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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Elise is a recent college graduate with student loans on which her parents have cosigned. If Elise is looking to purchase low-cost life insurance to ensure her parents will not have to repay her
How is the makeup of assets and liabilities of life insurance companies different from those of depository institutions? Why?
Many automobile insurance policies require a deductible to be paid by the insured. A deductible is a tool to help control for which problem?a. Adverse selectionb. Underwritingc. Moral hazardd. Claims
Sarah and David are interested in purchasing life insurance policies. Why might they may wind up paying very different life insurance premiums?
Andrew is a bit confused about risk. In his investments class he learned about risk when purchasing a financial asset, and he thinks that is the same as risk when buying automobile insurance. How
Today much of the regulation of depository institutions occurs at the federal level. How is the insurance industry different?
If John Deere Financial provides loans to John Deere customers and is owned by Deere & Company, then John Deere Financial is known as what type of finance company?a. Captive sales finance
Finance companies are not depository institutions, but they still lend money. If finance companies do not take deposits, where do they get the funds they lend to their customers?
Bobby is interested in borrowing money, but he cannot get a loan from a depository institution. He turns to a consumer finance company. In what ways are the loans Bobby might get from a finance
The first credit unions, or credit cooperatives, in North America were started where and when?a. Quebec, Ontario, Canada, in 1901b. Boston, Massachusetts, in 1909c. Chicago, Illinois, in 1910d.
When it comes to lending to businesses, credit unions often argue they should be allowed to write more business loans, whereas critics contend credit unions’ business lending should be restricted.
Credit unions are similar to commercial banks in that they are both depository institutions. Explain how credit unions are also very different from commercial banks.
Which government agency was created to close and liquidate the failed thrifts?a. FDICb. SECc. RTCd. DEA
Explain how zombie institutions are in one sense “dead” but in another sense are still “alive.”
Explain why the phasing out of Regulation Q by DIDMCA did not end the problems faced by the thrifts.
When market interest rates increased during the 1960s, thrifts found it difficult to attract deposits because of which Depression-era policy?a. FDIC deposit insuranceb. SEC bond registration
Initially, thrifts were depository institutions that often were considered “special.” Why were they viewed this way?
In an “import substitutions” policy, what is being substituted for imports?a. Cash transfersb. Domestically made goods and servicesc. Interest payments received in the futured. Bonds that can be
The IMF and World Bank often are described as “sister organizations.” One could say they are “sisters” in that they are very similar yet also very different. Explain this argument.
Few argue with the idea that the policies the IMF suggests are sound long-term policies. Yet critics believe these sound long-term policies are the wrong policies for the IMF to be suggesting.
Why did the IMF suffer from “mission creep”?a. As members left the IMF, it changed on whom it focused.b. The collapse of the Bretton Woods System led the IMF to become a lending institution.c.
How did the “closing of the gold window” in 1971 affect how the IMF operates?
How and why did the International Monetary Fund attempt to end “beggar-thy-neighbor” policies?
How does the World Bank get its funds?a. It creates its own currency.b. It borrows money from the world’s central banks.c. It is funded by national governments and borrows in the global financial
Why was Robert McNamara’s tenure at the World Bank so controversial?
Greg is a bit confused about the creation of the World Bank. Explain to Greg how and why the World Bank was created.
Which of the following is not a condition for countries to be considered an optimal currency area?a. They speak the same language.b. They allow workers to move between countries.c. They allow capital
Would you consider the United States to be an optimal currency area? Why or why not? Yes, due to the following:
How can a fixed exchange rate regime be used to build the credibility of a central bank?
Which of the following explain why exchange rates may “overshoot”?a. Incomes change more slowly than exchange rates.b. Exchange rates change more slowly than market prices of goods and
The currency board exchange rate regime worked well for Hong Kong. Why did currency boards not work so well for other countries?
The target zone exchange rate regime held promise because it was designed to be flexible yet stable. Why did the target zone regime not work as well as planned?
Why does the crawling peg exchange rate regime often not work as planned?
Why might a central bank want to “sterilize” its exchange rate intervention?
During what time period was the Bretton Woods System in place?a. From 1812 until World War Ib. Between World War I and World War IIc. From the Great Depression until the end of World War IId. From
You read in the business press that real, risk-adjusted interest rates in Switzerland have decreased relative to interest rates in the United Kingdom. What will happen in the foreign exchange market
Andy is completely confused about the Bretton Woods System. He does not understand how it functioned. What would you tell Andy?
Why did the attempt to return to the gold standard after World War I not work out so well?
Gary does not understand how purchasing power parity affects exchange rates. How would you explain this to him?
When a central bank seeks to offset the impact of its attempt to influence the exchange rate of its currency on the monetary base, this action is referred to as:a. Sterilization.b. Counter-setting
Explain in words and show graphically why decreases in inflationary expectations can lead to currency appreciation.
Explain why the supply curve in the foreign exchange market slopes upward. Who causes it to have this shape and how?
a. Explain why the demand curve in the foreign exchange market slopes downward. b. Who causes it to have this shape and how?
If the value of the Indian rupee decreases, which of the following will occur?a. The price of Swiss-made watches in India will decrease.b. The price of Indian-made computers will increase in
Kari runs a firm in Los Angeles, California, that buys a lot of its inputs from a supplier in Australia. What would she like to see happen to the US dollar in terms of the Australian dollar? Why?
Julie runs an export business in Austin, Texas, and sells a large amount in Mexico. What would she like to see happen to the US dollar in terms of the Mexican peso? Why?
In subprime home mortgages the term subprime refers to:a. The fact that the interest rates on these mortgages were below the prime rate.b. The idea that these mortgages were offered to young
Explain how an increase in defaults of home mortgages in the United States could affect savers on the other side of the world via CMOs.
Explain how the economic policies of both the Clinton and George W. Bush Administrations toward home ownership helped to contribute to the financial crisis.
In a collateralized debt obligation (CDO) such as a collateralized mortgage obligation (CMO), the senior tranche:a. Comprises the oldest mortgages.b. Has the lowest risk of all the tranches.c. Pays
Explain what a CMO is. How do tranches work?
What is Fannie Mae? What was it originally established to do?
A home mortgage where the monthly payment is not enough to pay the monthly principal payment is calleda. Teaser mortgage.b. NegAm mortgage.c. Upside-down mortgage.d. Default mortgage
Explain why adjustable-rate mortgages, while beneficial for some, often turned out to be very harmful to others, especially the teaser-rate variation of the ARM.
Why might zero-down home mortgages have a higher default rate than traditional home mortgages?
If a homeowner decides to save money each month to pay property taxes and insurance on their home, this is referred to as:a. Escrow.b. Amortization.c. Discretionary savings.d. Forward savings.
Other than getting an adjustable-rate mortgage, what can a home purchaser do to get a mortgage with a lower monthly payment?
Adjustable-rate mortgages offer lower interest rates than fixed-rate mortgages, yet ARMs are often viewed as “more risky” than fixed-rate mortgages. Why is this the case?
Which of the following is not a federal government agency designed to assist families getting a home mortgage?a. Federal Housing Administration (FHA)b. Federal National Mortgage Association (FNMA, or
Home ownership rates in the United States started to increase after World War II. Why did this occur?
Kevin thinks home ownership is part of “the American dream” and has been achieved by most Americans. Why is Kevin incorrect?
The assumption that the stock market reflects all information, both public and private, is referred to as:a. Strong form of efficiencyb. Mildly strong form of efficiencyc. Semi-strong form of
Some people argue that the rise of behavioral finance raises questions about the level of efficiency in the stock market. Explain this argument.
The S&P 500 Index is different from the Dow Jones Industrial Average in that:a. The S&P 500 is a market value–weighted index, whereas the DJIA is a price-weighted index.b. The S&P 500
Joel is confused about what “efficient stock market” means. How would you explain this concept to Joel?
Why do stock market analysts need to be able to “predict” macroeconomic changes?
Harry is an old-time investor. He tells you, “When I was young I was told the Dow Jones Industrial Average tells you everything you need to know about how the stock market is doing. Is that still
According to the Gordon growth model, a stock with an expected dividend payment of $10 next year and an expected growth rate of dividends of 4% should sell at what price if the investor’s discount
Steven is very excited. He just found out that the stock he is about to buy has the lowest PE ratio of the stocks of similar firms. Why is he happy? How would you explain to him why he might not want
Explain in words how the time value of money is related to the price of stocks.
IPOs take place in which of the following equity markets?a. Buybacksb. Secondaryc. Primaryd. Proxy
Crusty is an old-time investor who has not kept up with the changing structure of financial markets. How would you explain to Crusty how the differences between over the counter and stock exchanges
Austin has some money saved and is thinking about buying some corporate stock. He can’t decide whether he should buy common stock or preferred stock. What things should affect his decision?
During times of crises, funds can flow from long-term debt markets to shorter term debt markets. This is often referred to as a:a. Flight to yield.b. Flight to liquidity.c. Flight to shortness.d.
Explain, in words and graphically, how the financial crisis that started in the United States led to a worldwide flight to quality.
Explain, in words and graphically, how private borrowers such as Harley-Davidson are negatively affected by a flight to quality.
Which of the following correctly describes the role of the bond-rating agencies in the subprime mortgage asset bubble?a. The bond-rating agencies warned early on that subprime mortgages were going to
Explain why some argue the “issuer pays” model creates a conflict of interest.
Initially, bond ratings were paid for by the bond purchaser. Today bonding ratings are under an “issuer pays” model. Explain how the two forms are different.
A convertible bond allows for a bond to be converted into what at a future date?a. Cashb. Stockc. Dividendd. Interest payment
Why do bonds have sinking funds? How are they different from a call provision?
Jenny is considering purchasing a bond, but she notices that the bond has many covenants. She is unsure what they mean. How would you explain these covenants to Jenny?
Sunita wants to earn the highest possible after-tax return on her savings. She has two options:a corporate bond and a tax-free government bond. The corporate bond yields 5%, and Sunita is in the 25%
Shoma is thinking about buying a municipal bond. She notices some are revenue bonds, whereas others are general obligation bonds, but she does not understand what these are. How would you explain
Explain how TIPS, or Treasury inflation-protected securities, actually protect investors from inflation.
A money market transaction in which one party sells a financial asset with the agreement to buy it back in the future is called:a. A commercial paper transaction.b. A standby letter of agreement.c. A
How might a firm use the issuance of commercial paper as a way to deal with its seasonal fluctuations in sales?
Explain how the Federal Reserve paying interest on deposits created a floor in the federal funds market.
Which of the following is not a characteristic of a Treasury Bill auction?a. It takes place every business day at noon.b. It is a single-price auction.c. Buyers can enter competitive bids.d. Buyers
Why do the DRY and the IRY result in different values? Explain why this difference, even though seemingly small, can be very important.
Assume you are going to buy a 90-day Treasury bill with a face value of $1,000 for a price of $944. Calculate the DRY, or discount rate yield. Also calculate the IRY, or investment return yield.
Which of the following is not a characteristic of money market instruments?a. They pay a relatively high rate of return.b. They have a low level of default risk.c. They have a high level of
Johanna is an institutional investor who is looking to “park” some of her investment funds for a short time. How would you explain to Johanna why money market instruments might be useful for her?
Explain why the money market is really not “a market for money.”
Scott suffers from what Simon Johnson calls “intellectual capture.” What does that mean?a. Scott believes that only highly educated people should manage financial institutions.b. Anything that is
Explain the controversies that exist over the Bureau of Consumer Financial Protection. How can some critics claim it has too much power, whereas other claim it has no meaningful use at all?
The Community Reinvestment Act was created in response to the issue of redlining. What is/was redlining and how did the act attempt to address it?
In a “pay off and liquidate” approach, what is being liquidated?a. The cash a bank holdsb. The insolvent institution that is being closedc. All of the depositors’ accounts at the institution in
Explain how regulators use the CAMEL rating in the regulation process.
Robert is confused about why regulators created the too big to fail policies. What would you tell Robert?

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