Assume a financial institution has more rate-sensitive liabilities than rate-sensitive assets. Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts so as to hedge its exposure?
> Explain how the Fed's monetary policy affects the unemployment level.
> Do you think that large financial institutions should have been rescued by the Fed during the credit crisis?
> Distinguish between primary and secondary markets. Distinguish between money and capital markets.
> Explain how consideration of a liquidity premium affects the estimate of a forward interest rate.
> Explain why a credit crisis in one country may be transmitted to other countries.
> What is the meaning of the forward rate in the context of the term structure of interest rates? Why might forward rates consistently overestimate future interest rates? How could such a bias be avoided?
> How does high credit risk affect the yield on securities?
> Explain the preferred habitat theory.
> If a downward-sloping yield curve is mainly attributed to segmented markets theory, what does that suggest about the demand for and supply of funds in the short-term and long-term maturity markets?
> Why do forecasts of interest rates made by experts differ?
> How can the financial problems of one large bank affect the market’s risk evaluation of other large banks?
> How do economies of scale in banking relate to the issue of interstate banking?
> Explain the “moral hazard” problem as it relates to deposit insurance.
> Given the higher capital requirements imposed on them, why might banks be even more interested in underwriting corporate debt issues?
> Describe highly leveraged transactions (HLTs) and explain why regulators closely monitor a bank’s exposure to HLTs.
> Explain why systemic risk is a source of concern in the bond and other debt markets. Also explain how the Financial Reform Act of 2010 was intended to reduce systemic risk.
> Explain the advantage of a bullet loan.
> How does the yield on a repurchase agreement differ from a loan in the federal funds market? Why?
> Explain the use of the federal funds market in facilitating bank operations.
> How does the money market deposit account differ from other bank sources of funds for banks?
> Compare the main sources and uses of funds for finance companies, insurance companies, and pension funds.
> What are four major sources of funds for banks? Which alternatives does a bank have if it needs temporary funds? What is the most common reason that banks issue bonds?
> Would you expect a bank to charge a higher rate on a term loan or a highly leveraged transaction (HLT) loan? Why?
> Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets (uses of funds).
> Explain the conditions under which a speculator would like to take a speculative position in which it will invest in a foreign currency today, even when the speculator has no use for that currency in the future.
> The Bank of Japan desires to decrease the value of the Japanese yen against the U.S. dollar. How could it use direct intervention to achieve this goal?
> Assume that you maintain bonds and money market securities in your portfolio, and you suddenly believe that long-term interest rates will rise substantially tomorrow (even though the market does not share the same view), while short-term interest rates w
> Assume that Mexico suddenly experiences high and unexpected inflation. How could this affect the value of the Mexican peso according to purchasing power parity (PPP) theory?
> Assume that stocks in the United Kingdom become very attractive to U.S. investors. How could this affect the value of the British pound? Explain.
> Assume that European countries impose a quota on goods imported from the United States, and that the United States does not plan to retaliate. How could this affect the value of the euro? Explain.
> Explain the difference between a freely floating system and a dirty float. Which type is more representative of the United States system?
> How does a weak dollar affect U.S. inflation? Explain.
> With regard to the profit motive, how are credit unions different from other financial institutions?
> North Pier Company entered into a two-year swap agreement, which would provide fixed-rate payments for floating-rate payments. Over the next two years, interest rates declined. Based on these conditions, did North Pier Company benefit from the swap?
> Shea Savings negotiates a fixed-for-floating swap with a reputable firm in South America that has an exceptional credit rating. Shea is very confident that there will not be a default on inflow payments because of the very low credit risk of the South Am
> Comiskey Savings provides fixed-rate mortgages of various maturities, depending on what customers want. It obtains most of its funds from issuing certificates of deposit with maturities ranging from one month to five years. Comiskey has decided to engage
> Chelsea Finance Company receives floating inflow payments from its provision of floating-rate loans. Its outflow payments are fixed because of its recent issuance of long-term bonds. Chelsea is concerned that interest rates will decline in the future. Ye
> The pension fund manager of Utterback (a U.S. firm) purchased German 20-year Treasury bonds instead of U.S. 20-year Treasury bonds. The coupon rate was 2 percent lower on the German bonds. Assume that the manager sold the bonds after five years. The yiel
> Give an example of how sovereign risk is related to currency swaps.
> Bowling Green Savings & Loan uses short-term deposits to fund fixed-rate mortgages. Explain how Bowling Green can use interest rate swaps to hedge its interest rate risk.
> Why would a financial institution holding Hinton stock consider buying a put option on that stock rather than simply selling it?
> How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?
> Identify the factors affecting the premium paid on a put option. Describe how each factor affects the size of the premium.
> Identify the factors affecting the premium paid on a call option. Describe how each factor affects the size of the premium.
> Explain the primary use of funds for commercial banks versus savings institutions.
> Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?
> Describe the general differences between a call option and a futures contract.
> Why do some financial institutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure?
> A U.S. insurance company purchased British 20-year Treasury bonds instead of U.S. 20-year Treasury bonds because the coupon rate was 2 percentage points higher on the British bonds. Assume that the insurance company sold the bonds after five years. Its y
> Assume a financial institution has more rate-sensitive assets than rate-sensitive liabilities. Would it be more likely to be adversely affected by an increase or decrease in interest rates? Should it purchase or sell interest rate futures contracts in or
> Explain how sellers of financial futures contracts can offset their position. How is their gain or loss determined?
> Explain how purchasers of financial futures contracts can offset their position. How is their gain or loss determined? What is the maximum loss to a purchaser of a futures contract?
> Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain.
> Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk.
> How does the price of a financial futures contract change as the market price of the security it represents changes? Why?
> Commercial banks use some funds to purchase securities and other funds to make loans. Why are the securities more marketable than the loans in the secondary market?
> Explain why interest rates changed as they did over the past year.
> What type of general guidelines may be specified for a trust that is managing a pension fund?
> The value of the dollar is monitored by bond market participants over time. a. Explain why expectations of a weak dollar could reduce bond prices in the U.S. b. On some occasions, news of the dollar weakening did not have any impact on bond markets. Ass
> Explain how ERISA affects employees who change employers.
> What is the main purpose of the Pension Benefit Guarantee Corporation (PBGC)?
> Explain the general difference between the portfolio composition of private pension funds and public pension funds.
> How do insurance companies manage credit risk and liquidity risk?
> What is a policy loan? When is it popular? Why?
> How do insurance companies finance the real estate market?
> What are the main assets of life insurance companies? Identify the main categories. What is the main use of funds by life insurance companies?
> Explain group plan life insurance.
> Identify the characteristics of universal life insurance.
> How do whole life and term insurance differ from the perspective of insurance companies? From the perspective of the policyholders?
> Assume that the bond market participants suddenly expect the Fed to substantially increase the money supply. a. Assuming no threat of inflation, how would this expectation affect bond prices? b. Assuming that inflation may result, how would bond prices
> What is the NAIC and what is its purpose?
> What is reinsurance?
> Explain how a life insurance company’s asset portfolio may be affected by inflation.
> Explain the concept of cash flow underwriting.
> How is whole life insurance serve as a form of savings to policyholders?
> Explain why securities firms from the United States have expanded into foreign markets.
> What is a best-efforts agreement?
> Describe the underwriting function of a securities firm.
> Describe the origination process for corporations that are about to issue new stock.
> What is the purpose of the SIPC?
> Explain how the bond market facilitates a government’s fiscal policy. How do you think the bond market could discipline a government and discourage the government from borrowing (and spending) excessively?
> What is asset stripping?
> Explain how the income generated by a mutual fund is taxed when it distributes at least 90 percent of its taxable income to shareholders.
> Explain how changes in foreign currency values can affect the performance of international mutual funds.
> Describe the ideal mutual fund for investors who wish to generate tax-free income but also maintain a low degree of interest rate risk.
> Support or refute the following statement: Investors can avoid all types of risk by purchasing a mutual fund that contains only Treasury bonds.
> Like mutual funds, commercial banks and stock-owned savings institutions sell shares; yet, proceeds received by mutual funds are used in a different way. Explain.
> Explain the difference between load and no-load mutual funds.
> How do open-end mutual funds differ from closed-end funds?
> Explain the difference between equity REITs and mortgage REITs. Which type would likely be a better hedge against high inflation? Why?
> Explain why some hedge funds failed as a result of the credit crisis of 2008-s009.
> Explain why the market for auction-rate securities suffered in 2008.
> Is the value of a money market fund or a bond fund more susceptible to increasing interest rates? Explain.
> Explain the relative risk of the various types of securities in which a money market fund may invest.
> According to research, have mutual funds outperformed the market? Explain. Would mutual funds be attractive to some investors even if they are not expected to outperform the market? Explain.
> Explain how the interest rate risk of finance companies differs from that of savings institutions.
> Describe the kinds of regulations that are imposed on finance companies.
> Explain how finance companies provide financing through leasing.
> Explain how finance companies benefit from offering consumers a credit card.
> Describe the major uses of funds by finance companies.
