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financial markets institutions

Questions and Answers of Financial Markets Institutions

S. Compare the monetary base to M2 on the grounds Of controllability and measurability. Which do you prefer as an interrnediate target? Why?
7. "Interest rates can be measured more accurateLb'and more quickLV than the money supply Bence an interest rate is preferred over the money supply as an intermediate target." DO you agree or dis
6. If the Fed has an interest-rate target. why an increase in the demand for reserves lead to a rise in the money supply?
5. What procedures can the Fed use to control the three•month Treasury bill rate? Why does control Of this interest rate imply that the Fed Will lose con•trol of the money supply?
4. Classify each ofthe following as either an operating target or an intermediate target, and explaina. The three-month Treasury bill rateb. The monetary base
3. "If the demand for resetves did not fluctuate, the Fed could pursue both a nonborrowcd reserves target and an Lnterest•rate target at the same time."Is this statement true, false, or uncertain?
2. umich goals of the Fed frequently conflict?
1. "Unemployment is a bad thjng, and the government should make every effort to eliminate it,- Do you agree or disagree? Explain your answer.
2. Go to the previously mentioned site and click on "Monetary Policy" to find the beige book. Accord- ing to the summary of the most recently published book, is the economy weakening or recovering?
I. GO to http:h'www.federalreserve.gov/general.hon. Choose "Structure of the Federal Reserve."Axording to the Federal Reserv-e, what is the most important respons.bility of the Board of Governors?
15. The Fed prornotes secrecy by not releasing POMC rtunutes to Congress or rhe public immediately.Discuss the pros and cons Of this policy.
"The independence of the Fed has meant that it takes the long view and not the short v*w" Is this statement true, false, or uncertain? Explain your
13. The independence of the Fed leaves it completely unaccountable for its actions- Is this statement true. false, or uncertain? Explain your answer,
12. Why Jraght elimjnating the Fed's independence lead to a more pronounced political business cycle?
I I. The theory of bureaucratic behavior indicates that the Fed never operates in the public interest.- Is this statement true, false, or uncertain? Explain Vour answer.
10.tern lost member banks al. a rapid rate. How can the theory of bureaucratic behavior explain the Fed's campaign for legislation to require all commercial banks to become members? Was the Fed
9. What is the primary tool that Congress uses to exercise some control over the Fed?In the 1960s and 1970s, the Federal Resen•e Sys,
7. Over time, which entities have gained power in the Federal Reserve System and which have lost power? Why do you think this has happened?
6. Do you think that the 14-year nonrenewable terms for governors effectively insulate the Board or Gov-ernors from political pressure?
4. In What ways can the regional Federal Reserve banks influence the conduct. or monetary policy?
3. "The Federal Reserve System resembles the u,S.Constitution in that it was desaened with many checks ard balances." Discuss.
2. What political realities might explain why the Fed•eral Reserve Act Of 1913 placed two Federal Reserve banks in MissourP
l. Why was the ?ederal Reserve System up with 12 regional Federal Reserve banks rather than One central bank, as in other countries?
2. The Internet is a great source of information on stock prices and stock price movements. There are many sites that provide up-to-the minute data on stock market indices. One of the best is found
1. Visit http://www.forecasts.org/data/index.htm. Click on "Stock Index" at the very top of the page. Now choose "U.S, Stock Indices-monthly." Review the indices for the DJIA, the S&P 500, and the
2. 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
1. A company has just a a-for-I stock split, effective immediately. Prior to the split, the com runy had a market value of 55 billion %hth 100 lion shares Outstanding Assuming that the split conveys
14. "Human fear is the source of stock market crashes, so these crashes indicate that expectations in the stock market cannot be optimal." Is this statement true, false, or uncertain? Explain your
13. Can we expect the value of the dollar to rise by 2% next week if our expectations are optimal?
12. "Foreign exchange rates, like stock prices, should follow a random walk." Is this statement true, false, or uncertain? Explain your answer.
11. If higher money growth is associated with higher future inflation and if announced money growth turns out to be extremely high but is still less than the market expected, what do you think would
10. "An efficient market is one in which no one ever profits from having better information than the rest. Is this statement true, false, or uncertain? Explain your answer.
9. "If most participants in the stock market do not fol- low what is happening to the monetary aggregates, prices of common stocks will not fully reflect infor- mation about them." Is this statement
8. Can a person with optimal expectations expect the price of IBM to rise by 10% in the next month?
7. If my broker has been right in her five previous buy and sell recommendations, should I continue lis- tening to her advice?
6. If I read in the Wall Street Journal that the "smart money" on Wall Street expects stock prices to fall, should I follow that lead and sell all my stocks?
5. Suppose that increases the money supply lead to a rise in stock prices Does this mean that when you see that the money supply has had a sharp rise in the past week, you should go out and buy
3. a forecaster spends hours every day studying data LO (Orecast interest rates hut his expectations are not as accurate as predicting that tomorrow's interest rates will be identical to today's
2. -Whenever it is smwing when Joe Commuter gets up in the morning. he misjudges how long it will lake him to drive to work. his expecta•üons of rhe driving time are perfectly accurate Considering
I. "Forecasters' predictions of inflation are notori•Ously inaccurate, so their expectations Of inflation cannot be Optimal." Is this statement true, false, or uncertain? Explain your answer.
3. Investment companies attempt to explain to investors the nature of the risk the investor incurs when buying shares in their mutual funds. For example, Vanguard carefully explains interest-rate
2. Figure 8 in this chapter shows a number of yield curves at various points in time. Go to http:// www.bloomberg.com and click on "Markets" at the top of the page. Find the Treasury yield curve.
1. The amount of additional interest investors receive due to the various premiums changes over time. Sometimes the risk premiums are much larger than at other times. For example, the default risk
15. If the interest rates on one- to five-year bonds are currently 496. and and the term premiums for one. to five-year bonds are 0.40%, and 0.5096, predict what the one-year interest rate will be
14. You observe the following rnarket interest rates, for both borrowing and lending:One-year rate Two-year rate 6%One-year rate one year from now 7.25%How Can you take advantage Of these races to
13. At your favorite bond store, Bonds-R-Us, you see the follcnvirg prices:Ore •year S zero selling for W). 19 Three-year coupon t»nd selling for $ 1000 coupon S par bond for Assume that the pure
12. One-year T-bill rates over the next four years are expected to be and If four•year T-bonds are ytelciing 4.5%, what is the liquidity pre-mium on this bond?
Il. One-year T-bill rates are 2% currently. If interest rates are expected to go up after three years by every year, what should be the required interest rate on a I O-year bond issued today? Assume
10. Little Monsters, Inc.. borrowed Sl for two years NorthernBank, Inc, at an L 1.5% Inter-est rate The current risk- free rate is , and Little Monsters' financial condition warrants a default risk
9. Which bond would pr«h'ce a greater return if the pure expectations the-or,' to hold true, a year bond with an interest rate Of Or one-year bonds with sequential interest payments Of and 17%?
8. Using the information from the previous question, now assume that investors prefer holding short- term bonds. A liquidity premium of 10 basis points is required for each year of a bond's maturity.
7. The one-year interest rate over the next ten years will be 3%, 4.5%, 6%, 7.5 %, 9 %, 10.5%, 13%, 14.5%, 16%, and 17.5%. Using the pure expectations the- ory, what will be the interest rates on a
6. One-year T-bill rates are expected to steadily increase by 150 basis points per year over the next six years. Determine the required interest rate on a three-year T-bond and a six-year T-bond if
5. Debt issued by Southeastern Corporation currently yields 12%. A municipal bond of equal risk cur- rently yields 8%. At what marginal tax rate would an investor be indifferent between these two
4. Consider the decision to purchase either a five-year corporate bond or a five-year municipal bond. The corporate bond is a 12% annual coupon bond with a par value of $1000. It is currently
1. Assuming that the pure expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the
11. If the income tax exemption on bonds were abolished. what would happen the inter.est rates on these bonds? What effect would it have on interest rates on U.S. Treasury securities?
10. Predict what would happen to the risk premiums on bonds if brokerage comnussions lowered the corporate bond market.
9. Predict what happen to interest rates on acor-porat101B bonds if the federal government guar, antees today that it Will pay creditors if the corporation goes bankrupt in the future What Win happen
8. What effect would reducing income tax rates have on the interest rates of municipal bonds? Would interest rates of Treasury securities be affected and, if so, how?
5. If yield orves, on average, were flat. what would this say about the liquidity premiums in the term structure? Would you be more Or less willing to accept the pure expectations theory?
4. bonds of different maturities are close substi-tut.es. their interest rates are more likely to move together?' Is this statement true. false. or uncer-tain? Explain your answer.
3, Risk premiums on corporate bonds are usually anti, cyclical; that is, they decrease during business Cycle expansions and increase during recessions.Why is this so?
2. Why do LIS. Treasury bills have lower interest rates than large•denorrunal.ion negotiable bank CDs?
1. Which should have the higher risk premium its interest rates, a corporate bond with a MoodyS Baa rating or a corporate bond with a C rating? Why?
2. 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 www.jsc.nasa.gov/
1. One Of the largest single innuenees on the level Of interest rates is inflation There area number of Sites that report inflation over time. Go to txt and review the data available. Note that the
6. The demand curve and supply curve for one-year discount bonds were estimated using the follow- ing equations: -2 B: Price= Quantity + 990 5 B: Price Quantity + 500 As the stock market continued to
5. The demand curve and supply curve for one-year discount bonds were estimated using the follow- ing equations: B: Price = Quantity + 940 B: Price Quantity + 500 Following a dramatic increase in the
4. An economist has concluded that, near the point of equilibrium, the demand curve and supply curve for one-year discount bonds can be estimated using the following equations: -2 B: Price Quantity +
3. Last month, corporations supplied $250 billion in one-year discount bonds to investors at an aver- age market rate of 11.8%. This month, an additional $25 billion in one-year discount bonds became
2. Consider a $1000-par junk bond paying a 12% annual coupon with two years, to maturity. The issu- ing company has a 20% chance of defaulting this year; in which case, the bond would not pay any-
19. If the next chair Of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current chair, what will happen to interest rates? Discuss the possible
18. Predict what Will happen to interest rates if prices in the bond market become more volatile.
17. Predict what will happen to interest rates if the public suddenly expects a large increase in stock prices.
16. The chairman of the Fed announces that interest rates will rise sharply next year, and the market believes him. What will happen to today's interest rate on AT&T bonds, such as the 8s of 2022?
15. The president of the United States announces in a press conference that he will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates if
14. Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.
13. Using a supply and demand analysis for bonds, show what the effect is on interest rates when the riskiness of bonds rises.
8. Why should a rise in the price level (but not in expected inflation) cause interest rates to rise when the nominal money supply is fixed?
7. Using the supply and demand for bonds framework, show why interest rates are procyclical (rising when the economy is expanding and falling during recessions).
6. An important way which the Federa! Reserve decreases the money supply is by selling botuls to the public. Using a supply and demand ara&sis for bonds, show What effect this action has on inter-est
5. "No one Who is risk-averse Will ever buy a security that has a lower expected return. more risk, and less iiquidity than another security." Is this State-ment true, false, or uncertain? Explain
4. I own a professional footbal' team, and plan to diversify by purchasing shares in either a company that owns a pro basketball Leam or a pharmaceu-tical company. Which of l,hese two investments IS
2. 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 fau from of the sales price to of sales
1. Explain why you would be more or less Willing to buy a share of Polaroid stock in the Ioliowing situ-ations:a. Your wealth falls.b. You expect it to appreciate in value,c. The bond market becomes
2. Figure 1 in the chapter shows the estimated real and nominal rates for three-month Treasury bills.GO to http://www.martincapital.eom/charts.htm. Click on "interest rates and yields" then
1. Investigate the data available from the Federal Reserve at http:ffwww.rederalreserve.gov/releases/ , Then answer the following questions.a. What is the difference in the interest rates on
15. Consider a bond that promises the following cash flows. The required discount rate 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
14. A bank has two 3-year commercial loans with a present value of $70 million. The first is a $30 mil-lion loan that requires a single payment of $37.8 rnillion in three years, with no other
13. The duration of a $100 million portfolio is 10 years.$40 mjllion in new securities are added to the port-folio, increasing the duration of the portfolio to 12.5 years. What is the duration Of the
12. Consider the bönd in the previous question. Cal-culate the expected price change if interest rates drop to 6.75% using Che duration approximation.Calculate the actual price change using
11. Calculate the duration Of a SIOOO, 6% coupon bond with three years to maturity. Assume that all mar-ket interest rates are 7%.
10. You have paid $980.30 for an 8% coupon bond with a face value of SIOOO that matures in five years. You plan on holding the bond for onc year. If you want to earn a 9% rate of return on this
9. A ten-year, 7% coupon bond with a face value of is currently selling for $871.65. Compute your rate of return ifyou sell the bond next year for$880.10.
8. Assume you just deposited $1000 into a bank account. The current real interest rate is 2%, and inflation is expected to be 6% over the next year.What nominal rate would you lequjre from the bank
7. Property taxes in DeKalb County are roughly 2.66% of the purchase price every year. If you just bought a $100,000 home, what is the PV of all the future property tax payments? Assume that the
6. What is the price of a perpetuity that has a coupon of $50 per year and a yield to maturity of 2.5%? If the yield to maturity doubles, what will happen to its price?
5. You are willing to pay $15,625 now to purchase a perpetuity that will pay you and your heirs $1250 each year, forever, starting at the end of this year. If your required rate of return does not
4. Consider a coupon bond that has a $1000 par value and a coupon rate of 10%. The bond is currently selling for $1150 and has eight years to maturity. What is the bond's yield to maturity?

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