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financial accounting

Questions and Answers of Financial Accounting

Assume that interest rates for one-year securities are expected to be 2 percent today, 4 percent one year from now and 6 percent two years from now. Using only the pure expectations theory, what are
a. A corporation is planning to sell its 90-day commercial paper to investors offering an 8.4 percent yield. If the three-month T-bill's annualized rate is 7 percent, the default risk premium is
a. Determine the forward rate for various one-year interest rate scenarios if the two-year interest rate is 8 percent, assuming no liquidity premium. Explain the relationship between the one-year
Determine how the after-tax yield from investing in a corporate bond is affected by higher tax rates, holding the before-tax yield constant. Explain the logic of this relationship.
a. Determine how the appropriate yield to be offered on a security is affected by a higher risk-free rate. Explain the logic of this relationship. b. Determine how the appropriate yield to be offered
Why did the Fed purchase long-term Treasury securities in 2010, and how did this strategy differ from the Fed's usual operations?
What was TALF, and why did the Fed create it?
Explain how the Fed's "quantitative easing" strategies differed from the traditional strategy of trading short-term Treasury securities.
What is the Beige book and why is it important to the FOMC?
How is money supply growth affected by an increase in the reserve requirement ratio?
What is the purpose of economic presentations during a POMC meeting?
The Fed intervened heavily in the credit crisis. Write a short essay on whether you believe the Fed's intervention improved conditions in financial markets or made conditions worse.
a. "The Fed's future monetary policy will be dependent on the economic indicators to be reported this week." b. "The Fed's role is to take the punch bowl away just as the party is coming alive." c.
a. Given the circumstances, do you expect that the administration will be more concerned about increasing economic growth or reducing inflation? b. Given the circumstances, do you expect that the Fed
a. How should Carson interpret the actions by the Fed? That is, will these actions place upward or downward pressure on the price of Treasury securities? Explain. b. Will these actions place upward
Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks.
Why do the Fed's open market operations have a different effect on money supply than do transactions between two depository institutions?
Explain how and why the Fed extended its discount window lending to nonbank financial institutions during the credit crisis.
Should the Fed or Congress decide the fate of large financial institutions that are near bankruptcy?
Do you think that large financial institutions should have been rescued by the Fed during the credit crisis?
Explain how the Fed's monetary policy affects the unemployment level.
Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for homes by consumers?
Explain how the Fed's monetary policy may indirectly affect the prices of equity securities.
How might the FOMC statement (following the committee's meeting) stabilize financial markets more than if no statement were provided?
Explain how the Fed's facility programs improved liquidity in some debt markets.
As a result of the Financial Reform Act of 2010, the Consumer Financial Protection Bureau was established, and housed within the Federal Reserve. Explain the role of this bureau.
Explain why participating in the eurozone causes a country to give up its independent monetary policy and control over its domestic interest rates.
What should be the Fed's role? Should it be focused only on monetary policy? Or should it be allowed to engage in the trading of various types of securities in order to stabilize the financial system
Explain the motivation behind the Fed's policy of purchasing massive amounts of mortgage-backed securities during the credit crisis. What could this policy accomplish that its traditional monetary
Why and how did the Fed intervene in the commercial paper market during the credit crisis?
How does the Fed's monetary policy affect economic conditions?
Describe the Fed's monetary policy response to the credit crisis.
Explain why an increase in the money supply can affect interest rates in different ways. Include the potential impact of the money supply on the supply of and the demand for loanable funds when
What other factors might be considered by financial market participants who are assessing whether an increase in money supply growth will affect inflation?
Explain how the Fed's monetary policy could depend on the fiscal policy that is implemented.
When the Fed increases money supply to lower the federal funds rate, do you think this will the cost of capital of U.S. companies be reduced? Explain how the segmented markets theory regarding the
Why might a foreign government's policies be closely monitored by investors in other countries, even if the investors plan no investments in that country? Explain how monetary policy in one country
Consider a discussion during FOMC meetings in which there is a weak economy and a war, with potential major damage to oil wells. Explain why this possible effect would have received much attention at
Stock market conditions serve as a leading economic indicator. Assuming the U.S. economy is in a recession, what are the implications of this indicator? Why might this indicator be inaccurate?
Consider the existing economic conditions, including inflation and economic growth. Do you think the Fed should increase interest rates, reduce interest rates, or leave interest rates at their
Describe the economic tradeoff faced by the Fed in achieving its economic goals.
Assume that the Fed adopts an inflation-targeting strategy. If oil prices rise abruptly by 15 percent in response to an oil shortage, describe how the Fed's monetary policy would be affected by this
Assume the following conditions. The last time the FOMC met, it decided to raise interest rates. At that time economic growth was very strong, and inflation was relatively high. Since the last
In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large
The Fed uses a targeted federal funds rate when implementing monetary policy. However, the Fed's main purpose in its monetary policy is typically to have an impact on the aggregate demand for
During the credit crisis, the Fed used a stimulative monetary policy. Why do you think the total amount of loans to households and businesses did not increase as much as the Fed had hoped? Are the
Explain why a stimulative monetary policy might not be effective during a weak economy in which there is a credit crunch.
In a weak economy, the Fed commonly implements a stimulative monetary policy to lower interest rates, and presumes that firms will be more willing to borrow. Even if banks are willing to lend, why
Why might the Fed want to focus its efforts on reducing long-term interest rates rather than short-term interest rates during a weak economy? Explain how it might use a monetary policy focused on
Explain the effects of a stimulative monetary policy on a firm's cost of capital.
What circumstances might cause a stimulative monetary policy to be ineffective?
When does the Fed use a stimulative monetary policy and when does it use a restrictive-monetary policy? What is a criticism of a stimulative monetary policy? What is the risk of using a monetary
How did the debt repayment problems in Greece affect creditors from other countries in Europe? How did the ECB's stimulative monetary policy affect the Greek crisis?
Why may the Fed have difficulty in controlling the economy in the manner desired? Be specific.
Compare the recognition lag and the implementation lag.
Assume that the Fed's primary goal is to reduce inflation. How can it achieve its goal? What is a possible adverse effect of such action by the Fed (even if it achieves this goal)?
Why do financial market participants closely monitor money supply movements?
The Fed attempts to use monetary policy to control the level of inflation and economic growth in the U.S. Write a short essay on the Fed's role during the housing bubble that occurred in the
a. "Lately, the Fed's policies are driven by gold prices and other indicators of the future rather than by recent economic data." b. "The Fed cannot boost money growth at this time because of the
a. Given the situation, is the Fed likely to adjust monetary policy? If so, how? b. Recently, the Fed has allowed the money supply to expand beyond its long-term target range. Does this affect your
a. How will the Fed's monetary policy change based on the report? b. How will the likely change in the Fed's monetary policy affect Carson's future performance? Could it affect Carson's plans for
Explain how the Treasury uses the primary market to obtain adequate funding.
Explain how the yield on a foreign money market security would be affected if the foreign currency denominating that security declined to a greater degree.
The maximum maturity of commercial paper is 270 days. Why would a firm issue commercial paper instead of longer-term securities, even if it needs funds for a long period of time?
How do you think the shape of the yield curve for commercial paper and other money market instruments compares to the yield curve for Treasury securities? Explain your logic.
Assume that interest rates for most maturities are unusually high. Also assume that the net working capital (defined as current assets minus current liabilities) levels of many corporations are
Apply the term structure of interest rate theories that were discussed in Chapter 3 to explain the shape of the existing commercial paper yield curve.
Explain the lesson to be learned about the repo market based on the experience of Bear Stearns.
Explain why the credit crisis affected the ability of financial institutions to access short-term financing in the money markets.
Explain how the credit crisis affected the credit risk premium in the commercial paper market.
Explain how systemic risk is related to the commercial paper market. That is, why did problems in the market for mortgage-backed securities affect the commercial paper market?
Explain why investors that provided guarantees on commercial paper were exposed to much risk during the credit crisis.
Describe the activity in the secondary T-bill market. How can this degree of activity benefit investors in T-bills? Why might a financial institution sometimes consider T-bills as a potential source
Why do ratings agencies assign ratings to commercial paper?
Explain how investors' preferences for commercial paper change during a recession. How should this reaction affect the difference between commercial paper rates and T-bill rates during recessionary
Explain how each of the following would use banker's acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks, and (d) investors.
Many financial institutions borrow heavily in the money markets using mortgages and mortgage-backed securities as collateral. Write a short essay about the lessons of the credit crisis to the deficit
Interpret the following statements made by Wall Street analysts and portfolio managers. a. "Money markets are not used to get rich, but to avoid being poor." b. "Until conditions are more favorable,
a. The yield curve is currently upward sloping, such that 10-year Treasury bonds have an annualized yield 3 percentage points above the annualized yield of three-month T-bills. Should you consider
a. The prevailing commercial paper rate on paper issued by large publicly traded firms is lower than the rate Carson would pay when using a line of credit. Do you think that Carson could issue
Assume an investor purchased a six-month T-bill with a $10,000 par value for $9,000 and sold it ninety days later for $9,100. What is the yield?
Phil purchased an NCD a year ago in the secondary market for $980,000. The NCD matures today at a price of $1,000,000, and Phil received $45,000 in interest. What is Phil's return on the NCD?
Newly issued three-month T-bills with a par value of $10,000 sold for $9,700. Compute the T-bill discount.
Assume an investor purchased six-month commercial paper with a face value of $1,000,000 for $940,000. What is the yield?
Stanford Corporation arranged a repurchase agreement in which it purchased securities for $4,900,000 and will sell the securities back for $5,000,000 in 40 days. What is the yield (or repo rate) to
You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you hold it until maturity, what is the T-bill yield? What is the T-bill discount?
The Treasury is selling 91-day T-bills with a face value of $10,000 for $9,900. If the investor holds them until maturity, calculate the yield.
A money market security that has a par value of $10,000 sells for $8,816.60. Given that the security has a maturity of two years, what is the investor's required rate of return?
A U.S. investor obtains British pounds when the pound is worth $1.50 and invests in a one-year money market security that provides a yield of 5 percent (in pounds). At the end of one year, the
a. Determine how the annualized yield of a T-bill would be affected if the purchase price were lower. Explain the logic of this relationship. b. Determine how the annualized yield of a T-bill would
If bond yields in Japan rise, how might U.S. bond yields be affected? Why?
Explain how the credit crisis affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds.
Explain the new guidelines for credit rating agencies resulting from the Financial Reform Act of 2010.
Explain the conditions that led to the debt crisis in Greece.
Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors that currently hold these bonds, and the potential return to other
Merrito Inc. is a large U.S. firm that issued bonds several years ago. Its bond ratings declined over time, and about a year ago, the bonds were rated in the junk bond classification. Yet, investors
An insurance company purchased bonds issued by Hartnett Company two years ago. Today, Hartnett Company has begun to issue junk bonds and is using the funds to repurchase most of its existing stock.
Explain what exchange-traded notes are and how they are used. Why are they risky?
Explain why the market for auction-rate securities suffered in 2008.
Explain how the bond market facilitates a government's fiscal policy. How do you think the bond market could discipline a government and discourage the government from borrowing (and spending)

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