If the market price for bonds is higher than the equilibrium price, what is the result, and what will change to bring about equilibrium as price falls, ceteris paribus?
> what is the relationship between the principle–agent problem in corporate governance and the moral hazard problem?
> Which government regulatory agency was created, in great part, to help overcome the adverse selection problem in equity markets?
> It is often stated that “we live in an information age,” yet the adverse selection problem still exists. Why?
> How does the existence of “free riders” help to perpetuate the adverse selection problem?
> Akerlof changed the conditions of perfect competition by adding in what factor that often occurs in real life?
> Many automobile insurance policies require a deductible to be paid by the insured. A deductible is a tool to help control for which problem?
> CarMax offers a solution to the lemons problem in the used car market. What other ways might the lemons problem be resolved?
> The assumption that the stock market reflects all information, both public and private, is referred to as:
> Some people argue that the rise of behavioral finance raises questions about the level of efficiency in the stock market. Explain this argument.
> In an “import substitutions” policy, what is being substituted for imports?
> The IMF and World Bank often are described as “sister organizations.” One could say they are “sisters” in that they are very similar yet also very different. Explain this argument.
> Few argue with the idea that the policies the IMF suggests are sound long-term policies. Yet critics believe these sound long-term policies are the wrong policies for the IMF to be suggesting. Explain the critics’ argument.
> Why did the IMF suffer from “mission creep”?
> How did the “closing of the gold window” in 1971 affect how the IMF operates?
> How and why did the International Monetary Fund attempt to end “beggar-thy-neighbor” policies?
> How does the World Bank get its funds?
> Today much of the regulation of depository institutions occurs at the federal level. How is the insurance industry different?
> Why was Robert McNamara’s tenure at the World Bank so controversial?
> Greg is a bit confused about the creation of the World Bank. Explain to Greg how and why the World Bank was created.
> Which of the following is not a condition for countries to be considered an optimal currency area?
> Would you consider the United States to be an optimal currency area? Why or why not? Yes, due to the following:
> How can a fixed exchange rate regime be used to build the credibility of a central bank?
> Which of the following explain why exchange rates may “overshoot”?
> The currency board exchange rate regime worked well for Hong Kong. Why did currency boards not work so well for other countries?
> The target zone exchange rate regime held promise because it was designed to be flexible yet stable. Why did the target zone regime not work as well as planned?
> In an unsterilized exchange rate intervention, if a central bank wants to push down the value of its currency in the foreign exchange market, it ___________ its own currency, causing the monetary base in its country to ___________.
> Why does the crawling peg exchange rate regime often not work as planned?
> Andrew is a bit confused about risk. In his investments class he learned about risk when purchasing a financial asset, and he thinks that is the same as risk when buying automobile insurance. How would you explain to Andrew the differences between differ
> Why might a central bank want to “sterilize” its exchange rate intervention?
> Joel is confused about what “efficient stock market” means. How would you explain this concept to Joel?
> The S&P 500 Index is different from the Dow Jones Industrial Average in that:
> Why do stock market analysts need to be able to “predict” macroeconomic changes?
> Harry is an old-time investor. He tells you, “When I was young I was told the Dow Jones Industrial Average tells you everything you need to know about how the stock market is doing. Is that still true?” How would you answer Harry’s question?
> According to the Gordon growth model, a stock with an expected dividend payment of $10 next year and an expected growth rate of dividends of 4% should sell at what price if the investor’s discount rate or required rate of return is 6%?
> Steven is very excited. He just found out that the stock he is about to buy has the lowest PE ratio of the stocks of similar firms. Why is he happy? How would you explain to him why he might not want to be so happy?
> Explain in words how the time value of money is related to the price of stocks.
> IPOs take place in which of the following equity markets?
> Crusty is an old-time investor who has not kept up with the changing structure of financial markets. How would you explain to Crusty how the differences between over the counter and stock exchanges have changed over the past 40 years?
> The FOMC meets to decide which of the following?
> Austin has some money saved and is thinking about buying some corporate stock. He can’t decide whether he should buy common stock or preferred stock. What things should affect his decision?
> While Akerlof described adverse selection in the used car market, can you think of how adverse selection might arise in the labor market? Or even in dating?
> If the ex- ante real interest rate is less than the ex post real interest rate, which of the following happened?
> Explain why rapid changes in the rate of inflation, as well as inflationary expectations, make business investment decisions difficult.
> Explain why businesspeople should use the real interest rate instead of the nominal interest rate when making economic decisions.
> you read in the financial press that the recent flight to quality is reversing. What will happen in the bond market?
> Offer an explanation to someone with no training in economics for why the yield on US government bonds is used as a substitute for the risk-free rate.
> Firms borrowing in developing countries such as Brazil often have to pay a higher default risk premium, ceteris paribus, than similar firms borrowing in the United States. Explain why this is the case.
> The Federal Reserve Bank of New York has a great deal of influence over financial markets to this very day. Yet the New York Fed is not as powerful as many wanted it to be in the early part of the twentieth century. Explain why the New York Fed is today
> When the Fed was created, one of its main purposes was to maintain the gold standard. What does this mean?
> Private equity funds often earn high returns on their investments, in part because the interest that must be paid on debt issued by their portfolio firms can be used to reduce the amount of federal income tax the portfolio firms must pay. This is often r
> You read in the financial press that the economy of Finland is sliding into a recession. What will happen in the bond market and the loanable funds market in Finland, ceteris paribus?
> Robyn is an entrepreneur, and she is looking for a private equity firm to make an equity investment in her firm. How can Robyn tell the difference between the dumb money and smart money that various private equity firms are offering?
> Why do general partners in private equity funds pay such a low rate of tax on the income they generate?
> People who operate private equity funds can receive very high levels of compensation if the fund is able to sell its portfolio firms for a much higher price than what it paid for and invested in them. This return that is paid to the operators of private
> “Waterfalls are pretty things in nature; it is water falling off a cliff. But how do they function in private equity?” asks your friend. How do you answer this question?
> Sandy is confused about the terminology used in the private equity industry. How would you explain to her the differences between a limited partner and general partner in private equity?
> During what time periods did the size of investment banks change?
> Explain why so many people see a “revolving door” between the investment banking industry and the entities designed to regulate and oversee it.
> Rodney does not understand how investment banks work. In the Abacus case, Rodney assumes Goldman Sachs would lose money since the value of assets in Abacus declined drastically. How would you explain to Rodney how Goldman Sachs actually made money on Aba
> Your friend Cynthia works at an investment bank and tells you she is going on a “roadshow.” What will Cynthia be doing?
> Explain how proprietary, or prop, trading, when done by investment banks, can result in the bank’s customers becoming the bank’s competition.
> Explain why a change in the demand for loanable funds may not change the supply of bonds.
> The voting structure of the FOMC means that the Fed governors have more votes than the Federal Reserve bank presidents. Why do you think this is the case?
> David is a bit confused as to what investment banks do. For example, he has heard of insurance underwriters, but David can’t seem to understand what underwriting has to do with investment banks. How would you explain investment banking underwriting to Da
> You read in the financial press that market participants expect stock prices to increase dramatically in the near future, while at the same time business confidence is increasing. Explain in words and show graphically what will happen in the bond market
> If a three-year bond with a $1,000 face value has a coupon rate of 3.5%, and the current market interest rate is 2%, what is the market price of the bond?
> How did DIDMCA and the Garn-St. Germain Act cause more problems for Savings & Loans than they solved?
> Which of the following explain why Ronald Reagan and Paul Volcker agreed on economic policy?
> In the twenty-first century Paul Volcker is greatly respected, yet during the early 1980s he was one of the most disliked people in America. Why was Paul Volcker so disliked in the early 1980s? Why do you think so many people changed their opinion of him
> Explain why changes in the demand for bonds change the supply of loanable funds.
> A money market transaction in which one party sells a financial asset with the agreement to buy it back in the future is called:
> How might a firm use the issuance of commercial paper as a way to deal with its seasonal fluctuations in sales?
> Explain how the Federal Reserve paying interest on deposits created a floor in the federal funds market.
> Which of the following is not a characteristic of a Treasury Bill auction?
> Why do the DRY and the IRY result in different values? Explain why this difference, even though seemingly small, can be very important.
> Assume you are going to buy a 90-day Treasury bill with a face value of $1,000 for a price of $944. Calculate the DRY, or discount rate yield. Also calculate the IRY, or investment return yield.
> Which of the following is not a characteristic of money market instruments?
> Johanna is an institutional investor who is looking to “park” some of her investment funds for a short time. How would you explain to Johanna why money market instruments might be useful for her?
> Explain why the money market is really not “a market for money.”
> During times of crises, funds can flow from long-term debt markets to shorter term debt markets. This is often referred to as a:
> Explain, in words and graphically, how the financial crisis that started in the United States led to a worldwide flight to quality.
> Explain, in words and graphically, how private borrowers such as Harley-Davidson are negatively affected by a flight to quality.
> Which of the following correctly describes the role of the bond-rating agencies in the subprime mortgage asset bubble?
> Explain why some argue the “issuer pays” model creates a conflict of interest.
> Initially, bond ratings were paid for by the bond purchaser. Today bonding ratings are under an “issuer pays” model. Explain how the two forms are different.
> A convertible bond allows for a bond to be converted into what at a future date?
> Why do bonds have sinking funds? How are they different from a call provision?
> Jenny is considering purchasing a bond, but she notices that the bond has many covenants. She is unsure what they mean. How would you explain these covenants to Jenny?
> Sunita wants to earn the highest possible after-tax return on her savings. She has two options: a corporate bond and a tax-free government bond. The corporate bond yields 5%, and Sunita is in the 25% marginal tax bracket. What equivalent tax-free rate w
> Shoma is thinking about buying a municipal bond. She notices some are revenue bonds, whereas others are general obligation bonds, but she does not understand what these are. How would you explain this to Shoma?
> During the Reagan Administration in the 1980s, while the US government was running large government budget deficits, the rest of the world was also bringing large amounts of their savings to the United States. Using the loanable funds framework, explain
> Explain how TIPS, or Treasury inflation-protected securities, actually protect investors from inflation.
> Explain why economists in the 1960s were so perplexed about why stagflation had occurred.
> If the ECB is pursuing an expansionary monetary policy, it will do which of the following?
> Explain how the European Central Bank’s interest payments on the deposits commercial banks have at the ECB provides an interest rate floor for the interbank lending rate.
> The European Central Bank uses reserve transactions in its version of open market operations. Explain to someone with no training in economics what reserve transactions are.
> Monetization of public debt often leads to which economic problem?
> President Abraham Lincoln funded the Union Army during the Civil War by a “monetization of public debt.” What did Lincoln do?
> Explain why Keynes thought monetary policy during the Great Depression was like “pushing on a string.” Was it similar during the Great Recession of 2008–2009? Why or why not?
> Fred is holding on to cash because he thinks interest rates will increase in the future and thus bond prices will decrease, making the future a good time to buy bonds. Keynes would say Fred is holding on to cash as part of which type of demand for money?
