Question: A money market security that has a

> Explain how savings institutions could use interest rate futures to reduce interest rate risk.

> How did the creation of money market deposit accounts influence the savings institution’s overall cost of funds?

> What criteria do regulators use when examining a savings institution?

> How does high economic growth affect an SI?

> What are the alternative forms of ownership of a savings institution?

> Who regulates CUs? What are the regulators’ powers? Where do credit unions obtain deposit insurance?

> Who are the owners of credit unions? Explain the tax status of credit unions and the reason for that status. Why are CUs typically smaller than commercial banks or savings institutions?

> Explain how the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) reduced the perceived risk of savings institutions.

> An insurance company purchased bonds issued by Hartnett Company two years ago. Today, Hartnett Company has begun to issue junk bonds and is using the funds to repurchase most of its existing stock. Why might the market value of those bonds held by the in

> Explain why many savings institutions experience financial problems at the same time.

> Explain why the loan loss provisions of most banks could increase in a particular period.

> What are some of the more common reasons for a bank to experience a low ROA?

> What does the assets/equity ratio of a bank indicate?

> Why have large money center banks’ noninterest income levels typically been higher than those of smaller banks?

> Suppose the net income generated by a bank is equal to 1.5 percent of assets. Based on past experience, would the bank experience a loss or a gain? Explain.

> How could a bank generate higher income before tax (as a percentage of assets) when its net interest margin has decreased?

> What has been the trend in noninterest income in recent years? Explain.

> If a bank shifts its loan policy to pursue more credit card loans, how will its net interest margin be affected?

> What are likely reasons for weak bank performance?

> Merrito Inc. is a large U.S. firm that issued bonds several years ago. Its bond ratings declined over time, and about a year ago, the bonds were rated in the junk bond classification. Yet, investors continued to buy the bonds in the secondary market beca

> Why do you think some banks suffered larger losses during the credit crisis than other banks?

> How can gross interest income rise, while the net interest margin remains somewhat stable for a particular bank?

> Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk?

> What is the formula for the net interest margin? Explain why it is closely monitored by banks.

> If a bank is very uncertain about future interest rates, how might it insulate its future performance from future interest rate movements?

> List some rate-sensitive assets and some rate-insensitive assets of banks.

> If a bank expects interest rates to decrease over time, how might it alter the rate sensitivity of its assets and liabilities?

> How do banks resolve illiquidity problems?

> Given the liquidity advantage of holding Treasury bills, why do banks hold only a relatively small portion of their assets as T-bills?

> Does the use of floating-rate loans eliminate interest rate risk? Explain.

> Explain why investors that provided guarantees on commercial paper were exposed to so much risk during the credit crisis.

> If a bank has more rate-sensitive liabilities than rate-sensitive assets, what will happen to its net interest margin during a period of rising interest rates? During a period of declining interest rates?

> Why might a bank retain some excess earnings rather than distribute those funds as dividends?

> Do all commercial borrowers receive the same interest rate on loans?

> Can a bank simultaneously maximize return and minimize credit risk? If not, what can it do instead?

> Why do loans that can be prepaid on a moment’s notice complicate the bank’s assessment of interest rate risk?

> How do banks use duration analysis?

> What is accomplished when a bank integrates its liability management with its asset management?

> Explain how the CAMELS ratings are used.

> Describe the main provisions of the DIDMCA that relate to deregulation.

> What led to the establishment of FDIC insurance?

> Explain how systemic risk is related to the commercial paper market. That is, why did problems in the market for mortgage-backed securities affect the commercial paper market?

> Explain why the moral hazard problem may have received so much attention during the credit crisis.

> Explain why the credit crisis caused concerns about systemic risk.

> Why were bank regulators concerned with credit default swaps?

> Explain why regulators might argue that the assistance they provided to Bear Stearns during the credit crisis was necessary.

> Why are bank regulators more concerned about a large bank failure than a small bank failure?

> Assume an investor purchased a six-month T-bill with a $10,000 par value for $9,000 and sold it ninety days later for $9,100. What is the yield?

> Determine how the after-tax yield from investing in a corporate bond is affected by higher tax rates, holding the before-tax yield constant. Explain the logic of this relationship.

> Select a commercial bank whose income statement data are available. Using recent income statement data about that bank, assess its performance. How does the performance of this bank compare to the performance of other banks? Compared with other banks, is

> If a bank earns $75 million net profits after tax and has $7.5 billion invested in assets and $600 million equity investment, what is its return on equity?

> Explain why the credit crisis affected the ability of financial institutions to access short-term financing in the money markets.

> If a bank earns $169 million net profit after tax and has $17 billion invested in assets, what is its return on assets?

> Suppose a bank earns $201 million in interest revenue but pays $156 million in interest expense. It also has $800 million in earning assets. What is its net interest margin?

> Assume the following information: British pound spot rate = $1.58 British pound one-year forward rate = $1.58 British one-year interest rate = 11% U.S. one-year interest rate = 9% Explain how U.S. investors could use covered interest arbitrage to lock in

> Assume the following exchange rate quotes on British pounds: Explain how locational arbitrage would occur. Also explain why this arbitrage will realign the exchange rates.

> Use the following information to determine the probability distribution of net gains per unit from purchasing a call option on British pounds: The spot rate of the British pound = $1.45 The premium on the British pound option = $.04 per unit The exercise

> Use the following information to determine the probability distribution of per unit gains from selling Mexican peso futures. The spot rate of peso is $.10. The price of peso futures per unit is $.102 per unit. Your expectation of peso spot rate at maturi

> Iowa City Bank purchases a three-year interest rate floor for a fee of 2 percent of notional principal valued at $80 million, with an interest rate floor of 6 percent, and LIBOR representing the interest rate index. The bank expects LIBOR to be 6 percent

> Northbrook Bank purchases a four-year cap for a fee of 3 percent of notional principal valued at $100 million, with an interest rate ceiling of 9 percent, and LIBOR as the index representing the market interest rate. Assume that LIBOR is expected to be 8

> Assume that as of today, the annualized interest rate on a three-year security is 10 percent, while the annualized interest rate on a two-year security is 7 percent. Use this information to estimate the one-year forward rate two years from now.

> Cleveland Insurance Company has just negotiated a three-year plain vanilla swap in which it will exchange fixed payments of 8 percent for floating payments of LIBOR + 1 percent. The notional principal is $50 million. LIBOR is expected to 7 percent, 9 per

> Apply the term structure of interest rate theories that were discussed in Chapter 3 to explain the shape of the existing commercial paper yield curve.

> Coral Inc. has purchased shares of stock M at $28 per share. It will sell the stock in six months. It considers using a strategy of covered call writing to partially hedge its position in this stock. The exercise price is $32, the expiration date is six

> DePaul Insurance Company purchased a call option on a stock index futures contract. The option premium is quoted as $6. The exercise price is $1,430. Assume the index on the futures contract becomes $1,440. Should DePaul exercise the call option or let i

> A put option on Indiana stock specifies an exercise price of $23. Today the stock’s price is $24. The premium on the put option is $3. Assume the option will not be exercised until maturity, if at all. Complete the following table:

> A put option on Iowa stock specifies an exercise price of $71. Today the stock’s price is $68. The premium on the put option is $8. Assume the option will not be exercised until maturity, if at all. Complete the following table for a sp

> A call option on Michigan stock specifies an exercise price of $55. Today the stock’s price is $54 per share. The premium on the call option is $3. Assume the option will not be exercised until maturity, if at all. Complete the followin

> A call option on Illinois stock specifies an exercise price of $38. Today’s price of the stock is $40. The premium on the call option is $5. Assume the option will not be exercised until maturity, if at all. Complete the following table

> Marks Insurance Company sold stock index futures that specified an index of 1690. When the position was closed out, the index specified by the futures contract was 1,720. Determine the profit or loss, ignoring transaction costs.

> R. C. Clark sold a futures contract on Treasury bonds that specified a price of 92-10. When the position was closed out, the price of Treasury bond futures contract was 93-00. Determine the profit or loss, ignoring transaction costs.

> Egan Company purchased a futures contract on Treasury bonds that specified a price of 91-00. When this position was closed out, the price of the Treasury bond futures contract was 90-10. Determine the profit or loss, ignoring transaction costs.

> a. Assume that as of today, the annualized two-year interest rate is 13 percent, while the one-year interest rate is 12 percent. Use this information to estimate the one-year forward rate. b. Assume that the liquidity premium on a two-year security is 0.

> Which circumstances might cause a stimulative monetary policy to be ineffective?

> Rude Dynamics, Inc., sold T-bill futures contracts when the quoted price was 93-26. When this position was closed out, the quoted price was 93-90. Determine the profit or loss per contract, ignoring transaction costs.

> Toland Company sold Treasury bond futures contracts when the quoted price was 94-00. When this position was closed out, the quoted price was 93-20. Determine the profit or loss per contract, ignoring transaction costs.

> Suerth Investments, Inc., purchased Treasury bond futures contracts when the quoted price was 95-00. When this position was closed out, the quoted price was 93-60. Determine the profit or loss per contract, ignoring transaction costs.

> Spratt Company purchased Treasury bond futures contracts when the quoted price was 93-50. When this position was closed out, the quoted price was 94-75. Determine the profit or loss per contract, ignoring transaction costs.

> Suppose that you buy a stock for $48 by paying $25 and borrowing the remaining $23 from a brokerage firm at 8 percent annualized interest. The stock pays an annual dividend of $0.80 per share, and after one year, you are able to sell it for $65. Calculat

> Assume that Duever stock is priced at $80 per share and pays a dividend of $2 per share. An investor purchases the stock on margin, paying $50 per share and borrowing the remainder from the brokerage firm at 12 percent annualized interest. If after one y

> Assume that Vogl stock is priced at $50 per share and pays a dividend of $1 per share. An investor purchases the stock on margin, paying $30 per share and borrowing the remainder from the brokerage firm at 10 percent annualized interest. If after one yea

> A stock has a beta of 2.2, the risk-free rate is 6 percent, and the expected return on the market is 12 percent. Using the CAPM, what would you expect the required rate of return on this stock to be? What is the market risk premium?

> A share of common stock currently sells for $110. Current dividends are $8 per share and are expected to grow at 6 percent per year indefinitely. What is the rate of return required by investors in the stock?

> Why might the Fed want to focus its efforts on reducing long-term interest rates rather than short-term interest rates during a weak economy? Explain how it might use a monetary policy focused on influencing long-term interest rates. Why might such a po

> You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two secur

> Suppose you know that a company just paid a dividend of $1.75 per share on its stock and that the dividend will continue to grow at a rate of 8 percent per year. If the required return on this stock is 10 percent, what is the current share price?

> Micro, Inc. will pay a dividend of $2.30 per share next year. If the company plans to increase its dividend by 9 percent per year indefinitely, and you require a 12 percent return on your investment, what should you pay for the company’s stock?

> Suppose that you are interested in buying the stock of a company that has a policy of paying a $6 per share dividend every year. Assuming no changes in the firm’s policies, what is the value of a share of stock if the required rate of return is 11 percen

> You discovered that Olmsted Stock is expected to generate earnings of $4.38 per share this year, and that the mean PE ratio for its industry is 27.195. Use the PE valuation method to determine the value of Olmsted shares.

> Assume Mess stock has a beta of 1.2. If the risk-free rate is 7 percent, and the market return is 10 percent, what is the expected return on Mess stock?

> a. When computing the price of the stock with the dividend discount model, how would the price of a stock be affected if the required rate of return is increased. Explain the logic of this relationship. b. When computing the price of a stock using the co

> Assume that the standard deviation of daily returns for a particular stock in a recent historical period is 1.8 percent. Assume that the expected daily return of the stock is 0.01 percent. Estimate the maximum percentage one-day loss based on a 95 percen

> Using the information from Problem 12, suppose that you instead decide to invest $20,000 in Stock D, $30,000 in Stock E and $50,000 in Stock F. What is the beta of your portfolio now?

> Assume the following information: Beta of Stock D = 1.31 Beta of Stock E = 0.85 Beta of Stock F = 0.94 If you invest 40 percent of your money in Stock D, 30 percent in Stock E and 30 percent in Stock F, what is your portfolio’s beta?

> In a weak economy, the Fed commonly implements a stimulative monetary policy to lower interest rates and presumes that firms will be more willing to borrow money. Even if banks are willing to lend such funds, why might such a presumption about the willin

> Suppose you bought a stock at the beginning of the year for $76.50. During the year, the stock paid a dividend of $0.70 per share and had an ending share price of $99.25. What is the total percentage return from investing in that stock over the year?

> what is the market consensus forecast about the one-year forward rate one year from now? Is this rate above or below today’s one-year interest rate? Explain.

> You are considering investing in a stock that has an expected return of 13 percent. If the risk-free rate is 5 percent and the market risk premium is 7 percent, what is the beta of this stock?

> Assume the following information over a five-year period. Average risk-free rate = 6% Average return for Crane stock = 11% Average return for Load stock = 14% Standard deviation of Crane stock returns = 2% Standard deviation of Load stock returns = 4% Be

> Use an amortization table (go to www.bankrate.com and click on “amortization calculator” under “Mortgages” or use another online source) that determines the monthly mortgage payment based on a specific interest rate and principal with a 15-year maturity,