1. Assume that as of today, the annualized interest rate on a three-year security is 8 percent, while the annualized interest rate on a two-year security is 6 percent. Use only this information to estimate the one-year forward rate two years from now.
2. You need to choose between investing in a one-year municipal bond with a 6 percent yield and a one-year corporate bond with a 9 percent yield. If your marginal federal income tax rate is 20 percent and no other differences exist between these two securities, which one would you invest in?
3. Assume that interest rates for one-year securities are expected to be 3 percent today, 6 percent one year from now, and 7 percent two years from now. Using only the pure expectations theory, what are the current interest rates on two-year and three-year securities?
4. Identify some factors that influence the shape of the yield curve. Describe how financial market participants use the yield curve to make decisions.
5. Assume there is a sudden expectation of increasing interest rates in the future. What would be the effect on the shape of the interest curve? Explain.
6. Identify the primary objectives of the Federal Open Market Committee and the means by which it attempts to achieve these objectives.
7. What is the Beige Book and why do market participants pay attention to it?
8. Is it the role of the Fed or Congress to determine the fate of large financial institutions that are near bankruptcy?
9. Does the Federal Reserve directly or indirectly influence equity security prices? Based on your response, do equity market participants focus on current Fed actions or the expected ones when it comes to pricing equity securities?
10. Visit the Consumer Financial Protection Bureau's website. Identify one policy objective and its effects on consumers and businesses.
11. Describe an economic trade-off faced by the Fed in achieving its economic policy objectives.
12. What are recognition and implementation lags? How do these influence security prices?
13. Why might the Fed's monetary policy depend on the fiscal policy that is implemented?
14. Stock market conditions serve as a leading economic indicator. Assuming the U.S. economy is in an expansion, what are the implications of this indicator? Why might this indicator be inaccurate?
15. Assess the economic situation today. Is the current administration more concerned with reducing unemployment or inflation? Does the Fed have a similar opinion? If not, is the administration publicly criticizing the Fed? Is the Fed publicly criticizing the administration? Explain.
16. What type of organization issues commercial paper? Given the short-term nature of commercial paper, why would ratings agencies assign ratings to them?
17. The maximum maturity of commercial paper is 270 days. Why would an organization issue commercial paper rather than longer-term securities, even if it needs funds for a long period of time?
18. Assume an investor purchased a three-month T-bill with a $10,000 par value for $9,500 and sold it 45 days later for $9,600. What is the yield?
19. A money market security that has a par value of $10,000 sells for $8,924.70. Given that the security has a maturity of two years, what is the investor's required rate of return?
20. A U.S. investor obtains British pounds when the pound is worth $1.30 and invests in a one-year money market security that provides a yield of 4 percent (in pounds). At the end of one year, the investor converts the proceeds from the investment back to dollars at the prevailing spot rate of $1.32 per pound. Calculate the effective yield.Explore one financial market and the types of transactions supported by it in the United States and global economies. Determine how valuable these transactions are to the United States and the global economies.
21. Evaluate all the factors that affect interest rates to determine the one that appears to impact interest rates the most in today's economic climate. Support your answer with evidence and examples.
22. Analyze the ease or difficulty of forecasting interest rate changes. Assess the value the forecast provides.
23. Examine why the Federal Reserve was created. Then construct an argument as to whether or not the Federal Reserve's major roles are essential to the U.S. economy.
24. Choose a recent monetary policy (adopted during the past 12 months). Analyze its current and future impact on the United States and global economies.
25. Imagine you are a financial manager. Develop a strategy for the use of bond markets by either an investor or a firm of your choice to meet a stated financial objective of your choice for that investor or firm.Briefly explain the securitization process and include at least one reason why a bank would consider using this.
26. Briefly compare and contrast a collateralized mortgage obligation with a collateralized debt obligation.
27. Provide at least two reasons why the blame for the credit crisis is a challenge to assign to one particular group alone.
28. Provide at least one reason why the government felt compelled to pass the Troubled Asset Relief Program (TARP). What is your conclusion regarding the effectiveness of this?
29. Briefly identify one key component of the Financial Reform Act and why you think it may or may not be effective.
30. Identify two reasons why an investor would prefer common stock to preferred stock.
31. What is book building and does it benefit investors or the issuing corporation, in your opinion?
32. What benefit do investors realize as a result of an extended trading session? What might be a downside to using this session?
33. You are a fund manager and are dissatisfied with one of the companies in your portfolio. You have decided shareholder activism is an appropriate strategy. Select one approach from the material to use and briefly note why you selected it.
34. Chatter Corporation issued the following quarterly dividends last year: $0.15, $0.17, $0.20, and $0.25. The current stock price is $24.59. What is the dividend yield for this stock using this information?