When tensions rise or war erupts in the Middle East, bond prices in many countries tend to decline. What is the link between problems in the Middle East and bond prices? Would you expect bond prices to decline more in Japan or in the United Kingdom as a result of the crisis? (The answer is tied to how interest rates may change in those countries.) Explain.
> 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?
> Why are trading halts sometimes imposed on particular stocks?
> Describe the January effect.
> Explain why investor sentiment can affect stock prices.
> Explain how the value of the dollar affects stock valuations.
> Offer an argument for why a political regime that favors a large government will cause interest rates to be higher. Offer at least one example of why a political regime that favors a large government will cause interest rates to be lower [Hint: Recognize
> How are the interest rate, the required rate of return on a stock, and the valuation of a stock related?
> Describe the dividend discount valuation model. What are some limitations when using this model?
> Explain the difference between weak-form, semistrong-form, and strong-form efficiency. Which of these forms of efficiency is most difficult to test? Which is most likely to be refuted? Explain how to test weak-form efficiency in the stock market.
> In the movie Wall Street, Bud Fox is a broker who conducts trades for Gordon Gekko’s firm. Gekko purchases shares of firms that he believes are undervalued. Various scenes in the movie offer excellent examples of concepts discussed in this chapter. a. B
> Explain how to estimate the beta of a stock. Explain why beta serves as a measure of the stock’s risk.
> Identify the factors that affect a stock portfolio’s volatility and explain their effects.
> Explain the use of the price-earnings (PE) ratio for valuing a stock. Why might investors derive different valuations for a stock when using the price-earnings method? Why might investors derive an inaccurate valuation of a firm when using the price-earn
> What does it mean to “flip” shares? Why would investors want to flip shares?
> Describe a lockup provision and explain why it is required by the lead underwriter.
> Explain the use of a prospectus developed before an IPO. Why does a firm do a road show before its IPO? What factors influence the offer price of stock at the time of the IPO?
> During the credit crisis, U.S. interest rates were extremely low, which enabled businesses to borrow at a low cost. Holding other factors constant, this should have resulted in a higher number of feasible projects, which should have encouraged businesses
> Many financial institutions borrow heavily in the money markets using mortgages and mortgage-backed securities as collateral. Write a short essay about the lessons of the credit crisis to the deficit units and the surplus units that participate in the mo
> Explain the difference between obtaining funds from a venture capital firm and engaging in an IPO. Explain how the IPO may serve as a means by which the venture capital firm can cash out.
> Why do firms engage in IPOs? What is the amount of fees that the lead underwriter and its syndicate charge a firm that is going public? Why are there many IPOs in some periods and few IPOs in other periods?
> What is the danger of issuing too much stock? What is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock?
> Describe how the interaction between buyers and sellers affects the market value of a firm and explain how that value can subject a firm to the market for corporate control.
> How does the initial rate on adjustable rate mortgages (ARMs) differ from the rate on fixed-rate mortgages? Why? Explain how caps on ARMs can affect a financial institution’s exposure to interest rate risk.
> What is the general relationship between mortgage rates and long-term government security rates? Explain how mortgage lenders can be affected by interest rate movements. Also explain how they can insulate themselves against interest rate movements.
> Explain how a mortgage company’s degree of exposure to interest rate risk differs from other financial institutions.
> Compare the secondary market activity for mortgages to the activity for other capital market instruments (such as stocks and bonds). Provide a general explanation for the difference in the activity level.
> Is the price of a long-term bond or the price of a short-term security more sensitive to a change in interest rates? Why?
> Assume that breaking news causes bond portfolio managers to suddenly expect much higher economic growth. How might bond prices be affected by this expectation? Explain. Now assume that breaking news causes bond portfolio managers to suddenly anticipate a
> 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 interest rates will likely increase or decre
> Explain how bond prices may be affected by money supply growth, oil prices, and economic growth.
> An analyst recently suggested that there will be a major economic expansion that will favorably affect the prices of high-rated fixed-rate bonds, because the credit risk of bonds will decline as corporations improve their performance. Assuming that the e
> Explain the concept of bond price elasticity. Would bond price elasticity suggest a higher price sensitivity for zero-coupon bonds or high-coupon bonds that are offering the same yield to maturity? Why? What does this suggest about the market value volat
> Why can convertible bonds be issued by firms at a higher price than other bonds?
> Are variable-rate bonds attractive to investors who expect interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable-rate bonds if it expects interest rates to decrease in the future? Explain.
> What are the advantages and disadvantages to a firm that issues low- or zero-coupon bonds?
> Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors who currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future.
> Explain the conditions that led to the debt crisis in Greece.
> Explain the guidelines for credit rating agencies That resulted from the Financial Reform Act of 2010.
> Explain why financial institutions are highly exposed to systemic risk during a financial crisis.
> Explain how the credit crisis that began in 2008 affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds.
> What is a bond indenture? What is the function of a trustee, with respect to the bond indenture?
> Explain how each of the following would use banker’s acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks, and (d) investors.
> How can small investors participate in investments in negotiable certificates of deposits (NCDs)?
> Who issues commercial paper? Which types of financial institutions issue commercial paper? Why do some firms create a department that can directly place commercial paper? Which criteria affect the decision to create such a department?
> How do you think the shape of the yield curve for commercial paper and other money market instruments compares to the yield curve for Treasury securities? Explain your logic.
> Why do financial market participants closely monitor money supply movements?
> Compare the recognition lag and the implementation lag.
> When does the Fed use a stimulative monetary policy and when does it use a restrictive-monetary policy? What is a criticism of a stimulative monetary policy? What is the risk of using a monetary policy that is too restrictive?
> Explain how the Fed's facility programs improved liquidity in some debt markets.
> Explain how each type of financial institution serves as a financial intermediary.
> Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for homes by consumers?
> Should the Fed or Congress decide the fate of large financial institutions that are near bankruptcy?
> The Fed focuses its control on the federal funds rate, yet indirectly influences many other types of interest rates. Explain.
> Why do the Fed’s open market operations have a different effect on money supply than do transactions between two depository institutions?
> Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks.
> Explain how the Fed’s “quantitative easing” strategies differed from the traditional strategy of buying short-term Treasury securities.
> What was TALF, and why did the Fed create it?
> Why did the Fed purchase long-term Treasury securities in 2010, and how did this strategy differ from the Fed’s usual operations?
> Why and how did the Fed intervene in the commercial paper market during the credit crisis?
> Explain the motivation behind the Fed’s policy of purchasing massive amounts of mortgage-backed securities during the 2008 credit crisis. What could this policy accomplish that its traditional monetary policy might not accomplish?
> Assume that your publicly traded company attempts to be completely transparent about its financial condition, and provides thorough information about its debt, sales, and earnings every quarter. Explain why there still may be much uncertainty surrounding
> What should be the Fed’s role? Should it focus only on monetary policy? Or should it engage in the trading of various types of securities in an attempt to stabilize the financial system when securities markets are suffering from investor fears and the po
> Explain why participating in the eurozone causes a country to give up its independent monetary policy and control over its domestic interest rates.
> Assume an expectation of lower interest rates in the future arises quite suddenly. What would be the effect on the shape of the yield curve? Explain.
> Explain how a yield curve would shift in response to a sudden expectation of rising interest rates, according to the pure expectations theory.
> Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? Do municipal bonds or corporate bonds offer a higher before-tax yield at a given point in time? Why? Which has the higher after-tax yield? If tax
> If the segmented markets theory causes an upward-sloping yield curve, what does this imply? If markets are not completely segmented, should we dismiss the segmented markets theory as even a partial explanation for the term structure of interest rates? Ex
> Why is it important for long-term debt securities to have an active secondary market?
> What is the function of a mutual fund? Why are mutual funds popular among investors? How does a money market mutual fund differ from a stock or bond mutual fund?
> What factors influence the shape of the yield curve? Describe how financial market participants use the yield curve.
> What is the difference between the nominal interest rate and real interest rate? What is the logic behind the implied positive relationship between expected inflation and nominal interest rates?
> Different types of financial institutions commonly interact. Specifically, they may provide loans to each other, and take opposite positions on many different types of financial agreements, whereby one will owe the other based on a specific financial out
> Assume that if the U.S. dollar strengthens, it can place downward pressure on U.S. inflation. Based on this information, how might expectations of a strong dollar affect the demand for loanable funds in the United States and U.S. interest rates? Is there
> If the federal government planned to expand the space program, how might this change affect interest rates?
> Explain why some stocks in the marijuana industry were mis-valued when several states legalized the recreational use of marijuana.
> What are the functions of securities firms? Many securities firms employ brokers and dealers. Distinguish between the functions of a broker and those of a dealer and explain how each type of professional is compensated.
> What type of information do investors rely on in order to determine the proper value of stocks?
> Assume the following information for an existing bond that provides annual coupon payments: Par value = $1,000 Coupon rate = 11% Maturity = 4 years Required rate of return by investors = 11% a. What is the present value of the bond? b. If the required
> Assume that the U.S. economy experienced deflation during the year, and that the consumer price index decreased by 1 percent in the first six months of the year, and by 2 percent during the second six months of the year. If an investor had purchased infl
> An inflation-indexed Treasury bond has a par value of $1,000 and a coupon rate of 6 percent. An investor purchases this bond and holds it for one year. During the year, the consumer price index increases by 1 percent every six months. What are the total
> Montana Bank wants to determine the sensitivity of its stock returns to interest rate movements, based on the following information: Use a regression model in which Montana’s stock return is a function of the stock market return and th
