Currently, each unit employs economists who develop forecasts for interest rates and other economic conditions. When assessing potential economic effects on each unit, what are the disadvantages of this approach versus having just one economist at the holding company provide forecasts?
> a. Determine how the annualized yield of a T-bill would be affected if the purchase price were lower. Explain the logic of this relationship. b. Determine how the annualized yield of a T-bill would be affected if the selling price were lower. Explain the
> a. Determine how the appropriate yield to be offered on a security is affected by a higher risk-free rate. Explain the logic of this relationship. b. Determine how the appropriate yield to be offered on a security is affected by a higher default risk pre
> Hankla Company plans to purchase either (1) zero-coupon bonds that have ten years to maturity, a par value of $100 million, and a purchase price of $40 million, or (2) bonds with similar default risk that have five years to maturity, a 9 percent coupon r
> a. Determine the forward rate for various one-year interest rate scenarios if the two-year interest rate is 8 percent, assuming no liquidity premium. Explain the relationship between the one-year interest rate and the one-year forward rate, holding the t
> a. A corporation is planning to sell its 90-day commercial paper to investors offering an 8.4 percent yield. If the three-month Treasury bill’s annualized rate is 7 percent, the credit risk premium is estimated to be 0.6 percent and there is a 0.4 percen
> Assume that interest rates for one-year securities are expected to be 2 percent today, 4 percent one year from now and 6 percent two years from now. Using only the pure expectations theory, what are the current interest rates on two-year and three-year s
> Describe how a country’s laws can influence the degree of its financial market liquidity.
> Cardinal Company, a U.S.-based insurance company, considers purchasing bonds denominated in Canadian dollars, with a maturity of six years, a par value of C$50 million, and a coupon rate of 12 percent. The bonds can be purchased at par by Cardinal and wo
> As an analyst at a bond rating agency, you have been asked to interpret the implications of the recent shift in the yield curve. Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, the long-term yields declined, w
> As an analyst at a bond rating agency, you have been asked to interpret the implications of the recent shift in the yield curve. Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, the long-term yields declined, w
> As the treasurer of a manufacturing company, your task is to forecast the direction of interest rates. Your company plans to borrow funds and it may use the forecast of interest rates to determine whether it should obtain a loan with a fixed interest rat
> As a manager of a firm, you are concerned about a potential increase in interest rates, which would reduce the demand for your firm’s products. The Fed is scheduled to meet in one week to assess the economic conditions and set monetary policy. Economic g
> As a manager of a large U.S. firm, one of your assignments is to monitor U.S. economic conditions so that you can forecast the demand for products sold by your firm. You realize that the Federal Reserve implements monetary policy, whereas the federal go
> As a financial manager of a large firm, you plan to borrow $70 million over the next year. a. What are the more likely alternatives for you to borrow $70 million? b. Assuming that you decide to issue debt securities, describe the types of financial inst
> As a consultant to a state’s underfunded pension fund, you have been asked to search for solutions to prevent underfunding in the future. a. One explanation for the underfunding of the defined-benefit plan is that the economy was weak recently, and fin
> As a consultant to an insurance company, you have been asked to assess the asset composition of the company. a. The insurance company has recently sold a large amount of bonds and invested the proceeds in real estate. Its logic was that these actions wo
> As a consultant for a securities firm, you are assessing the operations of a securities firm. a. This securities firm relies heavily on full-service brokerage commissions. Do you think that heavy reliance on these brokerage commissions is risky? Explain
> Explain why financial markets may be less liquid if companies are not forced to provide accurate financial reports.
> As an individual investor, you are attempting to invest in a well-diversified portfolio of mutual funds, so that you will be somewhat insulated from any type of economic shock that may occur. a. An investment adviser recommends that you buy four differe
> As a manager of a finance company, you are attempting to increase the spread between the rate earned on your assets and the rate paid on your liabilities. a. Assume that you expect interest rates decline over time. Should you issue bonds or commercial p
> As a consultant to Boca Savings & Loan Association, you notice that a large portion of 15-year, fixed-rate mortgages are financed with funds from short-term deposits. You believe the yield curve is useful in indicating the market’s anticipation of future
> As a manager of Hawaii Bank, you anticipate the following information provided to you: Loan loss provision at end of year = 1 percent of assets Gross interest income over the next year = 9 percent of assets Noninterest expenses over the next year = 3 per
> As a manager of Stetson Bank, you are responsible for hedging Stetson’s interest rate risk. Stetson has forecasted its cost of funds as follows: The bank expects to earn an average rate of 11 percent on some assets that charge a fixed i
> A bank has asked you to assess various strategies it is considering and explain how they could affect its regulatory review. Regulatory reviews include an assessment of capital, asset quality, management, earnings, liquidity, and sensitivity to financial
> As a consultant, you have been asked to assess a bank’s sources and uses of funds, and to offer recommendations on how it can restructure its sources and uses of funds to improve its performance. This bank has traditionally focused on attracting funds by
> You are the manager of a stock portfolio for a financial institution, and approximately 20 percent of your stock portfolio is in British stocks. You expect the British stock market to perform well over the next year, and you plan to sell the stocks one y
> As a manager of a commercial bank, you have just purchased a three-year interest rate collar, with LIBOR as the interest rate index. The interest rate cap specifies a fee of 2 percent of notional principal valued at $100 million and an interest rate ceil
> As a stock portfolio manager, you have investments in many U.S. stocks and plan to hold these stocks over a long-term period. However, you are concerned that the stock market may experience a temporary decline over the next three months, and that your st
> Explain why mortgage defaults during the credit crisis in 2008 and 2009adversely affected financial institutions that did not originate the mortgages. What role did these institutions play in financing the mortgages?
> The Fed attempts to use monetary policy to control the level of inflation and economic growth in the United States. Write a short essay on how the government’s fiscal policy can make the Fed’s role more difficult. Specifically, assume that the administra
> As a portfolio manager, you are monitoring previous investments that you made in stocks and bonds of U.S. firms, and in stocks and bonds of Japanese firms. Although you plan to keep all of these investments over the long run, you are willing to hedge aga
> As an investment manager, you frequently make decisions about investing in stocks versus other types of investments, and about types of stocks to purchase. a. You have noticed that investors tend to invest more heavily in stocks after interest rates hav
> As a manager of a savings institution, you must decide whether to invest in collateralized mortgage obligations (CMOs). You can purchase interest-only (IO) or principal-only (PO) classes. You anticipate that economic conditions will weaken in the future
> As an investor, you plan to invest your funds in long-term bonds. You have $100,000 to invest. You may purchase highly rated municipal bonds at par with a coupon rate of 6 percent; you have a choice of a maturity of 10 years or 20 years. Alternatively, y
> As a portfolio manager for an insurance company, you are about to invest funds in one of three possible investments: (1) 10-year coupon bonds issued by the U.S. Treasury, (2) 20-year zero-coupon bonds issued by the Treasury, or (3) one-year Treasury secu
> As a treasurer of a corporation, one of your jobs is to maintain investment in liquid securities such as Treasury securities and commercial paper. Your goal is to earn as high a return as possible, but without taking much of a risk. a. The yield curve
> You maintain a large portfolio of U.S. bonds. You believe that if the Fed does not revise its monetary policy, the U.S. economy will continue to decline. If the Fed stimulates the economy at this point, you believe that you would be better off with stock
> Do you think that the Fed will use a stimulative monetary policy at this point? Explain.
> Should you still consider purchasing Kenner stock in light of the analysts’ arguments about why it may be undervalued?
> Should you still consider purchasing Olympic stock in light of the analysts’ arguments about why it may be undervalued?
> When economic crises in countries are due to a weak economy, local interest rates tend to be very low. However, if the crisis is caused by an unusually high rate of inflation, the interest rate tends to be very high. Explain why.
> Other than possible changes in the economy that may affect credit risk, what key factor will determine whether this strategy is beneficial beyond one year?
> Will the bank’s ROA next year be higher or lower if market interest rates are higher? (Use the T-bill rate as a proxy for market interest rates.) Why?
> Using the information provided, determine the probability distribution of ROA for next year by completing the following table: IN T E R E S T R AT E S C E N A R IO (P O S SIBL E T- BIL L R AT E ) F O R E C A S T E D R O A P R OB A BIL I T Y 8% 9 10
> Some stock analysts have just predicted that the prices of most stocks will fall because interest rates are expected to increase, which would cause investors to use higher required rates of return when valuing stocks. Based on this logic, the analysts su
> Using your answer to question 1 only, explain how prices of U.S. money market securities, bonds, and mortgages will be affected.
> Assume that day-to-day exchange rate movements are dictated primarily by the flow of funds between countries, especially international bond and money market transactions. How will exchange rates be affected by possible changes in the international flow o
> Using the information available to you, forecast the direction of Canadian interest rates.
> Using the information available to you, forecast the direction of U.S. interest rates.
> Your assignment is to identify the units that will be less adversely affected by the recession. You believe that the units’ different characteristics will cause some of them to be affected to a more significant extent than others are.
> Integrate the roles of accounting, regulations, and financial market participation. That is, explain how financial market participants rely on accounting, and why regulatory oversight of the accounting process is necessary.
> An international mutual fund sponsored by a U.S. securities firm consists of bonds evenly allocated across the United States and the United Kingdom. One of the portfolio managers has decided to hedge all the assets by selling futures on a popular U.S. bo
> A pension fund maintains a large bond portfolio of U.S. bonds. Which of the following would be most appropriate? Sell bond index futures. Buy bond index futures. Remain unhedged. Defend your recommendation.
> Suppose that, instead of reducing the supply of loanable funds in the United States, the event in Singapore increased demand for them. Would your assessment of future interest rates be different? What about your general assessment of economic conditions?
> Assume that you would consider recommending that as much as 20 percent of the funds be invested in foreign debt securities. Revise your prescription to include foreign securities if you desire (identify the type of security and the country).
> A savings institution holds 50 percent of its assets as long-term, fixed rate mortgages. Almost all of its funds are in the form of short-term deposits. Which of the following strategies would be most appropriate for this institution? Use a fixed-for-flo
> Assume that, for diversification purposes, you prescribe that at least 20 percent of an investor’s funds should be allocated to money market securities, 20 percent to bonds, and 20 percent to mortgages. This allows you to allocate freely the remaining 40
> Now use your answer to question 2 along with your answer to question 1 to assess the impact on security prices. Would prices of risky securities be affected more or less than those of risk-free securities with a similar maturity? Why?
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. It has a credit line with a bank in case it suddenly
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Because of its expectations of a strong U.S. economy,
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Expecting a strong U.S. economy, Carson plans to grow
> The interest rate on a one-year loan can be decomposed into a one-year risk-free (free from default risk) component and a risk premium that reflects the potential for default on the loan in that year. A change in economic conditions can affect the risk-f
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on these loans are tied to the six-month Treasury bill rate (and includes a risk premium) and are adjusted every six months. Thus, Ca
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Thus, its cost of obtaining funds is sensitive to int
> Carson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and ten other individuals. Over time, Carson Company has obtained subs
> Carson Company has a defined-benefit pension plan in which it offers generous benefits to its employees upon retirement. a. Explain the role of the portfolio managers who manage the pension fund. What is their primary role? b. Explain the tradeoff betwe
> Carson Company is considering a private placement of equity with Secura Insurance Company. a. Explain the interaction between Carson Company and Secura. How will Secura serve Carson’s needs, and how will Carson serve Secura’s needs? b. Why does Carson i
> Recall that Carson Company has periodically borrowed funds, but contemplates a stock or bond offering so that it can expand by acquiring some other businesses. It contacted Kelly Investment Company, an investment bank. a. Explain how Kelly Investment C
> Carson Company is considering a private placement of bonds with Venus Mutual Fund. a. Explain the interaction between Carson and Venus. How would Venus Mutual Fund serve Carson’s needs, and how would Carson serve Venus’s needs? b. Why does Carson intera
> Carson Company has sometimes relied on debt financing from Fente Finance Company. Fente has been willing to lend money even when most commercial banks were not. Fente obtains funding by issuing commercial paper and focuses mostly on channeling the funds
> Rimsa Savings is a savings institution that provided Carson Company with a mortgage for its office building. Rimsa recently offered to refinance the mortgage if Carson Company would prefer a fixed-rate loan rather than an adjustable-rate loan. a. Expla
> In recent years, Carson Company has requested the services listed in part (a) from Blazo Financial, a financial conglomerate. These transactions have created a flow of funds between Carson Company and Blazo. a. Classify each service according to how Bla
> Classify the types of financial institutions mentioned in this chapter as either depository or nondepository. Explain the general difference between depository and nondepository institutions as sources of funds. It is often stated that all types of finan
> Recall that Carson Company relies heavily on commercial banks for loans. When the company was first established with equity funding from its owners, Carson could easily obtain debt financing, because the financing was backed by some of the firm’s assets.
> Carson Company relies heavily on commercial banks for funding and for some other services. a. Explain how the services provided by a commercial bank (just the banking services, not the nonbank services) to Carson may be limited because of bank regulati
> Carson Company is attempting to compare the services offered by different banks, as it would like to have all services provided by one bank. a. Explain how a bank and its financial service subsidiaries can help Carson Company obtain funding so as to expa
> Carson Company expects that it will receive a large order from the government of Spain. If the order occurs, Carson will be paid about 3 million euros. Since all of its expenses are in dollars. Carson would like to hedge this position. Carson has contact
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in produc
> Carson Company would like to acquire Vinnet Inc., a publicly traded firm in the same industry. Vinnet’s stock price is currently much lower than the prices of other firms in the industry, because it operates inefficiently. Carson believes that it could r
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in produc
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in produc
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand for its products. It would need financing to expand and accommodate this
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate this increase in production. R
> Offer an argument for why the terrorist attack on the United States on September 11, 2001 could have placed downward pressure on U.S. interest rates. Offer an argument for why those attacks could have placed upward pressure on U.S. interest rates.
> Carson Company currently has a mortgage on its office building through a savings institution. It is attempting to determine whether it should convert its mortgage from an adjustable rate to a fixed rate. Recall that the yield curve is currently upward sl
> If the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall
> If the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall that th
> During a financial crisis, liquidity in financial markets declines dramatically, and many surplus units no longer participate in financial markets. Nevertheless, if the markets are efficient, securities prices should decline due to existing economic cond
> The key components of a market interest rate are the risk-free rate and the credit risk premium. During a credit crisis, these two components may change substantially, but in different ways. Write a short essay that describes how the risk-free rate and t
> Given your knowledge of how interest rates are influenced by various factors reflecting the demand for funds and the supply of funds available in the credit markets, write a short essay to explain how and why interest rates will change over the next thre
> Write a short essay explaining why there is so much uncertainty surrounding the valuation of a firm that is engaged in an IPO. Why do you think some investors overvalue firms at the time of their IPO?
> Many critics argue that greed in the mortgage markets caused the credit crisis. Yet, many market advocates suggest that greed is good, as the thirst for profits by firms that participate in mortgage markets allows for economic growth. Write a short essay
> The credit crisis was caused by the mortgage market, yet it had a serious impact on bond markets. Write a short essay on how the bond market was affected and offer your opinion on how the bond market may attempt to insulate itself from a credit crisis in
> The Fed intervened heavily in the credit crisis. Write a short essay explaining whether you believe the Fed’s intervention improved conditions in financial markets or made conditions worse.
> War tends to cause significant reactions in financial markets. Why might a war in the Middle East place upward pressure on U.S. interest rates? Why might some investors expect a war like this to place downward pressure on U.S. interest rates?
> Consider a state pension fund that needs to generate a series of fixed payments for its retirees. Yet, assume that its compensation for its portfolio managers is tied to the return earned on the investments each year. Write a short essay that explains ho
> Consider a life insurance company that needs to ensure that it can make a steady stream of payments over time to beneficiaries of its policyholders. Assume that the compensation for the insurance company’s portfolio managers is tied to the return earned
> Should large securities firms be allowed to be independent and insulated from bank regulation, or should they be required to register as bank holding companies, and subject to bank regulations? Write a short essay that supports your opinion.
> A critic recently claimed that hedge funds cause market volatility to increase when they publicize (and document) that a public corporation exaggerated its earnings. The critic argued that hedge funds should not be allowed to make such public statements
> Write a short essay on the future of finance company operations? Should finance companies be merged into the banking industry, or should they remain distinctly different from commercial banks?
