Assume that the yield curve for Treasury bonds has a slight upward slope, starting at 6% for a 10-year maturity and slowly rising to 8% for a 30-year maturity. Create a yield curve that you believe would exist for A-rated bonds, and a corresponding yield curve for B-rated bonds.
> Financial Intermediation. Look in a recent business periodical for news about a recent financial transaction that involves two financial institutions. For this transaction, determine the following: How will each institution’s balance sheet be affected? W
> Jayhawk Forecasting Services analyzed several factors that could affect interest rates in the future. Most factors were expected to place downward pressure on interest rates. Jayhawk also expected that although the annual budget deficit was to be cut by
> Assess the economic situation today. Is the current presidential 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 c
> Suppose that the U.S. Treasury decided to finance its deficit with mostly long-term funds. How could this decision affect the term structure of interest rates? If short-term and long-term markets are segmented, would the Treasury’s decision have a more o
> Consider a discussion during FOMC meetings in which there is a weak economy and a war, with potential major damage to oil wells. Explain why this possible effect would have received much attention at the FOMC meetings. If this situation was perceived to
> Explain how and why the option premiums may change in response to a surprise announcement that the Fed will increase interest rates even if stock prices are not affected.
> What are the implications of Regulation FD?
> During periods when investors suddenly become fearful that stocks are overvalued, they dump their stocks, and the stock market experiences a major decline. During these periods, interest rates also tend to decline. Use the loanable funds framework discus
> Now assume that the bank is considering a strategy of increasing its consumer loans by $1 billion instead of using the funds for loans to small businesses. Using this information along with all the original assumptions provided, determine the probability
> The previous strategy of attracting more one-year NCDs could affect noninterest expenses and revenues. How would noninterest expenses be affected by this strategy of offering additional loans to small businesses? How would noninterest revenues be affecte
> Would increasing the money supply growth place upward or downward pressure on interest rates?
> What was the purpose of the Securities Act of 1933? What was the purpose of the Securities Exchange Act of 1934? Do these laws prevent investors from making poor investment decisions? Explain.
> Explain the meaning of efficient markets. Why might we expect markets to be efficient most of the time? In recent years, several securities firms have been guilty of using inside information when purchasing securities, thereby achieving returns well abov
> Distinguish between perfect and imperfect security markets. Explain why the existence of imperfect markets creates a need for financial intermediaries.
> Explain what is meant by interest elasticity. Would you expect federal government demand for loanable funds to be more or less interest-elastic than household demand for loanable funds? Why?
> Why might a foreign government’s policies be closely monitored by investors in other countries, even if the investors plan no investments in that country? Explain how monetary policy in one country can affect interest rates in other countries.
> Explain the meaning of surplus units and deficit units. Provide an example of each. Which types of financial institutions do you deal with? Explain whether you are acting as a surplus unit or a deficit unit in your relationship with each financial instit
> Explain the general difference in the composition of pension portfolios managed by trusts versus those managed by insurance companies. Why does this difference occur?
> Explain how pension plans provide tax benefits.
> Explain how a pension plan’s vesting schedule works and what its purpose is.
> Explain how a pension fund’s governance over corporations can help to enhance the performance of the pension fund.
> Explain how pension funds participate in financial markets.
> Describe a defined-benefit pension plan. Describe a defined-contribution plan and explain how it differs from a defined-benefit plan.
> Explain the potential for corruption when a trustee has the power to determine who will manage a pension fund.
> Explain how an underfunded public pension fund can affect the debt rating of a city or state.
> Explain how some government defined-benefit plans have become underfunded as a result of overestimating their rate of return on investment.
> When the Fed increases money supply to lower the federal funds rate, do you think this will the cost of capital of U.S. companies be reduced? Explain how the segmented markets theory regarding the term structure of interest rates (as explained in Chapter
> McCanna Inc. has hired an investment company to manage its pension fund, which is invested in a stock portfolio and bond portfolio. Explain how McCanna can evaluate the performance of the investment company in managing its pension fund money.
> Why might pension funds be exposed to interest rate risk? How can pension funds reduce their exposure to interest rate risk?
> Why did the U.S. government rescue AIG during the credit crisis in 2008?
> Explain the adverse selection problem and the moral hazard problem in insurance. Gorton Insurance Co. wants to properly price the insurance for car accidents. If Gorton wants to avoid the adverse selection and moral hazard problems, do you think it shoul
> What purpose do property and casualty (PC) insurance companies serve? Explain how the characteristics of PC insurance and life insurance differ.
> Discuss the liquidity risk experienced by life insurance companies and by property and casualty (PC) insurance companies.
> Describe a direct placement of bonds. What is an advantage of a private placement? What is a disadvantage?
> Why did Lehman Brothers experience financial problems during the credit crisis?
> How do securities firms facilitate leveraged buyouts? Why are securities firms that are more capable of raising funds in the capital markets preferred by corporations that need advice on proposed acquisitions?
> What impact has the SEC’s Regulation Fair Disclosure (FD) had on securities firms?
> Explain how credit rating agencies have changed their rating processes following criticism of their ratings during the credit crisis.
> Write a short essay on the integration of bond markets. Explain why adverse conditions within one bond market (such as a particular country) commonly spread to other bond markets.
> How did the Financial Services Modernization Act affect securities firms?
> Explain how the credit crisis of 2008-2009 encouraged some securities firms to convert to a bank holding company (BHC) structure. Why might the expected return on equity be lower for securities firms that convert to this bank holding company structure?
> Most securities firms experience poor profit performance after periods in which the stock market performs poorly. Given what you know about securities firms, offer some possible reasons for these reduced profits.
> Why do securities firms typically have some inside information that could affect future stock prices of other firms?
> Why was the Federal Reserve concerned about systemic risk due to the financial problems of Bear Stearns?
> Explain why securities firms have used a high level of financial leverage in the past. How does such leverage affect their expected return and their risk?
> Explain the process of proprietary trading by securities firms. How was it affected by the Volcker Rule?
> Explain the role of the SEC, FINRA, and the stock exchanges in regulating the securities industry.
> Explain how the Financial Reform Act of 2010 applies to hedge funds.
> Explain why diversification across different types of mutual funds is highly recommended.
> How do money market funds differ from other types of mutual funds in terms of how they use the money invested by shareholders? Which securities do money market funds invest in most often? How can a money market fund accommodate shareholders who wish to s
> Explain why mutual funds are attractive to small investors. How can mutual funds generate returns to their shareholders?
> Explain how the liquidity position of finance companies differs from that of depository institutions such as commercial banks.
> How are small and medium-sized finance companies able to issue commercial paper? Why do some well-known finance companies directly place their commercial paper?
> Explain how savings institutions could use interest rate swaps to reduce interest rate risk. Will savings institutions that use swaps perform better or worse than those that were unhedged during a period of declining interest rates? Explain.
> What is an adjustable-rate mortgage (ARM)? Discuss the potential advantages that such mortgages offer a savings institution.
> Describe the liquidity and credit risk of savings institutions and discuss how each is managed.
> Discuss the entrance of savings institutions into consumer and commercial lending. What are the potential risks and rewards of this strategy? Discuss the conflict between diversification and specialization of savings institutions.
> Explain why savings institutions may benefit when interest rates fall.
> Explain how the credit crisis in the 2008-2009 period affected some savings institutions. Compare the causes of the credit crisis to the causes of the savings institution crisis in the late 1980s.
> In some countries where there is high inflation, the annual interest rate is more than 50 percent, while in other countries such as the U.S. and many European countries, the annual interest rates are typically less than 10 percent. Do you think such a la
> Identify some advantages of credit unions. Identify disadvantages of credit unions that relate to their common bond requirement.
> Explain how credit union exposure to liquidity risk differs from that of other financial institutions. Explain why credit unions are more insulated from interest rate risk than some other financial institutions.
> The following table discloses the interest-rate sensitivity of two SIs (dollar amounts are in millions). Based on this information only, which institution’s stock price would likely be affected more by a given change in interest rates?
> If market interest rates were expected to decline over time, will a savings institution with rate-sensitive liabilities and a large number of fixed-rate mortgages perform best by (a) using an interest rate swap, (b) selling financial futures, or (c) rema
> Explain in general terms how savings institutions differ from commercial banks with respect to their sources of funds and uses of funds. Discuss each source of funds for savings institutions. Identify and discuss the main uses of funds for savings instit
> Assume that SUNY Bank plans to liquidate Treasury security holdings and use the proceeds for small business loans. Explain how this strategy will affect the different income statement items. Also identify any income statement items for which the effects
> According to this chapter, have banks been able to insulate themselves against interest rate movements? Explain.
> Explain how banks become exposed to exchange rate risk.
> What are the two ways in which a bank should diversify its loans? Why? Is international diversification of loans a viable strategy for dealing with credit risk? Defend your answer.
> Consider how economic conditions affect the credit risk premium. Do you think the credit risk premium will likely increase or decrease during this semester? How do you think the yield curve will change during this semester? Offer some logic to support yo
> As economic conditions change, how do banks adjust their asset portfolio?
> What is a bank’s gap, and what does it attempt to determine? Interpret a negative gap. What are some limitations of measuring a bank’s gap?
> Explain how the value at risk (VaR) method can be used to determine whether a bank has adequate capital.
> Explain how the uniform capital requirements can discourage banks from taking excessive risk.
> Briefly describe the Glass-Steagall Act, and then explain how the related regulations have changed since it was enacted.
> Describe the U.S. government’s efforts to infuse capital in all of the very large banks during the credit crisis.
> Explain the government’s dilemma regarding whether it should rescue American International Group (AIG) during the credit crisis.
> Lehman Brothers continued to report positive earnings throughout the spring of 2008, even though mortgage valuations were clearly declining. Nevertheless, some institutional investors were concerned that Lehman Brothers might have been overstating its ea
> How did Basel III change capital and liquidity requirements for banks?
> How did the Financial Reform Act of 2010 change the reserve requirements of the FDIC’s Deposit Insurance Fund?
> During some crises, investors shift their funds out of the stock market and into money market securities for safety, even if they do not fear that interest rates will rise. Explain how and why these actions by investors affect the yield curve. Is the shi
> Explain how the Financial Reform Act is intended to prevent some problems that contributed to the credit crisis.
> Explain how the TARP was expected to help resolve problems during the credit crisis.
> Explain how bank regulation can be more effective when there is consolidation of banks and securities firms.
> Should the Fed have the power to rescue firms such as Bear Stearns that are not commercial banks?
> Provide examples of off-balance sheet activities. Why are regulators concerned about them?
> Explain how the accounting method applied to mortgage-backed securities made it more difficult for banks to satisfy capital requirements during the credit crisis of 2008–2009.
> Explain how the conversion of securities firms to a bank holding company (BHC) structure might reduce their risk.
> Explain how the Sarbanes-Oxley (SOX) Act improved the transparency of banks. Why might the act have a negative impact on some banks?
> Describe the Financial Services Modernization Act of 1999. Explain how it affected commercial bank operations, and how it changed the competitive landscape among financial institutions.
> How are banks’ balance sheet decisions regulated?
> Assume that (1) investors and borrowers expect that the economy will weaken and that inflation will decline, (2) investors require a small liquidity premium, and (3) markets are partially segmented and the Treasury currently has a preference for borrowin
> Describe the process of borrowing from the Federal Reserve. What rate is charged, and who sets it? Why do banks commonly borrow in the federal funds market rather than through the Federal Reserve?
> Define federal funds, the federal funds market, and the federal funds rate. Who sets the federal funds rate? Why is the federal funds market more active on Wednesday?
> Compare and contrast the retail CD and the negotiable CD.
> Explain how banks use credit default swaps.
> Explain how some mortgage operations by some commercial banks (along with other financial institutions) played a major role in instigating the credit crisis that began in 2008.
> Explain the dilemma faced by banks when determining the optimal amount of capital to hold. A bank’s capital is less than 10 percent of its assets. How do you think this percentage would compare to that of manufacturing corporations? How would you explain
> Why do banks invest in securities, even though loans typically generate a higher return? How does a bank decide the appropriate percentage of funds that should be allocated to each type of asset? Explain.
> Seattle Bank just took speculative positions by borrowing Canadian dollars and converting the funds to invest in Australian dollars. Explain a possible future scenario that could adversely affect the bank’s performance.
