How have money market rates changes since the beginning of the semester? Consider the existing economic conditions. Do you think money market rates will increase or decrease during the semester? Offer some logic to support your answer.
> 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 a portfolio manager, you commonly take short positions in stocks that have a high short interest margin. What is the advantage of focusing on these types of firms? What is a possible disadvantage?
> As a portfolio manager of a financial institution, you are invited to numerous road shows at which firms that are going public promote themselves, and the lead underwriter invites you to invest in the IPO. Beyond any specific information about the firm,
> What is the obvious risk of such a strategy beyond the next year?
> The Fed uses a targeted federal funds rate when implementing monetary policy. However, the Fed's main purpose in its monetary policy is typically to have an impact on the aggregate demand for products and services. Reconcile the Fed's targeted federal fu
> Would the bank’s ROA likely be higher or lower over the next year if it allocates the extra funds to small business loans?
> The bank is considering a strategy of using $1 billion to offer additional loans to small businesses instead of purchasing T-bills. Using all the original assumptions provided, determine the probability distribution of ROA (assume that noninterest expens
> What would be an obvious concern about a strategy of using more one-year NCDs and fewer five-year NCDs beyond the next year?
> Is the bank’s ROA likely to be higher next year if it uses this strategy of attracting more one-year NCDs?
> The bank is considering a strategy of attempting to attract an extra $1 billion in funds in the form of one-year negotiable certificates of deposit, which will replace $1 billion of five-year NCDs. Develop the probability distribution of ROA based on thi
> Now assume that the bank wants to determine how its forecasted return on equity (ROE) next year would be affected by boosting its capital from $1 billion to $1.2 billion. (The extra capital would not be used to increase interest or noninterest revenues.)
> In recent years, private equity funds have grown substantially. Will the creation of private equity funds increase the semi-strong form of market efficiency in the stock market? Explain.
> Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on the current conditions, rec
> What are the consequences to a government in the Euroone when it obtains credit from the ECB?
> Consider the prevailing conditions for inflation (including oil prices), the economy, interest rates, and any other factors that could affect exchange rates. Based on prevailing conditions, do you think the euro’s value will likely appreciate or deprecia
> In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial i
> Back Bay Insurance Company negotiated a callable swap involving fixed payments in exchange for floating payments. Assume that interest rates decline consistently up until the swap maturity date. Do you think Back Bay might terminate the swap prior to mat
> Explain the advantage of a swap option to a financial institution that wants to swap fixed payments for floating payments.
> Bull and Finch Company wants a fixed-for-floating swap. It expects interest rates to rise far above the fixed rate that it would pay and remain very high until the swap maturity date. Should it consider negotiating for a rate-capped swap with the cap set
> Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on prevailing conditions, woul
> Short-term and long-term interest rates are presently very low. You believe that the Fed will use a monetary policy to maintain these interest rates at a very low level. Do you think financial institutions that could be adversely affected by a decline in
> Consider the prevailing conditions for inflation (including oil prices), the economy, the budget deficit, and other conditions that could affect the values of futures contracts. Based on these conditions, would you prefer to buy or sell Treasury bond fut
> Blue Devil Savings and Loan Association has a large number of 10-year fixed-rate mortgages and obtains most of its funds from short-term deposits. It uses the yield curve to assess the market’s anticipation of future interest rates. It believes that expe
> Elon Savings and Loan Association has a large number of 30-year mortgages with floating interest rates that adjust on an annual basis and obtains most of its funds by issuing five-year certificates of deposit. It uses the yield curve to assess the market
> Use a stock valuation framework to explain why the Sarbanes-Oxley Act (SOX) could improve the valuation of a stock. Why might SOX cause a reduction in the valuation of a stock?
> Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on prevailing conditions, do y
> Assume the following conditions. The last time the FOMC met, it decided to raise interest rates. At that time economic growth was very strong, and inflation was relatively high. Since the last meeting, economic growth has weakened, and the unemployment r
> Venture capital firms commonly attempt to cash out as soon as possible following IPOs. Describe the likely effect that would have on the stock price at the time of lockup expiration. Would the effect be different for a firm that relied more heavily on VC
> How have international mutual funds (IMFs) increased the international integration of capital markets among countries?
> Why do you think it is difficult for investors to assess the financial condition of a financial institution that has purchased a large amount of mortgage-backed securities?
> The U.S. Treasury attempted to resolve the credit crisis by establishing a plan to buy mortgage-backed securities held by financial institutions. Explain how the plan could improve the situation for mortgage-backed securities.
> Explain why Fannie Mae and Freddie Mac experienced mortgage problems during the credit crisis.
> Explain the role of credit rating agencies in facilitating the flow of funds from investors into the mortgage market (through mortgage-backed securities).
> Do you think that the U.S. financial system will be able to avoid a credit crisis in the future?
> Explain the problems that arise in valuing MBS.
> How did the repayment of subprime mortgages compare to the repayment of prime mortgages during the credit crisis?
> Consider the prevailing conditions for inflation (including oil prices), the economy, the budget deficit, and the Fed’s monetary policy that could affect interest rates. Based on the prevailing conditions, do you think the values of mortgages that are so
> Assume that the Fed adopts an inflation-targeting strategy. If oil prices rise abruptly by 15 percent in response to an oil shortage, describe how the Fed’s monetary policy would be affected by this situation. Do you think the inflation-targeting strateg
> Explain how the maturity of mortgage-backed securities can be affected by interest rate movements.
> Describe how collateralized mortgage obligations (CMOs) are used and why they have been popular.
> Explain how the prices of bonds were affected by a change in the risk-free rate during the credit crisis that began in 2008. Explain how bond prices were affected by a change in the credit risk premium during the credit crisis.
> Consider the prevailing conditions for inflation (including oil prices), the economy, the budget deficit, and the Fed’s monetary policy that could affect interest rates. Based on these conditions, do you think bond prices will increase or decrease during
> Assume the yield curve experiences a sudden shift, such that the new yield curve is higher and more steeply sloped today than it was yesterday. If a firm issues new bonds today, would its bonds sell for higher or lower prices than if it had issued the bo
> Explain the effects of a stimulative monetary policy on a firm’s cost of capital.
> The Fed’s open market operations can change the money supply, which can affect the risk-free rate offered on bonds. Why might the Fed’s policy also affect the risk premium on corporate bonds?
> When stock market volatility is high, corporate bond yields tend to increase. Which market forces cause the increase in corporate bond yields under these conditions?
> Explain how the credit crisis affected the credit risk premium in the commercial paper market.
> Explain how the bankruptcy of Lehman Brothers (a large securities firm) reduced the liquidity of the commercial paper market.
> Stock market conditions serve as a leading economic indicator. Assuming the U.S. economy is in a recession, what are the implications of this indicator? Why might this indicator be inaccurate?
> Consider a period in which stock prices are very high, such that investors begin to think that stocks are overvalued and their valuations are very uncertain. If investors decide to move their money into much safer investments, how do you think this would
> Assume that interest rates for most maturities are unusually high. Also assume that the net working capital (defined as current assets minus current liabilities) levels of many corporations are relatively low in this period. Explain how the money markets
> Consider the existing economic conditions, including inflation and economic growth. Do you think the Fed should increase interest rates, reduce interest rates, or leave interest rates at their present levels? Offer some logic to support your answer.
> Which factors influence a security’s liquidity?
> Explain the lesson to be learned about the repo market based on the experience of Bear Stearns.
> 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?
