Questions and Answers of Economics Of Money Banking And Financial Markets

Why would you think that technical analysis could not predict security prices over time?
What is meant by an asset bubble? Is the presence of a bubble consistent with the efficient markets hypothesis?
There was a time when large mutual fund complexes touted the ability of their funds to post returns that beat the market. These days, they place more emphasis on the convenience of investing in their
Mutual funds have a wide variety of investment strategies. And in a particular quarter or over a particular year, some will have substantially higher returns than others. Would you expect these same
Are investors in the money market best characterized as having a strong appetite for risk or being highly risk averse? What evidence would you use to support your answer?
The auction price of 91-day commercial paper having a face (par) value of $1 million is $996,000. What is the quarterly yield on this bill (you can assume that there are 91 days in a quarter)? The
How does the Treasury use the money market to meet its financing needs? That is, does it issue Treasury bills to meet longer-term financing needs or seasonal variations in its cash flow?
For commercial banks, what is meant by a managed liability? What role do liquid assets play on the balance sheet of commercial banks? What role do money market instruments play in the asset and
What is meant by asset-backed commercial paper? SPVs? How have large commercial and investment banks used ABCP to reduce the amount of capital they need?
Which commercial paper credit rating is highest: A1 (P1), A2 (P2), or A3 (P3)? Lowest? How do these relate to corporate bond ratings?
Which type of institutional investor is the biggest investor in money market instruments?
Is a letter of credit (L/C) a money market or a capital market instrument? How do L/Cs deal with asymmetric information? What types of transactions are involved?What is the role of commercial banks
What is a banker’s acceptance? Does it have any connection with L/Cs?
What is meant by the interbank eurodollar market? What role does it play in the global banking system? What is meant by the term LIBOR?
From Bloomberg, what is the current three-month Treasury bill rate? The one-year rate? What is three-month LIBOR?
From the Board’s website, what is the level of the effective federal funds rate? The overnight RP rate? The one-month nonfinancial CP rate? The three-month CD rate? Can you explain why they differ?
Describe the steps by which a change in the central bank’s policy interest rate affect the array of short-term interest rates.
Describe the method by which the following securities are distributed in the primary market: Treasury bills, notes, and bonds; corporate bonds; muni bonds; GSE bonds.
In the Treasury market, what is: a when‐issued security; a reopening; an on‐the‐run security; an off‐the‐run security?
What happens to the yield on an on‐the‐run Treasury security as a new auction date is approached? Explain. How would the yield be affected if the Treasury announced a reopening of that security?
As a first approximation, is leverage a zero‐sum game between debt holders and shareholders? Why do shareholders benefit from more leverage? More risk? Is there a moral hazard problem?
What is the role of restrictive covenants in a bond indenture? What are some common covenants?
According to the Modigliani‐Miller Theorem, does it benefit a firm’s shareholders when more leverage is added to the firm’s financial structure? Why or why not?
How do the following features of a corporate bond affect its yield: call option, convertibility, collateralization, sinking fund, and senior status.
In what respect does a privately placed bond resemble a loan made by a commercial bank? Why do firms with access to the public bond market sometimes issue privately placed bonds under Rule 144a?
Why are junk bonds riskier than investment‐grade bonds? How do investors in junk bonds reduce their risk exposure?
What is a CDS? How can an investor use a CDS to reduce the risk of holding a corporate bond? Is there any residual risk to the investor?
Why would a muni issuer want to place a serial issue of bonds rather than a single maturity? A callable rather than call-protected bond?
If the yield on a 10‐year Treasury note is 3.5 percent and the marginal tax rate facing an investor is 30 percent, what is the expected yield on a muni of that maturity if that security has the
Using the FRED database, plot the nominal yield on a 30‐year Treasury bond and the yield on a 30‐year TIPS bond. Do they move together? Next plot inflation compensation on the 30‐year bond. Can
Using the FRED database, plot the yield on an investment‐grade corporate bond.Next plot the yield on a junk bond. Do they move together? Next plot the risk premium on the junk bond. Can you
Why are the GSEs said to be characterized by moral hazard? Any evidence that this is a serious problem?
How does monetary policy affect bond yields? How might forward guidance result in a more predictable impact on bond rates? What kinds of spending might be affected by such changes in bond rates?
What is meant by unbundling? How might this lead to more economic efficiency and less risk in the financial system? How do economies of scale fit in?
Why might investors be cautious about buying participations in a securitized pool of loans? How is this related to adverse selection? How might they be assured about the underlying quality of assets
What is meant by regulatory arbitrage? How are banks able to lower regulatory capital through securitization? How have the regulators responded?
What are the differences between Ginnie Mae MBSs and those of Fannie Mae and Freddie Mac? Which might be regarded as having the lowest credit risk for investors?
How do pools of nonconforming mortgages differ from those of Ginnie, Fannie, and Freddie? In forming these pools, what do issuers have to do to make them attractive to investors?
Compare consumer ABSs with Fannie and Freddie MBSs. Which have longer maturities? More credit risk to the investor? What about nonconforming MBSs?
Describe the various types of securitizations involving business credits. How do their risk properties compare with consumer ABSs?
What are regarded to be structured securities? How do these utilize pass‐throughs?What distinguishes the different tranches in a structured security? What is meant by the Z or equity tranche? How
How can structured securities create value?
How has securitization been affected by the financial crisis? How do you think it has affected the role of Fannie Mae and Freddie Mac in the mortgage market—their market share?
Why did structured securities do so poorly during the financial crisis? Would you regard their risk attributes as having been transparent or opaque?
Explain how securitization helps to integrate individual loan markets into national money and capital markets? Economic efficiency?
How does this improve the effectiveness of monetary policy?
How do you think the securitization process might evolve in coming years? Do you think that each of the component sectors will develop at the same pace? Why or why not?
Why do you suppose that lending for real estate purchases commonly takes the form of mortgages instead of unsecured loans? What are the advantages to the borrower?
Go to: www.fhfa.gov. What is the interest rate on a 30‐year fixed‐rate mortgage?What is the rate on a 15‐year mortgage? Why is the first above the second?
Why would you expect the cumulative total of interest payments under an ARM to be less than those under an FRM of the same maturity? Compare the risks to the borrower.
Explain why and how the following features affect mortgage borrowing interest rates: monthly payments, amortization, an escrow account for taxes and hazard insurance.
Give reasons why interest rates on conforming mortgages are lower than those on other home mortgages?
Explain why the market for securitized HELOCs was battered more by the financial crisis (and bursting of the real estate bubble) than the market for GSE MBSs.
Describe how the pattern of actual cash flows from mortgages with prepayment options differs from scheduled payments. How would a drop in benchmark interest rates early in the life of such a cohort
What is negative convexity? How does it affect interest rates on mortgages (with prepayment options)?
In the corporate bond market, what is the counterpart to the prepayment option on mortgages? Does it have the same impact on borrowing costs?
Apart from the collateral being financed, what are some of the other differences between commercial and residential mortgages?
Why do you think securitization of commercial mortgages is less developed than for home mortgages?
Describe the ways in which monetary policy works through the mortgage market—both residential and commercial.
Why is it said that preferred stock is a hybrid between debt (bonds) and equity?Why would investors want to hold preferred shares over equity?
What are the reasons for issuing preferred stock? Why does the federal government usually acquire preferred shares when it takes an equity position in a firm?
Why do you think that electronic communications networks (ECNs) are gaining market share over other platforms? What are the economic forces favoring them?
In any given year, the corporate sector retires more shares (in value terms) than it issues in new stock. Still, the value of the stock market increases over time. What can account for this increase
Explain how an increase in the risk‐free interest rate affects share prices, the equity premium, and the rate of return on internal investments.
What determines whether an increase in the share of retained earnings increases or decreases share prices?
If a firm does not pay dividends, how do investors earn their returns? Why might personal tax considerations favor retaining earnings and not paying dividends?
What do you suppose accounts for the P‐E for J. P. Morgan exceeding that of Bank of America?
The stock market is highly volatile. What accounts for this?
Explain how a major disturbance affecting financial markets in Europe and the European economy can have a big impact on share prices in the United States.
What are the shortcomings of the DJIA as a measure of the stock market? Which index is a better representation of the stock market? Why?
Why do you suppose that all major mutual fund complexes offer investors a fund that replicates the S&P 500? Why would investors be interested in such a fund if they were seeking to buy the market?
Which parts of the Federal Reserve System are private? Which is part of the federal government?
Who selects the boards of directors of Federal Reserve Banks? What are the principal responsibilities of those boards?
What does central bank independence mean? How does the Fed get its independence?
What is meant by fiscal agency? How might the Fed’s role as fiscal agent differ from that of many other central banks?
Why do central banks perform a central role in the payment system for their economy? What are the aspects of this role?
What does a lender of last resort mean? How does this relate to the financial stability function of central banks?
What are the pros and cons of having the central bank playing a key role in the supervision of major financial institutions?
Who selects members of the Board of Governors? Does Congress play a role? Who selects the Board’s chair and vice chair? Who selects senior officers of Reserve Banks?
How does the Fed get its independence? Why might central bank independence be beneficial for monetary policy? What is the tension created by an independent central bank in a democratic political
In the market for reserves, what determines demand? What determines supply?How does an increase in the discount rate affect supply? An increase in Treasury deposits at the central bank? An open
Illustrate how the Fed goes about setting the federal funds rate (policy rate) at its target using open market operations (assume initially that the Fed does not pay interest on excess reserves).
How did the Fed’s response to the financial crisis affect the market for reserves? Illustrate.
Suppose that the FOMC decides to raise the target for the federal funds rate later this year. What tools are available to achieve this? Illustrate.
When the market for reserves is in equilibrium, what is the relationship between required reserves, excess reserves, on the one hand, nonborrowed reserves, and borrowed reserves, on the other?
How does an outright purchase of Treasury securities by the Desk relate to a repurchase agreement (RP)? An outright sale to a reverse RP (matched sale purchase)? What will determine whether the Desk
In practice, which interest rates are most important for spending decisions?What is the connection between these rates and Treasury benchmark interest rates? How does the Fed affect benchmark
Under what circumstances might the Fed’s maximum employment goal conflict with its price stability goal?
How does monetary policy affect aggregate demand through wealth effects?
How would a credit crunch affect the relationship between the Fed’s policy rate and the interest rate and terms faced by business and household borrowers?How would this affect aggregate demand?
Is there a role for communication policy to enhance the effectiveness of Fed policy? Does it make any difference whether people believe Fed public statements (whether the Fed is credible)?
If actual output currently is equal to potential output and inflation is not a concern, should aggregate demand be stable or growing over the next couple years?What would be the implications of
Output is currently below potential. What are the implications for inflation?How should the Fed set its policy rate to achieve its twin goals? What will happen to the growth in aggregate demand as a
If the unemployment rate is currently around 9.5 percent, how many years of growth in real GDP of 4.5 percent per year would be required to restore the unemployment rate to the natural rate (NAIRU)
If the Fed seeks to stimulate growth in aggregate demand, what should it do with its policy rate? Communications?
If the unemployment rate were to be stable over the next few years, what would you infer has happened to growth in real GDP?
What is meant by disinflation? If the United States were experiencing disinflation, what would you conclude about the relationship between actual output (aggregate demand) and potential output
At the present time, is inflation or disinflation more of a concern for the United States? Why? What is the outlook for inflation? Why?
If inflation expectations were to increase, what would be the implications for actual inflation? How would this affect the twin goals? What would be required to return inflation to its previous rate?
Does a positive aggregate demand shock have the same effect on output and inflation as a positive supply shock? How do inflation expectations come into play?

Showing 400 - 500 of 728