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financial markets institutions

Questions and Answers of Financial Markets Institutions

2. A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use a discount rate of
1. Calculate the present value of a $1000 zero-coupon bond with 5 years to maturity if the yield to matu-rity is 6%.
4. If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?
3. A financial adviser has just given you the follow- ing advice: "Long-term bonds are a great invest- ment because their interest rate is over 20%." Is the financial adviser necessarily right?
2. If there is a decline in interest rates, which would you rather be holding, long-term bonds or short- term bonds? Why? Which type of bond has the greater interest-rate risk?
1. Write down the formula that is used to calculate the yield to maturity on a 20-year 10% coupon bond with $1000 face value that sells for $2000.
Are Financial Markets Efficient?
How Do Risk and Term Structure Affect Interest Rates?
Why Do Interest Rates Change?
What Do Interest Rates Mean and What Is Their Role in Valuation?
2. The most famous financial market in the world is the New York Stock Exchange. Check out their website at http://www.nyse.com and answer the following questions.a. What is the mission Of the
1. One of the single best sources of information about financial institutions is the "U.S. Flow of Funds Report" produced by the Federal Reserve. This doc-ument contains data on most financial
15. Discuss some of the manifestations of the global-ization of world capital markets.
14.How does risk sharing benefit both financial inter-mediaries and private investors?
13. Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank loan her the funds at a 10% interest
12. "In a world without information and transaction costs, financial intermediaries would not exist," Is this statement true, false, or uncertain? Explain your answer.
11. If there were no asymmetry in the information that a borrower and a lender had, could there still be a moral hazard problem?
10.[f you are an employer, what kinds Of moral haz-ard problems might you worry about, with your employees?
9. VVhy do loan sharks worry less about moral hazard in connection with their borrowers than some Other lenders do?
8. Think of one example in which you have had to deal with the adverse selection problem.
7. How can the adverse selection problem explain why you are more likely to make a loan to a fam-jly member than to a stranger?
6. Ifyou suspect that a company will go bankrupt next year, which would you rather hold—bonds issued by the company or equities Issued by the company?
5. "Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets." Comment.
4. In the nineteenth century the U.S. economy bor-rowed heavily from the British to build a railroad system. What was the principal debt instrument used? Why did this make both countries better off?
3. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?
2. If I can buy a Car today for and it is worth$10,000 next year in extra income to me because it enables me to get a job as a traveling anvil seller, should I take out a loan from Larry the Loan
1. Why is a share of IBM common stock an asset for its owner and a liability for IBM?
15. do managers of financial institutions care so much about the activities of the Federal Reserve System?
14. What types of risks do financial institutions face?
13. Can you think of any financial innovation in the past ten years that has affected you personally? Has it made you better or worse oft? In what way?
12. What are the other important financial intermedi-aries in the econortuv besides banks?
11. What is the basic activity of banks?
10. Looking at Figure 3, in what years would you have chosen to visit the Grand Canyon in Arizona rather the Tower of London?
9. How can changes in foreign exchange rates affect the profitability of financial institutions?
8. How does an increase in the value of the pound sterling affect American businesses?
7. How does a decline in the value of the pound ster- ling affect British consumers?
6. What effect might a rise in stock prices have on consumers' decisions to spend?
5. What effect might a fall in stock prices have on business investment?
4. Is everybody worse off when interest rates rise?
3. How can a change in interest rates affect the prof- itability of financial institutions?
2. When interest rates rise, how might businesses and consumers change their economic behavior?
1. Why are financial markets important to the health of the economy?
2. Overview of the F/noncial System
1. Why Study Financial Markets and Institutions?
From the most recent balance sheet and income statement, calculate the ROA, ROE, equity multi- plier, profit margin, and asset utilization ratios. Which ratio has changed the most since 2010 as
What is the most recent value of net income for Bank of America? How has this changed since 2010 as reported in Table 12-3?
What is the most recent value of total assets for Bank of America? How has this changed since 2010 as reported in Table 12-1?
Everytown bank has the following ratios: (LG 12-5)a. Profit margin: 5%b. Asset utilization: 20%c. Equity multiplier: 7.75X Calculate Everytown's ROE and ROA.
Anytown bank has the following ratios: (LG 12-5)a. Profit margin: 21%b. Asset utilization: 11%c. Equity multiplier: 12X Calculate Anytown's ROE and ROA.
Megalopolis Bank has the following balance sheet and income statement. (LG 12-5) Balance Sheet (in millions) Assets Liabilities and Equity Cash and due Demand from banks Investment securities $ 9,000
Smallville Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities. Balance Sheet (in thousands) Rate Earned Assets (%) Cash and due from banks $ 6,000 4
The financial statements for THE Bank are shown below: (LG 12-5) Balance Sheet THE Bank Assets Liabilities and Equity 600 Cash Demand deposits from other Fis $ 200 Demand deposits $ 2,450 Small time
The financial statements for MHM Bank (MHM) are shown below: (LG 12-5) Balance Sheet MHM Bank Assets Liabilities and Equity Cash and due Demand from banks $ 1,920 deposits $10,620 Demand deposits
The financial statements for BSW National Bank (BSWNB) are shown below: (LG 12-5) Balance Sheet BSW National Bank Assets Liabilities and Equity Cash and due Demand from banks $ 936 deposits $ 5,040
The financial statements for First National Bank (FNB) are shown below: (LG 12-5) Balance Sheet First National Bank Assets Liabilities and Equity Cash $ 450 Demand deposits $ 5,510 Demand deposits
A bank is considering an investment in a municipal secu- rity that offers a yield of 6 percent. What is this security's tax equivalent yield if the bank's tax rate is 35 percent? (LG 12-4)
A bank is considering two securities: a 30-year Treasury bond yielding 7 percent and a 30-year municipal bond yielding 5 percent. If the bank's tax rate is 30 percent, which bond offers the higher
What sort of problems or opportunities might ratio analysis fail to identify? (LG 12-5)
A security analyst calculates the following ratios for two banks. How should the analyst evaluate the financial health of the two banks? (LG 12-5) Bank A Bank B Return on equity 22% 24% Return on
What is the likely relationship between the interest income ratio and the noninterest income ratio? (LG 12-5)
How does the asset utilization ratio for a bank compare to that of a retail company? How do the equity multipliers compare? (LG 12-5)
How might the use of an end-of-the-year balance sheet bias the calculation of certain ratios? (LG 12-5)
How does a bank's annual net income compare with its annual cash flow? (LG 12-4)
What are the major categories of off-balance-sheet activi- ties? (LG 12-3)
How do core deposits differ from purchased funds? (LG 12-2)
How does a retail CD differ from a wholesale CD? (LG 12-2)
How does a NOW account differ from a demand deposit? (LG 12-2)
Repurchase agreements are listed as both assets and liabili- ties in Table 12-1. How can an account be both an asset and a liability? (LG 12-1, LG 12-2)
If we examine a typical bank's asset portion of the balance sheet, how are the assets arranged in terms of expected return and liquidity? (LG 12-1)
Classify the following accounts into one of the following categories: (LG 12-1, LG 12-2, LG 12-3, LG 12-4)a. Assetsb. Liabilitiesc. Equityd. Revenuee. Expensef. Off-balance-sheet activities (1)
Match these three types of cash balances with the functions that they serve: (LG 12-1)a. Vault cash (1) Used to meet legal reserve requirementsb. Deposits at (2) Used to purchase services the Federal
How does a bank's report of condition differ from its report of income? (LG 12-1, LG 12-4)
Although commercial bank assets as a percentage of total assets in the financial sector may have declined in recent years, this does not necessarily mean that banking activity has decreased. Indeed,
The Farm Credit System was created by Congress in 1916 to provide American agriculture with a source of sound, dependable credit at low rates of interest.
The Federal Reserve is the U.S. central bank charged with promoting economic growth in line with the economy’s potential to expand.
For example, the market value of equity is the product of the price of the equity times the number of shares that are issued.27.We describe and illustrate this flow of funds in Chapter 2.
We discuss the users and suppliers of funds in more detail in Chapter 2.
Calculate the percentage change in daily trading volume since the 3.3 billion shares traded on April 18, 2016.
What is the largest number of daily shares traded on the NYSE? On what day did this occur?
What countries have the largest commercial banks? (LG 1-9)
What countries have the most international debt securities outstanding? (LG 1-9)
What events resulted in banks’ shift from the traditional banking model of originate-and-hold to a model of originate-and-distribute?(LG 1-6, LG 1-7, LG 1-8)
What types of risks do FIs face? (LG 1-7)
How do financial institutions help individuals diversify their portfolio risks? Which financial institution is best able to achieve this goal? (LG 1-6)
If a U.S. bank is holding Japanese yen in its portfolio, what type of exchange rate movement would the bank be most concerned about?(LG 1-3)
Which of the capital market instruments is the largest in terms of dollar amount outstanding in 2016? (LG 1-2)
Which of the money market instruments is the largest in terms of dollar amount outstanding in 2016? (LG 1-2)
How does the location of money markets differ from that of capital markets? (LG 1-2)
Classify the following financial instruments as money market securities or capital market securities: (LG 1-2)a. Banker’s acceptancesb. Commercial paperc. Common stockd. Corporate bondse.
Classify the following transactions as taking place in the primary or secondary markets: (LG 1-1)a. IBM issues $200 million of new common stock.b. The New Company issues $50 million of common stock
What countries have the largest commercial banks? ( LG 1-8 )
What countries have the most international debt securities outstanding? ( LG 1-8 )
How did the boom in the housing market in the early and mid-2000s exacerbate FIs transition away from their role as specialists in risk measurement and management? (LG 1-6, LG 1-7, LG 1-8)
What events resulted in banks’ shift from the traditional banking model of “originate and hold” to a model of “originate and distribute?” (LG 1-6, LG 1-7, LG 1-8)
Why are FIs regulated? ( LG 1-8 )
What other services do FIs provide to the financial system? ( LG 1-6 )
What is meant by denomination intermediation? ( LG 1-6 )
What is meant by maturity intermediation? ( LG 1-6 )
How do financial institutions help individuals to diversify their portfolio risks? Which financial institution is best able to achieve this goal? ( LG 1-6 )
How do FIs alleviate the problem of liquidity and price risk faced by investors wishing to invest in securities of corporations? ( LG 1-6 )

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