issuing securities?
What does it mean to say that investment bankers underwrite a security offering? How is this different from a best-efforts offering?
What law separated investment banking and commercial banking?
What was the motivation behind legislation separating commercial banking and investment banking?
What is a pay-as-you-go pension plan?
What is the purpose behind reinsurance?
How are insurance companies able to predict their losses from claims accurately enough to let them price their policies such that they will make a profit?
Are most insurance companies organized as mutual or stock companies?
How do insurance companies protect themselves against losses due to adverse selection and moral hazard?
Why do insurance companies not allow people to buy insurance on personally unrelated risks?
Why do people choose to buy insurance even if their expected loss is less than the payments they will make to the insurance company?
On January 2nd, the prices at 4:00 p.m. are as follows:Calculate the net asset value (NAV) for the fund. Price Stock Shares owned $2.03 1,000 5,000 $51.37 $29.08 2,800 10,000 $67.19 4 $4.42 3,000
On January 1st, a mutual fund has the following assets and prices at 4:00 p.m.Calculate the net asset value (NAV) for the fund. Assume that 8,000 shares are outstanding for the fund. Stock Shares
A mutual fund reported year-end total assets of $1,508 million and an expense ratio of 0.90%. What total fees is the fund charging each year?
What regulatory changes have been adopted or are being considered to deal with abuses in the mutual fund industry?
What do 12b-1 fees pay, and what is the maximum amount these fees can be?
What distinguishes a hedge fund from other types of mutual funds?
What is meant by liquidity intermediation?
What features of mutual funds and the investment environment have led to mutual funds’ rapid growth in the last two decades?
If the bank at which you keep your checking account is owned by Saudi Arabians, should you worry that your deposits are less safe than if the bank were owned by Americans?
“The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the
For the upcoming week, Nobel National Bank plans to issue $25 million in mortgages and purchase $100 million in 31-day T-bills. New deposits of $35 million are expected, and other sources will
The balance sheet of TriBank starts with an allowance for loan losses of $1.33 million. During the year, TriBank charges off worthless loans of $0.84 million, recovers $0.22 million on loans
If the balance in the current account increases by $2 billion while the capital account is off $3.5 billion, what is the effect on governmental international reserves?
What steps should an international lender of last resort take to limit moral hazard?
Has the IMF done a good job in performing the role of the international lender of last resort?
Why might central banks in emerging-market countries find that engaging in a lender-of-last-resort operation might be counterproductive? Does this provide a rationale for having an international
Discuss the pros and cons of controls on capital inflows.
Are controls on capital outflows a good idea? Why or why not?
Short-term interest rates are 2% in Japan and 4% in the United States. The current exchange rate is 120 yen per dollar. What is the expected forward exchange rate?
A one-year CD in Europe is currently paying 5%, and the exchange rate is currently 0.99 euros per dollar. If you believe the exchange rate will be 1.04 euros per dollar one year from now, what is
The Mexican peso is trading at 10 pesos per dollar. If the expected U.S. inflation rate is 2% while the expected Mexican inflation rate is 23% over the next year, what is the expected exchange rate
The Brazilian real is trading at 0.375 real per U.S. dollar. What is the U.S. dollar per real exchange rate?
If the Canadian dollar to U.S. dollar exchange rate is 1.28 and the British pound to U.S. dollar exchange rate is 0.62, what must the Canadian dollar to British pound exchange rate be?
The six-month forward rate between the British pound and the U.S. dollar is $1.75 per pound. If six month interest rates are 3% in the United States and 150 basis points higher in England, what is
The current exchange rate is 0.93 euros per dollar, but you believe the dollar will decline to 0.85 euros per dollar. If a euro-denominated bond is yielding 2%, what return do you expect in
Describe how a mortgage pass-through works.
The reverse annuity mortgage (RAM) allows retired people to live off the equity they have in their homes without having to sell the home. Explain how a RAM works.
Many banks offer lines of credit that are secured by a second mortgage (or lien) on real property. These loans have been very popular among bank customers. Why are homeowners so willing to pledge
What kind of insurance do lenders usually require of borrowers who have less than an 80% loan-to-value ratio?
What is a lien, and when is it used in mortgage lending?
What features contribute to keeping long-term mortgage interest rates low?
What distinguishes the mortgage markets from other capital markets?
The projected earnings per share for Risky Ventures, Inc., is $3.50. The average PE ratio for the industry composed of Risky Ventures’ closest competitors is 21. After careful analysis, you decide
Suppose Microsoft, Inc., reports earnings per share of around $0.75. If Microsoft is in an industry with a PE ratio ranging from 30 to 40, what is a reasonable price range for Microsoft?
Analysts are projecting that CB Railways will have earnings per share of $3.90. If the average industry PE ratio is about 25, what is the current price of CB Railways?
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
Review the list of firms now included in the Dow Jones Industrial Average listed in Table 13.3. How many firms appear to be technology related? Discuss what this means in terms of the risk of the
A zero-coupon bond has a par value of $1,000 and matures in 20 years. Investors require a 10% annual return on these bonds. For what price should the bond sell?
A bond makes an annual $80 interest payment (8% coupon). The bond has five years before it matures, at which time it will pay $1,000. Assuming a discount rate of 10%, what should be the price
What is the document called that lists the terms of a bond?
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.
What are the primary capital market securities, and who are the primary purchasers of these securities?
Contrast investors’ use of capital markets with their use of money markets.
If the Treasury also received $750 million in noncompetitive bids, who will receive T-bills, in what quantity, and at what price?
In a Treasury auction of $2.1 billion par value 91-day T-bills, the following bids were submitted:If only these competitive bids are received, who will receive T-bills, in what quantity, and at what
Does the Federal Reserve directly set the federal funds interest rate? How does the Fed influence this rate?
Who issues federal funds, and what is the usual purpose of these funds?
Is a Treasury bond issued 29 years ago with six months remaining before it matures a money market instrument?
“The zero-lower-bound on short-term interest rates is not a problem, since the central bank can just use quantitative easing to lower intermediate and longer term interest rates instead.” Is this
With the onset of the global financial crisis, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately $800 billion in 2007 to over $3 trillion in 2013. Many of
What political realities might explain why the Federal Reserve Act of 1913 placed two Federal Reserve banks in Missouri?
How can a sovereign debt crisis make an economic contraction more likely?
What is the shadow banking system, and why was it an important part of the 2007–2009 financial crisis?
How does the provision of several types of financial services by one firm lead to conflicts of interest?
Why can the provision of several types of financial services by one firm lead to a lower cost of information production?
If the public expects a corporation to lose $5 a share this quarter and it actually loses $4, which is still the largest loss in the history of the company, what does the efficient market hypothesis
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
Explain why you would be more or less willing to buy a share of Polaroid stock in the following situations:a. Your wealth falls.b. You expect it (Polaroid stock) to appreciate in value.c. The bond
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