Question: Describe the process of bookbuilding. Why is

> The next expected dividend for Sun, Inc., will be $1.20 per share and analysts expect the dividend to grow at a rate of 7 percent indefinitely. If Sun stock currently sells for $22 per share, what is the required rate of return?

> Describe the main source of funds for credit unions. Why might the average cost of funds to credit unions be relatively stable even when market interest rates are volatile?

> Explain (using intuition instead of math) why stock prices may decrease in response to a higher risk-free rate according to the CAPM. In some periods, the risk-free rate rises in response to higher economic growth. Explain (using intuition instead of mat

> At the time that a management group of RJR Nabisco initially considered engaging in a leveraged buyout, RJR’s stock price was less than $70 per share. Ultimately, RJR was acquired by the firm Kohlberg, Kravis, and Roberts (KKR) for about $108 per share.

> Explain the meaning and use of implied volatility.

> Describe the value-at-risk method for measuring risk.

> Describe the role of the designated market maker on the New York Stock Exchange.

> Explain how underwriters use the overallotment option in IPOs.

> Explain why private equity funds use a very high degree of financial leverage, and how this affects their risk and potential return on investment.

> What are some possible disadvantages to investors who invest in stocks listed on a private stock market?

> Describe the dilemma of securities firms that served as underwriters for Facebook’s IPOs, when attempting to satisfy Facebook and the institutional investors that invested in Facebook’s stock. Do you think that the securities firms satisfied Facebook or

> Explain why some public firms decided to go private in response to the passage of the Sarbanes-Oxley (SOX) Act.

> Some critics argue that insider trading should not be regulated, because it allows market prices to more quickly reflect the inside information. Write a short essay that supports or refutes this opinion.

> Explain the incentive for private equity funds to invest in a firm and improve its operations.

> Businesses valued at less than $50 million or so rarely go public. Explain the limitations to such businesses if they did go public.

> Explain the dilemma of stock analysts who work for securities firms and assign ratings to large corporations. Why might they prefer not to assign low ratings to weak but large corporations?

> Explain how venture capital (VC) funds finance private businesses, as well as how they exit from their participation in a firm.

> Describe international ETFs and explain how ETFs are exposed to exchange rate risk. How do you think an investor decides whether to purchase an ETF representing Japan, Spain, or some other country?

> Explain how shareholder protection varies among countries. Explain how enforcement of securities laws varies among countries. Why do these characteristics affect the valuations of stocks?

> Denton Co. plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer price for the stock be $12 per share to ensure that all th

> Briefly describe the provisions of the Sarbanes-Oxley Act. Discuss how this act affects the monitoring performed by shareholders.

> How do you think accounting irregularities affect the pricing of corporate stock in general? From an investor’s viewpoint, how do you think the information used to price stocks changes in response to accounting irregularities?

> Describe spinning and laddering in the IPO market. How do you think these actions influence the price of a newly issued stock? Who is adversely affected as a result of these actions?

> The credit crisis that occurred in 2008-2009 could also be called an equity crisis due to systemic risk. Write a short essay to explain the impact of the credit markets on the equity markets during the crisis.

> Explain how the Financial Reform Act of 2010 attempted to prevent biased ratings of mortgage-backed securities by credit rating agencies.

> An insurance company maintains a large portfolio of U.S. stocks. Which of the following would be more appropriate? Sell stock index futures contracts. Remain unhedged. Defend your recommendation.

> Would you recommend high-risk or low-risk money market securities? Would you recommend high-risk or low-risk bonds? Why?

> Assume that the perceived risk of corporations in the United States is expected to increase. Explain how the yield of newly issued U.S. corporate bonds will change to a different degree than will the yield of newly issued U.S. Treasury bonds.

> How will economic growth in the United States be affected by the event? How might this influence the values of securities?

> Should investors have confidence in ratings by analysts who are affiliated with securities firms that provide consulting services to firms? Explain.

> What alternative sources of information about a firm should investors rely on if they cannot rely on financial statements?

> 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?

> 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.

> 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.

> 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.