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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Is the VIX volatility index (FRED code: VIXCSL) an indicator of broader financial market volatility? Using weekly data ending on Fridays, plot from 1994 the VIX,with its scale on the left axis, and
Risk-averse investors care greatly about asset price volatility. Using the FRED “Notes” about the data series, briefly define the (VIX) Volatility Index (FRED code:VIXCLS) of the Chicago Board
You and a colleague both follow the movements of the VIX, an index based on options prices that reflects investors’ expectations for stock market volatility. Suppose, according to the VIX, implied
Suppose, prior to the European financial crisis, you were considering investing in Greek Government bonds but had some concerns about the creditworthiness of the Greek Government. Why, despite your
To see the impact of the bubble in internet stocks on household wealth, plot on a monthly basis since 1980 the NASDAQ stock index (FRED code: NASDAQCOM) on the left axis and the market value of
The NASDAQ stock market index (FRED code: NASDAQCOM) is comprised of stocks that tend to be relatively new and focused on technology, while the Wilshire 5000 (FRED code: WILL5000PR) includes all
Howwell does the stock market anticipate the behavior of the economy? Plot on a monthly basis since 1972 the percentage change from a year ago of the Wilshire 5000 index (FRED code: WILL5000PR). Is
Suppose a shock to the financial system were to disproportionately hit corporate bond markets making it much harder for companies to raise new funds via bond issuance. As a result, the proportion of
Memories of the 2007-2009 financial crisis have made you more risk averse, doubling the risk premium you require to purchase a stock. Suppose that your risk premium before the crisis was 4 percent
You are thinking about investing in stock in a company which paid a dividend of $10 this year and whose dividends you expect to grow at 4 percent a year. The risk free rate is 3 percent and you
If Professor Siegel is correct that stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2½ percent, the growth rate of
Suppose recent regulatory reforms relating to credit rating agencies are perceived to improve the reliability and accuracy of credit ratings of corporate bond issues. Imagine further that you manage
Consider again the economy described in Problem 14. Under which of the following scenarios would you expect the impact of the mineral discovery on bond yields to be larger? Before the discovery,
Considera struggling emerging-market economy where, in contrast to developed economies, the perceived risk associated with holding sovereign bonds is affected by the state of the economy. Suppose
Suppose your local government, threatened with bankruptcy, decided to tax the interest income on its own bonds as part of an effort to rectify serious budgetary woes. What would you expect to see
As economic conditions improve in countries with emerging markets, the cost of borrowing funds there tends to fall. Explain why.
Download the data from the graph you produced in Data Exploration Problem 3. Calculate the standard deviation of the annual inflation rate for the three time periods and compare these results against
Not long after the United Kingdom’s vote to leave the European Union, the yields on some British Government bonds (called gilts) turned negative. Assuming that these bonds were issued with a
During the euro-area sovereign debt crisis, the spread between the yields on bonds issued by the governments of geographically peripheral European countries (such as Greece, Ireland, Italy, Portugal,
Consider a U.S. Treasury Bill with 270 days to maturity. If the annual yield is 3.8 percent, what is the price?
For the period since 2005, plot on one graph the 30-year conventional mortgage rate (FRED code: MORTG) and a measure of an adjustable mortgage rate (FRED code: MORTGAGE5US). Explain their systematic
The plot shows several spikes in the DJIA volatility index, usually in periods when the Wilshire 5000 index is falling. For example, the volatility index peaked at nearly 60% in the crisis of
Consider again the U.K. referendum on membership of the European Union (EU) referred to in question 22, but this time from the perspective of an international investor. Assume that the downside
In June 2016, the United Kingdom (U.K.) held a referendum on whether the country should remain a member of the European Union (EU). A decision to leave the EU was commonly referred to as Brexit and
Banks pay substantial amounts to monitor the risks that they take. One of the primary concerns of a bank’s “risk managers” is to compute the value at risk. Why is value at risk so important for
Suppose analysts agree that the losses resulting from climate change will reach x dollars 100 years from now. Use the concept of present value to explain why estimates of what needs to be
An unusual development in the wake of the 2007-2009 financial crisis was that nominal interest rates on some financial instruments turned negative. In which of the following examples would the
A financial institution offers you a one-year certificate of deposit with an interest rate of 5 percent. You expect the inflation rate to be 3 percent. What is the real return on your deposit?
In Data Exploration Problem 3, you looked at changes in household net worth. In Data Exploration Problem 4 you examined stock market wealth. Aside from stock market wealth, what other assets
Do changes in stock values affect the wealth of households? Beginning in 1971, plot on a quarterly basis the percent change from a year ago of theWilshire 5000 (FRED code: WILL5000PR) and the percent
Plot the percent change from a year ago of the Wilshire 5000 (FRED code: WILL5000PR).Discuss the behavior of changes in the index before, during, and after recession periods, which are indicated by
The broadest stock index in the United States is the Wilshire 5000. Plot this index (FRED code: WILL5000PR)over the period from 1971 to the present.
How might broader access to finance benefit a country where access was previously very limited?
Give two examples of how greater financial inclusion might benefit a small farmer who previously did not have access to modern finance.
Has the distinction between direct and indirect forms of finance become more or less important in recent times? Why?
Which of the following would be more valuable to you: a portfolio of stocks that rises in value when your income rises or a portfolio of stocks that rises in value when your income falls? Why?
As the end of the month approaches, you realize that you probably will not be able to pay the next month’s rent. Describe both an informal and a formal financial instrument that you might use to
Is the challenge of making “time consistent” policy unique to fiat-based paper money?
Why might one doubt that current new forms of digital money, such as Bitcoin, will replace more traditional fiat currencies?
If money growth is related to inflation, what would you expect to happen to the inflation rates of countries that join a monetary union and adopt a common currency such as the euro?
As of July 2016, 19 European Union countries have adopted the euro, while the remaining member countries have retained their own currencies. What are the advantages of a common currency for someone
In December 2015, the Federal Reserve increased its policy interest rate target. This was the first increase since cutting the target to close to zero in December 2008 to combat the economy weakness
The Dodd-Frank Act, enacted in the United States in the aftermath of the 2007-2009 financial crisis, includes provisions aimed at enhancing the coordination of various regulatory agencies. Which two
In broad terms, explain how a central bank tries to maintain economic and financial stability and encourage economic growth.
If the U.S. Securities and Exchange Commission eliminated its requirement for public companies to disclose information about their finances, what would you expect to happen to the stock prices for
Suppose medical research confirms earlier speculation that red wine is good for you. Why would banks be willing to lend to vineyards that produce red wine at a lower interest rate than before?
Using Core Principle 2, under what circumstances would you expect a job applicant to accept an offer of a low base salary and an opportunity to earn commission over one with a higher base salary and
When you apply for a loan, you are required to answer lots of questions. Why?Why is the set of questions you must answer standardized?
Financial innovation has reduced individuals’ need to carry cash. Explain how.
List three items you used to buy with cash but you now purchase with a debit card.

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