Question: McCanna Inc. has hired an investment company

> 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?

> 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.

> 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

> 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?

> 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