SELECTED QUESTIONS ON FINANCIAL MARKETS & INSTITUTIONS

1. 2. Explain financial intermediation and its benefits. Explain how and why the secondary capital markets play an important role in

our economy. How do secondary markets assist the primary market? 3. 4. List and briefly describe the main risks managed by financial intermediaries. Explain how the Central Bank adjusts its balance sheet to increase or

decrease the monetary base. 5. How does the Central bank control the money supply by controlling the size

of the monetary base? Note the tools of monetary policy and how each can affect the monetary base and money supply. 6. What should happen to consumption if the monetary base increases?

Explain. 7. 8. List and briefly describe the channels of transmission of monetary policy. Using loanable funds theory, discuss how changes in consumer savings,

business investment, and in the money supply by the Central Banking System can influence the level of interest rates. 9. Explain how price expectations influence the level of interest rates. What

impact has inflation premiums had on interest rate levels in recent years? 10. Explain why realized real rates of interest are sometimes negative, but

expected real rates are always positive. Give an example.

11.

Calculate the price of a 1000 face value bond, maturing in three years with a

9 percent coupon (paid semiannually) if current real rates of interest are 4 percent, historical inflation rates are 3 percent, and expected inflation rates are 4 percent.

12.

Name and discuss the variables that determine the price or value of a fixed-

rate coupon bond. 13. Name and discuss the factors that must be considered when calculating the

realized rate of return on a bond. 14. What are the relationships between bond price volatility and (a) bond

maturity; (b) coupon rate? 15. Define and discuss interest rate risk. What are the two risk components of

interest rate risk and how do these interact with each other? 16. What is bond duration and what are the implications of holding a bond to its

duration versus holding the bond to maturity? 17. List and discuss five basic factors which explain the differences in interest

rates on different securities at any point in time. 18. Explain how the term structure of interest rates can be used to help forecast

future economic activities. 19. Explain why municipal bonds have lower yields than comparable corporate

taxable bonds. 20. Define the term default risk premium. Why does the "premium" represent

the "expected default loss rate"? Explain how and why default risk premiums vary over the business cycle.

21.

How do bond options such as a call, put, and convertibility influence the

yields on securities relative to bonds without such options? 22. What are the fundamental characteristics of money market debt instruments?

Explain why these characteristics are important to money market participants who are investing and financing. 23. 24. Explain the economic function of money markets. Explain why most short- and long-term interest rates tend to move together

over time. 25. What is a banker's acceptance? Why are bankers acceptances ideally suited

for foreign trade transactions? 26. In the stock market crashes of 1987, 1989, and shortly after September What caused this drop in money market

11th, money market yields dropped. interest rates? Discuss. 27.

Compare and contrast the characteristics of the securities of the money

market with those of the capital market. 28. What might determine whether an individual investor buys corporate or

municipal bonds? Give an example. 29. 30. List and discuss the risks faced by bond investors. What factors have contributed to the increased globalization of bond

markets? 31. Commercial banks and mortgage pools recently overtook thrift institutions as

major investors in mortgages. List and discuss several factors responsible for this change.

32. 33.

Explain the ways in which the federal government fostered the development A change in the rate of an adjustable-rate mortgage can affect the borrower's

of the secondary mortgage markets. mortgage three ways. Discuss 34. Mortgages are now originated, funded, serviced, and insured by different

parties. What developments are associated with this unbundling of loan cash flows in recent years? 35. Explain how a savings and loan manager could use futures or options to

hedge against the possibility that interest rates will rise. 36. 37. 38. Explain how forward and futures markets differ. What determines where a futures buyer or seller is a hedger or a speculator? A portfolio manager, managing a large portfolio of common stocks, has How might it "lock in" the portfolio return with trades in derivative

earned a respectable return by October, and would like to protect that return for the year. securities? 39. Explain why a decline in a country's exchange rate will generally increase the

demand for its goods and reduce its demand for foreign goods. 40. With reference to the concepts and terms related to the International

Payments Flow (balance of payments), under which conditions could a country have a sizable deficit in its trade balance and still have an appreciating currency. 41. List a number of reasons for the increased internationalization of financial

markets in the last two decades.

42.

Why has the bank holding company form of organization been so popular?

43.

What are the major economic differences between bank loans and

investments? Arent both intended to generate profits? 44. What are the major economic differences between deposits and borrowed

funds? Arent both intended to finance loans and investments cost-effectively? 45. 46. How does regulation tax bank assets and liabilities? Why can banks operate with so much more leverage (so much less equity

capital) than ordinary businesses? 47. Banks are more apt to fail than other forms of business. Do you agree?

Discuss. 48. Discuss the concern regarding bank profitability, solvency, and liquidity from How are these similar?

the shareholder, depositor, and regulator perspective. Dissimilar? 49.

Discuss the major sources and use (needs) of bank liquidity. Why do liquidity

and profitability often involve a trade-off? 50. 51. Explain the role that bank secondary reserves play in liquidity management. Define maturity GAP. If interest rates are expected to rise in the future, how

should bank management adjust the GAP between its assets and liabilities? 52. What risks are involved in international lending? What methods do banks

have to reduce these risks? Explain. 53. List the various organizational forms to deliver international banking

services? 54. Explain the rollover pricing feature of LIBOR lending?

55. 56.

List several ways that banks reduce the risks of international lending. What was the primary reason US banks began to develop overseas

operations after World War II? 57. Explain why depository institutions are today the most regulated firms in the

financial services industry. 58. Explain how unexpected increases in interest rates hurt savings institutions.

How would they alter their maturity GAP if they expected interest rates to rise? The issue of defining the common bond among members of credit unions has Why is this issue important to competing

59.

been in the courts and Congress. credit unions? 60.

bankers? To credit unions? Does it have any relationship to the risks faced by

Explain how finance companies and depository institutions might differ in

managing credit risk. 61. 62. Discuss a way in which contractual financial institutions contribute to society. Discuss the intense competitive battle between commercial and investment

banks for corporate client business. Why have investment banks and commercial banks sought to step into each others business? 63. Name and discuss the important procedures involved in bringing a new

security issue to market by an investment banking firm. 64. What are the major services of a full-service investment banking/brokerage

firm? What does each provide for financial investors and funds-seeking firms and governments?

65. firms.

Venture capitalists provide a unique service to developing businesses.

Discuss their services and the organizational structures used by venture capital