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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Briefly explain in which of the following situations moral hazard is likely to be less of a problem.a. A manager is paid a flat salary of $150,000.b. A manager is paid a salary of $75,000 plus 10% of
A news story reported that the former CEO of homebuilder KB Home was convicted “of four felony counts in a stock option backdating scam.”The article goes on to note:A stock option allows an
After a report appeared that many projects financed through crowd-funding site Kickstarter failed to meet their completion deadlines, an article in Bloomberg Businessweek noted: “The company says
How does the use of collateral help to reduce the problem of adverse selection?
Explain how the use of net worth helps mitigate the chances of adverse selection in corporations.
If everyone were perfectly honest, would there be a role for financial intermediaries?
An article in the Wall Street Journal made the following comment on the surge in corporations selling long-term bonds in 2012: “For investors, the longer maturities provide better returns than
In this chapter we learned that the net worth of a firm is called shareholders’ equity. In the context of a bank the shareholders’ equity is usually called the bank’s capital. Briefly explain
What is correspondent banking? Explain why this function has diminished in importance.
In 1960, federal regulations prohibited banks from paying interest on checking accounts. Today, banks are legally allowed to pay interest on checking accounts, yet the value of checking accounts has
An article in the Wall Street Journal in 2012 noted: “A battle over who gets stuck with tens of billions worth of bad housing loans made during the boom years explains why many Americans still
What do you understand by repurchase agreements?Explain how banks use repurchase agreements as a source of business funds in the financial market.
Why might the managers of a bank want the bank to be highly leveraged? Why might the bank’s shareholders want the bank to be less highly leveraged?
An article in the Wall Street Journal noted that new federal banking regulations “mean only a 5 percent reduction in [bank] revenue … from households with $500,000 in assets or more compared with
An article in the Wall Street Journal argues that for investors to continue to see banks as good investments, the banks need an ROE of at least 12%. The average ROE for U.S. banks in 2012 was only
What do you understand by the term “credit scoring systems”? How do banks use them?
What is the prime rate? What kind of loans is it charged on?
What is the Federal Reserve Act? What did it establish?
What is the VAR approach?
What is the Volcker Rule? When and why was it created?
Evaluate the following statement:The United States has more than 6,000 banks, while Canada has only a few. Therefore, the U.S. banking industry must be more competitive than the Canadian banking
In 2012, an article in the Wall Street Journal described how Amazon had begun making loans to the small businesses that sell on its site. Many of these businesses had previously been turned down for
A bank analyst was quoted as saying:“There are very real expenses to owning and operating ATMs…. In the current environment, banks are unable to support the cost structure they have
Explain the role of investment banks as underwriters, and explain the term “syndicate” in this context.
What became of the large, standalone investment banks during the financial crisis of 2007–2009?
An article in the Economist magazine says about investment banks: “By unlocking the capital markets and helping firms to manage risks, investment banks are important conduits of credit.” How do
In 2005, before the financial crisis, Timothy Geithner, who was then president of the Federal Reserve Bank of New York, thought that leverage at hedge funds was rising, “probably because of
What are the key differences between open-end and closed-end mutual funds?
What is financial engineering? How does it help a business firm?
When Chrysler Corporation was considering setting up its own auto finance company, it sent a memo to its dealers that contained the following:“Chrysler Group is in private discussions with multiple
An article in the Economist magazine remarks that the average hedge fund is unlikely to earn more than the average mutual fund, and “since their fees are higher, the result will be disappointing
A New York Stock Exchange (NYSE) publication asks the question: “Do all investors fully understand the riskier characteristics of hedge funds as they pursue potentially greater returns?”a. What
What are the main characteristics of exchangetraded mutual funds? How are they different from no-load funds?
Explain the different ways in which finance companies act as financial intermediaries. Name the different types of finance companies.
An article in the New York Times observes that 401(k) plans:have largely supplanted traditional pensions and become the central pillar of America’s employer-sponsored retirement system, with 60
Why do pension funds have vesting periods? Do vesting periods have any advantages to employees relative to a system where new hires are eligible to participate in a pension plan right away?
Insurance companies never know the exact amounts of their future payouts. So, why do they hold large amounts of long-term, relatively illiquid assets, such as corporate bonds, that may be difficult
In a speech in October 2012, Federal Reserve Governor Daniel Tarullo made the following observation:“Money market funds remain a major part of the shadow banking system and a key potential systemic
Gary Gorton, a professor at Yale University, has compared repurchase agreements used by shadow banks to bank deposits in commercial banks. He notes: “If the depositors become concerned that their
In 2009, Congress and the president set up the Financial Crisis Inquiry Commission to investigate the causes of the financial crisis. At a hearing of the commission in 2010, Robert Rubin—who had
What is a financial crisis?
What is contagion? Explain how it is related to a bank run.
What is a pegged exchange rate? How does pegging against a foreign currency lead to a crisis?
An article in the Economist on the Dodd-Frank Act noted the following about a provision of the act that would require that trading in some derivatives be moved from over the counter to exchanges:The
In 2012, the euro-zone countries began the process of increasing the integration of their banking systems by giving the European Central Bank the authority to supervise banks in all member countries.
In 2012, some economists and policymakers continued to worry about the state of the European financial system. An article in the Economist magazine commented on the actions of the European Central
In 2012, as speculation increased that Greece might stop using the euro as its currency, the Wall Street Journal published an article that included this observation: “The Continent’s financial
In 2010, an article in the Wall Street Journal observed:In the bond market . . . investors have been flocking to all manner of [bonds] . . . from Treasuries to “junk” bonds. The attraction:
Briefly discuss the role envisaged for the Consumer Financial Protection Bureau in the aftermath of the financial crisis.
Financial journalist Joe Nocera observed about the decision of the Federal Reserve and the Treasury not to help save Lehman Brothers:Ever since that weekend, most people, including me, have viewed
What was the main function of the Federal Reserve Bank originally intended to be?
What was peculiar about the division of the Federal Reserve Bank into different districts?
How do the Federal Reserve Banks engage in monetary policy both directly and indirectly?
What changes did the Dodd-Frank Act make to the Fed?
Why did Congress pass the Federal Reserve Act in 1913, when the United States had functioned without a central bank since 1836?
Why did Congress want the member banks to own the Federal Reserve Banks? Does the current relationship between the member banks and the Federal Reserve Banks indicate that Congress achieved its goal?
Suppose that Bank of America pays a 2% annual interest rate on checking account balances while having to meet a reserve requirement of 10%.Assume that the Fed pays Bank of America an interest rate of
What is the composition of the Fed’s Board of Governors?
Is Michael McAvoy’s explanation of how the Federal Reserve Bank cities were selected more consistent with a public interest view of how the decision was made or a principal-agent view?Briefly
Are the high rates of inflation that the United States experienced during the 1970s consistent with the public interest view of the Fed’s motivation?
In late 2009, during the debate over the Dodd-Frank Act, a newspaper article noted:Last summer, the central bank hired an experienced Democratic hand and former lobbyist, Linda Robertson, to help
In a speech, Fed Chairman Ben Bernanke argued that: “Democratic principles demand that, as an agent of the government, a central bank must be accountable in the pursuit of its mandated goals,
What is the Federal Open Market Committee?What is its main function?
In October 2012, a newspaper article describing a meeting between ECB President Mario Draghi and members of the German parliament quoted Draghi as saying that in deciding to buy sovereign debt, the
A newspaper article in 2012 referred to “growing expectations the Bank of Japan, pressed by the government, will take a large-scale easing step next week.” It also noted that: “Japan’s
Name the three principle actors who determine the money supply.
What do you understand by the term “currency in circulation”? How is different from vault cash?Explain the relationship between vault cash and bank reserves.
An article in the Wall Street Journal titled “Why the Fed’s Balance Sheet Is Shrinking,” observed that: “As people pay back their mortgages . . .the Fed’s holdings of mortgage backed
In August 2010, the Federal Reserve announced that as the mortgage-backed securities it owns matured, it would reinvest the funds by buying U.S. Treasury securities. How would these actions affect
In the fall of 2012, an article in the New York Times speculated that the Federal Reserve “could announce a new round of asset purchases, expanding its balance sheet for the third time since
Define the term “required reserve ratio.”
How does the Fed change the monetary base of the financial system through the use of open market operations? Where are these operations carried out and which securities are involved in these
Suppose that Bank of America lends $100,000 to Jill’s Jerseys. Using T-accounts, show how this transaction is recorded on the bank’s balance sheet. If Jill’s spends the money to buy materials
According to an article in the Wall Street Journal:“The identity of who buys gold has changed radically.. . . Just five years ago, jewelry accounted for two-thirds of gold demand. Last year, it
An article in the New York Times noted that many people are increasing the types of investments in their retirement accounts beyond just stocks and bonds to include gold:“This is nothing but
What are non-banking financial intermediaries?List the different types and briefly explain their role in connecting savers with borrowers in the financial system.
Name and briefly explain the three key components of a modern financial system.
Briefly explain the process of asset securitization in the financial system.
In a talk at the White House in December 2009, President Barack Obama argued, “Ultimately in this country we rise and fall together: banks and small businesses, consumers and large
An article in the New York Times in mid-2012 noted, “with the economy still struggling and new regulations meant to eliminate bad lending, bank loans continue to lag.”a. What does the article
Households have a much larger fraction of their savings in stocks than in bonds. Can you think of reasons why this is the case?
What is money? Why do we need money?
List the qualities necessary for an asset to be suitable as a medium of exchange.
Is money the same as wealth? If not, distinguish between the two with examples of both, and explain the main difference between money, wealth, and income.
In 2009, the government of North Korea announced that it was replacing the existing currency with a new currency. The government would allow people to exchange only a limited amount of the old
If there were a decrease in the efficiency of the payments system, what would be the cost to the economy?
Is the United States likely to become a “cashless society”? Briefly explain.
Suppose that debit cards, ATMs, ACH transactions, and other forms of electronic funds transfers did not exist. How would this change the way you shop and pay bills? How would transactions costs in
What are monetary aggregates? Distinguish between M1 and M2 as measures of monetary aggregates.
Since 1975, which measure of the money supply has grown more rapidly, M1 or M2? Briefly explain why. Has the growth of M1 been more or less stable than the growth rate of M2?
In a report, investment analyst Ned Davis referred to gold as “real money.” Is gold used as money in the United States? What point was Davis making?
Why might households and firms in a foreign country prefer to use U.S. dollars rather than their own country’s currency in making transactions?What advantages or disadvantages do foreign
Explain whether you agree with the following statement:The Federal Reserve believes that two-thirds of the currency included in M1 is actually outside the United States. If this is correct, then M1
What is the cause of hyperinflation?
If during 2013 the money supply increases by 4%, the inflation rate is 2%, and the growth of real GDP is 3%, what must have happened to the value of velocity during 2013?
Prior to 2009, Zimbabwe experienced several years of declining real GDP. According to an article in the Wall Street Journal, “After Zimbabwe abandoned its currency in favor of the greenback, the
In late 2009, Federal Reserve Chairman Ben Bernanke wrote the following in a column published in the Washington Post: [Proposals in Congress to reduce the independence of the Fed] are very much out
State and local governments typically offer their employees defined benefit pension plans. Under these plans, employees are promised a fixed monthly payment after they retire. A government’s
At the end of 2011, Jose Reyes signed a sixyear contract to play shortstop for the Miami Marlins baseball team. (Reyes was later traded by the Marlins to the Toronto Blue Jays.) The contract was
What is a perpetuity? How is it different from a regular coupon bond?

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