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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Consider a stochastic growth model with fixed labor supply and labor-augmenting technological shocks. Output \(Y_{t}\) isfor technology \(A_{t}\) and capital stock \(K_{t}\).Capital is accumulated
The first three principal components of the yield curve are empirically known to account for almost all of the cross-sectional variation in bond yields. These principal components approximately
Consider the following model for the log stochastic discount factor, \(m_{t+1}\) :where \(\xi_{t+1}\) is randomly drawn from one of two distributions. With probability \(\pi\), state 1 occurs at time
Consider the following two-factor essentially affine term structure model,where \(\varepsilon_{t+1}\) and \(\eta_{t+1}\) are independent standard normal variables. Assume \(\sigma_{x}, \sigma_{z
Lustig, Stathopoulos, and Verdelhan (2016) investigate the profitability of carry-trade strategies with long-maturity bonds. One such strategy involves going long (short) longmaturity government
In Problem 4.1 we showed that the martingale method for portfolio choice can be applied to static incomplete market settings under the special assumption of quadratic utility. Cochrane (2014) extends
This problem asks you to use the GMM framework, presented in section 4.4, to analyze the two-beta asset pricing model of Campbell and Vuolteenaho (CV 2004). The data for this question can be found in
Let Y1,Y2,…Y1,Y2,… be independent and identically distributed (iid) non-negative random variables with mean one. For tt greater than or equal to one, define Xt=Y1Y2⋯YtXt=Y1Y2⋯Yt. (a) Show
Consider the risky term structure model of Lettau and Wachter (LW 2007), given by equations (9.53)-(9.56). The model is closely related to the class of essentially affine term structure models with
Consider a simplified model of mortgage choice with three dates, 0,1 , and 2. At date 0 , a household buys a house of value \(M\) and finances it with a mortgage of equal value (so the loan-to-value
In a market for an individual stock, a fraction \(\mu\) of investors are subject to the disposition effect while the remaining investors are rational. The number of shares demanded by the rational
This question asks you to analyze a simple model that formalizes the case for consumer financial regulation. The model assumes that a fraction \(b\) of consumers are "behavioral" agents who make
Consider an economy with two dates \(t=1,2\) and a continuum of consumers. Each consumer receives a random endowment at date 2 and consumes only then. At date 1 , securities are traded but no
Consider a model with two dates \(t=1,2\) and two agents. Agents receive income and consume only at date 2. Agent 1 has income \(x_{1}=c+v+\varepsilon\), while agent 2 has income
In this exercise we will explore the welfare implications of the distributive pecuniary externalities discussed in section 11.1.3 in an international setting where countries are subject to "sudden
Consider the risksharing problem of two infinitely lived agents, who receive random shares of a fixed endowment \(e\). Each period there are two states of the economy. In state 1 , agent 1 receives
A large literature, briefly discussed in section 11.4.1, examines the conditions under which agents with incorrect beliefs about fundamentals will be driven out of the market by rational agents in
Consider a static model in which a continuum of agents of unit mass with exponential (CARA) utility and coefficient of absolute risk aversion \(A\) invest their wealth in two risky assets (stocks)
Consider an extension of the Kyle (1985) model with two periods of trading. The fundamental value of an asset is \(v\), which is distributed normally with prior mean \(\mu_{0}\) and variance
Consider the setting of section 12.3 .4 but now allow for multiple risky assets \(j=1, \ldots, J\). The speculators' budget constraint and margin constraint are now given by \(W_{t}=W_{t-1}+\)
Explain how the output gap and the inflation gap in the Taylor Rule are calculated.
Economists are searching for a “good” measurement of the money supply. What constitutes a good measurement of the money supply?
Private equity funds often earn high returns on their investments, in part because the interest that must be paid on debt issued by their portfolio firms can be used to reduce the amount of federal
Robyn is an entrepreneur, and she is looking for a private equity firm to make an equity investment in her firm. How can Robyn tell the difference between the dumb money and smart money that various
Why do general partners in private equity funds pay such a low rate of tax on the income they generate?
People who operate private equity funds can receive very high levels of compensation if the fund is able to sell its portfolio firms for a much higher price than what it paid for and invested in
“Waterfalls are pretty things in nature; it is water falling off a cliff. But how do they function in private equity?” asks your friend. How do you answer this question?
Sandy is confused about the terminology used in the private equity industry. How would you explain to her the differences between a limited partner and general partner in private equity?
During what time periods did the size of investment banks change?a. In the 1920s, as US consumer spending increased, investment banks grew in size to provide credit to American consumers.b. Shortly
Explain why so many people see a “revolving door” between the investment banking industry and the entities designed to regulate and oversee it.
Rodney does not understand how investment banks work. In the Abacus case, Rodney assumes Goldman Sachs would lose money since the value of assets in Abacus declined drastically. How would you explain
Your friend Cynthia works at an investment bank and tells you she is going on a “roadshow.” What will Cynthia be doing?a. Going to the government and asking for a taxpayer bailout of the
Explain how proprietary, or prop, trading, when done by investment banks, can result in the bank’s customers becoming the bank’s competition.
Which of the following are characteristics that make hedge funds different from open-ended mutual funds?a. Investors in hedge funds are limited to individuals with a high net worth and institutional
Explain how close-ended mutual funds are, at the same time, in some ways very similar to but in other ways very different from open-ended mutual funds.
Explain why ETFs seldom trade at a premium or discount relative to their NAV.
Doug sees that his mutual fund is charging him with a 12b-1 fee. He has no idea what this is. Which of the following would correctly summarize for Doug what he is being charged?a. A fee to purchase
Adrienne is a registered financial advisor. What role do mutual funds and mutual funds play in Adrienne’s career?
Jason is thinking about purchasing some mutual fund shares, but he is confused by the terminology. How would you explain to Jason the difference between a mutual fund with loads and a no-load mutual
Grace is disappointed with the relatively low rate of return she is earning on her government bond mutual fund. She sees another bond fund that invests in corporate securities offered by firms that
Bob lives in Texas, is 64 years old, and is close to retirement. What type of mutual funds might be best for Bob? Why?
Trudy, who lives in New York, is concerned that her investment portfolio suffers from the “home country bias.” Explain what Trudy is worried about and how might she use mutual funds to address
You read a story in the Financial Times reporting that mutual funds that invest primarily in equities are currently holding a high level of cash. Based on this, where do many analysts think stock
Bob is confused about how the pricing of the open-end mutual fund he owns is actually calculated. Bob sees that stock prices have increased, yet the market value of his mutual fund, as determined by
If the total market value of an open-end mutual fund is $2,500 and there are 100 shares outstanding at the end of trading on Monday, what would the NAV of the fund be?
Which of the following has resulted in questions being raised about the future of the Social Security public pension system?a. Demographic changes in the US populationb. Decreasing market interest
Carolyn has just purchased a homeowners’ insurance policy that will pay for damages to her house that occur only if flooding in her area takes place. What type of insurance did Carolyn purchase?a.
Charlotte is fully vested in her defined contribution pension plan where she works. What will happen if Charlotte decides to quit her job and go work for a different employer?
Stan has worked for the same firm for over 30 years and has a defined benefits pension. However, he is worried the pension fund where he works is underfunded. Explain to someone with no training in
Ben, who has health insurance provided through his employer, has an appointment with his physician for an annual exam. Ben pays a $25 co-pay at the doctor’s office. Ben tells Sheila it cost him $25
Credit default swaps often were issued by banks, yet many argue they were actually an insurance product and thus should have been issued only by regulated insurance companies. Explain this argument.
Elise is a recent college graduate with student loans on which her parents have cosigned. If Elise is looking to purchase low-cost life insurance to ensure her parents will not have to repay her
How is the makeup of assets and liabilities of life insurance companies different from those of depository institutions? Why?
Many automobile insurance policies require a deductible to be paid by the insured. A deductible is a tool to help control for which problem?a. Adverse selectionb. Underwritingc. Moral hazardd. Claims
Sarah and David are interested in purchasing life insurance policies. Why might they may wind up paying very different life insurance premiums?
Andrew is a bit confused about risk. In his investments class he learned about risk when purchasing a financial asset, and he thinks that is the same as risk when buying automobile insurance. How
Today much of the regulation of depository institutions occurs at the federal level. How is the insurance industry different?
If John Deere Financial provides loans to John Deere customers and is owned by Deere & Company, then John Deere Financial is known as what type of finance company?a. Captive sales finance
Finance companies are not depository institutions, but they still lend money. If finance companies do not take deposits, where do they get the funds they lend to their customers?
Bobby is interested in borrowing money, but he cannot get a loan from a depository institution. He turns to a consumer finance company. In what ways are the loans Bobby might get from a finance
The first credit unions, or credit cooperatives, in North America were started where and when?a. Quebec, Ontario, Canada, in 1901b. Boston, Massachusetts, in 1909c. Chicago, Illinois, in 1910d.
When it comes to lending to businesses, credit unions often argue they should be allowed to write more business loans, whereas critics contend credit unions’ business lending should be restricted.
Credit unions are similar to commercial banks in that they are both depository institutions. Explain how credit unions are also very different from commercial banks.
Which government agency was created to close and liquidate the failed thrifts?a. FDICb. SECc. RTCd. DEA
Explain how zombie institutions are in one sense “dead” but in another sense are still “alive.”
Explain why the phasing out of Regulation Q by DIDMCA did not end the problems faced by the thrifts.
When market interest rates increased during the 1960s, thrifts found it difficult to attract deposits because of which Depression-era policy?a. FDIC deposit insuranceb. SEC bond registration
Initially, thrifts were depository institutions that often were considered “special.” Why were they viewed this way?
In an “import substitutions” policy, what is being substituted for imports?a. Cash transfersb. Domestically made goods and servicesc. Interest payments received in the futured. Bonds that can be
The IMF and World Bank often are described as “sister organizations.” One could say they are “sisters” in that they are very similar yet also very different. Explain this argument.
Few argue with the idea that the policies the IMF suggests are sound long-term policies. Yet critics believe these sound long-term policies are the wrong policies for the IMF to be suggesting.
Why did the IMF suffer from “mission creep”?a. As members left the IMF, it changed on whom it focused.b. The collapse of the Bretton Woods System led the IMF to become a lending institution.c.
How did the “closing of the gold window” in 1971 affect how the IMF operates?
How and why did the International Monetary Fund attempt to end “beggar-thy-neighbor” policies?
How does the World Bank get its funds?a. It creates its own currency.b. It borrows money from the world’s central banks.c. It is funded by national governments and borrows in the global financial
Why was Robert McNamara’s tenure at the World Bank so controversial?
Greg is a bit confused about the creation of the World Bank. Explain to Greg how and why the World Bank was created.
Which of the following is not a condition for countries to be considered an optimal currency area?a. They speak the same language.b. They allow workers to move between countries.c. They allow capital
Would you consider the United States to be an optimal currency area? Why or why not? Yes, due to the following:
How can a fixed exchange rate regime be used to build the credibility of a central bank?
Which of the following explain why exchange rates may “overshoot”?a. Incomes change more slowly than exchange rates.b. Exchange rates change more slowly than market prices of goods and
The currency board exchange rate regime worked well for Hong Kong. Why did currency boards not work so well for other countries?
The target zone exchange rate regime held promise because it was designed to be flexible yet stable. Why did the target zone regime not work as well as planned?
Why does the crawling peg exchange rate regime often not work as planned?
Why might a central bank want to “sterilize” its exchange rate intervention?
During what time period was the Bretton Woods System in place?a. From 1812 until World War Ib. Between World War I and World War IIc. From the Great Depression until the end of World War IId. From
You read in the business press that real, risk-adjusted interest rates in Switzerland have decreased relative to interest rates in the United Kingdom. What will happen in the foreign exchange market
Andy is completely confused about the Bretton Woods System. He does not understand how it functioned. What would you tell Andy?
Why did the attempt to return to the gold standard after World War I not work out so well?
Gary does not understand how purchasing power parity affects exchange rates. How would you explain this to him?
When a central bank seeks to offset the impact of its attempt to influence the exchange rate of its currency on the monetary base, this action is referred to as:a. Sterilization.b. Counter-setting
Explain in words and show graphically why decreases in inflationary expectations can lead to currency appreciation.
Explain why the supply curve in the foreign exchange market slopes upward. Who causes it to have this shape and how?
a. Explain why the demand curve in the foreign exchange market slopes downward. b. Who causes it to have this shape and how?
If the value of the Indian rupee decreases, which of the following will occur?a. The price of Swiss-made watches in India will decrease.b. The price of Indian-made computers will increase in
Kari runs a firm in Los Angeles, California, that buys a lot of its inputs from a supplier in Australia. What would she like to see happen to the US dollar in terms of the Australian dollar? Why?
Julie runs an export business in Austin, Texas, and sells a large amount in Mexico. What would she like to see happen to the US dollar in terms of the Mexican peso? Why?
In subprime home mortgages the term subprime refers to:a. The fact that the interest rates on these mortgages were below the prime rate.b. The idea that these mortgages were offered to young
Explain how an increase in defaults of home mortgages in the United States could affect savers on the other side of the world via CMOs.
Explain how the economic policies of both the Clinton and George W. Bush Administrations toward home ownership helped to contribute to the financial crisis.

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