Questions and Answers of Financial Markets Institutions

If ti1 > ti2 what is the market consensus forecast about the one-year forward rate one year from now? Is this rate above or below today’s one-year interest rate? Explain.
Explain the liquidity premium theory.
Explain how credit raters have changed their process following criticism of their ratings during the credit crisis.
What are the main goals of the Federal Open Market Committee? How does it attempt to achieve these goals?
How has the Fed used mortgage-backed securities in recent years, and what has it been trying to accomplish?
Assess the economic situation today. Is the administration more concerned with reducing unemployment or inflation? Does the Fed have a similar opinion? If not, is the administration publicly
Individual credit unions are very small in size. If there is going to be increased competition in the consumer credit market, and greater regulatory equalization among competing institutions, how do
Discuss the debt instruments used in liability management. What are the common characteristics of these debt instruments and what type of bank is most likely to issue them?
How do banks decide on the proper amount of primary and secondary reserves to hold?
Assume you are the manager of a bank with the balance sheet as shown below. Determine the maturity GAP and duration GAP for the bank. What will happen to the value or net income for the bank if
Distinguish between the credit risk of individual loans and the credit risk of loan portfolios. How are they related? Which is more important?
How do financial institutions identify problem loans?
Describe what banks do when they identify a problem loan.
Describe how internal credit risk ratings can be used to allocate funds to different types of loans.
Describe how credit default swaps can be used to manage credit risk exposure.
Explain what happens to the cash flows or market value of a typical bank when interest rates decline. What happens if interest rates increase?
Suppose a financial institution holds a portfolio of bonds with a value of $50,000,000 and duration of 3.5. The portfolio currently yields 4 percent and you don’t anticipate any changes in the
Explain how financial futures are used to reduce bank interest rate risk. How does the value of a futures contract change when interest rates change?
Explain how one can use options on financial futures to manage interest rate risk.
A bank economist projects that interest rates in the future are expected to decline. What is the bank's proper funds management strategy? Why?
Liquidity management can be practiced on either side of the balance sheet. How are asset and liability management similar and how do they differ? Why do smaller banks have limited access to liability
What are the two ways a bank can fail? Explain how these two conditions cause failure. Give examples of times when we have had the two different types of failures.
Explain the profitability versus solvency and liquidity dilemma facing bank management.
What is a REIT? How did REITs perform during the most recent U.S. real estate bubble and crash?
Explain how a hedge fund differs from a mutual fund.
Give examples from this chapter to illustrate how different forms of financial institutions may either grow rapidly or decline as economic and regulatory conditions change.
Why are money market funds included in the broader measures of the money supply (M2 and M3) that the Federal Reserve introduced in 1980?
Why have ETFs grown so popular so quickly? What advantages do ETFs have over open-end index funds?
What is the major difference between open-end and closed-end investment companies? Why have open-end companies been more popular?
(a) If you earned 3 percent per year in a tax-free money market fund and you were in the 31 percent federal income tax bracket and were fortunate enough to live in a state that had no state income
If you invested $10,000 in an index fund that matched the market return of 10 percent per year for ten years, and levied a 0.25 percent management fee and no other fees, how much would you have at
If you invested $10,000 in a closed-end fund that invested in stocks that matched the market return of 10 percent for 10 years, levied a management fee of 2 percent of net assets per year, and sold
If you invested $10,000 in a mutual fund that charged a 1 percent of net assets management advisory fee and a 1 percent 12b-1 fee, and the fund matched the stock market’s return of 10 percent per
What type of fund would you want to buy if you believed that stock markets were always fully efficient?Explain why. Why do you think people don’t all buy the same kinds of funds?
How can the pricing of closed-end funds possibly indicate that market inefficiencies exist? What are the pros and cons of that argument? If market inefficiencies exist, how can they be exploited to
Assume a venture capitalist requires a 40% rate of return per year. If the venture capitalist thinks that a company will be worth $50 million in five years, what percentage of ownership in the
What are the two primary categories of private equity? How do they differ?
How does private equity differ from public equity?
What is prime brokerage?
What is proprietary trading?
What does a broker-dealer do? How does a broker-dealer make money?
What is the difference between an IPO and a seasoned offering?
How does a private placement differ from a public offering?
Explain why there were no large independent investment banks left in the United States at the end of 2008.
Explain each of the following parts of bringing a new issue to market: origination, underwriting, and distribution.
Explain why underwriting new securities issues can be a risky business.
What are the major business activities of investment banks?
Granite Insurance Company’s combined ratio two years ago was 1.035. A review of that year’s financial statements showed the company paid $4.5 million in income taxes. Why was the company
Granite Insurance Company had claims and expenses of $425 million last year. The company’s premium income was $450 million. What was the company’s combined ratio?
Assume it was determined that the insurer in Question 17 had overestimated its loss reserves by $20 million. If the loss reserve estimate was corrected, what is the impact on policyholders’
An insurance company’s total assets were $400 million. Its total liabilities were $340 million. What was the insured policyholder surplus?
Differentiate between defined benefit and defined contribution pension plans. Who bears the investment risk under each of these alternatives? Which type of plan is easier to fund and manage?
How are Social Security old-age benefits funded? What is the age for full retirement benefits for those retiring under Social Security today? What is the age under current law for full retirement
What are the major similarities between the balance sheets of life insurance companies and property and liability insurance companies? What are the major differences?
What are the advantages of purchasing a package policy versus purchasing the same coverage included in a package policy separately?
Why is the liability risk much more difficult to gauge than the property risk?
What is the relationship between the level of policy loans taken by policy owners and the level of interest rates in the general economy?
Why are annuities and life insurance often described as opposites? If they are opposites, when why do insurance companies marketing life insurance also commonly market life annuities?
Why did universal life insurance become popular in the 1980s? What explains the popularity of variable life insurance in the 1990s?
Term insurance becomes cost prohibitive for older in dividuals. However, the same insurance companies that do not offer term policies at advanced ages sell whole life insurance. How are these
What is meant by the phrase “adverse selection” in insurance? Although discussed in this chapter in connection with term insurance, adverse selection is a problem in all insurance markets. What
What are the primary sources of insurance regulation? What areas are regulated?
What problem is likely to develop for a stock life insurance company that issues participating policies?
To what extent do(1) The risk of unemployment(2) The risk of war satisfy the requirements of privatelyinsurable risks?
According to the law of large numbers, as the number of insureds increases, risk is reduced. However, as an insurance company writes more policies, it exposes itself to the potential for greater
What is the difference between pure risk and speculative risk? Provide an example of each of these types of risk.
Throughout this chapter, the role of insurance companies and pension funds as financial intermediaries was stressed. Discuss the financial intermediation process as it applies to insurance companies
What is the U.S. Central Credit Union? Why is it important to the future development of the credit union industry?
Compare and contrast the retail operations of a commercial bank with those of a typical credit union in operation today. Taking into account the expanded powers of credit unions, how will they
What are the advantages and disadvantages of the credit union common bond requirement?
What are share drafts? Why are they important to credit unions?
What are the major asset and liability accounts for credit unions?
How can finance companies manage their interest rate, liquidity, and credit risks? What are their advantages or disadvantages vis-à-vis depository institutions?
What effect have growing consumer credit regulations had on finance companies' lines of business? What about their future opportunities?
Why have second mortgages grown in popularity with finance company consumer lenders?
Why have finance companies shifted from consumer to real estate and business lending in recent years?
How do finance companies differ from banks and thrift institutions?
How have savings institutions altered their deposit and liability structures to reduce their interest rate risk exposure in recent years? Would you say they have totally eliminated their interest
What are(a) The major regulations(b) The major regulatory bodies that affect savings institution operations? How do these regulations and regulatory bodies affect them?
What changes in market interest rates can hurt savings institutions? Why? What can savings institutions do to minimize their problems? Explain the kind of market interest rate changes that might help
How did regulatory weakness contribute to some of the savings institutions’ problems?
What were the two major types of problems that caused savings institution failures during the 1980s?
Why were each of the U.S. thrift institutions started, and when? Why are they now greater competitors with commercial banks than they were originally?
Using the following data calculate the bank’s RWA, the bank’s regulatory capital and decide whether the bank is well capitalized, adequately capitalized, undercapitalized, or significantly
Explain why bank regulators are so concerned about capital adequacy for the banking system.
Why is capital adequacy more of a problem for commercial banks than for most other businesses?
What are risk-based capital standards? What are they designed to do?
How might possibilities for regulatory capture contribute to the large number of financial regulators and deposit insurance funds?
Why do banks and other financial institutions willingly comply with financial regulation, even though they may complain about it?
How can an effective lender of last resort prevent financial panics from developing? Why was the Fed unable to prevent the Great Depression of the 1930's?
Why did bank failures increase, with a lag, after deposit insurance became available to banks? What else contributed to the increase in bank failures in the 1980's?
What is moral hazard, and how is it created by deposit insurance?
Why has Congress passed more regulatory acts for financial institutions in recent years? Cite all acts passed since 1980 and the major provisions of each.
How do failing bank resolution policies differ between large and small banks? Why the difference?
What is the purpose of bank examinations? How do they differ from CPA audits?
Bank regulation is considered to be in the public interest. Thus, the more regulation the better. Explain why you agree or disagree with this statement.
How would you assess the success of consumer regulation? In what areas has it failed in stated objectives?
Which of the bank safety regulations enacted in the 1930's do you believe are most important in actually achieving bank safety? Which of the safety regulations would you classify as being anti
Although the FDIC does not grant charters for banks to operate, it is said to have enormous impact upon the charter process.Explain.
What are the major lessons that have been learned from past bank failures? Do you think that history can or will repeat itself?

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