Assume that oil-producing countries have agreed to reduce their oil production by 30 percent. How would bond prices be affected by this announcement? Explain.
> Should members of Congress be allowed to enact laws on accounting and financial matters while receiving donations from related lobbying groups?
> The government intervened to resolve problems in the mortgage markets during the credit crisis. Summarize the advantages and disadvantages of the government intervention during the credit crisis. Should the government intervene when mortgage market condi
> How will U.S. interest rates be directly affected by the event (holding other factors equal)?
> Why would a pension fund or insurance company consider selling stock index futures?
> Explain how the probability distribution of a financial institution’s returns is affected when it uses interest rate futures to hedge. What does this imply about its risk?
> Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge?
> Describe the short selling process. Explain the short interest ratio. Investors can engage in short selling by selling a stock that they do not own. They must borrow the stock that they sell.
> Explain the difference between a market order and a limit order.
> How do earnings surprises affect valuations of stocks?
> Assume that the expected inflation rate has just been revised upward by the market. Would that change affect the required return by investors who invest in the stocks? Explain.
> Explain how economic growth affects the valuation of a stock.
> A consulting firm was hired to determine whether a particular trading strategy could generate abnormal returns. The strategy involved taking positions based on recent historical movements in stock prices. The strategy did not achieve abnormal returns. Co
> Explain how short sales work in the mortgage markets. Are short sales fair to homeowners? Are they fair to mortgage lenders?
> Explain how stock volatility changed during the credit crisis of 2008-2009.
> Estimate the real interest rate over the last year. If financial market participants overestimate inflation in a particular period, will real interest rates be relatively high or low? Explain.
> What are the risks of investing in stocks in emerging markets?
> Why can expectations of an acquisition affect the value of the target’s stock?
> What is the meaning of an initial return for an IPO?
> Describe the process of bookbuilding. Why is bookbuilding sometimes criticized as a means of setting the offer price?
> Are organized stock exchanges used to place newly issued stock? Explain.
> Explain why stocks traded on the NYSE generally exhibit less risk than stocks that are traded on other exchanges.
> Explain how ADRs enable U.S. investors to become part owners of foreign companies.
> Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares.
> During the Credit Crisis. Explain why mortgage originators have been criticized for their behavior during the credit crisis. Should other participants in the mortgage securitization process have recognized that lack of complete disclosure in mortgages?
> Discuss the concept of asymmetric information. Explain why it may motivate firms to repurchase some of their stock.
> How do IPOs perform over the long run?
> Explain the liquidity premium theory.
> Explain the rights of common stockholders that are not available to other individuals.
> Describe the shared-appreciation mortgage.
> Why are second mortgages offered by some home sellers?
> Describe the growing-equity mortgage. How does it differ from a graduated-payment mortgage?
> Describe the graduated-payment mortgage. What type of homeowners would prefer this type of mortgage?
> Explain the use of a balloon-payment mortgage. Why might a financial institution prefer to offer this type of mortgage?
> Why is the 15-year mortgage attractive to homeowners? Is the interest rate risk to the financial institution higher for a 15-year mortgage or a 30-year mortgage? Why?
> Explain why the rescue of Fannie Mae and Freddie Mac improved the ability of mortgage companies to originate mortgages.
> What types of financial institutions finance residential mortgages? What type of financial institution finances the majority of commercial mortgages?
> Explain why some financial institutions prefer to sell the mortgages they originate.
> Describe the factors that affect mortgage prices.
> Identify the relevant characteristics of any security that can affect the security’s yield.
> Mortgage lenders with fixed-rate mortgages should benefit when interest rates decline, yet research has shown that this favorable impact is dampened. By what?
> Distinguish between FHA and conventional mortgages.
> Why does the required rate of return for a particular bond change over time?
> If a bond’s coupon rate is greater than the investor’s required rate of return on the bond, would the bond’s price be greater than or less than its par value? Explain.
> Since fixed-rate mortgages and bonds have similar payment flows, how is a financial institution with a large portfolio of fixed-rate mortgages affected by rising interest rates? Explain.
> How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected by a greater degree than a financial institution with a greater concentration of bonds (and fewer short-term securities)? Explain.
> Many investors that purchased the mortgage-backed securities just before the credit crisis believed that they were misled, because these securities were riskier than they thought. Who was at fault?
> Determine the direction of bond prices over the last year and explain the reason for it.
> Why is the relationship between interest rates and bond prices important to financial institutions?
> Explain the impact of a decline in interest rates on: a. An investor’s required rate of return. b. The present value of existing bonds. c. The prices of existing bonds.
> Discuss why many financial institutions have expanded internationally in recent years. What advantages can be obtained through an international merger of financial institutions?
> Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation? Explain.
> Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.
> What are debentures? How do they differ from subordinated debentures?
> Explain the use of bond collateral and identify the common types of collateral for bonds.
> Explain the use of call provisions on bonds. How can a call provision affect the price of a bond?
> Explain how the credit crisis adversely affected many other people and institutions beyond homeowners and mortgage companies.
> What are protective covenants? Why are they needed?
> Explain the use of a sinking-fund provision. How can it reduce the investor’s risk?
> If bond yields in Japan rise, how might U.S. bond yields be affected? Why?
> Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why?
> Explain how investors’ preferences for commercial paper change during a recession. How would this reaction affect the difference between commercial paper rates and T-bill rates during recessionary periods?
> Explain how the expected interest rate in one year depends on your expectation of economic growth and inflation.
> Why do ratings agencies assign ratings to commercial paper?
> Describe the activity in the secondary T-bill market. How can this degree of activity benefit investors in T-bills? Why might a financial institution sometimes consider T-bills as a potential source of funds?
> How can investors using the primary T-bill market be assured that their bid will be accepted? Why do large corporations typically make competitive bids rather than noncompetitive bids for T-bills?
> You have the choice of investing in top-rated commercial paper or commercial paper that has a lower risk rating. How do you think the risk and return performances of the two investments differ?
> Describe the characteristics of subprime mortgages. Why were mortgage companies aggressively offering subprime mortgages before the credit crisis?
> The maximum maturity of commercial paper is 270 days. Why would a firm issue commercial paper instead of longer-term securities, even if it needs funds for a long period of time?
> Explain how the yield on a foreign money market security would be affected if the foreign currency denominating that security declined to a significant degree.
> Explain how the Treasury uses the primary market to obtain adequate funding from the U.S. government.
> Assume that the Fed’s primary goal is to reduce inflation. How can it achieve its goal? What is a possible adverse effect of such action by the Fed (even if it achieves this goal)?
> Why might the Fed have difficulty in controlling the economy in the manner desired? Be specific.
> Describe a passive monetary policy.
> Explain why interest rates tend to decrease during recessionary periods. Review historical interest rates to determine how they react to recessionary periods. Explain this reaction.
> Describe an active monetary policy.
> Describe the economic tradeoff faced by the Fed in achieving its economic goals.
> Explain how the Fed’s monetary policy could depend on the fiscal policy that is implemented.
> Explain collateralized debt obligations (CDOs).
> Which factors might be considered by financial market participants who are assessing whether an increase in money supply growth will affect inflation?
> Explain why an increase in the money supply can affect interest rates in different ways. Include the potential impact of the money supply on the supply of and the demand for loanable funds when answering this question.
> Describe the Fed’s monetary policy response to the credit crisis that began in 2008.
> How does the Fed’s monetary policy affect economic conditions?
> Explain how the Fed uses open market operations to reduce the money supply.
> What is the purpose of the economic presentations made during a POMC meeting?
> Describe the characteristics that a measure of money should have if it is to be manipulated by the Fed.
> Discuss the relationship between the yield and the liquidity of securities.
> Describe the purpose of the Fed’s lending facility.
> What is the Beige book and why is it important to the FOMC?
> Describe how mortgage-backed securities are used.
> How can the compensation of a firm’s board of directors be structured so that the board will not be tempted to allow accounting or other managerial decisions that could cause a superficially high price over a short period?
> What is the policy directive, and who carries it out?
> Explain how the Fed increases the money supply through open market operations.
> What are the main goals of the Federal Open Market Committee? How does it attempt to achieve these goals?
> As a result of the Financial Reform Act of 2010, the Consumer Financial Protection Bureau was established, and housed within the Federal Reserve. Explain the role of this bureau.
> How might the FOMC statement (issued following the committee's meeting) stabilize financial markets more than if no statement were provided?
> Explain how the Fed's monetary policy may indirectly affect the prices of equity securities.
> 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.
