Questions and Answers of Financial Markets Institutions

Consider a central bank policy to maintain 9% reserves on deposits held by commercial banks. A bank, ALFA, currently has $10 million in deposits and holds $1 million in reserves at the central bank.
Go to www.federalreserve.gov/releases/h15/ update/. Define the federal funds rate. What is the current federal funds rate? Define the discount rate. What is the current Federal Reserve discount rate?
The Federal Open Market Committee (FOMC) meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are
It is possible to access other central bank Web sites to learn about their structure. One example is the European Central Bank. Go to www.ecb.int. On the ECB home page, find information about the
Suppose a bank currently has $150,000 in deposits and $15,000 in reserves. The required reserve ratio is 10% (so this bank holds no excess reserves). If there is a deposit outflow (i.e., someone
One risk facing financial institutions is losing reputation, and a key contributor to it is financial panic. For instance, the first signs of impending financial crises appeared in the United States
Refer to the previous problem. What would be the cost for this bank to comply with its required reserves if the bank decides to borrow from the Fed at a discount rate of 0.75%? Can you now explain
Can interest rates on bank deposits be negative? Explain the reasons for your answer. Can negative interest rates on deposit have an expansionary effect?
In many countries, especially with expected inflation, inflation targeting is the objective of central banks. Do you think this is always a good idea? Why or why not?
What is the main rationale behind paying negative interest rates to banks for keeping their deposits at central banks in Sweden, Switzerland, and Japan? What could happen to these economies if banks
Suppose your boss asks you to write a report with two conditions: It has to be clear (i.e., well written) and it has to be completed by the end of the day. Do these instructions constitute a dual
A central bank decides to issue a statement declaring that it will not try to eliminate asset-price bubbles. Can you think of a negative consequence of this statement for the central bank’s ability
Why would it be better to lean against credit-driven bubbles and clean after other types of asset bubbles crash?
Describe in your own terms the concept of macroprudential regulation. Why might this approach be an important element in preventing credit bubbles?
Up-to-date interest rates are available from the Federal Reserve at http://www.federalreserve.gov/ releases. Locate the current rate on the following securities:a. Prime rateb. Federal fundsc.
What is the main characteristic of money market transactions which enables it to have active secondary market?
Calculate the annualized discount rate and annualized investment rate on the purchase of 91-day T-bill, if the face value is $3,000 and purchase price is $2,900.
If a 15-year bond is supposed to mature in the next three months, is it considered to be a money market instrument?
What would be the annualized discount rate % and the annualized investment rate % if a Treasury bill was purchased for $9,360 maturing in 270 days for $10,000?
The Treasury conducts auctions of money market treasury securities at regular intervals. Go to http:// treasurydirect.gov/instit/instit.htm?upcoming and locate the schedule of auctions. When is the
What cost advantages does the money market have over the banking sector?
Suppose you want to earn an annualized discount rate of 2.5%. What would be the most you would pay for a 182-day Treasury bill that pays $10,000 at maturity?
What are the main purposes of money markets? Why is there a need for money markets?
What is the minimum discount rate you will accept if you want to earn at least a 0.25% annualized investment rate on a 182-day $1,000 T-bill?
How did asset-backed commercial papers contribute to the financial crises of 2007-2008?
Why are T-Bills a favorable money market instrument for the U.S. government? For investors?
The Eurodollar market dates back to the period after World War II, when started with the circulation of dollars overseas followed by the development of a separate, less-regulated market. Why did the
Calculate the price of a 180-day T-bill purchased at a 5% discount rate if the T-bill has a face value of $5,000.
What is meant by the Eurodollar market? Why is it an important source of financing? Discuss.
A commercial paper's annualized discount rate is 4.85%. Its face value is $18,000,000, and it matures in 72 days. What would its price be? What would its price be if it matures in 125 days?
How are interest rates usually settled for negotiable CDs?
The annualized yield is 4.5% for a 91-day T-bill and 5% for a 182 day T-bill. What is the expected rate for 91 T-bill from now?
How can you characterize the Treasury bill’s interest rates? How are investment rates different from mentioned interest rates?
What are the terms of federal funds? Why are these terms often misleading?
How does the Federal Reserve control interest rates on Fed funds? How are interest rates settled on Fed funds?
Why do commercial paper securities mature within 270 days or less?
You are considering buying a bond that matures in 10 years from today. The par value of the bond is $10,000 and the coupon rate is 7%. If the current market interest rates are 5%, what is the bond
Stocks tend to get more publicity than bonds, but many investors, especially those nearing or in retirement, find that bonds are more consistent with their risk preferences. Go to
Differentiate between primary and secondary capital markets. What is an initial public offering (IPO)?
What is the current yield to maturity on the zero coupon bond that has a face amount (or par value) of $1,000 and the current market price for the bond is $850? The bond matures in 4 years.
What two characteristics make bonds a more popular long-term alternative to investing in stocks?
An investor is considering two bonds. One is a corporate bond yielding 12%, and is currently selling at par. The marginal tax rate is 28%. The other is a municipal bond with a coupon rate of 9.50%.
Suppose a municipal bond offers a yield to maturity of 5% and a same maturity corporate bond offers a 4% yield. For which values of the marginal tax rate would an investor prefer to buy the corporate
A & B Corporation issued bonds for 10 years, with face value of $10,000 and a 6% annual coupon rate. What is the current market price of the bond if the market rate is 8%? Assume semi-annual payments.
What are restrictive covenants? Why are they associated with interest rates of bonds?
Suppose there are two bonds you are considering:a. If both bonds had a required rate of return of 10%, what would the bonds' prices be?b. Explain what it means when a bond is selling at a discount, a
Does it seem right to you that one could buy insurance on anyone who looks unhealthy? Why?
An investor has the following options:a. To buy a two-year $1,000 zero-coupon bond at a market price of $860.b. To buy a two-year $1,000 bond with an annual interest of 3% for $900.Assuming annual
Consider the following cash flows. All market interest rates are 12%.a. What price would you pay for these cash flows? What total wealth do you expect after 2.5 years if you sell the rights to the
Distinguish between an investment-grade bond and a junk bond.
Refer to the previous problem. How would your answer change if the market rate falls to 6%?Data From Previous ProblemA & B Corporation issued bonds for 10 years, with face value of $10,000 and a 6%
Consider two $10,000 face-value corporate bonds. One is currently selling for $9,980 and matures in 15 years. The other bond sells for $9,350 and matures in 3 years. Calculate the current yield for
What are the risks an investor would face when making an investment in corporate bonds?
A $1,000 par bond with an annual coupon has only one year until maturity. Its current yield is 7.621% and its yield to maturity is 12%. What is the price of the bond?
A one-year premium bond with a face value of $10,000 has been purchased for $11,150. What is the yield to maturity? What is the yield on a discount basis?
Sun Corporation has a convertible bond with face value of $1,000, coupon rate of 6%, and with annual payments for 5 years. The bond can be converted into 25 shares of common equity (currently trading
In what ways can the national central banks influence the conduct of monetary policy?
The following table lists the foreign exchange rates between the U.S. dollar and the euro (EUR) during February, 2014.Which day would have been the best day to convert $300 to euros? Which day would
How would banks benefit when interest rates fall?
How does a decline in the value of the pound sterling affect German consumers in the Eurozone?
How does an increase in the value of the U.S. dollar affect businesses in the Eurozone?
Why are stock market conditions usually newsworthy?
How can fluctuations in a foreign exchange rate affect domestic and foreign consumption? Looking at Figure 1.3, briefly discuss how the U.S. dollar exchange rates behave.Figure 1.3 Index (March 1973
Discuss the role of banks as financial institutions that fuel the economic growth of a nation.
How do you think financial institutions help financial markets to work?
“A robust financial market is one of the pillars of stable economic growth and financial sustainability for the future.” Discuss.
How can monetary policies created by a central bank affect financial markets and financial institutions?
What is a debt market and how does a bond work within it?
Why is there a need to manage risk in financial institutions?
What is the main function of financial markets? Who is usually better off in case of well-functioning markets? Explain your answer.
Compare the performance of the emerging markets in Southeast Asia and the developed markets in Western Europe in light of the recent global economic downturn.
In May 2017, the world's first bond linked to the U.N. Sustainable Development Goals (SDG) had been issued by the World Bank, which helped it raise €163 million from investors in France and Italy
How are Eurodollars similar to Eurobonds? How are these related to Eurocurrencies?
What are the risks and rewards of investing in the stock market as compared to the bond market?
Explain the problem of adverse selection created by asymmetric flow of information. Use an example to illustrate your answer.
Lisa is planning to purchase a new house and is looking for a home loan that will give her the lowest interest rate. Discuss how she can be affected by asymmetric information and adverse selection.
How does the presence of asymmetric information in the direct selling market lead to consumers not buying the products?
What is an adverse selection? How is it usually created in financial markets?
“Financial intermediaries play a crucial role in an economic crisis–they are responsible for both causing the market to crash and then helping it recover from the crisis.” Is this statement
How do financial intermediaries solve the problem of adverse selection?
What is a main function of investment banks? Do such banks accept deposits and provide loans?
What is the main purpose of financial regulation? What kind of instruments may a government use to protect the economy and country from financial panic?
What is the concept of present value? What is discounting?
Calculate the present value of a $1,000 zero-coupon bond with six years to maturity if the yield to maturity is 7%.
Investigate the data available from the Federal Reserve Bank of St. Louis FRED database at http:// research.stlouisfed.org/fred2/. Then answer the following questions.a. What is the difference in the
Analyze the risk profiles of short-term bonds and long-term bonds during economic instability and fluctuating interest rates.
Consider a bond with an 8% annual coupon and a face value of $1,000. Complete the following table: Years to Maturity TFTGH 5 7 10 11 Yield to Maturity 6 8 9 11 12 Current Price
A lottery claims its grand prize is $20 million, payable over 40 years at $500,000 per year. If the first payment is made immediately, what is the grand prize worth? Use an interest rate of 12%.
What is the yield to maturity? Why it is considered as a good measure of interest rates?
Property investment constitutes a large and longterm commitment to an individual. Describe the outcome of taking a property loan during fluctuating interest rates.
Consider a coupon bond which has a $1,000 par value and a coupon rate of 20%. The bond is currently selling for $2,300 and has 16 years to maturity. Calculate the bond’s yield to maturity.
You are willing to pay $31,250 now to purchase a perpetuity that will pay you and your heirs $2,500 each year, forever, starting at the end of this year.If your required rate of return does not
Calculate the yield to maturity on the bond that has a price of $1,000 and pays $50 dividend for the life of the bond. What will happen if the dividend is $25 instead of $50?
Suppose you bought a land that costs $500,000 today. You will need to continue to pay tax on the land, and the rate is 3% of your purchase. Calculate the PV of your payment, using a 10% discount
Suppose that you want to take out a loan at a bank that wants to charge you an annual real interest rate equal to 5%. Assuming that the expected rate of inflation during the life of the loan is 2%,
Anna bought a bond with a par value of $10,000 and a coupon rate of 8% at par. After a year, she was able to sell her bond for $11,000. Calculate the rate of return on Anna's investment. What is the
Suppose that you have a bond with a face value of $1,000 and a coupon rate of 8% for one year and that you buy another one after one year. What will be your gain if the interest rate increases up to
Consider a bond that promises the following cash flows. The yield to maturity is 12%.You plan to buy this bond, hold it for 2.5 years, and then sell the bond.a. What total cash will you receive from
Calculate the duration of a five-year bond with a face value of $1,000 and a coupon rate of 8%. Assume that the current interest rates are 10%. What will your answer be if the current interest rates
Financial institutions hold a portfolio comprising the following securities:10 million bond with duration 4 years 20 million securities with duration 6 years 40 million bonds with duration 5

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