In recent years, many banks are relying more heavily on non-interest income as a proportion of their total income. Write a short essay explaining whether banks that rely more heavily on non-interest income will have better or worse performance than banks that rely more heavily on traditional sources of income (such as loans)?
> A pension fund maintains a large bond portfolio of U.S. bonds. Which of the following would be most appropriate? Sell bond index futures. Buy bond index futures. Remain unhedged. Defend your recommendation.
> Suppose that, instead of reducing the supply of loanable funds in the United States, the event in Singapore increased demand for them. Would your assessment of future interest rates be different? What about your general assessment of economic conditions?
> Assume that you would consider recommending that as much as 20 percent of the funds be invested in foreign debt securities. Revise your prescription to include foreign securities if you desire (identify the type of security and the country).
> A savings institution holds 50 percent of its assets as long-term, fixed rate mortgages. Almost all of its funds are in the form of short-term deposits. Which of the following strategies would be most appropriate for this institution? Use a fixed-for-flo
> Assume that, for diversification purposes, you prescribe that at least 20 percent of an investor’s funds should be allocated to money market securities, 20 percent to bonds, and 20 percent to mortgages. This allows you to allocate freely the remaining 40
> Now use your answer to question 2 along with your answer to question 1 to assess the impact on security prices. Would prices of risky securities be affected more or less than those of risk-free securities with a similar maturity? Why?
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. It has a credit line with a bank in case it suddenly
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Because of its expectations of a strong U.S. economy,
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Expecting a strong U.S. economy, Carson plans to grow
> The interest rate on a one-year loan can be decomposed into a one-year risk-free (free from default risk) component and a risk premium that reflects the potential for default on the loan in that year. A change in economic conditions can affect the risk-f
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on these loans are tied to the six-month Treasury bill rate (and includes a risk premium) and are adjusted every six months. Thus, Ca
> Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Thus, its cost of obtaining funds is sensitive to int
> Carson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and ten other individuals. Over time, Carson Company has obtained subs
> Carson Company has a defined-benefit pension plan in which it offers generous benefits to its employees upon retirement. a. Explain the role of the portfolio managers who manage the pension fund. What is their primary role? b. Explain the tradeoff betwe
> Carson Company is considering a private placement of equity with Secura Insurance Company. a. Explain the interaction between Carson Company and Secura. How will Secura serve Carson’s needs, and how will Carson serve Secura’s needs? b. Why does Carson i
> Recall that Carson Company has periodically borrowed funds, but contemplates a stock or bond offering so that it can expand by acquiring some other businesses. It contacted Kelly Investment Company, an investment bank. a. Explain how Kelly Investment C
> Carson Company is considering a private placement of bonds with Venus Mutual Fund. a. Explain the interaction between Carson and Venus. How would Venus Mutual Fund serve Carson’s needs, and how would Carson serve Venus’s needs? b. Why does Carson intera
> Carson Company has sometimes relied on debt financing from Fente Finance Company. Fente has been willing to lend money even when most commercial banks were not. Fente obtains funding by issuing commercial paper and focuses mostly on channeling the funds
> Rimsa Savings is a savings institution that provided Carson Company with a mortgage for its office building. Rimsa recently offered to refinance the mortgage if Carson Company would prefer a fixed-rate loan rather than an adjustable-rate loan. a. Expla
> In recent years, Carson Company has requested the services listed in part (a) from Blazo Financial, a financial conglomerate. These transactions have created a flow of funds between Carson Company and Blazo. a. Classify each service according to how Bla
> Classify the types of financial institutions mentioned in this chapter as either depository or nondepository. Explain the general difference between depository and nondepository institutions as sources of funds. It is often stated that all types of finan
> Recall that Carson Company relies heavily on commercial banks for loans. When the company was first established with equity funding from its owners, Carson could easily obtain debt financing, because the financing was backed by some of the firm’s assets.
> Carson Company relies heavily on commercial banks for funding and for some other services. a. Explain how the services provided by a commercial bank (just the banking services, not the nonbank services) to Carson may be limited because of bank regulati
> Carson Company is attempting to compare the services offered by different banks, as it would like to have all services provided by one bank. a. Explain how a bank and its financial service subsidiaries can help Carson Company obtain funding so as to expa
> Carson Company expects that it will receive a large order from the government of Spain. If the order occurs, Carson will be paid about 3 million euros. Since all of its expenses are in dollars. Carson would like to hedge this position. Carson has contact
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in produc
> Carson Company would like to acquire Vinnet Inc., a publicly traded firm in the same industry. Vinnet’s stock price is currently much lower than the prices of other firms in the industry, because it operates inefficiently. Carson believes that it could r
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in produc
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in produc
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand for its products. It would need financing to expand and accommodate this
> Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate this increase in production. R
> Offer an argument for why the terrorist attack on the United States on September 11, 2001 could have placed downward pressure on U.S. interest rates. Offer an argument for why those attacks could have placed upward pressure on U.S. interest rates.
> Carson Company currently has a mortgage on its office building through a savings institution. It is attempting to determine whether it should convert its mortgage from an adjustable rate to a fixed rate. Recall that the yield curve is currently upward sl
> If the economy continues to be strong, Carson Company may need to increase its production capacity by approximately 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall
> If the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall that th
> During a financial crisis, liquidity in financial markets declines dramatically, and many surplus units no longer participate in financial markets. Nevertheless, if the markets are efficient, securities prices should decline due to existing economic cond
> The key components of a market interest rate are the risk-free rate and the credit risk premium. During a credit crisis, these two components may change substantially, but in different ways. Write a short essay that describes how the risk-free rate and t
> Given your knowledge of how interest rates are influenced by various factors reflecting the demand for funds and the supply of funds available in the credit markets, write a short essay to explain how and why interest rates will change over the next thre
> Write a short essay explaining why there is so much uncertainty surrounding the valuation of a firm that is engaged in an IPO. Why do you think some investors overvalue firms at the time of their IPO?
> Many critics argue that greed in the mortgage markets caused the credit crisis. Yet, many market advocates suggest that greed is good, as the thirst for profits by firms that participate in mortgage markets allows for economic growth. Write a short essay
> The credit crisis was caused by the mortgage market, yet it had a serious impact on bond markets. Write a short essay on how the bond market was affected and offer your opinion on how the bond market may attempt to insulate itself from a credit crisis in
> The Fed intervened heavily in the credit crisis. Write a short essay explaining whether you believe the Fed’s intervention improved conditions in financial markets or made conditions worse.
> War tends to cause significant reactions in financial markets. Why might a war in the Middle East place upward pressure on U.S. interest rates? Why might some investors expect a war like this to place downward pressure on U.S. interest rates?
> Consider a state pension fund that needs to generate a series of fixed payments for its retirees. Yet, assume that its compensation for its portfolio managers is tied to the return earned on the investments each year. Write a short essay that explains ho
> Consider a life insurance company that needs to ensure that it can make a steady stream of payments over time to beneficiaries of its policyholders. Assume that the compensation for the insurance company’s portfolio managers is tied to the return earned
> Should large securities firms be allowed to be independent and insulated from bank regulation, or should they be required to register as bank holding companies, and subject to bank regulations? Write a short essay that supports your opinion.
> A critic recently claimed that hedge funds cause market volatility to increase when they publicize (and document) that a public corporation exaggerated its earnings. The critic argued that hedge funds should not be allowed to make such public statements
> Write a short essay on the future of finance company operations? Should finance companies be merged into the banking industry, or should they remain distinctly different from commercial banks?
> Write a short essay on the future of thrift operations? Should they be merged into the banking industry, or should they remain distinctly different from commercial banks?
> Some bank managers argue that U.S. bank’s access to capital is restricted because the capital requirements imposed by U.S. regulators are too high. Write a short essay that can offer logical insight into why high capital requirements may restrict a bank’
> The Volcker Rule is intended to prevent banks from engaging in proprietary trading. Write a short essay offering your opinion on whether banks should be allowed to engage in proprietary trading.
> During the credit crisis in the 2008-2009 period, banks were criticized for restricting their credit. Write a short essay to explain why you think banks should or should not be allowed to restrict their credit during the credit crisis.
> Why might you expect the interest rate movements of various industrialized countries to be more highly correlated in recent years than they were in earlier years?
> Recently, a government official in Europe stated that the European Central Bank needs to weaken the euro so as to improve the European economy. Write a short essay that explains the logic behind this recommendation, and state whether you believe the stra
> A critic recently mentioned that the creation of credit default swaps caused the credit crisis in the 2008-2009 period. Write a short essay that supports or refutes this statement.
> An investment newsletter suggests that because the prevailing stock market conditions are subject to much uncertainty, investors should purchase call options on the CBOE volatility index (VIX). Write a short essay on the logic behind how the valuation of
> Explain the motivation of hedge funds to rely on expert networks in recent years.
> Explain the difference between how equity mutual funds generate returns for their investors, versus how private equity funds generate returns for their investors. Which fund do you think would be more capable of capitalizing on a weak publicly traded fir
> Money that had previously been invested by individual and institutional investors in stocks is now being invested in private equity funds. Explain why this should result in improved business conditions.
> Explain why hedge funds may be able to achieve higher returns for their investors than mutual funds do. Explain why the risk of hedge funds may differ from mutual funds. When the market is overvalued, why might hedge funds be better able to capitalize on
> Compare the portfolio managers of closed-end funds with an open-end fund. Given the differences in the fund characteristics, explain why the portfolio manager’s management of liquidity is different in the open-end fund as compared with the closed-end fun
> Dakota Bank has a branch overseas with the following balance sheet characteristics: 50 percent of the liabilities are rate sensitive and denominated in Swiss francs; the remaining 50 percent of liabilities are rate insensitive and are denominated in doll
> Oregon Bank has branches overseas that concentrate in short-term deposits in dollars and floating-rate loans in British pounds. Because it maintains rate-sensitive assets and liabilities of equal amounts, the bank believes it has essentially eliminated i
> How might expectations of higher prices in the U.S. affect the demand for loanable funds, the supply of loanable funds, and interest rates in the U.S.? Offer a logical explanation of why such an impact on interest rates in the U.S. might spread to other
> Explain the possible signal that would be transmitted to the market if a country abandoned its use of the euro.
> Assume a horizontal yield curve exists. How do you think the yield curve would be affected if foreign investors in short-term securities and long-term securities suddenly anticipate that the value of the dollar will strengthen? (You may find it helpful t
> Explain how the Financial Reform Act of 2010 and the rules issued to implement it attempted to reduce the risk in the financial system resulting from the use of credit default swaps.
> Explain why the failures of Lehman Brothers caused prices on credit default swap contracts to increase.
> Credit default swaps were once viewed as a great innovation could make mortgage markets more stable. However, the swaps were sometimes criticized for making the credit crisis worse. Why?
> Rider Company negotiates a forward swap to begin two years from now, in which it will swap fixed payments for floating-rate payments. What will be the effect on Rider if interest rates rise substantially over the next two years? That is, would Rider be b
> How would you interpret a large increase in the CBOE volatility index (VIX)? Explain why the VIX increased substantially during the credit crisis that began in 2008.
> The price of Garner stock is $40. There is also a call option on Garner stock that is at the money, with a premium of $2.00. There is a put option on Garner stock that is at the money, with a premium of $1.80. Why would investors consider writing this ca
> Three savings and loan institutions (S&Ls) have identical balance sheet compositions: a high concentration of short-term deposits that are used to provide long-term, fixed-rate mortgages. The S&Ls took the following positions one year ago. Assum
> Explain how and why high frequency trading affects spreads.
> Assume a savings institution has a large number of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements? Would futures or options on fu
> Explain how some high frequency traders used a form of front running to capitalize on faster access to specific markets.
> Describe the Flash Crash on May 6, 2010 and explain why it caused so much concern to investors and regulators.
> Explain the strategy of high frequency trading firms. Describe the typical time horizon of an investment that is relevant to high frequency traders, and how that varies from other institutional investors.
> Explain how the Galleon Fund case led to stronger enforcement against insider trading.
> Describe inside information as applied to the trading of stocks. Why is it illegal to trade based on inside information? Describe the evidence that suggests some investors use inside information.
> What are dark pools? How can they help investors accumulate shares without other investors knowing about the trades? Why are dark pools criticized by public stock exchanges? Explain the strategy used by public stock exchanges to compete with dark pools.
> Why did the SEC impose a temporary ban on short sales of specific stocks in 2008? Do you think a ban on short selling is effective?
> Your friend just told you about a penny stock that he purchased, which increased in price from $0.10 to $0.50 per share. You start investigating penny stocks, and after conducting a large amount of research, you find a stock with a quoted price of $0.05.
> Explain how foreign stock exchanges have reduced transactions costs.
> Explain why participants in the stock market monitor the VIX index. What does a decline in VIX imply about a change in expected volatility by market participants?
> Write a short essay explaining how financial futures might reduce systemic risk, and how financial futures might increase systemic risk within financial markets.
> Should an accounting firm be prohibited from offering both auditing services and consulting services to the same client? Explain your answer. If an accounting firm offered only one service, could there still be conflicts of interest due to referrals (and
> The calculations in PERT allow you to determine the probability that as project will be completed. Suppose you calculate that the probability a project will be completed by a target deadline is only 0.25. What steps might you take if you were the project
> Crashing in the Critical Path Method (CPM) assumes that the cost of crashing an activity is linearly proportional to the amount of time the activity is crashed; that is, the rate of cost increase is constant (see Exhibit 19.12). Is this a reason- able as
> Find an application of project management in your own life (e.g., in your home, fraternity, or business organization). List the activities and events that comprise the project, and draw the precedence network. What problems did you encounter in doing thi
> Develop a small example consisting of no more than ten activities and illustrate the ideas, rules, and mechanics of forward and backward passes through the project network to compute the critical path.
> Perhaps the most well-known software for project management is Microsoft Project™. Investigate its capabilities and write a short paper (two pages maximum) that describes its features.
> The local chapter of the Project Management Institute is planning a dinner meeting with a nationally known speaker, and you are responsible for organizing it. How could the methodology discussed in this chapter help you?
> Research and write a short paper (two pages maximum) on the skills needed to be a successful project manager.
> Exhibit 19.2 lists a number of impediments to project success. How might you minimize or eliminate these impediments?
> Identify at least five additional examples of projects that are not cited in this chapter.
> Prepare a job profile for a newspaper or on-line advertisement for a project manager.
> Provide examples of perishable inventory. How does fresh fruit differ from a concert seat even though both are perishable?
> Marta Tompkins, a graduate in industrial engineering from Purdue University, was excited. She had accepted a new job in South Carolina as the Operations & Logistics manager at Kempfer Furniture, Incorporated. Marta had work for Honda Manufactur
> Research and write a short paper on the impact of global supply chains on JIT.
