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?
> 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 denomination intermediation?
> 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 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
> What factors affect the value of an option?
> What are the three ways an option holder can liquidate his or her position?
> What must happen to the price of the underlying stock for the purchaser of a put option on the stock to make money? How does the writer of the put option make money?
> What must happen to the price of the underlying T-bond futures contract for the purchaser of a call option on T-bond futures to make money? How does the writer of the call option make money?
> What is a derivative security?
> If international capital markets are well integrated and operate efficiently, will FIs be exposed to foreign exchange risk? What are the sources of foreign exchange risk for FIs?
> What are the two primary methods of hedging FX risk for an FI? What conditions are necessary to achieve a perfect hedge through on-balance-sheet hedging? What are the advantages and disadvantages of off-balance-sheet hedging in comparison to on-balance-s
> What motivates FI managers to hedge foreign currency exposures? What are the limitations to hedging foreign currency exposures?
> What is the spot market for FX? What is the forward market for FX? What is the position of being net long in a currency?
> How are foreign exchange markets open 24 hours per day?
> Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of $1,000, and a required rate of return of 8 percent. a. The bond has 10 years remaining to maturity. b. The bond has 15
> How did the Bretton Woods and the Smithsonian Agreements affect the ability of foreign exchange rates to float freely? How did the elimination of exchange boundaries in 1973 affect the ability of foreign exchange rates to float freely?
> A U.S. insurance company invests $1,000,000 in a private placement of British bonds. Each bond pays £300 in interest per year for 20 years. If the current exchange rate is £1.364/$, what is the nature of the insurance company’s exchange rate risk? Specif
> If the Swiss franc is expected to depreciate relative to the U.S. dollar in the near future, would a U.S.-based FI in Bern City prefer to be net long or net short in its asset positions? Discuss.
> Why must the current account balance equal the value of the capital plus financial account balance (in opposite sign)?
> Why has the United States held a trade deficit for most of the 1990s and 2000s? Make sure you distinguish between the imports versus exports of goods and services.
> Explain the concept of interest rate parity. What does this concept imply about the long-run profit opportunities from investing in international markets? What market conditions must prevail for the concept to be valid?
> What is the purchasing power parity theorem?
> What is the implication for cross-border trades if it can be shown that interest rate parity is maintained consistently across different markets and different currencies?
> What are the major foreign exchange trading activities performed by financial institutions?
> What are foreign exchange markets and foreign exchange rates? Why is an understanding of foreign exchange markets important to financial managers and individual investors?
> The Wall Street Journal reports that the rate on four-year Treasury securities is 5.60 percent and the rate on five-year Treasury securities is 6.15 percent. According to the unbiased expectations theory, what does the market expect the one-year Treasury
> What is a market order? What is a limit order? How are each executed?
> What have been the trends in the growth of the major U.S. stock market exchanges?
> Describe the registration process for a new stock issue.
> What is the difference between cumulative and noncumulative preferred stock?
> What is the difference between nonparticipating and participating preferred stock?
> What is a dual-class firm? Why do firms typically issue dual classes of common stock?
> What is meant by the statement “common stockholders have a residual claim on the issuing firm’s assets”?
> What is an ADR? How is an ADR created?
> What are some characteristics associated with dividends paid on common stock?
> You have written a call option on Walmart common stock. The option has an exercise price of $74, and Walmart’s stock currently trades at $72. The option premium is $1.25 per contract. a. How much of the option premium is due to intrinsic value versus tim
> Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return of 10 percent. a. The bond has a 6 percent coupon rate.
> You have taken a long position in a call option on IBM common stock. The option has an exercise price of $176 and IBM’s stock currently trades at $180. The option premium is $5 per contract. a. How much of the option premium is due to intrinsic value ver
> Suppose an investor has a $1 million long position in T-bond futures. The investor’s broker requires a maintenance margin of 4 percent, which is the amount currently in the investor’s account. a. Suppose also that the value of the futures contract drops
> Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 105100. Dudley Savings thinks interest rates will go down over the period of investment. a. Should the bank go long or short on the futures
> Tree Row Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 95-040. Tree Row thinks interest rates will go up over the period of investment. a. Should the bank go long or short on the futures contracts? b.
> Consider the following two financial institutions: Managers of the bank are concerned that interest rates may fall over the next four years, while managers of the savings association are concerned that interest rates may rise over the next four years.
> Suppose you purchase a Treasury bond futures contract at a price of 95 percent of the face value, $100,000. a. What is your obligation when you purchase this futures contract? b. Assume that the Treasury bond futures price falls to 94 percent. What is yo
> Consider the following two financial institutions: Managers of the money center bank are concerned that interest rates may fall over the next four years, while managers of the savings bank are concerned that interest rates may rise over the next four y
> A commercial bank has $200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $200 million of fixed-rate deposits costing 9 percent. A savings bank has $200 million of mortgages with a fixed rate of 13 p
> An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed with $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $50 million of auto loans
> An FI has purchased a $200 million cap of 9 percent at a premium of 0.65 percent of face value. A $200 million floor of 4 percent is also available at a premium of 0.69 percent of face value. a. If interest rates rise to 10 percent, what is the amount r
> Calculate the yield to maturity on the following bonds: a. A 9 percent coupon (paid semiannually) bond, with a $1,000 face value and 15 years remaining to maturity. The bond is selling at $985. b. An 8 percent coupon (paid quarterly) bond, with a $1,000
> A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 percent. The security’s liquidity risk premium is 0.25 percent and maturity risk premium is
