What is meant by denomination intermediation?
> Calculate the future value in five years of $5,000 received today if your investments pay a. 6 percent compounded annually b. 8 percent compounded annually c. 10 percent compounded annually d. 10 percent compounded semiannually e. 10 percent compounded q
> What are capital markets, and how do bond markets fit into the definition of capital markets?
> Describe the two types of fed funds transactions.
> What are federal funds? How are they recorded on the balance sheets of commercial banks?
> How are T-bills traded in secondary markets?
> What is the difference between a competitive bid and a noncompetitive bid in a T-bill auction?
> Describe the T-bill auction process.
> What is the difference between a single-payment yield and a bond equivalent yield?
> Why can discount yields not generally be compared to yields on other (nondiscount) securities?
> What are Eurodollar CDs and Eurocommercial paper?
> What is the difference between a discount yield and a bond equivalent yield? Which yield is used for Treasury bill quotes?
> You can buy commercial paper of a major U.S. corporation for $498,000. The paper has a face value of $500,000 and is 45 days from maturity. Calculate the discount yield and bond equivalent yield on the commercial paper.
> Describe the issues regarding the validity of the LIBOR rate before and during the financial crisis.
> Who are the major issuers of and investors in money market securities?
> Describe the process by which a banker’s acceptance is created.
> What is the process through which negotiable CDs are issued?
> What factors caused the amount of outstanding commercial paper to increase from 1992 through 2000 and in the mid-2000s? What factors caused the amount of outstanding commercial paper to decrease from 2000 through 2004 and from 2007 through 2013?
> Why do commercial paper issuers almost always obtain a rating of their issues?
> Why do commercial paper issues have an original maturity of 270 days or less?
> Describe the trading process for repurchase agreements.
> What is the difference between a repurchase agreement and a reverse repurchase agreement?
> What is the primary risk of trading in the fed funds markets? How did this risk come into play during the financial crisis of 2008–2009?
> A T-bill that is 225 days from maturity is selling for $98,850. The T-bill has a face value of $100,000. a. Calculate the discount yield, bond equivalent yield, and EAR on the T-bill. b. Calculate the discount yield, bond equivalent yield, and EAR on th
> What are the three characteristics common to money market securities?
> Why did U.S. government agency securities go from nothing to being the largest asset account on the Federal Reserve’s balance sheet in the late 2000s?
> Why did reserve deposits increase to the point that this account represented the largest liability account on the Federal Reserve’s balance sheet in the late 2000s?
> What are the major liabilities of the Federal Reserve System? Describe each.
> What are the primary responsibilities of the Federal Open Market Committee?
> What are the primary responsibilities of the Federal Reserve Board?
> Describe the structure of the Board of Governors of the Federal Reserve System.
> Define the discount rate and the discount window.
> Summarize the monetary policy measures taken by central banks to address the worldwide financial crisis.
> Describe how expansionary activities conducted by the Federal Reserve impact the money supply, credit availability, interest rates, and security prices. Do the same for contractionary activities.
> Marly Bank currently has $650 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 9 percent. a. Show the balance sheet of the Federal Reserve and M
> Suppose the Federal Reserve instructs the Trading Desk to sell $850 million of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial banks.
> Which of the monetary tools available to the Federal Reserve is most often used? Why?
> What changes did the Fed implement to its discount window lending policy in the early 2000s? in the late 2000s?
> Why does the Federal Reserve rarely use the discount rate to implement its monetary policy?
> Explain how a decrease in the discount rate affects credit availability and the money supply.
> What are the tools used by the Federal Reserve to implement monetary policy?
> Describe the functions performed by Federal Reserve Banks.
> How is duration related to the price elasticity of a fixed income security? What is the relationship between duration and the price of a fixed-income security?
> Which has the longest duration: a 30-year, 8 percent yield to maturity, 5 percent coupon bond or a 30-year, 10 percent yield to maturity, 5 percent coupon bond?
> How did the boom in the housing market in the early and mid-2000s exacerbate FIs’ transition away from their role as specialists in risk measurement and management?
> What events resulted in banks’ shift from the traditional banking model of originate-and-hold to a model of originate-and-distribute?
> On March 11, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows: 1 R 1 = 4.75%, 1 R 2 = 4.95%, 1 R 3 = 5.25%, 1 R 4 = 5.65% Using the unbiased expectations
> Why are FIs regulated?
> What types of risks do FIs face?
> What other services do FIs provide to the financial system?
> What is meant by maturity intermediation?
> How do financial institutions help individuals diversify their portfolio risks? Which financial institution is best able to achieve this goal?
> How do FIs alleviate the problem of liquidity and price risk faced by investors wishing to invest in securities of corporations?
> What is the relationship between present values and interest rates as interest rates increase?
> What is the relation between the coupon rate on a bond and its duration?
> How does the liquidity premium theory of the term structure of interest rates differ from the unbiased expectations theory? In a normal economic environment, that is, an upward-sloping yield curve, what is the relationship of liquidity premiums for succe
> Brown Bank currently has $350 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is increasing this requirement to 11 percent. a. Show the balance sheet of the Federal Reserve and
> What are the major assets of the Federal Reserve System? Describe each.
> All else equal, which bond’s price is more affected by a change in interest rates, a short-term bond or a long-term bond? Why?
> What happens to the fair present value of a bond when the required rate of return on the bond increases?
> How does equity valuation differ from bond valuation?
> What is the difference between a zero-coupon bond and a coupon bond?
> How does the location of money markets differ from that of capital markets?
> What is the relation between the expected rate of return and the required rate of return as they pertain to the fair market price and the current market price of a security?
> What is the difference between a required rate of return and an expected rate of return?
> What is meant by an off-balance-sheet activity? What are some of the forces responsible for them?
> How does the liability maturity structure of a bank’s balance sheet compare with the maturity structure of the asset portfolio? What risks are created or intensified by these differences?
> Repeat parts (a) through (c) of Problem 13 using a required rate of return on the bond of 11 percent. What do your calculations imply about the relation between time to maturity and bond price volatility? Data from Problem 13: Calculate the fair presen
> What are the three major segments of deposit funding? How are these segments changing over time? Why? What strategic impact do these changes have on the profitable operation of a bank?
> What type of transaction accounts do commercial banks issue? Which type of accounts have dominated the transaction accounts of banks?
> What are the principal liabilities for commercial banks? What does this liability structure tell us about the maturity of the liabilities of banks? What types of risks does this liability structure entail for commercial banks?
> Why do commercial banks hold investment securities?
> What are the principal types of financial assets for commercial banks? How has the relative importance of these assets changed over the past several decades? What are some of the forces that have caused these changes? What are the primary types of risk a
> What are the advantages and disadvantages of international expansion?
> For each of the following banking organizations, identify which regulatory agencies (OCC, FRB, FDIC, or state banking commission) may have some regulatory supervision responsibility. a. State-chartered, nonmember, non–holding company bank b. State-charte
> What are the major functions performed by the FDIC?
> Who are the major regulators of commercial banks? Which banks does each agency regulate?
> Which commercial banks are experiencing the highest profitability? Which commercial banks are experiencing the lowest profitability?
> Repeat parts (a) through (c) of Problem 11 using a required rate of return on the bond of 8 percent. What do your calculations imply about the relation between the coupon rates and bond price volatility? Data from Problem 11: Calculate the fair present
> How has the performance of the commercial banking industry changed in the last 30 years?
> What are the major sources of funds for commercial banks in the United States? What are the major uses of funds for commercial banks in the United States? For each of your answers, specify where the item appears on the balance sheet of a typical commerci
> Compare and contrast the profitability ratios (ROE and ROA) of banks with assets below and above $100 million in Figure 11–7 from 1990 through 2016. What conclusions can you derive from those numbers? Figure 11–7:
> How do small bank activities differ from large bank activities?
> What are the differences between community banks, regional banks, and money center banks? Contrast the business activities, locations, and markets of each of these bank groups.
> What is a money center bank and a regional bank?
> What challenges have been made to the commercial banking industry by nonbanks?
> The following balance sheet accounts (in millions of dollars) have been taken from the annual report for a U.S. bank. Arrange the accounts in balance sheet order and determine the value of total assets. Based on the balance sheet structure, would you cla
> What are the main off-balance-sheet activities undertaken by commercial banks?
> What types of activities are normally classified as off- balance-sheet (OBS) activities? a. How does an OBS activity move onto the balance sheet as an asset or liability? b. What are the benefits of OBS activities to a bank? c. What are the risks of OBS
> A $1,000 par value bond with five years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much will the
> How does one distinguish between an off-balance-sheet asset and an off-balance-sheet liability?
> What is the difference between a call option and a put option?
> What is an option? How does an option differ from a forward or futures contract?
> Refer to Table 10–4. a. If you think five-year Treasury note prices will fall between August 3, 2016, and December 2016, what type of futures position would you take? b. If you think inflation in Japan will increase by more than that in
> What is the purpose of requiring a margin on a futures or option transaction? What is the difference between an initial margin and a maintenance margin?
> What are the functions of floor brokers and professional traders on the futures exchanges?
> What are the differences between a cap, a floor, and a collar? When would a firm enter any of these derivative security positions?
> What are the differences among a spot contract, a forward contract, and a futures contract?
> Which party is the swap buyer and which is the swap seller in an interest rate swap transaction?
> Who are the major regulators of futures and options markets?
> Based on economists’ forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium theory, plot the current yield curve. Make sure you
