How did the Financial Reform Act of 2010 change the reserve requirements of the FDIC’s Deposit Insurance Fund?
> 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.
> 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
> 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?
> 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.
> Assume that Switzerland has a very strong economy, placing upward pressure on both its inflation and interest rates. Explain how these conditions could place pressure on the value of the Swiss franc and determine whether the franc’s value will rise or fa
> Explain how foreign exchange derivatives could be used by U.S. speculators to speculate on the expected appreciation of the Japanese yen.
> Assume that the yield curves in the United States, France, and Japan are flat. If the U.S. yield curve suddenly becomes so positively sloped, do you think the yield curves in France and Japan would be affected? If so, how?
> Explain the exchange rate system that existed during the 1950s and 1960s. How did the Smithsonian Agreement in 1971 revise it? How does today’s exchange rate system differ from the earlier system?
> Explain how the failure of a large commercial bank could cause a worldwide swap credit crisis.
> Explain how an equity swap could allow Marathon Insurance Company to capitalize on expectations of a strong stock market performance over the next year without altering its existing portfolio mix of stocks and bonds.
> Describe the possible roles of securities firms in the swap market.
> Explain the types of cash flow characteristics that would cause a firm to hedge interest rate risk by swapping floating-rate payments for fixed payments. Why would some firms avoid the use of interest rate swaps, even when they are highly exposed to int
> Explain why some companies that issue bonds engage in currency swaps. Why do they not simply issue bonds in the currency that they would prefer to use for making payments?
> Explain why some companies that issue bonds engage in interest rate swaps in financial markets. Why do they not simply issue bonds that require the type of payments (fixed or variable) that they prefer to make?
> Explain basis risk as it relates to a currency swap.
> Markus Company purchases supplies from France once a year. Would Markus be favorably affected if it establishes a currency swap arrangement and the dollar strengthens? What if it establishes a currency swap arrangement and the dollar weakens?
> Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?
> If liquidity and interest rate expectations are both important for explaining the shape of a yield curve, what does a flat yield curve indicate about the market’s perception of future interest rates?
> How do speculators use put options? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?
> How do speculators use call options? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?
> Describe a put option on interest rate futures. How does it differ from selling a futures contract?
> Explain the use of circuit breakers.
> Explain systemic risk as it relates to the futures market. Explain how the Financial Reform Act of 2010 attempted to improve the monitoring of systemic risk in the futures market and other markets.
> Describe stock index futures. How could they be used by a financial institution that is anticipating a jump in stock prices but does not yet have sufficient funds to purchase large amounts of stock? Explain why stock index futures may reflect investor ex
> How might a savings and loan association use Treasury bond futures to hedge its fixed-rate mortgage portfolio (assuming that its main source of funds is short-term deposits)? Explain how prepayments on mortgages can limit the effectiveness of the hedge.
> Describe the practice of cross hedging and explain when this strategy might be used.
> Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?
> Explain how circuit breakers are used to reduce the likelihood of a large stock market crash.
> Use the loanable funds framework to explain how European economic conditions might affect U.S. interest rates.
> Explain how the Securities and Exchange Commission attempts to prevent violations of SEC regulations.
> Briefly describe the structure and role of the Securities and Exchange Commission (SEC).
> What are electronic communication networks (ECNs)?
> Describe the roles of market makers.
> Under what conditions might investors consider short selling a specific stock?
> Explain how margin requirements can affect the potential return and risk from investing in a stock. What is the maintenance margin?
