Questions and Answers of Financial System Of The Economy

Are firms listed on the NYSE “big board” always larger than firms listed only by NASDAQ?
What are circuit breakers? How have the rules affecting them changed in recent years?
What is program trading? What is index-arbitrage trading?
How has the NYSE responded to the technological challenge posed by NASDAQ and the trend toward more global financial markets?
In a paragraph, explain how inflation in stock markets can spill over to inflation in output markets. Do the same for deflation.
What is buying on the margin? Does it increase or decrease the risk of large losses? What about gains?
Can newly issued Microsoft stock be offered in an IPO? Explain. What is the difference between buying stock in a secondary public offering or in the secondary market?
What are the differences between indexed mutual funds and ETFs?
If a share of stock pays a dividend of $3 and closes today at $36, what is the current yield?
What is the discount factor if beta is 1.2, the market risk premium is 5 percent, and the riskfree return is 4 percent?
If the expected cash flow is constant and equal to $10, what is the value of a share of stock with the discount factor in problem 18? If the cash flow is expected to grow 3 percent each year, what is
If I bought $10,000 worth of stock by putting up 60 percent of the selling price and borrowing the rest, how much have I borrowed? If the stock falls to $3,000 and a margin call is put in for the
New earnings figures suggest that cash flows will experience a $100 onetime increase because of a new product being brought online. If d is 15 percent and g is 3 percent, how much will the stock’s
What are the functions of investment banks? Do they engage in primary or secondary market activity? What is a syndicate?
What is a prospectus? What are the differences among a prospectus, a registration statement, and a bond indenture?
What is the difference between a securities broker and a securities dealer? What roles do brokers and dealers play in the financial system?
How does a hedge fund differ from a traditional mutual fund? What are the two types of hedge funds and how are their requirements for participation different? What is the difference between a mutual
Are investment banks financial intermediaries? Explain why or why not.
The spread between the bid and asked price widens. What does this mean about the securities?
What is the difference between a load and a no load mutual fund? Could a no-load fund ever result in higher total sales commissions and costs?
Miguel expects a stock’s price to rise. Should he short sell the stock? Explain.
What type of securities do GSEs sell? What is the purpose of GSEs? Who owns the GSEs? What happened to the federal government guarantee of securities issued by Fannie Mae and Freddie Mac in 2008?
What are some of the factors for the growth of mutual funds in recent years?
List some reasons that Henry should consider purchasing a fund of funds. Are there any reasons he should not?
How do REITs differ from other mutual funds? Are all REITs pretty much the same? What are their differences?
What is a financial conglomerate? Discuss the factors that contribute to the formation of financial conglomerates.
A mutual fund owns stocks with a market value of $1 billion and has liabilities of $1 million. What is the net asset value? If there are 2 million shares of stock outstanding, what is the net asset
What are some of the factors that determine the spread between the bid and asked price? If the bid-asked spread narrows, what does this mean?
What are the factors that determine the spread between agency securities and Treasuries? If agency and Treasury securities are perceived to have the same risk, why may there still be a positive
Make a chart listing the similarities and differences among the following institutions: money market mutual funds, mutual funds, hedge funds, government- sponsored enterprises, and REITs.
Comment on the following: Frank calls his broker to complain that the stock the broker sold him has fallen in value and Frank has lost a lot of money. The broker says: “Look, I made money and the
Define exchange rate, foreign currency, and foreign exchange market.
Distinguish between a change in the quantity demanded of foreign exchange and a change in demand for foreign exchange. Do the same for the quantity supplied and the supply of foreign exchange.
Explain the relationship between the supply of dollars in the foreign exchange market and debit items in the balance of payments. Do the same for the demand for dollars in the foreign exchange market
Defend the following statement: The balance of payments always balances.
Explain how the trade balance, the balance of goods and services, and the balance of payments differ.
How is a surplus in the current account related to a deficit in the capital account? How is a deficit in the current account related to a surplus in the capital account?
If interest rates in the United States were lower than rates in the rest of the world, would the United States be more likely to be experiencing a net capital inflow or a net capital outflow? Ceteris
If the demand for U.S. exports falls because of a change in foreign tastes, what will happen to the exchange rate? What will happen to the trade balance and the balance of goods and services?
What would happen to the exchange rate if foreigners decided to sell U.S. securities, perhaps because of an increase in the perceived risk of investing in the United States?
What are the assumptions of the purchasing power parity theory? What are the reasons that the theory may not offer a complete explanation of exchange rate differentials?
If a hotel room in downtown Tokyo costs 20,000 yen per night and the yen/dollar exchange rate is 100, what is the dollar price of the hotel room? If the yen/dollar exchange rate increases to 150,
If a hotel room in downtown Los Angeles costs $100 per night and the yen/dollar exchange rate is 100, what is the yen price of the hotel room? If the yen/dollar exchange rate increases to 150, what
Assume that the dollar appreciates by 10 percent in terms of the Mexican peso. Explain what happens to the dollar price of tequila from Mexico after the appreciation. What happens if the dollar
If a bottle of rare French wine sells for 40 euros in Paris and the exchange rate is 0.9 euros/dollar, how much will the bottle of wine sell for in New York City? Assume purchasing power parity holds.
If merchandise exports are $600 and merchandise imports are $500, what is the trade balance?
If there is a surplus of $100 in the capital account, no unilateral transfers, and a $50 deficit in the net exports of services, what is the trade balance?
If $1 = 150 yen and 1 yen = 75 British pounds, what is the pound/dollar exchange rate? What is the dollar/pound exchange rate?
If the yen/dollar exchange rate is 125, how much will 25,000 yen cost in dollars? If the dollar appreciates to 150 yen/dollar, how much will the 25,000 yen cost in dollars?
If the yen/dollar exchange rate is 125, how many yen will $15,000 be worth? If the dollar depreciates to 100 yen/dollar, how many yen will $15,000 be worth?
Explain how, according to the purchasing power parity theory, exchange rates will adjust if inflation in the United States is 3 percent and inflation in Japan is 1 percent.
If nominal interest rates fall by 2 percent in the United States, ceteris paribus, explain what will happen to exchange rates to achieve interest rate parity.
Define financial futures, forward agreements, and options. What are the advantages and disadvantages of each?
How do spot markets differ from forward markets? How do spot markets differ from futures markets?
Why do both the buyer and the seller of futures contracts have to put up performance bonds? When does the seller profit? When does the buyer profit?How is the clearing house protected from losses?
A government report forecasts both higher inflation and higher interest rates in the future. Yvette needs to borrow money in six months. What can she, as a future borrower, do now to protect herself
Explain why the futures price is very close to the spot price on the day before the delivery date of a futures contract.
How do arbitrageurs and speculators differ?
Explain how arbitrage causes the futures and spot prices to converge.
Explain the difference between call and put options. Does the buyer or the seller of an option pay the option premium? Why does the seller of an option take on the risk?
What are options on futures?
Explain how an investor could use a stock index future to hedge the risk of a fall in stock prices.
Assume that an intermediary uses futures only to hedge risk but never to speculate. Is it as vulnerable to losses as an intermediary that uses futures to speculate? Explain.
What factors determine the size of the option premium?
A firm buys a December $100,000 Treasury bond call option with a strike price of 110. If the spot price in December is $108,000, is the option exercised?
A firm buys a December $100,000 Treasury bond put option with a strike price of 110. If the spot price in December is $108,000, is the option exercised?
An investment firm buys a December $100,000 Treasury bond put option with a strike price of 105. If the spot price in December is $108,000, is the option exercised?
An investment firm buys a December $100,000 Treasury bond call option with a strike price of 105. If the spot price in December is $108,000, is the option exercised?
If the settle price for a T-bill futures contract is 96.75, what is the percent discount?
A brokerage house purchases an S&P 500 futures agreement for $300,000. On the delivery date, the S&P 500 Index is 575. Does the brokerage house make a profit? What if the S&P 500 is 625?
If I buy a T-bill future for $950,000 and interest rates go up between now and the delivery date, what will happen to the price of the T-bill future? Will I make money or lose money? Explain.
Assume that you will inherit a $1 million trust fund from your family when you turn 21 next year. Interest rates are high right now, and you fear they may be lower in a year. Explain in detail how
What is the international financial system, and how has it changed in recent years? What opportunities does the new system offer? What are the challenges?
Identify and explain three differences between the international monetary system under the Bretton Woods Accord and the managed float exchange rate system that replaced it.
Why did the Bretton Woods Accord break down?
What was the role of the dollar under the Bretton Woods Accord?
Why has the demand for dollars in international financial markets continued to grow, even though the dollar is no longer the official reserve currency?
When a country ran a deficit in its balance of payments under the Bretton Woods Accord, how was that deficit resolved?
Leticia is a small country that is experiencing a deficit in its balance of payments. The value of Leticia’s currency is tied to the U.S. dollar, which has been appreciating. What options could the
Under flexible exchange rates, what happens if a country experiences a deficit in its balance of payments? How long can a deficit in the balance of payments persist?
Why and how do central banks intervene in foreign exchange markets under the managed float exchange rate system?
How do the roles of the IMF and the BIS differ? How are they similar? What is the primary function of the World Bank?
What is the difference between the types of projects financed by the World Bank and those funded by the International Finance Corporation?
What factors have contributed to the increase in capital flows among countries?
What is the contagion effect? Why is it more pronounced today than it was 30 years ago?
What were the causes of the Asian crisis? What did the IMF do to mitigate the Asian crisis?
Explain how foreign exchange futures contracts can be used to reduce exchange rate risk. Is there exchange rate risk under both fixed and flexible exchange rate systems? Explain.
What is the Financial Stability Forum? Why was it created?
Suppose the United States has capital inflows of $100 billion and capital outflows of $200 billion. What is the balance on the capital account?
Go online and find today’s yen/dollar exchange rate. Has the dollar appreciated or depreciated since March 5, 2008, when $1 equaled 104.03 yen?
Graphically demonstrate what would happen to the exchange rate in each of the following situations: a. The U.S. trade deficit increases, ceteris paribus. b. The U.S. trade deficit decreases,
Briefly explain why the Fed does not have precise control over the money supply.
If the public chooses to hold no currency, does the Fed control the money supply? If depository institutions choose to always loan up, does the Fed have precise control? If both of these situations
If a depository institution has excess reserves, how much can it safely lend?
What are offsetting open market operations? When would the Fed use an off setting open market purchase? An offsetting open market sale?
Explain how open market purchases and sales influence interest rates. To increase the money supply, should the Fed use an open market purchase or sale?
Comment on John D. Rocke feller’s statement, “I believe that the power to make money is a gift from God.” Do depository institutions really create money? Explain.
If discount loans increase, what happens to the monetary base?
Assume that the Fed sets the required reserve ratio equal to 10 percent. If the banking system has $20 million in required reserve assets, what is the amount of checkable deposits outstanding?
If rD = .25, what is the simple money multiplier? If reserves increase by $100, how much do deposits increase?

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