Financial Institutions Management A Risk Management Approach 8th edition Marcia Cornett, Patricia McGraw, Anthony Saunders - Solutions

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Suppose the growth rate of Europe’s money supply exceeds the ECB’s reference value, leading the ECB to raise its interest-rate target. Will this action push money growth toward the reference value? Explain.
Suppose that firms in Boversia gain confidence in the economy, so domestic in-vestment rises for any given interest rate. For now, assume that net capital outflows don’t change. Using graphs, show what happens to output and the real exchange rate under three assumptions about Boversia’s
Suppose the U.S. dollar is abolished. To replace it, each of the 12 Federal Reserve Banks issues a currency for its region. The Boston Fed issues the New England dollar, the Richmond Fed issues the Mid-Atlantic dollar, and so on. What are the costs and benefits of this change?
A currency board issues money backed by a foreign currency. Like a currency union, a currency board is an extreme version of a fixed exchange rate. Are speculative attacks a danger with a currency board? Explain.
On the text Web site, examine (1) the behavior of the U.S.-Canada exchange rate over 2005-2007 and (2) the interest-rate targets chosen by the Bank of Canada over the same period.a. Over 2005-2007, did the Bank of Canada respond to movements in the exchange rate in the manner described in the
Through Internet research, update the information in Figure 17.12. Find out which countries have joined the euro area recently or are likely to join soon. Why are these countries joining while others in the European Union are still left out?
Suppose again that investment rises in Boversia. In this case, assume that higher confidence in the economy also causes a decrease in net capital outflows. Use graphs to answer the following questions:a. If the central bank holds the real interest rate constant, what happens to output and the real
Consider the scenario in Figure 17.4: a rise in confidence causes a fall in net capital outflows, and the central bank adjusts the interest rate to keep the exchange rate constant. For this case, explain what happens to each of the components of aggregate spending: consumption, investment,
Suppose government spending rises in Boversia, shifting the AE curve outward. The central bank would like to keep both output and the real exchange rate constant. Using graphs, show how policymakers can accomplish these goals through a combination of an interest-rate adjustment and capital
Compare two statements about exchange rates that Henry Paulson, Treasury secretary under President Bush, made in 2007: (1) “A strong dollar is in our nation’s interest." (2) “The currency [China’s Yuan] needs to appreciate, and it needs to appreciate faster." Are the two statements
What is the difference between a depreciation of a currency and a devaluation of a currency? What is the difference between an appreciation and a revaluation?
Some countries have a “crawling peg" for their nominal exchange rate: they adjust it by a fixed percentage every year. For example, Boversia might reduce its exchange rate against the dollar by 3 percent per year. Why might a country adopt a crawling peg?
Boversia has a fixed exchange rate against the dollar. Taxes rise in the United States, reducing U.S. aggregate expenditure. The Federal Reserve adjusts the U.S. interest rate to keep output constant, and Boversia’s central bank adjusts its interest rate to keep the exchange rate constant.
Under the Maastricht Treaty, a country may adopt the euro only if its government budget deficit is less than 3 percent of GDP. What is the rationale for this requirement?
Many economists argue that the rescue of a financial institution should protect the institution’s creditors from losses but not protect its owners: they should lose their equity. Supporters of this idea say it reduces the moral hazard created by bailouts.a. Explain how this approach reduces moral
What could U.S. policymakers have done to prevent the Great Depression or at least to reduce its severity? Specifically:a. What government or Fed policies might have prevented the stock market crash and bank panics that started the financial crisis?b. Once the crisis began, what could policymakers
Some Congress members think the government should not risk taxpayer money to rescue financial firms whose highly paid executives have behaved irresponsibly. Instead, the government should aid middle- and low-income people hurt by the financial crisis, such as homeowners facing foreclosure. Discuss
In 2010, Senator Blanche Lincoln (D-Arkansas) proposed that commercial banks be forbidden to trade derivative securities. Discuss the arguments for and against this proposal.
Of the proposed financial reforms discussed in Section 18.4, which would have significantly dampened the financial crisis of 2007-2009 if they had been in place before the crisis? Could any of the reforms have prevented the crisis entirely? Explain.
Draw an expanded version of Figure 18.1 (the outline of a typical financial crisis on page 554) for emerging economy crises. Your chart should include capital flight and show how this phenomenon and its consequences interact with the other elements common to a financial crisis.
In the late 1990s, some economists advised Argentina to dollarize, that is, to eliminate the peso and use the U.S. dollar as its currency. Discuss how dollarization might have changed the course of events in 2001-2002.
Explain what has happened to Greece’s financial system and economy since the fall of 2010. Has its crisis worsened or eased? Has the crisis affected other European or non-European economies? Have events followed the typical pattern of financial crises described in this chapter?
In 2010, the Dodd-Frank Act authorized the Federal Reserve, Financial Services Oversight Council, and Office of Credit Ratings to issue new financial regulations, including stronger capital requirements and restrictions on risk-taking by investment banks. What major regulations have been issued
How do FIs alleviate the problem of liquidity risk faced by investors who wish to buy securities issued by corporations?
How do financial institutions help individual savers diversify their portfolio risks? Which type of financial institution is best able to achieve this goal?
How can financial institutions invest in high-risk assets with funding provided by low-risk liabilities from savers?
How can individual savers use financial institutions to reduce the transaction costs of investing in financial assets?
What is maturity intermediation? What are some of the ways in which the risks of maturity intermediation are managed by financial institutions?
What are five areas of institution-specific FI specialness and which types of institutions are most likely to be the service providers?
How do depository institutions such as commercial banks assist in the implementation and transmission of monetary policy?
What is meant by credit allocation regulation? What social benefit is this type of regulation intended to provide?
Which intermediaries best fulfill the intergenerational wealth transfer function? What is this wealth transfer process?
What are two of the most important payment services provided by financial institutions? To what extent do these services efficiently provide benefits to the economy?
Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial institutions.
What is denomination intermediation? How do FIs assist in this process?
What is negative externality? In what ways do the existence of negative externalities justify the extra regulatory attention received by financial institutions?
If financial markets operated perfectly and costlessly, would there be a need for financial institutions?
Why are FIs among the most regulated sectors in the world? When is the net regulatory burden positive?
What forms of protection and regulation do regulators of FIs impose to ensure their safety and soundness?
In the transmission of monetary policy, what is the difference between inside money and outside money? How does the Federal Reserve try to control the amount of inside money? How can this regulatory position create a cost for the depository institutions?
What are some examples of credit allocation regulation? How can this attempt to create social benefits create costs to a private institution?
What is the purpose of the Home Mortgage Disclosure Act? What are the social benefits desired from the legislation? How does the implementation of this legislation create a net regulatory burden on financial institutions?
What legislation has been passed specifically to protect investors who use investment banks directly or indirectly to purchase securities? Give some examples of the types of abuses for which protection is provided.
How do regulations regarding barriers to entry and the scope of permitted activities affect the charter value of financial institutions?
Identify and explain three economic disincentives that would dampen the flow of funds between household savers of funds and corporate users of funds in an economic world without financial institutions.
What reasons have been given for the growth of investment companies at the expense of “traditional” banks and insurance companies?
What events resulted in banks’ shift from the traditional banking model of “originate and hold” to a model of “originate and distribute?”
Identify and explain the two functions FIs perform that would enable the smooth flow of funds from household savers to corporate users.
In what sense are the financial claims of FIs considered secondary securities, while the financial claims of commercial corporations are considered primary securities? How does the transformation process, or intermediation, reduce the risk, or economic disincentives, to the savers?
Explain how financial institutions act as delegated monitors. What secondary benefits often accrue to the entire financial system because of this monitoring process?
What are five general areas of FI specialness that are caused by providing various services to sectors of the economy?
What are agency costs? How do FIs solve the information and related agency costs experienced when household savers invest directly in securities issued by corporations?
How do large financial institutions solve the problem of high information collection costs for lenders, borrowers, and financial markets?
What are the main features of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994? What major impact on commercial banking activity occurred from this legislation?
What factors normally are given credit for the revitalization of the banking industry during the decade of the 1990s? How is Internet banking expected to provide benefits in the future?
What factors are given credit for the strong performance of commercial banks in the early and mid-2000s?
What factors are given credit for the weak performance of commercial banks in the late 2000s?
How do the asset and liability structures of a savings institution compare with the asset and liability structures of a commercial bank? How do these structural differences affect the risks and operating performance of a savings institution? What is the QTL test?
How do savings banks differ from savings associations? Differentiate in terms of risk, operating performance, balance sheet structure, and regulatory responsibility.
What happened in 1979 to cause the failure of many savings institutions during the early 1980s? What was the effect of this change on the operating statements of savings associations?
How did the two pieces of regulatory legislation─the DIDMCA in 1980 and the DIA in 1982─change the operating profitability of savings institutions in the early 1980s? What impact did these pieces of legislation ultimately have on the risk posture of the savings institution industry? How did the
Use the data in Table 2-5 for banks in the two asset size groups (a) $100 million-$1 billion and (b) more than $10 billion to answer the following questions.a. Why have the ratios for ROA and ROE tended to increase for both groups over the 1990-2006 period, decrease in 2007-2009, and increase in
How did the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991 reverse some of the key features of earlier legislation?
What is the “common bond” membership qualification under which credit unions have been formed and operated? How does this qualification affect the operational objective of a credit union?
What are the operating advantages of credit unions that have caused concern among commercial bankers? What has been the response of the Credit Union National Association to the banks’ criticisms?
How does the asset structure of credit unions compare with the asset structure of commercial banks and savings institutions? Refer to Tables 2-6, 2-10, and 2-13 to formulate your answer.
Compare and contrast the performance of the worldwide depository institutions with those of major foreign countries during the financial crisis.
What factors caused the decrease in loan volume relative to other assets on the balance sheets of commercial banks? How has each of these factors been related to the change and development of the financial services industry during the 1990s and 2000s? What strategic changes have banks implemented
What is the primary function of finance companies? How do finance companies differ from depository institutions?
Why do finance companies face less regulation than do commercial banks? How does this advantage translate into performance advantages? What is the major performance disadvantage?
What are the three major types of finance companies? To which market segments do each of these types of companies provide service?
What have been the major changes in the accounts receivable balances of finance companies over the 35-year period from 1977 to 2012?
What are the major types of consumer loans? Why are the rates charged by consumer finance companies typically higher than those charged by commercial banks?
Why have home equity loans become popular? What are securitized mortgage assets?
What advantages do finance companies have over commercial banks in offering services to small business customers? What are the major subcategories of business loans? Which category is largest?
What have been the primary sources of financing for finance companies?
How do finance companies make money? What risks does this process entail? How do these risks differ for a finance company versus a commercial bank?
Compare Tables 3-1 and 2-6. Which firms have higher ratios of capital to total assets: finance companies or commercial? What does this comparison indicate about the relative strengths of these two types of firms?
Explain how securities firms differ from investment banks. In what ways are they financial intermediaries?
An investment bank pays $23.50 per share for 4 million shares of JCN Company. It then sells those shares to the public for $25 per share. How much money does JCN receive? What is the profit to the investment bank? What is the stock price of JCN?
If an investor observes that the price of a stock trading in one exchange is different from the price in another exchange, what form of arbitrage is applicable, and how can the investor participate in that arbitrage?
An investor notices that an ounce of gold is priced at $1,518 in London and $1,525 in New York. a. What action could the investor take to try to profit from the price discrepancy? b. Under which of the four trading activities would this action be classified?c. If the investor is correct in
What three factors are given credit for the steady decline in brokerage commissions as a percent of total revenues over the period beginning in 1977 and ending in 1991?
In what ways have changes in the investment banking industry mirrored changes in the commercial banking industry?
What factors are given credit for the resurgence of profitability in the securities industry beginning in 1991? Are firms that trade in fixed-income securities more or less likely to have volatile profits? Why?
Using Table 4-6, which type of security accounts for most underwriting in the United States? Which is likely to be more costly to underwrite: corporate debt or equity? Why?
How do the operating activities, and thus the balance sheet structures, of securities firms differ from the operating activities of depository institutions? How are the balance sheet structures of securities firms similar to depository institutions?
Based on the data in Table 4-7, what were the largest single asset and the largest single liability of securities firms in 2012? Are these asset and liability categories related? Exactly how does a repurchase agreement work?
What are the three requirements of the U.S.A. Patriot Act that financial service firms must implement after October 1, 2003?
What are the different types of firms in the securities industry and how does each type differ from the others?
What are the key activity areas for investment banks and securities firms? How does each activity area assist in the generation of profits and what are the major risks for each area?
What is the difference between a private placement and a public offering?
What are the risk implications to an investment bank from underwriting on a best-efforts basis versus a firm commitment basis? If you operated a company issuing stock for the first time, which type of underwriting would you prefer? Why? What factors may cause you to choose the alternative?
An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corp. a. If the investment bank underwrites the stock on a firm commitment basis, it agrees to pay $12.50 per share to Looney Landscaping Corp. for the 15 million shares of stock. It can then
An investment bank agrees to underwrite a $500 million, 10-year, 8 percent semiannual bond issue for KDO Corporation on a firm commitment basis. The investment bank pays KDO on Thursday and plans to begin a public sale on Friday. What type of interest rate movement does the investment bank fear
A mutual fund owns 300 shares of General Electric, currently trading at $22, and 400 shares of Microsoft, Inc., currently trading at $28. The fund has 1,000 shares outstanding. a. What is the net asset value (NAV) of the fund? b. If investors expect the price of General Electric shares to increase
What is the difference between open-end and closed-end mutual funds? Which type of fund tends to be more specialized in asset selection? How does a closed-end fund provide another source of return from which an investor may either gain or lose?
Open-end fund A owns 165 shares of AT&T valued at $35 each and 50 shares of Toro valued at $45 each. Closed-end fund B owns 75 shares of AT&T and 120 shares of Toro. Each fund has 1,000 shares of stock outstanding. a. What are the NAVs of both funds using these prices? b. Assume that in one month
What is the difference between a load fund and a no-load fund? Is the argument that load funds are more closely managed and therefore have higher returns supported by the evidence presented in Table 5-6?
What are money market mutual funds? In what assets do these funds typically invest? What factors have caused the strong growth in this type of fund since the late 1970s?

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