Question: Do you think that eliminating or limiting

> How does an index fund differ from an actively managed fund?

> If mortgage rates rise from 5% to 10%, but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?

> Discuss why a mutual fund family may find it beneficial to offer 50 or 60 different stock mutual funds.

> Distinguish between an open- and closed-end mutual fund.

> Considering the discussion of market efficiency from Chapter 6, discuss whether you should be willing to pay high fees to mutual fund investment managers.

> What is meant by liquidity intermediation?

> What features of mutual funds and the investment environment have led to mutual funds’ rapid growth in the last two decades?

> What regulatory changes have been adopted or are being considered to deal with abuses in the mutual fund industry?

> What is market timing when referred to by mutual funds?

> What is late trading when referred to by mutual funds?

> What is the primary source of the conflict of interest between shareholders and investment managers?

> What do 12b-1 fees pay, and what is the maximum amount these fees can be?

> If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?

> What prompted the growth of money market mutual funds?

> What distinguishes a hedge fund from other types of mutual funds?

> How are deferred loads usually structured?

> What is a load fund?

> A mutual fund offers “A” shares, which have a 5% upfront load and an expense ratio of 0.76%. The fund also offers “B” shares, which have a 3% back-end load and an expense ratio of 0.87%. Which shares make more sense for an investor looking over an 18-yea

> A mutual fund charges a 5% upfront load plus reports an expense ratio of 1.34%. If an investor plans on holding a fund for 30 years, what is the average annual fee, as a percent, paid by the investors?

> Unhappy with the results, the new investor then sells the 389.09 shares. What is his profit? What is the new fund value?

> On January 1 a mutual fund has the following assets and prices at 4:00 p.m. Calculate the net asset value (NAV) for the fund. Assume that 8,000 shares are outstanding for the fund. Stock Shares owned Price 1 1,000 $1.97 5,000 $48.26 3 1,000 $26.44

> A $1 million fund is charging a back-end load of 1%, 12b-1 fees of 1%, and an expense ratio of 1.9%. Prior to deducting expenses, what must the fund value be at the end of the year for investors to break even?

> A mutual fund reported year-end total assets of $1,508 million and an expense ratio of 0.90%. What total fees is the fund charging each year?

> Write down the formula that is used to calculate the yield to maturity on a 20-year 10% coupon bond with $1,000 face value that sells for $2,000.

> To discourage short-term investing in its fund, the fund now charges a 5% upfront load and a 2% backend load. The same investor decides to put $50,000 back into the fund. Calculate the new number of shares outstanding. Assume the fund manager buys back a

> Assume the new investor then sells the 420 shares. What is his profit? What is the annualized return? The fund sells 800 shares of stock 4 to raise the needed funds. Assume 250 trading days per year.

> On January 2 the prices at 4:00 p.m. are as follows: Calculate the net asset value (NAV) for the fund. Stock Shares owned Price 1 1,000 $2.03 2 5,000 $51.37 3 2,800 $29.08 4 10,000 $67.19 5 3,000 $4.42 Cash $2,408.00 n.a.

> An investor sends the fund a check for $50,000. If there is no front-end load, calculate the new number of shares and price per share. Assume the manager purchases 1,800 shares of stock 3, and the rest is held as cash.

> On January 1, the shares and prices for a mutual fund at 4:00 p.m. are as follows: Stock 3 announces record earnings, and the price of stock 3 jumps to $32.44 in after-market trading. If the fund (illegally) allows investors to buy at the current NAV,

> On January 3 the prices at 4:00 p.m. are as follows: Calculate the new NAV. Stock Shares owned Price 1 1,000 $1.92 2 5,000 $51.18 3 2,800 $29.08 4 9,900 $67.19 3,000 $4.51 Cash $5,353.40 n.a.

> Why did new technology make it harder to enforce limitations on bank branching?

> “The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the United States there are around 6,000 commercial banks.”

> Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? a. National banks b. Bank holding companies c. Non-Federal-Reserve-member state banks d. Federal-Reserve-member state banks

> Why was the United States one of the last of the major industrialized countries to have a central bank?

> A financial adviser has just given you the following advice: “Long-term bonds are a great investment because their interest rate is over 20%.” Is the financial adviser necessarily right?

> What will be the likely effect of the Gramm-LeachBliley Act on financial consolidation?

> If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds?

> If the bank at which you keep your checking account is owned by Saudi Arabians, should you worry that your deposits are less safe than if the bank were owned by Americans?

> How could the approval of international banking facilities (IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe?

> What incentives have regulatory agencies created to encourage international banking? Why have they done this?

> Why has there been such a dramatic increase in bank holding companies?

> “If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today.” Is this statement true, false, or uncertain? Explain your answer.

> Why have banks been losing cost advantages in acquiring funds in recent years?

> How did competitive forces lead to the repeal of the Glass-Steagall Act’s separation of the banking and the securities industries?

> “The invention of the computer is the major factor behind the decline of the banking industry.” Is this statement true, false, or uncertain? Explain your answer.

> Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently selling for $1,150 and has eight years to maturity. What is the bond’s yield to maturity?

> Why have banks been losing income advantages on their assets in recent years?

> Why does imposing bank capital requirements on banks help limit risk taking?

> Do you think that removing the impediments to a nationwide banking system will be beneficial to the economy? Explain.

> What forms does bank supervision take, and how do they promote a safe and sound banking system?

> What special problem do off-balance-sheet activities present to bank regulators, and what have they done about it?

> What are the costs and benefits of a too-big-to-fail policy?

> What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Will they eliminate the moral hazard problem?

> What bank regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work?

> If casualty insurance companies provided fire insurance without restrictions, what kind of adverse selection and moral hazard problems might result?

> A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.

> How could market-value accounting for bank capital requirements (discussed in the first Web appendix to this chapter) benefit the economy? How difficult would it be to implement?

> How could higher deposit insurance premiums for banks with riskier assets benefit the economy?

> How do disclosure requirements help limit excessive risk taking by banks?

> Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?

> What steps were taken in the FhinDICIA legislation of 1991 to improve the functioning of federal deposit insurance?

> Consider a bank with the following balance sheet: Calculate the bank’s risk-weighted assets. Assets Liabilities Required $8 million Checkable $100 million reserves deposits Excess $3 million Bank $6 million reserves capital T-bill

> Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat’s first day.

> Bank regulators force Oldhat to sell its mortgages to recognize the fair market value. What is the accounting transaction? How does this affect its capital position?

> The next day, terrible news hits the mortgage markets, and mortgage rates jump to 13%. What is the market value of Oldhat’s mortgages? What is Oldhat’s “market value” capital ratio?

> Oldhat Financial started its first day of operations with $9 million in capital. $130 million in checkable deposits are received. The bank issues a $25 million commercial loan and another $50 million in mortgages, with the following terms: • Mortgages:

> Calculate the present value of a $1,000 zero-coupon bond with five years to maturity if the yield to maturity is 6%.

> Consider a bank with the following balance sheet: The bank commits to a loan agreement for $10 million to a commercial customer. Calculate the bank’s capital ratio before and after the agreement. Calculate the bank’s

> Consider a failing bank. A deposit of $150,000 is worth how much if the FDIC uses the payoff method? The purchase-and-assumption method? Which is more costly to taxpayers?

> Oldhat borrows $5.5 million in the overnight federal funds market to meet its resources requirement. What is the new balance sheet for Oldhat? How well- capitalized is the bank?

> The bad news about the mortgages is featured in the local newspaper, causing a minor bank run. $6 million in deposits is withdrawn. Examine the bank’s condition after this occurs.

> Oldhat decides to invest the $77 million in excess reserves in commercial loans. What will be the impact on its capital ratio? Its risk-weighted capital ratio?

> Congress allowed Oldhat to amortize the loss over the remaining life of the mortgage. If this technique had been used in the sale, how would the transaction have been recorded? What would be the annual adjustment? What does Oldhat’s balance sheet look li

> Why has noninterest income been growing as a source of bank operating income?

> “Banking has become a more dynamic industry because of more active liability management.” Is this statement true, false, or uncertain? Explain your answer.

> “Bank managers should always seek the highest return possible on their assets.” Is this statement true, false, or uncertain? Explain your answer.

> If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?

> The duration of a $100 million portfolio is 10 years. $40 million in new securities are added to the portfolio, increasing the duration of the portfolio to 12.5 years. What is the duration of the $40 million in new securities?

> Is everybody worse off when interest rates rise?

> Rank the following bank assets from most to least liquid: a. Commercial loans b. Securities c. Reserves d. Physical capital

> What are the benefits and costs for a bank when it decides to increase the amount of its bank capital?

> If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?

> What does the net interest margin measure, and why is it important to bank managers?

> Which components of operating expenses experience the greatest fluctuations? Why?

> Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?

> If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don’t have any excess reserves to loan out? Why or why not? What options are available for yo

> If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?

> If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?

> If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?

> You have paid $980.30 for an 8% coupon bond with a face value of $1,000 that matures in five years. You plan on holding the bond for one year. If you want to earn a 9% rate of return on this investment, what price must you sell the bond for? Is this real

> Why do equity holders care more about ROE than about ROA?

> The balance sheet of TriBank starts with an allowance for loan losses of $1.33 million. During the year, TriBank charges off worthless loans of $0.84 million, recovers $0.22 million on loans previously charged off, and charges current income for a $1.48

> For the upcoming week, Nobel National Bank plans to issue $25 million in mortgages and purchase $100 million in 31-day T-bills. New deposits of $35 million are expected, and other sources will generate $15 million in cash. What is Nobel’s estimate of fun

> X-Bank reported an ROE of 15% and an ROA of 1%. How well capitalized is this bank?

> NewBank also pays off its fed funds borrowed. How much cash is owed? How is this recorded?

> The end of the month finally arrives for NewBank, and it receives all the required payments from its mortgages, commercial loans, and T-bills. How much cash was received? How are these transactions recorded?

> To meet any shortfall in the previous question, NewBank will borrow the cash in the federal funds market. Management decides to borrow the needed funds for the remainder of the month (now 29 days). The required yield on a discount basis is 2.9%. What doe

> On the third day of operations, deposits fall by $5 million. What does the balance sheet look like? Are there any problems?

> NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently trading at $4,986.70 (including commissions) for a $5,000 face value instrument. How many do they purchase? What does the balance sheet look like?

> NewBank started its first day of operations with $6 million in capital. $100 million in checkable deposits is received. The bank issues a $25 million commercial loan and another $25 million in mortgages, with the following terms: • Mortgages: 100 standar