Question: Support or refute the following statement:

> The pension fund manager of Utterback (a U.S. firm) purchased German 20-year Treasury bonds instead of U.S. 20-year Treasury bonds. The coupon rate was 2 percent lower on the German bonds. Assume that the manager sold the bonds after five years. The yiel

> Give an example of how sovereign risk is related to currency swaps.

> Bowling Green Savings & Loan uses short-term deposits to fund fixed-rate mortgages. Explain how Bowling Green can use interest rate swaps to hedge its interest rate risk.

> Why would a financial institution holding Hinton stock consider buying a put option on that stock rather than simply selling it?

> How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?

> Identify the factors affecting the premium paid on a put option. Describe how each factor affects the size of the premium.

> Identify the factors affecting the premium paid on a call option. Describe how each factor affects the size of the premium.

> Explain the primary use of funds for commercial banks versus savings institutions.

> Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

> Describe the general differences between a call option and a futures contract.

> Why do some financial institutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure?

> A U.S. insurance company purchased British 20-year Treasury bonds instead of U.S. 20-year Treasury bonds because the coupon rate was 2 percentage points higher on the British bonds. Assume that the insurance company sold the bonds after five years. Its y

> Assume a financial institution has more rate-sensitive liabilities than rate-sensitive assets. Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts so

> Assume a financial institution has more rate-sensitive assets than rate-sensitive liabilities. Would it be more likely to be adversely affected by an increase or decrease in interest rates? Should it purchase or sell interest rate futures contracts in or

> Explain how sellers of financial futures contracts can offset their position. How is their gain or loss determined?

> Explain how purchasers of financial futures contracts can offset their position. How is their gain or loss determined? What is the maximum loss to a purchaser of a futures contract?

> Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain.

> Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk.

> How does the price of a financial futures contract change as the market price of the security it represents changes? Why?

> Commercial banks use some funds to purchase securities and other funds to make loans. Why are the securities more marketable than the loans in the secondary market?

> Explain why interest rates changed as they did over the past year.

> What type of general guidelines may be specified for a trust that is managing a pension fund?

> The value of the dollar is monitored by bond market participants over time. a. Explain why expectations of a weak dollar could reduce bond prices in the U.S. b. On some occasions, news of the dollar weakening did not have any impact on bond markets. Ass

> Explain how ERISA affects employees who change employers.

> What is the main purpose of the Pension Benefit Guarantee Corporation (PBGC)?

> Explain the general difference between the portfolio composition of private pension funds and public pension funds.

> How do insurance companies manage credit risk and liquidity risk?

> What is a policy loan? When is it popular? Why?

> How do insurance companies finance the real estate market?

> What are the main assets of life insurance companies? Identify the main categories. What is the main use of funds by life insurance companies?

> Explain group plan life insurance.

> Identify the characteristics of universal life insurance.

> How do whole life and term insurance differ from the perspective of insurance companies? From the perspective of the policyholders?

> Assume that the bond market participants suddenly expect the Fed to substantially increase the money supply. a. Assuming no threat of inflation, how would this expectation affect bond prices? b. Assuming that inflation may result, how would bond prices

> What is the NAIC and what is its purpose?

> What is reinsurance?

> Explain how a life insurance company’s asset portfolio may be affected by inflation.

> Explain the concept of cash flow underwriting.

> How is whole life insurance serve as a form of savings to policyholders?

> Explain why securities firms from the United States have expanded into foreign markets.

> What is a best-efforts agreement?

> Describe the underwriting function of a securities firm.

> Describe the origination process for corporations that are about to issue new stock.

> What is the purpose of the SIPC?

> Explain how the bond market facilitates a government’s fiscal policy. How do you think the bond market could discipline a government and discourage the government from borrowing (and spending) excessively?

> What is asset stripping?

> Explain how the income generated by a mutual fund is taxed when it distributes at least 90 percent of its taxable income to shareholders.

> Explain how changes in foreign currency values can affect the performance of international mutual funds.

> Describe the ideal mutual fund for investors who wish to generate tax-free income but also maintain a low degree of interest rate risk.

> Like mutual funds, commercial banks and stock-owned savings institutions sell shares; yet, proceeds received by mutual funds are used in a different way. Explain.

> Explain the difference between load and no-load mutual funds.

> How do open-end mutual funds differ from closed-end funds?

> Explain the difference between equity REITs and mortgage REITs. Which type would likely be a better hedge against high inflation? Why?

> Explain why some hedge funds failed as a result of the credit crisis of 2008-s009.

> Explain why the market for auction-rate securities suffered in 2008.

> Is the value of a money market fund or a bond fund more susceptible to increasing interest rates? Explain.

> Explain the relative risk of the various types of securities in which a money market fund may invest.

> According to research, have mutual funds outperformed the market? Explain. Would mutual funds be attractive to some investors even if they are not expected to outperform the market? Explain.

> Explain how the interest rate risk of finance companies differs from that of savings institutions.

> Describe the kinds of regulations that are imposed on finance companies.

> Explain how finance companies provide financing through leasing.

> Explain how finance companies benefit from offering consumers a credit card.

> Describe the major uses of funds by finance companies.

> Explain why some finance companies are associated with automobile manufacturers. Why do some of these finance companies offer below-market rates on loans?

> Explain how the credit risk of finance companies differs from that of other lending financial institutions.

> Explain what exchange-traded notes are and how they are used. Why are they risky?

> How might a firm’s board of directors discourage its managers from attempting to manipulate financial statements to create a temporarily high stock price?

> Is the cost of funds obtained by finance companies very sensitive to market interest rate movements? Explain.

> Explain how savings institutions could use interest rate futures to reduce interest rate risk.

> How did the creation of money market deposit accounts influence the savings institution’s overall cost of funds?

> What criteria do regulators use when examining a savings institution?

> How does high economic growth affect an SI?

> What are the alternative forms of ownership of a savings institution?

> Who regulates CUs? What are the regulators’ powers? Where do credit unions obtain deposit insurance?

> Who are the owners of credit unions? Explain the tax status of credit unions and the reason for that status. Why are CUs typically smaller than commercial banks or savings institutions?

> Explain how the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) reduced the perceived risk of savings institutions.

> An insurance company purchased bonds issued by Hartnett Company two years ago. Today, Hartnett Company has begun to issue junk bonds and is using the funds to repurchase most of its existing stock. Why might the market value of those bonds held by the in

> Explain why many savings institutions experience financial problems at the same time.

> Explain why the loan loss provisions of most banks could increase in a particular period.

> What are some of the more common reasons for a bank to experience a low ROA?

> What does the assets/equity ratio of a bank indicate?

> Why have large money center banks’ noninterest income levels typically been higher than those of smaller banks?

> Suppose the net income generated by a bank is equal to 1.5 percent of assets. Based on past experience, would the bank experience a loss or a gain? Explain.

> How could a bank generate higher income before tax (as a percentage of assets) when its net interest margin has decreased?

> What has been the trend in noninterest income in recent years? Explain.

> If a bank shifts its loan policy to pursue more credit card loans, how will its net interest margin be affected?

> What are likely reasons for weak bank performance?

> Merrito Inc. is a large U.S. firm that issued bonds several years ago. Its bond ratings declined over time, and about a year ago, the bonds were rated in the junk bond classification. Yet, investors continued to buy the bonds in the secondary market beca

> Why do you think some banks suffered larger losses during the credit crisis than other banks?

> How can gross interest income rise, while the net interest margin remains somewhat stable for a particular bank?

> Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk?

> What is the formula for the net interest margin? Explain why it is closely monitored by banks.

> If a bank is very uncertain about future interest rates, how might it insulate its future performance from future interest rate movements?

> List some rate-sensitive assets and some rate-insensitive assets of banks.

> If a bank expects interest rates to decrease over time, how might it alter the rate sensitivity of its assets and liabilities?

> How do banks resolve illiquidity problems?

> Given the liquidity advantage of holding Treasury bills, why do banks hold only a relatively small portion of their assets as T-bills?

> Does the use of floating-rate loans eliminate interest rate risk? Explain.

> Explain why investors that provided guarantees on commercial paper were exposed to so much risk during the credit crisis.

> If a bank has more rate-sensitive liabilities than rate-sensitive assets, what will happen to its net interest margin during a period of rising interest rates? During a period of declining interest rates?