Which factors might be considered by financial market participants who are assessing whether an increase in money supply growth will affect inflation?
> Describe the growing-equity mortgage. How does it differ from a graduated-payment mortgage?
> Describe the graduated-payment mortgage. What type of homeowners would prefer this type of mortgage?
> Explain the use of a balloon-payment mortgage. Why might a financial institution prefer to offer this type of mortgage?
> Why is the 15-year mortgage attractive to homeowners? Is the interest rate risk to the financial institution higher for a 15-year mortgage or a 30-year mortgage? Why?
> Explain why the rescue of Fannie Mae and Freddie Mac improved the ability of mortgage companies to originate mortgages.
> What types of financial institutions finance residential mortgages? What type of financial institution finances the majority of commercial mortgages?
> Explain why some financial institutions prefer to sell the mortgages they originate.
> Describe the factors that affect mortgage prices.
> Identify the relevant characteristics of any security that can affect the security’s yield.
> Mortgage lenders with fixed-rate mortgages should benefit when interest rates decline, yet research has shown that this favorable impact is dampened. By what?
> Distinguish between FHA and conventional mortgages.
> Why does the required rate of return for a particular bond change over time?
> If a bond’s coupon rate is greater than the investor’s required rate of return on the bond, would the bond’s price be greater than or less than its par value? Explain.
> Since fixed-rate mortgages and bonds have similar payment flows, how is a financial institution with a large portfolio of fixed-rate mortgages affected by rising interest rates? Explain.
> How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected by a greater degree than a financial institution with a greater concentration of bonds (and fewer short-term securities)? Explain.
> Many investors that purchased the mortgage-backed securities just before the credit crisis believed that they were misled, because these securities were riskier than they thought. Who was at fault?
> Determine the direction of bond prices over the last year and explain the reason for it.
> Why is the relationship between interest rates and bond prices important to financial institutions?
> Explain the impact of a decline in interest rates on: a. An investor’s required rate of return. b. The present value of existing bonds. c. The prices of existing bonds.
> Assume that oil-producing countries have agreed to reduce their oil production by 30 percent. How would bond prices be affected by this announcement? Explain.
> Discuss why many financial institutions have expanded internationally in recent years. What advantages can be obtained through an international merger of financial institutions?
> Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation? Explain.
> Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.
> What are debentures? How do they differ from subordinated debentures?
> Explain the use of bond collateral and identify the common types of collateral for bonds.
> Explain the use of call provisions on bonds. How can a call provision affect the price of a bond?
> Explain how the credit crisis adversely affected many other people and institutions beyond homeowners and mortgage companies.
> What are protective covenants? Why are they needed?
> Explain the use of a sinking-fund provision. How can it reduce the investor’s risk?
> If bond yields in Japan rise, how might U.S. bond yields be affected? Why?
> Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why?
> Explain how investors’ preferences for commercial paper change during a recession. How would this reaction affect the difference between commercial paper rates and T-bill rates during recessionary periods?
> Explain how the expected interest rate in one year depends on your expectation of economic growth and inflation.
> Why do ratings agencies assign ratings to commercial paper?
> Describe the activity in the secondary T-bill market. How can this degree of activity benefit investors in T-bills? Why might a financial institution sometimes consider T-bills as a potential source of funds?
> How can investors using the primary T-bill market be assured that their bid will be accepted? Why do large corporations typically make competitive bids rather than noncompetitive bids for T-bills?
> You have the choice of investing in top-rated commercial paper or commercial paper that has a lower risk rating. How do you think the risk and return performances of the two investments differ?
> Describe the characteristics of subprime mortgages. Why were mortgage companies aggressively offering subprime mortgages before the credit crisis?
> The maximum maturity of commercial paper is 270 days. Why would a firm issue commercial paper instead of longer-term securities, even if it needs funds for a long period of time?
> Explain how the yield on a foreign money market security would be affected if the foreign currency denominating that security declined to a significant degree.
> Explain how the Treasury uses the primary market to obtain adequate funding from the U.S. government.
> Assume that the Fed’s primary goal is to reduce inflation. How can it achieve its goal? What is a possible adverse effect of such action by the Fed (even if it achieves this goal)?
> Why might the Fed have difficulty in controlling the economy in the manner desired? Be specific.
> Describe a passive monetary policy.
> Explain why interest rates tend to decrease during recessionary periods. Review historical interest rates to determine how they react to recessionary periods. Explain this reaction.
> Describe an active monetary policy.
> Describe the economic tradeoff faced by the Fed in achieving its economic goals.
> Explain how the Fed’s monetary policy could depend on the fiscal policy that is implemented.
> Explain collateralized debt obligations (CDOs).
> Explain why an increase in the money supply can affect interest rates in different ways. Include the potential impact of the money supply on the supply of and the demand for loanable funds when answering this question.
> Describe the Fed’s monetary policy response to the credit crisis that began in 2008.
> How does the Fed’s monetary policy affect economic conditions?
> Explain how the Fed uses open market operations to reduce the money supply.
> What is the purpose of the economic presentations made during a POMC meeting?
> Describe the characteristics that a measure of money should have if it is to be manipulated by the Fed.
> Discuss the relationship between the yield and the liquidity of securities.
> Describe the purpose of the Fed’s lending facility.
> What is the Beige book and why is it important to the FOMC?
> Describe how mortgage-backed securities are used.
> How can the compensation of a firm’s board of directors be structured so that the board will not be tempted to allow accounting or other managerial decisions that could cause a superficially high price over a short period?
> What is the policy directive, and who carries it out?
> Explain how the Fed increases the money supply through open market operations.
> What are the main goals of the Federal Open Market Committee? How does it attempt to achieve these goals?
> As a result of the Financial Reform Act of 2010, the Consumer Financial Protection Bureau was established, and housed within the Federal Reserve. Explain the role of this bureau.
> How might the FOMC statement (issued following the committee's meeting) stabilize financial markets more than if no statement were provided?
> Explain how the Fed's monetary policy may indirectly affect the prices of equity securities.
> Explain how the Fed's monetary policy affects the unemployment level.
> Do you think that large financial institutions should have been rescued by the Fed during the credit crisis?
> Distinguish between primary and secondary markets. Distinguish between money and capital markets.
> Explain how consideration of a liquidity premium affects the estimate of a forward interest rate.
> Explain why a credit crisis in one country may be transmitted to other countries.
> What is the meaning of the forward rate in the context of the term structure of interest rates? Why might forward rates consistently overestimate future interest rates? How could such a bias be avoided?
> How does high credit risk affect the yield on securities?
> Explain the preferred habitat theory.
> If a downward-sloping yield curve is mainly attributed to segmented markets theory, what does that suggest about the demand for and supply of funds in the short-term and long-term maturity markets?
> Why do forecasts of interest rates made by experts differ?
> How can the financial problems of one large bank affect the market’s risk evaluation of other large banks?
> How do economies of scale in banking relate to the issue of interstate banking?
> Explain the “moral hazard” problem as it relates to deposit insurance.
> Given the higher capital requirements imposed on them, why might banks be even more interested in underwriting corporate debt issues?
> Describe highly leveraged transactions (HLTs) and explain why regulators closely monitor a bank’s exposure to HLTs.
> Explain why systemic risk is a source of concern in the bond and other debt markets. Also explain how the Financial Reform Act of 2010 was intended to reduce systemic risk.
> Explain the advantage of a bullet loan.
> How does the yield on a repurchase agreement differ from a loan in the federal funds market? Why?
> Explain the use of the federal funds market in facilitating bank operations.
> How does the money market deposit account differ from other bank sources of funds for banks?
> Compare the main sources and uses of funds for finance companies, insurance companies, and pension funds.
> What are four major sources of funds for banks? Which alternatives does a bank have if it needs temporary funds? What is the most common reason that banks issue bonds?
> Would you expect a bank to charge a higher rate on a term loan or a highly leveraged transaction (HLT) loan? Why?
> Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets (uses of funds).
> Explain the conditions under which a speculator would like to take a speculative position in which it will invest in a foreign currency today, even when the speculator has no use for that currency in the future.
> The Bank of Japan desires to decrease the value of the Japanese yen against the U.S. dollar. How could it use direct intervention to achieve this goal?
> Assume that you maintain bonds and money market securities in your portfolio, and you suddenly believe that long-term interest rates will rise substantially tomorrow (even though the market does not share the same view), while short-term interest rates w
> Assume that Mexico suddenly experiences high and unexpected inflation. How could this affect the value of the Mexican peso according to purchasing power parity (PPP) theory?
> Assume that stocks in the United Kingdom become very attractive to U.S. investors. How could this affect the value of the British pound? Explain.
> Assume that European countries impose a quota on goods imported from the United States, and that the United States does not plan to retaliate. How could this affect the value of the euro? Explain.
> Explain the difference between a freely floating system and a dirty float. Which type is more representative of the United States system?
> How does a weak dollar affect U.S. inflation? Explain.
> With regard to the profit motive, how are credit unions different from other financial institutions?
> North Pier Company entered into a two-year swap agreement, which would provide fixed-rate payments for floating-rate payments. Over the next two years, interest rates declined. Based on these conditions, did North Pier Company benefit from the swap?
