Questions and Answers of Financial Markets Institutions

What are the benefits of reinsurance? Why is it popular in offshore locations such as Bermuda and the Cayman Islands?
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
Most rich countries have increasingly aging populations. Discuss the effect of this tendency on pay-asyou- go systems.
Private pension plans are risky and have received bad publicity in recent years. Discuss.
What is a pay-as-you-go pension plan?
Discuss the effects of a regulation that allows all currently illegal workers to become contributors to Social Security.
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
In initial public offerings (IPOs), securities are sold to the public for the first time. Go to http://www.renaissancecapital.com/ipohome/marketwatch.aspx. This site lists various statistics
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
The Securities and Exchange Commission is responsible for regulating securities firms. Go to www.sec.gov. This is the official home page of the SEC. Use this page to answer the following.a. What is
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
How does risk differ in investment banking and commercial banking?
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
What are the main functions of an investment bank?
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on shares outstanding was listed in the final prospectus:In the IPO, the firm issued 3,000,000
What are the advantages of forming a syndicate when underwriting an issue?
How do investment bankers, securities brokers, and security dealers differ in their roles?
Consider an equity sale. Suppose Gordon Gekko is interested in buying the company only to dismantle all production and sell the company's assets, including its plant, to real estate investors. Which
What are the signs and causes of a hostile takeover?
Suppose that Axel was involved in a short sale of stock of a trucking company. What would happen to Axel’s profits if the price of the stock increases?
How do venture capitalists function and add value as active investors?
How do the private equity investment strategies differ from hedge fund strategies?
How do financial institutions screen potential borrowers? Why do they do so apart from mitigating the adverse selection problem? Can you think of another reason?
A bank issues a $100,000 variable-rate 30-year mortgage with a nominal annual rate of 4.5%. If the interest rate drops to 4.0% after the first six months, what is the impact on the interest income
This chapter discussed the need financial institutions have to control credit risk by lending to creditworthy borrowers. If you allow your credit to deteriorate, you may find yourself unable to
After the global financial crisis, banks have become more cautious in lending to each other. Why?
A bank issues a $150,000 fixed-rate, 35-year mortgage with a nominal annual rate of 5.5%. If the required rate drops to 5.0% immediately after the mortgage is issued, what is the impact on the value
The FDIC is extremely concerned with risk management in banks. High-risk banks are more likely to fail and cost the FDIC money. The FDIC regularly examines banks and rates them using a system called
Diego applied for a $450,000 loan for his local brewing company. However, the bank approved his loan for only $250,000. Which type of credit risk management strategy was applied by this bank? Which
A bank makes a loan with the following characteristics: monthly payments for 20 years, with a nominal annual rate of 4.5%. The amount loaned is $350,000. What is the duration of the loan? Calculate
The value of a $200,000 fixed-rate, 35-year mortgage falls to $179,074 when interest rates move from 10% to 12%. What is the approximate duration of the mortgage?
The following is an excerpt from the Federal Reserve web site, released September 21, 2016: ". . . the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.
The duration of a bank's portfolio of assets is 9 years; the interest rate has recently decreased by 3/5 of a percentage point, increasing the value of the portfolio 4.5%. If the portfolio is now
What are some ways financial institutions diversify the risk among their instruments?
A bank’s balance sheet contains interest-sensitive assets of $560 million and interest-sensitive liabilities of $930 million. Calculate the income gap.
Calculate the income gap for a financial institution with rate-sensitive assets of $40 million and ratesensitive liabilities of $96 million. If interest rates rise from 8% to 9.6%, what is the
Determine the income gap of a bank with the following assets: reserves ($6 million), short term securities ($8 million), commercial loans maturing in less than 1 year ($20 million), commercial loans
Orinoco Bank has the following rate-sensitive assets: Treasury bills ($210 million), commercial loans ($540 million), and consumer loans ($200 million). The duration of each type of asset is 0.65,
Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.Given the estimates of duration in Table 23.2, what will happen
Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.If the manager of the Friendly Finance Company decides to sell
Determine the duration gap of a financial institution with an average duration of assets of 3.2 years, and an average duration of liabilities of 4.5 years assuming the market value of assets is $405
Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.If the Friendly Finance Company raises an additional $20 million
Determine the minimum average duration of assets a bank needs if it wants to tolerate a duration gap not lower than -1.5 years, assuming that the average duration of liabilities is 3 years, that
CNDF Bank has assets totaling $250 million with an average duration of 5 years, and liabilities totaling $225 million, with an average duration of 4 years. CNDF Bank is subject to Basel III
Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.If the manager of the Friendly Finance Company revises the
Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.Given the estimates of duration found in problem 27, how should
Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.Given the estimates of duration in problem 27, how should the
If the pension fund Anna manages expects to have an inflow of $240 million 12 months from now, what forward contract should Anna seek to enter into in order to lock in current interest rates?
Tom, a junior stockbroker, has to prepare a presentation on options for a group of final year university students during their industry visit to Tom’s office. Which instruments, or options, do you
The following site can be used to demonstrate how the features of an option affect the option's prices. Go to http://www.hoadley.net/options/bs.htm. Scroll down to the online options calculator. What
If the portfolio you manage is holding $50 million of 7s of 2037 Treasury Bonds with a price of $115, what forward contract would you enter into to hedge the interest-rate risk on these bonds over
Beatrice, a junior financial analyst, has to prepare a proposal for an upcoming meeting with a group of potential high net worth investors about interestrate swaps. Assist Beatrice in preparing a
If at the expiration date, the deliverable Treasury bond is selling for 105, but the Treasury bond futures contract is selling for 106. What will happen to the futures price? Explain your answer.
If you buy a $200,000 March Treasury bond contract for 109 and the price of the deliverable Treasury bond at the expiration date is 103, what is your profit or loss on the contract?
Suppose that the pension you are managing is expecting an inflow of funds of $200 million next year and you want to make sure that you will earn the current interest rate of 9% when you invest the
If you buy a put option on a $100,000 Treasury bond futures contract with an exercise price of 97 and the price of the Treasury bond is 130 at expiration, is the contract in the money, out of the
Jason bought a put option on a $100,000 Treasury bond futures contract with an exercise price of 105 for a premium of $2,000. If on expiration the futures contract sells for 110, determine Jason's
Refer to the previous exercise. Determine Jason's profits (for both prices on expiration date) if instead of buying a put option on a futures contract he sold a $100,000 Treasury bonds futures
Suppose you buy a futures contract at a price of 107 and that the margin requirement is 2 points. Determine the settlement price at which you will receive a margin call if the maintenance margin
Suppose a bank has an income gap of -$15 million. How can this bank use interest-rate swaps to hedge against interest rate increases? Determine the amount of the notional principal and propose an
Dickey Bank anticipates an increase in interest rates in 2016 and has therefore decided to engage in an interest-rate swap in which it pays 3% over a notional principal of $4 million annually. Fuller
Explain what a mortgage market is. Who are the participants of such a market? How is it different from a stock and bond market?
Compute the required monthly payment on a $160,000, 25-year fixed-rate mortgage with a nominal interest rate of 8.80%. How much of the payment goes toward principal and interest during the first year?
You may be looking into acquiring a home in the near future. One common question you may have is how large a mortgage loan you can afford. Go to http:// interest.com and click on the "Mortgage" tab
The Great Depression, 1929–39, left the mortgage markets in devastation. Most mortgages by then were called balloon loans. What does a balloon loan mean? How had the health of mortgage markets
Refer to problem 1. What is the total amount of interest paid over the life of the loan?Data From Problem 1Compute the required monthly payment on a $160,000, 25-year fixed-rate mortgage with a
One of the more difficult decisions faced by homeowners is whether it pays to refinance a mortgage loan when rates have dropped. Go to http://interest.com and click on the calculator labeled
How can balloon payments benefit the mortgage account holder?
Compute the face value of a 30-year fixed-rate mortgage with a monthly payment of $1,200, assuming a nominal interest rate of 6%. Compute the face value if the interest rate is now 7%. What is the
Consider a 27-year fixed-rate mortgage for $200,000 at a nominal rate of 11.5%. If the borrower pays an additional $500 with each payment, how fast will the mortgage be paid off?
How is a lien beneficial to the lender?
Consider a 25-year fixed-rate mortgage for $200,000 at a nominal rate of 8.7%. An S&L issues this mortgage on April 1 and retains the mortgage in its portfolio. However, by April 2, mortgage rates
How can high or low down payment on a loan benefit the mortgage account holder in the long run?
You have two options for a mortgage loan: $100,000 for 30 years with 8% interest or $100,000 for 15 years with 6% interest. Which loan would you prefer? Which conditions will you consider to make
What is originate-to-distribute model? Will it cause any problems with mortgage loans?
Consider a 25-year fixed-rate mortgage loan for $200,000. The bank requires the monthly payment of annual 6% rate. Develop the loan amortization table.
What are the reasons for the subprime mortgage meltdown in relation to the credit rating of the mortgage customers?
What are the main terms for mortgage loans that protect the lender from financial losses?
Consider a 28-year fixed-rate mortgage for $750,000 at a nominal rate of 7.5%. What is the difference in required payments between a monthly payment and a bimonthly payment (payments made twice a
Differentiate between fixed and adjustable rate mortgages. What would be a lender’s preference? A borrower’s?
Suppose you need to make $200,000 mortgage loan for 20 years; two options are available: one for 7% with no discount point and another for 6% for two discount points; no early payments are available.
Suppose you will be taking out a mortgage loan, but you are sure that your income will increase by 50% over the next two years. What type of mortgage loan would you prefer? List the advantages and
Use the data from problem 11. How many years you need to stay in your house, to make the second option better?Data From Problem 11Suppose you need to make $200,000 mortgage loan for 20 years; two
Two mortgage options are available: a 20-year fixed-rate loan for 6.5% with no discount points, and one with discount points for 6.25%. You will be living in the house for 10 years. How much are you
What is the purpose of second mortgages? Did the second mortgage contribute to the mortgage market collapse? Explain the reasons for your answer.
Consider a 20-year graduated-payment mortgage on a $150,000 mortgage with yearly payments. The stated interest rate on the mortgage is 6%, but for the first payment it is calculated assuming a 3.5%
Consider a growing equity mortgage on a $300,000 mortgage with yearly payments. The stated interest rate is 6%, but this applies only to the first annual payment. Thereafter, the annual payment will
What are the reasons for financial institutions to engage in foreign exchange trading activities?
Suppose you want to buy a German car, which costs €55,000. What will be price of this car in the United States if the exchange rate is €0.90 per U.S. dollar? What will happen to the price if the
The Federal Reserve maintains a Web site that lists the exchange rates between the U.S. dollar and many other currencies. Go to http://www.newyorkfed.org/markets/foreignex.html. Go to the historical
What is the law of the one price? How does it work?
In 2017, Hurricane Maria caused Puerto Rico to suffer an average loss of U.S. $504.96 million, if purchasing power parity is considered. Define purchasing power parity (PPP). How is it related to the
A Malaysian investor purchased 100 of Apple stock on January 31, 2016, at $153.00 per share. Apple paid an annual dividend of $1.50 per share on December 31, 2016. The investor sold the stock on the
Suppose that price levels in Indonesia rise by 20% relative to price levels in the Eurozone countries and that the purchasing power parity theory holds. How would this affect the value of the
The current exchange rate is €0.92 per U.S. dollar, but you think that U.S. dollar will appreciate to €0.95 per U.S. dollar. If you know the euro-denominated bond is yielding 3%, what return
If the demand for a country’s exports falls at the same time that tariffs on imports are raised, will the country’s currency tend to appreciate or depreciate in the long run?
Suppose the exchange rate is €0.95 per U.S. dollar and you expect that U.S. dollar will depreciate to €0.92 per U.S. dollar. What is the expected return on U.S. dollar assets, if they pay 4%
If Malaysia experiences a decline in economic growth (and experiences a decline in inflation and nominal interest rates as a result), what would the probable impact on its currency be when it is

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