Questions and Answers of Financial Markets Institutions

Identify the potential impact that a federal government deficit has on the monetary system.
Explain how the Federal Reserve uses open market operations to affect the federal funds rate.
Determine which of the tools of monetary policy is the most important.
Illustrate how the tools of monetary policy are used to affect the supply of money and credit.
Define the federal funds rate.
Explain how deposits in commercial banks lead to a multiple expansion in the money supply.
Describe the structure of the Federal Reserve.
List the economic goals of monetary policy.
The Federal Reserve publishes financial data concerning the money supply and interest rates. Go to its website, www.federalreserve.gov, and locate the summary of economic conditions in the Beige
The Bureau of Labor Statistics, an agency within the U.S. Department of Labor, reports data concerning the aggregate economy. One possible measure of the direction of change is the rate of
Explain why an investor should not expect to outperform the market on a consistent basis.
Determine how American Depositary Receipts (ADRs) facilitate trading in foreign securities.
List several aggregate measures of the stock market
Illustrate the mechanics of a short sale.
Contrast long and short positions in stocks.
Explain the advantages and risk associated with buying stock on margin.
Select ten stocks and set up a watch account. Be certain the companies are in different industries; you want a diversified portfolio to help manage your risk exposure! Invest $1,000 in each company
Distinguish between (a) organized exchanges and OTC markets, (b) brokers and securities dealers, (c) market orders and limit orders.
Look up current interest rates for high grade, intermediate grade and speculative grade (junk) bonds. What is the relationship among the rates? Is the spread for speculative grade bonds over
Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better or worse off? In what way?
Think of one example in which you have had to deal with the adverse selection problem.
One of the best sources of information about financial institutions is the U.S. Flow of Funds report produced by the Federal Reserve. This document contains data on most financial intermediaries. Go
The most famous financial market in the world is the New York Stock Exchange. Go to www.nyse.com.a. What is the mission of the NYSE?b. Firms must pay a fee to list their shares for sale on the NYSE.
Give an example of the time-inconsistency problem that you experience in your everyday life.
Give one example each of moral hazard and adverse selection in private insurance arrangements.
Repeat the previous problem but assume that comparable yields are 10 percent. In which case did the price of the stock change? In which case was the price more volatile?Data from previous problemWhat
A sophisticated investor, B. Graham, sold 500 shares short of Amwell, Inc. at $42 a share. The price of the stock subsequently fell to $38 before rising to $49 at which time Graham covered the
Most of the previous problems may be solved using interest tables and financial calculators. There are, however, problems that are not easily solved using interest tables. For example, solving for
The federal corporate income tax rate is 35 percent and firms may carry back losses for two years and carry forward losses for 20 years. The carry-back must occur before carry-forward. A corporation
You invest $1,000 in stock A and $1,000 in stock B. If you earn 10 percent on stock A and 6 percent on stock B and hold each security for 20 years, what are the terminal values for each investment?
TSC, Inc. sells for $26 and pays an annual per share dividend of $1.00, which you expect to grow at 8 percent. What is your expected return on this stock? What would be the expected return if the
Last year Artworks, Inc. paid a dividend of $1.75. You anticipate that the company’s growth rate is 6 percent and have a required rate of return of 9 percent for this type of equity investment.
In 2013, VF Corporation split its stock four for one. On the day prior to the split, the stock sold for $245.80. What is the anticipated price of the stock when the split is effective? On the day
Sharon Bohnette owns 1,000 shares of Northern Chime Company. There are four seats on the board of directors up for election and Ms. Bohnette is one of the nominees. Under the traditional method of
A firm with sales of $10,000,000 has inventory of $1,000,000. The firm has no cash sales (all sales are on credit and are collected within 40 days). You are willing to sell inventory to the firm on
A firm€™s balance sheets for the last two years are as follows:Sales in 20X1 were $250,000. Sales in 20X2 were $250,000.a. Based solely on the current ratio and the quick ratio, has the
A firm has no cash sales (all sales are on credit and are collected 36 days after the sale). If the receivables are $100,000, what is the level of sales? Based solely on given information, what can
Two firms have sales of $1 million each. Other financial information is as follows:What are the operating profit margins and the net profit margins for these two firms? What are their returns on
What is the required return on an investment with a beta of 1.3 if the riskfree rate is 2.0 percent and the return on the market is 8.1 percent? If the expected return on the investment is 11.2
Stock A has a risk premium of 5.6 percent. If Treasury bills yield 2.3 percent and the expected return on the market is 8.1 percent, what is the stock’s beta coefficient?
You expect to invest your funds equally in four stocks with the following expected returns:Stock Expected ReturnA...............
Firm X buys equipment for $9,000 and leases the equipment to firm A for $800 a year for five years. After five years, firm X expects to sell the asset for $10,000. What is the return that firm X
AIR National’s capacity is 120 passengers per flight. It currently carries 74 passengers per flight. Growth in passengers is expected to be 6 percent annually. New planes will have to be ordered
You buy a mutual fund for $1,000. It annually distributes $60 for eight years, after which you sell the shares for $900. What is the annualized return on your investment?
Auntie Kitty sells her home for $200,000, which is then invested to earn 5 percent annually. If her life expectancy is ten years, what is the maximum amount she can annually spend on a nursing home,
You are offered an annuity that will pay $10,000 a year for ten years (that is, ten payments), but the payments start after five years have elapsed. If you want to earn 8 percent on your funds, what
A corporation issues a debt instrument such as a bond that promises to pay you annually $60 for three years and $1,000 after three years. What is the maximum amount you would pay for this debt
You have graduated from college but unfortunately have $32,000 in outstanding loans. The loans require monthly payments of $3,245, which covers interest and principal repayment (i.e., the loan has
You have an IRA worth $200,000 and want to start to make equal, annual withdrawals (i.e., distributions from the account) for 20 years. You anticipate earning 5 percent on the funds. (To facilitate
This extended problem covers many of the features of a mortgage. You purchase a town house for $250,000. Since you are able to make a down payment of 20 percent ($50,000), you are able to obtain a
Tuition costs at various colleges vary from $15,000 to $35,000 annually. These tuitions are expected to increase over time. If the annual rate of increase is 3 percent, what will be the new range in
Inflation is a general increase in prices and may be measured by the Consumer Price Index (CPI). The following are several problems related to price increases.a. In 1984 the CPI was 100; 30 years
An investment will generate $10,000 a year for 25 years. If you can earn 10 percent on your funds and the investment costs $100,000, should you buy it? Would your answer be different if you could
A widow currently has a $93,000 investment that yields 6 percent annually. Can she withdraw $14,000 for the next ten years? Would your answer be different if the yield were 9 percent?
Holly wants to have $200,000 to send a recently born child to college. She sets up a 529 plan and wants to know how much she must invest at the end of each year for the next 18 years if the funds can
A 45-year-old woman decides to put funds into a retirement plan. She can save $2,000 a year and earn 6 percent on this savings. How much will she have accumulated if she retires at age 65? At
Given the following information, determine the balance on the United States’ current account and capital
If the price of a British pound is $1.82, how many pounds are necessary to purchase $1.00?
Big Oil, Inc. has a preferred stock outstanding that pays a $7 annual dividend. If investors’ required rate of return is 10 percent, what is the market value of the shares? If the required return
Ten years ago your grandfather purchased for you a 25-year $1,000 bond with a coupon rate of 7 percent. You now wish to sell the bond and read that yields are 5 percent. What price should you receive
Your broker offers to sell for $1,150 a AAA-rated bond with a coupon rate of 6 percent and a maturity of eight years. Given that the interest rate on comparable debt is 4 percent, is your broker
A bond with 15 years to maturity has an annual interest payment of $40. If the bond sells for its par value, what are the bond’s current yield and yield to maturity?
A $1,000 bond has a coupon of 6 percent and matures after ten years.a. What would be the bond’s price if comparable debt yields 8 percent?b. What would be the price if comparable debt yields 8
Two stocks each currently pay a dividend of $1.75 per share. It is anticipated that both firms’ dividends will grow annually at the rate of 3 percent. Firm A has a beta coefficient of 0.88 while
The security market line is estimated to be k = 5% 1 (10.4% – 5%)β. You are considering two stocks. The beta of A is 1.4. The firm offers a dividend yield during the year of 4 percent and a growth
Jersey Jewel Mining has a beta coefficient of 1.2. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4
You expect the stock market to increase, but instead of acquiring stock, you decide to acquire a stock index futures contract. That index is currently 58.8, and the contract has a value that is $500
An investment costs $23,958 and will generate cash flow of $6,000 annually for five years. The firm’s cost of capital is 10 percent.a. What is the investment’s internal rate of return? Based on
An investment costs $23,958 and will generate cash flow of $6,000 annually for five years. The firm’s cost of capital is 6 percent.a. What is the investment’s internal rate of return? Based on
A firm has two possible investments with the following cash inflows. Each investment costs $480, and the cost of capital is ten percent.a. Based only on visual inspection, which investment is to be
You are given the following information concerning a firm:Assets required for operation: ............................$5,000,000Revenues:
Three investments cost $5,000 each and have the following cash flows. Rank them on the basis of their payback periods. Does the ranking make intuitive sense? Year A $2,000 $3,000 2 1,000 1,000 3,000
Fill in the table using the following information.Assets required for operation: $10,000Firm A uses only equity financingFirm B uses 30% debt with a 6% interest rate and 70% equityFirm C uses 50%
Fill in the table using the following information.Assets required for operation: $4,000Case A€”firm uses only equity financingCase B€”firm uses 30% debt with an 8% interest rate
Who issues commercial paper? What types of financial institutions issue commercial paper? Why do some firms create a department that can directly place commercial paper? What criteria affect the
What is a bond indenture? What is the function of a trustee, with respect to the bond indenture?
Why is the relationship between interest rates and bond prices important to financial institutions?
If a bond’s coupon rate were above its required rate of return, would its price be above or below its par value? Explain.
Describe the shared-appreciation mortgage.
Describe how collateralized mortgage obligations (CMOs) are used and why they have been popular.
Explain why the rescue of Fannie Mae and Freddie Mac improves the ability of mortgage companies to originate mortgages.
As a portfolio manager of a financial institution, you are invited to numerous road shows at which firms that are going public promote themselves, and the lead underwriter invites you to invest in
Discuss the concept of asymmetric information. Explain why it may motivate firms to repurchase some of their stock.
Explain expert networks. How can expert networks affect the trading of specific stocks?
How does the money market deposit account differ from other bank sources of funds?
Explain how the Financial Reform Act resolved some problems during the credit crisis.
What changes to reserve requirements were added by The Wall Street Reform and Consumer Protection Act (also called the Dodd-Frank Act) of 2010?
What criteria are used by regulators to examine a thrift institution?
Explain how the credit crisis in the 2008-2009 period affected some savings institutions. Compare the causes of the credit crisis to the causes of the savings institution crisis in the late
Explain how the default risk of finance companies differs from that of other lending financial institutions.
Explain the role of the SEC, the NASD, and the stock exchanges in regulating the securities industry.
What is a best-efforts agreement?
What is reinsurance?
What is the NAIC and what is its purpose?
In 2012, some economists suggested that U.S. interest rates are dictated by the weak economic conditions in Europe. Use the loanable funds framework to explain how European economic conditions might
Distinguish between primary and secondary markets. Distinguish between money and capital markets.
What was the purpose of the Securities Act of 1933? What was the purpose of the Securities Exchange Act of 1934? Do these laws prevent investors from making poor investment decisions? Explain.
European debt markets have become integrated over time, so that institutional investors (such as commercial banks) commonly purchase debt issued in other European countries. When the government of
Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates, and is adjusted every six
A war tends to cause significant reactions in financial markets. Why would a war in Iraq place upward pressure on U.S. interest rates? Why might some investors expect a war like this to place

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