【免费下载】第一章为何学习金融市场与机构(英文习题及答案)

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Chap001 金融机构习题解答

Chapter OneWhy Are Financial Intermediaries Special?Chapter OutlineIntroductionFinancial Intermediaries’ Specialness•Information Costs•Liquidity and Price Risk•Other Special ServicesOther Aspects of Specialness•The Transmission of Monetary Policy•Credit Allocation•Intergenerational Wealth Transfers or Time Intermediation•Payment Services•Denomination IntermediationSpecialness and Regulation•Safety and Soundness Regulation•Monetary Policy Regulation•Credit Allocation Regulation•Consumer Protection Regulation•Investor Protection Regulation•Entry RegulationThe Changing Dynamics of Specialness•Trends in the United States•Future Trends•Global IssuesSummarySolutions for End-of-Chapter Questions and Problems: Chapter One1. Identify and briefly explain the five risks common to financial institutions.Default or credit risk of assets, interest rate risk caused by maturity mismatches between assets and liabilities, liability withdrawal or liquidity risk, underwriting risk, and operating cost risks. 2. Explain how economic transactions between household savers of funds and corporate usersof funds would occur in a world without financial intermediaries (FIs).In a world without FIs the users of corporate funds in the economy would have to approach directly the household savers of funds in order to satisfy their borrowing needs. This process would be extremely costly because of the up-front information costs faced by potential lenders. Cost inefficiencies would arise with the identification of potential borrowers, the pooling of small savings into loans of sufficient size to finance corporate activities, and the assessment of risk and investment opportunities. Moreover, lenders would have to monitor the activities of borrowers over each loan's life span. The net result would be an imperfect allocation of resources in an economy.3. Identify and explain three economic disincentives that probably would dampen the flow offunds between household savers of funds and corporate users of funds in an economicworld without financial intermediaries.Investors generally are averse to purchasing securities directly because of (a) monitoring costs, (b) liquidity costs, and (c) price risk. Monitoring the activities of borrowers requires extensive time, expense, and expertise. As a result, households would prefer to leave this activity to others, and by definition, the resulting lack of monitoring would increase the riskiness of investing in corporate debt and equity markets. The long-term nature of corporate equity and debt would likely eliminate at least a portion of those households willing to lend money, as the preference of many for near-cash liquidity would dominate the extra returns which may be available. Third, the price risk of transactions on the secondary markets would increase without the information flows and services generated by high volume.4. Identify and explain the two functions in which FIs may specialize that enable the smoothflow of funds from household savers to corporate users.FIs serve as conduits between users and savers of funds by providing a brokerage function andby engaging in the asset transformation function. The brokerage function can benefit both savers and users of funds and can vary according to the firm. FIs may provide only transaction services, such as discount brokerages, or they also may offer advisory services which help reduce information costs, such as full-line firms like Merrill Lynch. The asset transformation function is accomplished by issuing their own securities, such as deposits and insurance policies that are more attractive to household savers, and using the proceeds to purchase the primary securities of corporations. Thus, FIs take on the costs associated with the purchase of securities.5. In what sense are the financial claims of FIs considered secondary securities, while thefinancial claims of commercial corporations are considered primary securities? How does the transformation process, or intermediation, reduce the risk, or economic disincentives, to the savers?The funds raised by the financial claims issued by commercial corporations are used to invest in real assets. These financial claims, which are considered primary securities, are purchased by FIs whose financial claims therefore are considered secondary securities. Savers who invest in the financial claims of FIs are indirectly investing in the primary securities of commercial corporations. However, the information gathering and evaluation expenses, monitoring expenses, liquidity costs, and price risk of placing the investments directly with the commercial corporation are reduced because of the efficiencies of the FI.6. Explain how financial institutions act as delegated monitors. What secondary benefitsoften accrue to the entire financial system because of this monitoring process?By putting excess funds into financial institutions, individual investors give to the FIs the responsibility of deciding who should receive the money and of ensuring that the money is utilized properly by the borrower. In this sense the depositors have delegated the FI to act as a monitor on their behalf. The FI can collect information more efficiently than individual investors. Further, the FI can utilize this information to create new products, such as commercial loans, that continually update the information pool. This more frequent monitoring process sends important informational signals to other participants in the market, a process that reduces information imperfection and asymmetry between the ultimate sources and users of funds in the economy.7. What are five general areas of FI specialness that are caused by providing various servicesto sectors of the economy?First, FIs collect and process information more efficiently than individual savers. Second, FIs provide secondary claims to household savers which often have better liquidity characteristics than primary securities such as equities and bonds. Third, by diversifying the asset base FIs provide secondary securities with lower price-risk conditions than primary securities. Fourth, FIs provide economies of scale in transaction costs because assets are purchased in larger amounts. Finally, FIs provide maturity intermediation to the economy which allows the introduction of additional types of investment contracts, such as mortgage loans, that are financed with short-term deposits.8. How do FIs solve the information and related agency costs when household savers investdirectly in securities issued by corporations? What are agency costs?Agency costs occur when owners or managers take actions that are not in the best interests of the equity investor or lender. These costs typically result from the failure to adequately monitor the activities of the borrower. If no other lender performs these tasks, the lender is subject to agency costs as the firm may not satisfy the covenants in the lending agreement. Because the FI invests the funds of many small savers, the FI has a greater incentive to collect information and monitor the activities of the borrower.9. What often is the benefit to the lenders, borrowers, and financial markets in general of thesolution to the information problem provided by the large financial institutions?One benefit to the solution process is the development of new secondary securities that allow even further improvements in the monitoring process. An example is the bank loan that is renewed more quickly than long-term debt. The renewal process updates the financial and operating information of the firm more frequently, thereby reducing the need for restrictive bond covenants that may be difficult and costly to implement.10. How do FIs alleviate the problem of liquidity risk faced by investors who wish to invest inthe securities of corporations?Liquidity risk occurs when savers are not able to sell their securities on demand. Commercial banks, for example, offer deposits that can be withdrawn at any time. Yet the banks make long-term loans or invest in illiquid assets because they are able to diversify their portfolios and better monitor the performance of firms that have borrowed or issued securities. Thus individual investors are able to realize the benefits of investing in primary assets without accepting the liquidity risk of direct investment.11. How do financial institutions help individual savers diversify their portfolio risks? Whichtype of financial institution is best able to achieve this goal?Money placed in any financial institution will result in a claim on a more diversified portfolio. Banks lend money to many different types of corporate, consumer, and government customers, and insurance companies have investments in many different types of assets. Investment in a mutual fund may generate the greatest diversification benefit because of the fund’s investment ina wide array of stocks and fixed income securities.12. How can financial institutions invest in high-risk assets with funding provided by low-riskliabilities from savers?Diversification of risk occurs with investments in assets that are not perfectly positively correlated. One result of extensive diversification is that the average risk of the asset base of an FI will be less than the average risk of the individual assets in which it has invested. Thus individual investors realize some of the returns of high-risk assets without accepting the corresponding risk characteristics.13. How can individual savers use financial institutions to reduce the transaction costs ofinvesting in financial assets?By pooling the assets of many small investors, FIs can gain economies of scale in transaction costs. This benefit occurs whether the FI is lending to a corporate or retail customer, or purchasing assets in the money and capital markets. In either case, operating activities that are designed to deal in large volumes typically are more efficient than those activities designed for small volumes.14. What is maturity intermediation? What are some of the ways in which the risks of maturityintermediation are managed by financial intermediaries?If net borrowers and net lenders have different optimal time horizons, FIs can service both sectors by matching their asset and liability maturities through on- and off-balance sheet hedging activities and flexible access to the financial markets. For example, the FI can offer the relatively short-term liabilities desired by households and also satisfy the demand for long-term loans such as home mortgages. By investing in a portfolio of long-and short-term assets that have variable- and fixed-rate components, the FI can reduce maturity risk exposure by utilizing liabilities that have similar variable- and fixed-rate characteristics, or by using futures, options, swaps, and other derivative products.15. What are five areas of institution-specific FI specialness, and which types of institutions aremost likely to be the service providers?First, commercial banks and other depository institutions are key players for the transmission of monetary policy from the central bank to the rest of the economy. Second, specific FIs often are identified as the major source of finance for certain sectors of the economy. For example, S&Ls and savings banks traditionally serve the credit needs of the residential real estate market. Third, life insurance and pension funds commonly are encouraged to provide mechanisms to transfer wealth across generations. Fourth, depository institutions efficiently provide payment services to benefit the economy. Finally, mutual funds provide denomination intermediation by allowing small investors to purchase pieces of assets with large minimum sizes such as negotiable CDs and commercial paper issues.16. How do depository institutions such as commercial banks assist in the implementation andtransmission of monetary policy?The Federal Reserve Board can involve directly the commercial banks in the implementation of monetary policy through changes in the reserve requirements and the discount rate. The open market sale and purchase of Treasury securities by the Fed involves the banks in the implementation of monetary policy in a less direct manner.17. What is meant by credit allocation regulation? What social benefit is this type of regulationintended to provide?Credit allocation regulation refers to the requirement faced by FIs to lend to certain sectors of the economy, which are considered to be socially important. These may include housing and farming. Presumably the provision of credit to make houses more affordable or farms more viable leads to a more stable and productive society.18. Which intermediaries best fulfill the intergenerational wealth transfer function? What isthis wealth transfer process?Life insurance and pension funds often receive special taxation relief and other subsidies to assist in the transfer of wealth from one generation to another. In effect, the wealth transfer processallows the accumulation of wealth by one generation to be transferred directly to one or more younger generations by establishing life insurance policies and trust provisions in pension plans. Often this wealth transfer process avoids the full marginal tax treatment that a direct payment would incur.19. What are two of the most important payment services provided by financial institutions?To what extent do these services efficiently provide benefits to the economy?The two most important payment services are check clearing and wire transfer services. Any breakdown in these systems would produce gridlock in the payment system with resulting harmful effects to the economy at both the domestic and potentially the international level.20. What is denomination intermediation? How do FIs assist in this process? Denomination intermediation is the process whereby small investors are able to purchase pieces of assets that normally are sold only in large denominations. Individual savers often invest small amounts in mutual funds. The mutual funds pool these small amounts and purchase negotiable CDs which can only be sold in minimum increments of $100,000, but which often are sold in million dollar packages. Similarly, commercial paper often is sold only in minimum amounts of $250,000. Therefore small investors can benefit in the returns and low risk which these assets typically offer.21. What is negative externality? In what ways do the existence of negative externalities justifythe extra regulatory attention received by financial institutions?A negative externality refers to the action by one party that has an adverse affect on some third party who is not part of the original transaction. For example, in an industrial setting, smoke from a factory that lowers surrounding property values may be viewed as a negative externality. For financial institutions, one concern is the contagion effect that can arise when the failure of one FI can cast doubt on the solvency of other institutions in that industry.22. If financial markets operated perfectly and costlessly, would there be a need for financialintermediaries?To a certain extent, financial intermediation exists because of financial market imperfections. If information is available costlessly to all participants, savers would not need intermediaries to act as either their brokers or their delegated monitors. However, if there are social benefits to intermediation, such as the transmission of monetary policy or credit allocation, then FIs would exist even in the absence of financial market imperfections.23. What is mortgage redlining?Mortgage redlining occurs when a lender specifically defines a geographic area in which it refuses to make any loans. The term arose because of the area often was outlined on a map with a red pencil.24. Why are FIs among the most regulated sectors in the world? When is net regulatoryburden positive?FIs are required to enhance the efficient operation of the economy. Successful financial intermediaries provide sources of financing that fund economic growth opportunity that ultimately raises the overall level of economic activity. Moreover, successful financial intermediaries provide transaction services to the economy that facilitate trade and wealth accumulation.Conversely, distressed FIs create negative externalities for the entire economy. That is, the adverse impact of an FI failure is greater than just the loss to shareholders and other private claimants on the FI's assets. For example, the local market suffers if an FI fails and other FIs also may be thrown into financial distress by a contagion effect. Therefore, since some of the costs of the failure of an FI are generally borne by society at large, the government intervenes in the management of these institutions to protect society's interests. This intervention takes the form of regulation.However, the need for regulation to minimize social costs may impose private costs to the firms that would not exist without regulation. This additional private cost is defined as a net regulatory burden. Examples include the cost of holding excess capital and/or excess reserves and the extra costs of providing information. Although they may be socially beneficial, these costs add to private operating costs. To the extent that these additional costs help to avoid negative externalities and to ensure the smooth and efficient operation of the economy, the net regulatory burden is positive.25. What forms of protection and regulation do regulators of FIs impose to ensure their safetyand soundness?Regulators have issued several guidelines to insure the safety and soundness of FIs:a. FIs are required to diversify their assets. For example, banks cannot lend more than 10percent of their equity to a single borrower.b. FIs are required to maintain minimum amounts of capital to cushion any unexpected losses.In the case of banks, the Basle standards require a minimum core and supplementarycapital of 8 percent of their risk-adjusted assets.c. Regulators have set up guaranty funds such as BIF for commercial banks, SIPC forsecurities firms, and state guaranty funds for insurance firms to protect individual investors.d. Regulators also engage in periodic monitoring and surveillance, such as on-siteexaminations, and request periodic information from the FIs.26. In the transmission of monetary policy, what is the difference between inside money andoutside money? How does the Federal Reserve Board try to control the amount of inside money? How can this regulatory position create a cost for the depository financialinstitutions?Outside money is that part of the money supply directly produced and controlled by the Fed, for example, coins and currency. Inside money refers to bank deposits not directly controlled by the Fed. The Fed can influence this amount of money by reserve requirement and discount rate policies. In cases where the level of required reserves exceeds the level considered optimal by the FI, the inability to use the excess reserves to generate revenue may be considered a tax or cost of providing intermediation.27. What are some examples of credit allocation regulation? How can this attempt to createsocial benefits create costs to the private institution?The qualified thrift lender test (QTL) requires thrifts to hold 65 percent of their assets in residential mortgage-related assets to retain the thrift charter. Some states have enacted usury laws that place maximum restrictions on the interest rates that can be charged on mortgagesand/or consumer loans. These types of restrictions often create additional operating costs to the FI and almost certainly reduce the amount of profit that could be realized without such regulation.28. What is the purpose of the Home Mortgage Disclosure Act? What are the social benefitsdesired from the legislation? How does the implementation of this legislation create a net regulatory burden on financial institutions?The HMDA was passed by Congress to prevent discrimination in mortgage lending. The social benefit is to ensure that everyone who qualifies financially is provided the opportunity to purchase a house should they so desire. The regulatory burden has been to require a written statement indicating the reasons why credit was or was not granted. Since 1990, the federal regulators have examined millions of mortgage transactions from more than 7,700 institutions each calendar quarter.29. What legislation has been passed specifically to protect investors who use investmentbanks directly or indirectly to purchase securities? Give some examples of the types ofabuses for which protection is provided.The Securities Acts of 1933 and 1934 and the Investment Company Act of 1940 were passed by Congress to protect investors against possible abuses such as insider trading, lack of disclosure, outright malfeasance, and breach of fiduciary responsibilities.30. How do regulations regarding barriers to entry and the scope of permitted activities affectthe charter value of financial institutions?The profitability of existing firms will be increased as the direct and indirect costs of establishing competition increase. Direct costs include the actual physical and financial costs of establishing a business. In the case of FIs, the financial costs include raising the necessary minimum capitalto receive a charter. Indirect costs include permission from regulatory authorities to receive a charter. Again in the case of FIs this cost involves acceptable leadership to the regulators. As these barriers to entry are stronger, the charter value for existing firms will be higher.31. What reasons have been given for the growth of investment companies at the expense of“traditional” banks and insurance companies?The recent growth of investment companies can be attributed to two major factors:a. Investors have demanded increased access to direct securities markets. Investmentcompanies and pension funds allow investors to take positions in direct securities markets while still obtaining the risk diversification, monitoring, and transactional efficiencybenefits of financial intermediation. Some experts would argue that this growth is theresult of increased sophistication on the part of investors; others would argue that theability to use these markets has caused the increased investor awareness. The growth in these assets is inarguable.b. Recent episodes of financial distress in both the banking and insurance industries have ledto an increase in regulation and governmental oversight, thereby increasing the netregulatory burden of “traditional” companies. As such, the costs of intermediation have increased, which increases the cost of providing services to customers.32. What are some of the methods which banking organizations have employed to reduce thenet regulatory burden? What has been the effect on profitability?Through regulatory changes, FIs have begun changing the mix of business products offered to individual users and providers of funds. For example, banks have acquired mutual funds, have expanded their asset and pension fund management businesses, and have increased the security underwriting activities. In addition, legislation that allows banks to establish branches anywhere in the United States has caused a wave of mergers. As the size of banks has grown, an expansion of possible product offerings has created the potential for lower service costs. Finally, the emphasis in recent years has been on products that generate increases in fee income, and the entire banking industry has benefited from increased profitability in recent years.33. What characteristics of financial products are necessary for financial markets to becomeefficient alternatives to financial intermediaries? Can you give some examples of thecommoditization of products which were previously the sole property of financialinstitutions?Financial markets can replace FIs in the delivery of products that (1) have standardized terms, (2) serve a large number of customers, and (3) are sufficiently understood for investors to be comfortable in assessing their prices. When these three characteristics are met, the products often can be treated as commodities. One example of this process is the migration of over-the-counter options to the publicly traded option markets as trading volume grows and trading terms become standardized.34. In what way has Regulation 144A of the Securities and Exchange Commission provided anincentive to the process of financial disintermediation?Changing technology and a reduction in information costs are rapidly changing the nature of financial transactions, enabling savers to access issuers of securities directly. Section 144A of the SEC is a recent regulatory change that will facilitate the process of disintermediation. The private placement of bonds and equities directly by the issuing firm is an example of a product that historically has been the domain of investment bankers. Although historically private placement assets had restrictions against trading, regulators have given permission for these assets to trade among large investors who have assets of more than $100 million. As the market grows, this minimum asset size restriction may be reduced.。

金融市场与机构课后习题答案.doc

Chapter 1Role of Financial Markets and InstitutionsQuestions1. Explain the meaning of surplus units and deficit units. Provide an example of each.ANSWER: Surplus units provide funds to the financial markets while deficit units obtain funds from the financial markets. Surplus units include households with savings, while deficit units include firms or government agencies that borrow funds.2. Distinguish between primary and secondary markets.ANSWER: Primary markets are used for the issuance of new securities while secondary markets are used for the trading of existing securities.3. Distinguish between money and capital markets.ANSWER: Money markets facilitate the trading of short-term (money market) instruments while capital markets facilitate the trading of long-term (capital market) instruments.4. Distinguish between perfect and imperfect security markets.ANSWER: With perfect financial markets, all information about any securities for sale would be freely available to investors, information about surplus and deficit units would be freely available, and all securities could be unbundled into any size desired. In reality, markets are imperfect, so that surplus and deficit units do not have free access to information, and securities can not be unbundled as desired.5. Explain why the existence of imperfect markets creates a need for financial institutions.ANSWER: Financial intermediaries are needed to facilitate the exchange of funds between surplus and deficit units. They have the information to provide this service and can even repackage deposits to provide the amount of funds borrowers desire.6. Explain the meaning of efficient markets. Why might we expect markets to be efficient most of thetime?ANSWER: If markets are efficient then prices of securities available in these markets properly reflect all information. We should expect markets to be efficient because if they weren't, investors would capitalize on the discrepancy between what prices are and what they should be. This action would force market prices to represent the appropriate prices as perceived by the market.7. In recent years, several securities firms have been guilty of using inside information when purchasingsecurities, thereby achieving returns well above the norm (even when accounting for risk). Does this suggest that the security markets are not efficient? Explain.ANSWER: Efficiency is often defined with regard to publicly available information. In this case, markets can be efficient, but investors with inside information could possibly outperform the market on a consistent basis. A stronger version of efficiency would hypothesize that even access to inside information will not consistently outperform the market.12 Chapter 1/Role of Financial Markets and Institutions8. What was the purpose of the Securities Act of 1933? What was the purpose of the SecuritiesExchange Act of 1934? Do these laws prevent investors from making poor investment decisions?Explain.ANSWER: The Securities Act of 1933 was intended to assure complete disclosure of relevantfinancial information on publicly offered securities, and prevent fraudulent practices when selling these securities. The Securities Exchange Act of 1934 extended the disclosure requirements tosecondary market issues. It also declared a variety of deceptive practices illegal, but does not prevent poor investments.9. If barriers to international securities markets are reduced, will a country's interest rate be more or lesssusceptible to foreign lending or borrowing activities? Explain.ANSWER: If international securities market barriers are reduced, a country's interest rate will likely become more susceptible to foreign lending and borrowing activities. Without barriers, funds will flow more freely in between countries. Funds would seek out countries where expected returns are high. Then, the amount of foreign funds invested in any country could adjust abruptly and affect interest rates.10. In what way could the international flow of funds cause a decline in interest rates?ANSWER: If a large volume of foreign funds was invested in the United States, it could placedownward pressure on U.S. interest rates. Without this supply of foreign funds, U.S. interest rates would have been higher.11. Distinguish between the functions of a broker and those of a dealer, and explain how each iscompensated.ANSWER: Brokers are commonly compensated with commissions on trades, while dealers are compensated on their positions in particular securities. Some dealers also provide brokerage services.12. Why is it necessary for securities to be somewhat standardized?ANSWER: Securities can be more easily traded when they are standardized because the specifics of the security transaction are well known. If securities were not standardized, transactions would be slowed considerably as participants would have to negotiate all the provisions.13. What are the functions of securities firms?ANSWER: Securities firms provide a variety of functions (such as underwriting and brokerage) that either enhance a borrower's ability to borrow funds or an investor’s abi lity to invest funds.14. Explain why some financial flows of funds cannot occur through the sale of standardized securities.ANSWER: Some financial flows, such as most commercial loans, must be provided on a personal basis, since the firms requesting loans have particular needs.15. If securities were not standardized, how would this affect the volume of financial transactionsconducted by brokers?ANSWER: If securities were not standardized, the volume of financial transactions conducted by brokers would be reduced, because the documentation would be greater.16. Commercial banks use some funds to purchase securities and other funds to make loans. Why are thesecurities more marketable than loans in the secondary market?ANSWER: Securities are more standardized than loans and therefore can be more easily sold in the secondary market. The excessive documentation on commercial loans limits a bank's ability to sell loans in the secondary market.17. How have the asset compositions of savings and loan associations differed from those of commercialbanks? Explain why and how this distinction may change over time.ANSWER: Savings and loan associations have traditionally concentrated in mortgage lending, while commercial banks have concentrated in commercial lending. Savings and loan associations are nowChapter 1/Role of Financial Markets and Institutions 3 allowed to diversify their asset portfolio to a greater degree and will likely increase theirconcentration in commercial loans (but not to the same degree as commercial banks.18. With regard to the profit motive, how are credit unions different from other financial institutions?ANSWER: Credit unions are non-profit financial institutions.19. Compare the main sources and uses of funds for finance companies, insurance companies, andpension funds.ANSWER: Finance companies sell securities to obtain funds, while insurance companies receive insurance premiums and pension funds receive employee/employer contributions. Finance companies use funds to provide direct loans to consumers and businesses. Insurance companies and pension funds purchase securities.20. What is the function of a mutual fund? Why are mutual funds popular among investors?ANSWER: A mutual fund sells shares to investors, pools the funds, and invests the funds in aportfolio of securities. Mutual funds are popular because they can help individuals diversify while using professional expertise to make investment decisions.21. How does a money market mutual fund differ from a stock or bond mutual fund?ANSWER: A money market mutual fund invests in money market securities, whereas other mutual funds normally invest in stocks or bonds.22. Classify the types of financial institutions mentioned in this chapter as either depository ornondepository. Explain the general difference between depository and nondepository institution sources of funds.ANSWER: Depository institutions include commercial banks, savings and loan associations, and credit unions. These institutions differ from nondepository institutions in that they accept deposits.Nondepository institutions include finance companies, insurance companies, pension funds, mutual funds, and money market funds.23. It is often stated that all types of financial institutions have begun to offer services that werepreviously offered only by certain types. Consequently, many financial institutions are becoming more similar in terms of their operations. Yet, the performance levels still differ significantly among types of financial institutions. Why?ANSWER: Even though financial institutions are becoming more similar, they often differ distinctly from each other in terms of sources and uses of funds. Therefore, their performance levels differ as well.24. Look in a recent business periodical for news about a recent financial transaction that involves twofinancial institutions. For this transaction, determine the following:a. How will each institution's balance sheet be affected?b. Will either institution receive immediate income from the transaction?c. Who is the ultimate user of funds?d. Who is the ultimate source of funds?ANSWER: This exercise will force students to understand how the balance sheet and incomestatement of a financial institution is affected by various transactions. When a financial institution simply acts as a middleman, income (fees or commissions) are earned, but the institution's asset portfolio is not significantly affected.25. Which types of financial institutions do you deal with? Explain whether you are acting as a surplusunit or a deficit unit in your relationship with each financial institution.ANSWER: This exercise allows students to realize that they constantly interact with financialinstitutions, and that they often play the role of a deficit unit (on car loans, tuition loans, etc.).4 Chapter 1/Role of Financial Markets and Institutions26. Explain how the privatization of companies in Europe can lead to the development of new securitiesmarkets.ANSWER: The privatization of companies will force these companies to finance with stocks and debt securities, instead of relying on the federal government for funds. Consequently, secondary markets for stocks and debt securities will be developed over time.Chapter 2Determination of Interest RatesQuestions1.Explain why interest rates changed as they did over the past year.ANSWER: This exercise should force students to consider how the factors that influence interest rates have changed over the last year, and assess how these changes could have affected interest rates.2. Explain what is meant by interest elasticity.ANSWER: Interest elasticity of supply represents a change in the quantity of loanable funds supplied in response to a change in interest rates. Interest elasticity of demand represents a change in thequantity of loanable funds demanded in response to a change in interest rates.3. Would you expect federal government demand for loanable funds to be more or less interest elasticthan household demand for loanable funds? Why?ANSWER: Federal government demand for loanable funds should be less interest elastic than the consumer demand for loanable funds, because the government's planned borrowings will likely occur regardless of the interest rate. Conversely, the quantity of loanable funds by consumers is moreresponsive to the interest rate level.4. If the federal government planned to expand the space program, how might this affect interest rates?ANSWER: An expanded space program would (a) force the federal government to increase its budget deficit, (b) possibly force any firms involved in facilitating the program to borrow more funds.Consequently, there is a greater demand for loanable funds. The additional spending could cause higher income and additional saving. Yet, this impact is not likely to be as great. The likely overall impact would therefore be upward pressure on interest rates.5. Explain why interest rates tend to decrease during recessionary periods.ANSWER: During a recession, firms and consumers reduce their amount of borrowing. The demand for loanable funds decreases and interest rates decrease as a result.6. Obtain or develop forecasts of economic growth and inflation. Use this information to forecastinterest rates one year from now.ANSWER: Open-ended question, intended to illustrate the ease of subjectively creating forecasts, but the difficulty in deciding the appropriate weight to be assigned to each influential factor.7. Jayhawk Forecasting Services analyzed several factors that could affect interest rates in the future.Most factors were expected to place downward pressure on interest rates. Jayhawk also felt that although the annual budget deficit was to be cut by 40 percent from the previous year, it would stillChapter 1/Role of Financial Markets and Institutions 5 be very large. Thus, Jayhawk believed that the deficit's impact would more than offset the othereffects and therefore forecast interest rates to increase by 2 percent. Comment on Jayhawk's logic.ANSWER: A reduction in the deficit should free up some funds that had been used to support the government borrowings. Thus, there should be additional funds available to satisfy other borrowing needs. Given this situation plus the other information, Jayhawk should have forecasted lower interest rates.8. Should increasing money supply growth place upward or downward pressure on interest rates? Justifyyour answer.ANSWER: If one believes that higher money supply growth will not cause inflationary expectations, the additional supply of funds places downward pressure on interest rates. However, if one believes that inflation expectations do erupt as a result, demand for loanable funds will also increase, and interest rates could increase (if the increase in demand more than offsets the increase in supply).9. Consider a scenario where inflation is low and is not expected to rise in the future. In addition,assume that the Fed substantially increases the money supply. Explain how this would likely affect interest rates.ANSWER: Interest rates should decrease because the amount of loanable funds will increase withouta corresponding increase in the demand for loanable funds.10. What is the logic behind the Fisher effect's implied positive relationship between expected inflationand nominal interest rates?ANSWER: Investors require a positive real return, which suggests that they will only invest funds if the nominal interest rate is expected to exceed inflation. In this way, the purchasing power of invested funds increases over time. As inflation rises, nominal interest rates should rise as well since investors would require a nominal return that exceeds the inflation rate.11. What is the difference between the nominal interest rate and real interest rate?ANSWER: The nominal interest rate is the quoted interest rate, while the real interest rate is defined as the nominal interest rate minus the expected rate of inflation. The real interest rate represents the recent nominal interest rate minus the recent inflation rate.12. Estimate the real interest rate over the last year.ANSWER: This exercise forces students to measure last year's nominal interest rate and inflation rate.13. Review historical interest rates to determine how they react to recessionary periods. Explain thisreaction.ANSWER: In general, interest rates tend to decline in recessionary periods. This reaction occurs because the demand for loanable funds declines during the recessionary periods, which placesdownward pressure of interest rates.14. Why do forecasts of interest rates differ among experts?ANSWER: Various factors may influence interest rates, and changes in these factors will affectinterest rate movements. Experts disagree about how various factors will change. They also disagree about the specific influence these factors have on interest rates.15. During the stock market crash in October 1987, interest rates declined. Use the loanable fundsframework discussed in this chapter to explain why.ANSWER: The crash led to concerns of a possible recession. The demand for loanable funds declined, causing downward pressure on interest rates. In addition, investors shifted funds out of stocks and into money market securities, causing an increase in the supply of loanable funds.6 Chapter 1/Role of Financial Markets and Institutions16. If foreign investors expected that the U.S. dollar's value would weaken over the next few years, howmight this affect (a) the foreign supply of funds to the U.S. markets and (b) U.S. interest rates?Explain.ANSWER: The expectation of a weaker U.S. dollar can cause a lower foreign supply of funds to the U.S. markets, as foreign investors reduce their investment in the United States, because a weakened dollar over the investment horizon reduces the return to foreign investors. The reduced foreign supply of funds to U.S. markets places upward pressure on U.S. interest rates.17. A well-known economist recently suggested that lower interest rates will stimulate the economy. Yet,this chapter implied that a strong economy can cause high interest rates. Do these concepts conflict?Explain.ANSWER: The concepts do not conflict. There are feedback effects between interest rates andeconomic growth. Lower interest rates stimulate the economy because they encourage borrowing and therefore spending. Yet, a strong economy can cause an additional desire to borrow, which places upward pressure on interest rates.18. Assume that if the U.S. dollar strengthens, it can place downward pressure on U.S. inflation. Basedon this information, how might expectations of a strong dollar affect the demand for loanable funds in the United States and U.S. interest rates? Is there any reason to think that expectations of a strong dollar could also affect the supply of loanable funds? Explain.ANSWER: As a strong U.S. dollar dampens U.S. inflation, it can reduce the demand for loanable funds, and therefore reduce interest rates. The expectations of a strong dollar could also increase the supply of funds because it may encourage saving (there is less concern to purchase goods before prices rise when inflationary expectations are reduced). In addition, foreign investors may invest more funds in the United States if they expect the dollar to strengthen, because that could increase their return on investment.19. If financial market participants overestimate inflation in a particular period, will real interest rates berelatively high or low? Explain.ANSWER: If inflation is overestimated, the real interest rate will be relatively high. Investors had required a relatively high nominal interest rate because they expected inflation to be high (according to the Fisher effect).20. Why might you expect interest rate movements of various industrialized countries to be more highlycorrelated in recent years than in earlier years?ANSWER: Interest rates among countries are expected to be more highly correlated in recent years because financial markets are more geographically integrated. More international financial flows will occur to capitalize on higher interest rates in foreign countries, which affects the supply and demand conditions in each market. As funds leave a country with low interest rates, this places upwardpressure on that country's interest rates. The international flow of funds caused this type of reaction.21. In November 1989, the wall separating East and West Germany was removed. Some analysts say thatthis event led to an increase in German and U.S. interest rates. Offer a possible explanation as to why this event could have caused an increase in German and U.S. interest rates.ANSWER: The removal of the wall led to the reunification of East and West Germany, and resulted in economic expansion in Germany. This led to an increased demand for loanable funds from sources in Germany and in the United States, placing upward pressure on interest rates.22. In August 1990, the Persian Gulf crisis occurred, resulting in some significant reactions in financialmarkets. Why would the crisis be expected to place upward pressure on U.S. interest rates? Why might some investors expect the crisis to place downward pressure on U.S. interest rates?ANSWER: The Persian Gulf crisis placed upward pressure on U.S. interest rates because it (1)increased inflationary expectations in the United States as oil prices increased abruptly, and (2)increased the expected U.S. budget deficit as government expenditures were necessary to boostChapter 1/Role of Financial Markets and Institutions 7 military support. However, the crisis also caused some analysts to revise their forecasts of economic growth downward. In fact, some analysts predicted that a U.S. recession would occur. The slower economy reflects a reduced corporate demand for funds, which by itself places downward pressure on interest rates. If inflation was not a concern, the Fed may attempt to increase money supply growth to stimulate the economy. However, the inflationary pressure restricted the Fed from stimulating the economy (since any stimulative policy could cause higher inflation).23. Offer an argument for why the terrorist attack on the United States on September 11, 2001 couldplace downward pressure on U.S. interest rates. Offer an argument for why the terrorist attack could place upward pressure on U.S. interest rates.ANSWER: The terrorist attack could cause a reduction in spending related to travel (airlines, hotels), and would also reduce the expansion by those types of firms. This reflects a decline in the demand for loanable funds, and places downward pressure on interest rates. Conversely, the attack increases the amount of government borrowing needed to support a war, and therefore places upward pressure on interest rates.Interpreting Financial NewsInterpret the following comments made by Wall Street analysts and portfolio managers.a. “The flight of funds from bank deposits to U.S. stocks will pressure interest rates.”As the supply of loanable funds declines (due to bank deposit withdrawals), there will be upward pressure on interest rates.b. “Since Japanese interest rates have recently declined to very low levels, expect a reduction in U.S.interest rates.”As Japanese interest rates decline, Japanese savers invest more loanable funds in the UnitedStates, which places downward pressure on U.S. interest rates.c. “The cost of borrowing by U.S. firms is dictated by the degree to which the federal governmen tspends more than it taxes.”As the federal government spends more than it taxes, it borrows the difference; the greater theamount borrowed, the higher the pressure on U.S. interest rates.Managing in Financial MarketsAs the treasurer of a manufacturing company, your task is to forecast the direction of interest rates. You plan to borrow funds and may use the forecast of interest rates to determine whether you should obtain a loan with a fixed interest rate or a floating interest rate. The following information can be considered when assessing the future direction of interest rates:♦Economic growth has been high over the last two years, but you expect that it will be stagnant over the next year.♦Inflation has been 3 percent over each of the last few years, and you expect that it will be about the same over the next year.♦The federal government has announced major cuts in its spending, which should have a major impact on the budget deficit.♦The Federal Reserve is not expected to affect the existing supply of loanable funds over the next year. ♦The overall level of savings by households is not expected to change.a. Given the preceding information, determine how the demand for and the supply of loanable fundswould be affected (if at all), and determine the future direction of interest rates.The demand for loanable funds should decline in response to: (1) stagnant economic growth(because a relatively low level of borrowing will be needed), and (2) a major cut in government8 Chapter 1/Role of Financial Markets and Institutionsspending. The supply of loanable funds should remain unchanged because the savings level is not expected to change, and the Fed is not expected to affect the existing money supply. Given a large decline in the demand for loanable funds and no significant change in the supply of loanablefunds, U.S. interest rates should decline.b. You can obtain a one-year loan at a fixed-rate of 8 percent or a floating-rate loan that is currentlyat 8 percent but would be revised every month in accordance with general interest ratemovements. Which type of loan is more appropriate based on the information provided?Since interest rates are expected to decline, you should prefer the floating-rate loan. As interest rates decline, the rate charged on this type of loan would decline.c. Assume that Canadian interest rates have abruptly risen just as you have completed your forecastof future U.S. interest rates. Consequently, Canadian interest rates are now 2 percentage pointsabove U.S. interest rates. How might this specific situation place pressure on U.S. interest rates?Considering this situation along with the other information provided, would you change yourforecast of the future direction of U.S. interest rates?This situation could encourage U.S. individuals and firms to withdraw their savings from U.S.financial institutions and send their funds to Canada to earn a higher interest rate (although they would have to convert their U.S. dollars into Canadian dollars and are therefore exposed toexchange rate risk). To the extent that savings are withdrawn from U.S. financial institutions,there would be a reduction in the supply of loanable funds in the U.S. Consequently, this specific situation places upward pressure on the U.S. interest rates.While this specific situation places upward pressure on U.S. interest rates, the economic growth and the budget deficit are expected to place downward pressure on interest rates.Therefore, you would still forecast a decline in U.S. interest rates, unless you believe that theimpact of the Canadian situation would overwhelm the impact of the economic growth and thebudget deficit.Problems1.Suppose the real interest rate is 6 percent and the expected inflation is 2 percent. What would youexpect the nominal rate of interest to be?ANSWER:i = E(INF) + i ki = 2% + 6% = 8%2. Suppose that Treasury bills are currently paying 9 percent and the expected inflation is 3 percent.What is the real interest rate?ANSWER:i = E(INF) + i ki k = i – E(INF)i k = 9% – 3% = 6%Chapter 3Structure of Interest RatesChapter 1/Role of Financial Markets and Institutions 9Questions1.Identify the relevant characteristics of any security that can affect the security's yield.ANSWER:The relevant characteristics are:1. default risk2. liquidity3. tax status4. maturity5. special provisions (such as a call feature)2. What effect does a high credit risk have on securities?ANSWER: Investors require a higher risk premium on securities with a high default risk.3. Discuss the relationship between the yield and liquidity of securities.ANSWER: The greater the liquidity of a security, the lower is the yield, other things being equal.4. Do investors in high-tax brackets or those in low-tax brackets benefit more from tax-exemptsecurities? Why?ANSWER: High-tax bracket investors benefit more from tax-exempt securities because their tax savings from avoiding taxes is greater.5. Do municipal bonds or corporate bonds offer a higher before-tax yield at a given point in time? Why?Which has the higher after-tax yield?ANSWER: Corporate bonds offer a higher before-tax yield, since they are taxable by the federal government. The municipal bonds may have a higher tax yield for investors subject to a high tax rate.For low-tax bracket investors, the corporate bonds would likely have a higher after-tax yield.6. If taxes did not exist, would Treasury bonds offer a higher or lower yield than municipal bonds withthe same maturity? Why?ANSWER: Treasury bonds would offer a lower yield than municipal bonds because they areperceived to be risk-free. If taxes did not exist, the required return on Treasury bonds would be lower than on municipal bonds.7. Explain how a yield curve would shift in response to a sudden expectation of rising interest rates,according to the pure expectations theory.ANSWER: The demand for short-term securities would increase, placing upward (downward)pressure on their prices (yields). The demand for long-term securities would decrease, placingdownward (upward) pressure on their prices (yields). If the yield curve was originally upward sloped, it would now have a steeper slope as a result of the expectation. If it was originally downward sloped, it would now be more horizontal (less steep), or may have even become upward sloping.8. What is the meaning of the forward rate in the context of the term structure of interest rates?ANSWER: The forward rate is the expected interest rate at a future point in time.9. Why might forward rates consistently overestimate future interest rates? How could such a bias beavoided?ANSWER: If forward rates are estimated without considering the liquidity premium, it mayoverestimate the future interest rates. If a liquidity premium is accounted for when estimating the forward rate, the bias can be eliminated.10. Assume there is a sudden expectation of lower interest rates in the future. What would be the effecton the shape of the yield curve? Explain.ANSWER: The demand for short-term securities would decrease, placing downward (upward)pressure on their prices (yields). The demand for long-term securities would increase, placing upward。

(完整word版)Fabozzi_金融市场与金融机构基础课后答案

The role of central banks can be categorized as: (1) risk assessment, (2) risk reduction, （3) oversight of payment systems, （4） crisis management.One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason，central banks are sometimes called monetary authority. In implementing monetary policy, central banks，acting as a reserve bank，require private banks to maintain and deposit the required reserves with the central bank. In times of financial crisis，central banks perform the role of lender of last resort for the banking system。

金融市场与金融机构Chapter1

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big killing 大赚一笔 big loss 巨大损失 Dow Jones industrial average 道琼斯工业平均指数
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Stock Market
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1.1.3 The Foreign Exchange Market

foreign exchange market: The market in which exchange rates are determined. The market is where the conversion (the currency in the country of origin into the currency of the country they are going to) take place, and so it is instrumental in moving funds between countries. foreign exchange rate: ( exchange rate). The price of one currency in terms of 订购现钞的平均结算价，每1000张新钞从69.66美元增加到86.36美元
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1.2.1 Structure of the Financial System

financial intermediaries: Institutions such as commercial banks, savings and loan associations, mutual savings bank, credit unions, insurance companies, mutual funds, pension funds, and finance companies that borrow funds from people who have saved and in turn make loans to others.

fabozzi_金融市场与金融机构基础课后答案.doc

CHAPTER 4THE U.S. FEDERAL RESERVEAND THE CREATION OF MONEYCENTRAL BANKS AND THEIR PURPOSEThe primary role of a central bank is to maintain the stability of the currency and money supply for a country or a group of countries. The role of central banks can be categorized as: (1) risk assessment, (2) risk reduction, (3) oversight of payment systems, (4) crisis management.One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason, central banks are sometimes called monetary authority. In implementing monetary policy, central banks, acting as a reserve bank, require private banks to maintain and deposit the required reserves with the central bank. In times of financial crisis, central banks perform the role of lender of last resort for the banking system. Countries throughout the world may have central banks. Additionally, the European Central Bank is responsible for implementing monetary policy for the member countries of the European Union.There is widespread agreement that central banks should be independent of the government so that decisions of the central bank will not be influenced for short-term political purposes such as pursuing a monetary policy to expand the economy but at the expense of inflation.In implementing monetary and economic policies, the United States is a member of an informal network of nations. This group started in 1976 as the Group of 6, or G6: US, France, Germany, UK, Italy, and Japan. Thereafter, Canada joined to for the G7. In 1998, Russia joined to form the G8.THE CENTRAL BANK OF THE UNITED STATES: THE FEDERAL RESERVE SYSTEMThe Federal Reserve System consists of 12 banking districts covering the entire country. Created in 1913, the Federal Reserve is the government agency responsible for the management of the US monetary and banking systems. It is independent of the political branches of government. The Fed is managed by a seven-member Board of Governors, who are appointed by the President and approved by Congress.The Fed's tools for monetary management have been made more difficult by financial innovations. The public's increasing acceptance of money market mutual funds has funneled a large amount of money into what are essentially interest-bearing checking accounts. Securitization permits commercial banks to change what once were illiquid consumer loans of several varieties into securities. Selling these securities gives the banks a source of funding that is outside the Fed's influence.INSTRUMENT OF MONETARY POLICY: HOW THE FED INFLUENCES THE SUPPLY OF MONEYThe Fed has three instruments at its disposal to affect the level of reserves.Reserve RequirementsUnder our fractional reserve banking system have to maintain specified fractional amounts of reserves against their deposits. The Fed can raise or lower these required reserve ratios, thereby permitting banks to decrease or increase their lending and investment portfolios. A bank's total reserves equal its required reserves plus any excess reserves.Open Market OperationsThe Fed's most powerful instrument is its authority to conduct open market operation. It buys and sells in open debt markets government securities for its own accounts. The Fed prefers to use Treasury bills because it can make its substantial transactions without seriously disrupting the prices or yields of bills.The Federal Open Market Committee, or FOMC, is the unit that decides on the general issues of changing the rate of growth in the money supply, by open market sales or purchases of securities. The implementation of policy through open market operations is the responsibility of the trading desk of the Federal Reserve Bank of New York.Open Market Repurchase AgreementsThe Fed often employs variants of simple open market purchases and sales, these are called the repurchase agreement (or repo) and the reverse repo. In a repo, the Fed buys a particular amount of securities from a seller that agrees to repurchase the same number of securities for a higher price at some future time. In a reverse repo, the Fed sells securities and makes a commitment to buy them back at a higher price later.Discount RateA bank borrowing from the Fed is said to use the discount window. The discount rate is the rate charged to banks borrowing directly from the Fed. Raising the rate is designed to discourage such borrowing, while lowering should have the opposite effect.DIFFERENT KINDS OF MONEYMoney is that item which serves as a numeraire. In a basic sense money can be defined as anything that serves as a unit of account and medium of exchange. We measure prices in dollars and exchange dollars for goods. Hence coins, currency, and any items readily exchanged into dollars (checking deposits or NOW accounts) constitute our money supply.MONEY AND MONETARY AGGREGATESMonetary aggregates measure the amount of money available to the economy at any time. The monetary base is defined as currency in circulation (coins and federal reserve notes) and reserves in the banking system. The instruments that serve as a medium of exchange can be narrowly defined as Mi, which is currency and demand deposits. M2 is Mi plus time and savings accounts, and money market mutual funds. Finally, M3 is M? plus short-term Treasury liabilities. While all three aggregates are watched and monitored, Mi is the most common form of the money supply, with its trait as being the most liquid. The ratio of the money supply to the economy's income is known as the velocity of money.THE MONEY MULTIPIER: THE EXPANSION OF THE MONEY SUPPLYThe money multiplier effect arises from the fact that a small change in reserves can produce a large change in the money supply. Through our fractional reserve system, a small increase will allow an individual bank, to lend out the greater part of these additional funds. These loans subsequently become deposits in other banks allowing them to expand proportionately. So, while one bank can expand its loans (or deposits) by an amount 1% of reserves required, all banks in the system can do likewise. Thus, in a simple format total change in deposits can be stated as change in reserves divided by the reserve requirement, which is also the formula for perpetuity. For example, if the change in the level of reserves is $100 and the reserve requirement is 20%, the change in total deposits will be $500 for a multiplier of 5. Of course, major assumptions are that banks will fully loan out their excess reserves and that depositors will not withdraw any of these extra reserves. THE IMPACT OF INTEREST RATES ON THE MONEY SUPPLYHigh rates of interest may make keeping excess reserves costly, since unused funds represent loans not made and interest not earned. High rates of interest will also affect the public's demand for holding cash. If deposits pay competitive interest rates, customers will be more willing to hold such bank liabilities and less cash. Therefore, a higher rate of interest can actually spur growth of the money supply. More likely, however, it will deter borrowing and slow monetary growth.THE MONEY SUPPLY PROCESS IN AN OPEN ECONOMYIn the modern era, almost every country has an open economy. Foreign commercial and central banks hold dollar accounts in the United States. Their purchases and sales of these deposits can affect exchange rates of the dollar against their own currency. The Fed has responsibility for maintaining stability in exchange rates. A purchase of foreign exchange with dollars depreciates the dollar's value, but it also adds dollars to the accounts of foreign banks in this country, thus adding to the U.S. monetary base. Most central banks of large economies own or stand ready to own a large amount of each of the world's major currencies, which are considered international reserves. Sales of foreign exchange transactions have monetary base implication and hence consequences for the domestic money supply, emphasis is given to coordinating monetarypolicies among developed nations.ANSWERS TO QUESTIONS FOR CHAPTER 4(Questions are in bold print followed by answers.)1.What is the role of a central bank?The role of a central bank has several functions: risk assessment, risk reduction, oversight of payment systems, and crisis management. It can do this through monetary policies, and through the implementation of regulations.2.Why is it argued that a central bank should be independent of the government?Central banks should be independent of the short-term political interests and political influences generally in setting economic policies.3.Identify each participant and its role in the process by which the money supply changes and monetary policy is implemented.The Fed determines monetary policy and seeks to implement it through changes in reserves. It is up to the nation's banking system to act on changes in reserves thereby affecting deposits, which constitute the greater part of the M| definition of the money supply.4.Describe the structure of the board of governors of the Federal Reserve System.The Board of Governors of the Federal Reserve System consists of 7 members who are appointed to staggered 14-year terms. The Board reviews discount operations and sets legal reserve requirements. In addition, all 7 members of the Board serve on the Federal Open Market Committee (FOMC), which determines the direction and magnitude of open-market operations. Such operations constitute the key instrument for implementing monetary policy.5.a・ Explain what is meant by the statement "the United States has a fractional reserve banking system."b. How are these items related: total reserves, required reserves, and excess reserves?a. A fractional reserve system requires that a fraction or percent of a bank's reserve be placedeither in currency in vault or with the Federal Reserve System.b.Total reserves are the amounts that banks hold in cash or at the Fed. Required reserves areamounts required by the Fed to meet some specific or legal reserve ratio to deposits. Excess reserves are bank reserves in currency and at the Fed which are in excess of legal requirements.Since these amounts are non-interest bearing, banks are often willing to lend these surplus funds to deficit banks at the Fed funds rate.5.What is the required reserve ratio, and how has the 1980 Depository Institutions Deregulation and Monetary Control Act constrained the Fed's control over the ratio?The required reserve ratio is the fraction of deposits a bank must hold as reserves. The DIDMCA constrained the Fed's control over the ratio by letting Congress set ranges of reserves for demand and time deposits.6.In what two forms can a bank hold its required reserves?A bank can hold its reserves in the form of currency in vault or in deposit at the Fed.8.a.What is an open market purchase by the Fed?b.Which unit of the Fed decides on open market policy, and what unit implements thatpolicy?c.What is the immediate consequence of an open market purchase?a.An open market purchase by the Fed consists of the purchase of U.S. Treasury securities.b.The FOMC decides on open market policy and directs the Federal Reserve Bank of New Yorkto implement it through sales and purchases of these securities.c.The immediate consequence of an open market purchase is to supply the seller of the securitywith a check on the Federal Reserve System that he can deposit in his bank, therebyimmediately increasing the excess reserves and thus nation's money supply.7.Distinguish between an open market sale and a matched sale (which is the same as a matched sale-purchase transaction or a reverse repurchase agreement).A matched sale or reverse repo involves the sale of a Treasury security with an agreement to buy it back at a later date and at a higher price as the cost for borrowing the funds. This contrasts with an outright sale at some discounted or premium price.8.What is the discount rate, and to what type of action by a bank does it apply?The discount rate is the rate a bank pays to borrow a t the "discount window” of the Fed. Such borrowings are often undertaken to meet temporary liquidity needs. Bank needs are monitored and the Fed likes to state that borrowing from it is a "privilege and not a right.”IL Define the monetary base and M2The monetary base includes total bank reserves plus currency in the hands of the public. M2 = Mi (currency and demand deposits) + savings and time deposits.12.Describe the basic features of the money multiplier.The money multiplier is crucial to the concept of money creation and is analogous to the idea of the autonomous spending multiplier and formula for a perpetuity. It is the inverse of the required reserve ratio (1/rr). If the reserve ratio is .2 then the money supply will expand five times any increase in new deposits. The multiplier will be less if banks hold excess reserves or experience cash drains.13.Suppose the Fed were to inject $100 million of reserves into the banking system by an open market purchase of Treasury bills. If the required reserve ratio were 10%, what is the maximum increase in Mi that the new reserves would generate? Assume that banks make all the loans their reserves allow, that firms and individuals keep all their liquid assets in depository accounts, and no money is in the form of currency.The maximum increase in Mi will be $1 billion assuming no cash drains in the system, and banks are fully loaned up.14.Assume the situation from question 13, except now assume that banks hold a ratio of0.5% of excess reserves to deposits and the public keeps 20% of its liquid assets in the form of cash. Under these conditions, what is the money multiplier? Explain why this value of the multiplier is so much lower than the multiplier from question 13.Substitute the given values of currency ratio, required reserves ratio, and excess reserves ratio of 20%, 10% and 0.5% respectively into the formula given on page 94 of the textbook. Now we have a lower multiplier value of 3.9=1.20A 305. This is because public and banks do not deposit or lend, all they can.。

chap001金融机构习题解答

Chapter OneWhy Are Financial Intermediaries SpecialChapter OutlineIntroductionFinancial Intermediaries’ SpecialnessInformation CostsLiquidity and Price RiskOther Special ServicesOther Aspects of SpecialnessThe Transmission of Monetary PolicyCredit AllocationIntergenerational Wealth Transfers or Time Intermediation Payment ServicesDenomination IntermediationSpecialness and RegulationSafety and Soundness RegulationMonetary Policy RegulationCredit Allocation RegulationConsumer Protection RegulationInvestor Protection RegulationEntry RegulationThe Changing Dynamics of SpecialnessTrends in the United StatesFuture TrendsGlobal IssuesSummarySolutions for End-of-Chapter Questions and Problems: Chapter One1. Identify and briefly explain the five risks common to financialinstitutions.Default or credit risk of assets, interest rate risk caused by maturity mismatches between assets and liabilities, liability withdrawal or liquidity risk, underwriting risk, and operating cost risks.2. Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial intermediaries (FIs).In a world without FIs the users of corporate funds in the economy would have to approach directly the household savers of funds in order to satisfy their borrowing needs. This process would be extremely costly because of the up-front information costs faced by potential lenders. Cost inefficiencies would arise with the identification of potential borrowers, the pooling of small savings into loans of sufficient size to finance corporate activities, and the assessment of risk and investment opportunities. Moreover, lenders would have to monitor the activities of borrowers over each loan's life span. The net result would be an imperfect allocation of resources in an economy.3. Identify and explain three economic disincentives that probably woulddampen the flow of funds between household savers of funds and corporate users of funds in an economic world without financial intermediaries.Investors generally are averse to purchasing securities directly because of (a) monitoring costs, (b) liquidity costs, and (c) price risk. Monitoring the activities of borrowers requires extensive time, expense, and expertise. As a result, households would prefer to leave this activity to others, and by definition, the resulting lack of monitoring would increase the riskiness of investing in corporate debt and equity markets. The long-term nature of corporate equity and debt would likely eliminate at least a portion of those households willing to lend money, as the preference of many for near-cash liquidity would dominate the extra returns which may be available. Third, the price risk of transactions on the secondary markets would increase without the information flows and services generated by high volume.4. Identify and explain the two functions in which FIs may specialize thatenable the smooth flow of funds from household savers to corporate users.FIs serve as conduits between users and savers of funds by providing a brokerage function and by engaging in the asset transformation function. The brokerage function can benefit both savers and users of funds and can vary according to the firm. FIs may provide only transaction services, such as discount brokerages, or they also may offer advisory services which helpreduce information costs, such as full-line firms like Merrill Lynch. The asset transformation function is accomplished by issuing their own securities, such as deposits and insurance policies that are more attractive to household savers, and using the proceeds to purchase the primary securities of corporations. Thus, FIs take on the costs associated with the purchase of securities.5. In what sense are the financial claims of FIs considered secondarysecurities, while the financial claims of commercial corporations areconsidered primary securities How does the transformation process, orintermediation, reduce the risk, or economic disincentives, to the saversThe funds raised by the financial claims issued by commercial corporations are used to invest in real assets. These financial claims, which are considered primary securities, are purchased by FIs whose financial claims therefore are considered secondary securities. Savers who invest in the financial claims of FIs are indirectly investing in the primary securities of commercial corporations. However, the information gathering and evaluation expenses, monitoring expenses, liquidity costs, and price risk of placing theinvestments directly with the commercial corporation are reduced because ofthe efficiencies of the FI.6. Explain how financial institutions act as delegated monitors. Whatsecondary benefits often accrue to the entire financial system because of this monitoring processBy putting excess funds into financial institutions, individual investors give to the FIs the responsibility of deciding who should receive the money and of ensuring that the money is utilized properly by the borrower. In this sense the depositors have delegated the FI to act as a monitor on their behalf. The FI can collect information more efficiently than individual investors. Further, the FI can utilize this information to create new products, such as commercial loans, that continually update the information pool. This more frequent monitoring process sends important informational signals to other participants in the market, a process that reduces information imperfection and asymmetry between the ultimate sources and users of funds in the economy.7. What are five general areas of FI specialness that are caused byproviding various services to sectors of the economyFirst, FIs collect and process information more efficiently than individual savers. Second, FIs provide secondary claims to household savers which often have better liquidity characteristics than primary securities such as equities and bonds. Third, by diversifying the asset base FIs provide secondary securities with lower price-risk conditions than primary securities. Fourth, FIs provide economies of scale in transaction costs because assets are purchased in larger amounts. Finally, FIs provide maturity intermediation to the economy which allows the introduction of additional types of investment contracts, such as mortgage loans, that are financed with short-term deposits.8. How do FIs solve the information and related agency costs when householdsavers invest directly in securities issued by corporations What areagency costsAgency costs occur when owners or managers take actions that are not in the best interests of the equity investor or lender. These costs typically result from the failure to adequately monitor the activities of the borrower. If no other lender performs these tasks, the lender is subject to agency costs as the firm may not satisfy the covenants in the lending agreement. Because the FI invests the funds of many small savers, the FI has a greater incentive to collect information and monitor the activities of the borrower.9. What often is the benefit to the lenders, borrowers, and financialmarkets in general of the solution to the information problem provided by the large financial institutionsOne benefit to the solution process is the development of new secondary securities that allow even further improvements in the monitoring process. An example is the bank loan that is renewed more quickly than long-term debt. The renewal process updates the financial and operating information of thefirm more frequently, thereby reducing the need for restrictive bond covenants that may be difficult and costly to implement.10. How do FIs alleviate the problem of liquidity risk faced by investors whowish to invest in the securities of corporationsLiquidity risk occurs when savers are not able to sell their securities on demand. Commercial banks, for example, offer deposits that can be withdrawn at any time. Yet the banks make long-term loans or invest in illiquid assets because they are able to diversify their portfolios and better monitor theperformance of firms that have borrowed or issued securities. Thus individual investors are able to realize the benefits of investing in primary assets without accepting the liquidity risk of direct investment.11. How do financial institutions help individual savers diversify theirportfolio risks Which type of financial institution is best able toachieve this goalMoney placed in any financial institution will result in a claim on a more diversified portfolio. Banks lend money to many different types of corporate, consumer, and government customers, and insurance companies have investmentsin many different types of assets. Investment in a mutual fund may generate the greatest diversification benefit because of the fund’s investment in a wide array of stocks and fixed income securities.12. How can financial institutions invest in high-risk assets with fundingprovided by low-risk liabilities from saversDiversification of risk occurs with investments in assets that are not perfectly positively correlated. One result of extensive diversification is that the average risk of the asset base of an FI will be less than the average risk of the individual assets in which it has invested. Thus individual investors realize some of the returns of high-risk assets without accepting the corresponding risk characteristics.13. How can individual savers use financial institutions to reduce thetransaction costs of investing in financial assetsBy pooling the assets of many small investors, FIs can gain economies of scale in transaction costs. This benefit occurs whether the FI is lending to a corporate or retail customer, or purchasing assets in the money and capital markets. In either case, operating activities that are designed to deal in large volumes typically are more efficient than those activities designed for small volumes.14. What is maturity intermediation What are some of the ways in which therisks of maturity intermediation are managed by financial intermediariesIf net borrowers and net lenders have different optimal time horizons, FIscan service both sectors by matching their asset and liability maturities through on- and off-balance sheet hedging activities and flexible access to the financial markets. For example, the FI can offer the relatively short-term liabilities desired by households and also satisfy the demand for long-term loans such as home mortgages. By investing in a portfolio of long-and short-term assets that have variable- and fixed-rate components, the FI can reduce maturity risk exposure by utilizing liabilities that have similar variable- and fixed-rate characteristics, or by using futures, options, swaps, and other derivative products.15. What are five areas of institution-specific FI specialness, and whichtypes of institutions are most likely to be the service providersFirst, commercial banks and other depository institutions are key players for the transmission of monetary policy from the central bank to the rest of the economy. Second, specific FIs often are identified as the major source of finance for certain sectors of the economy. For example, S&Ls and savings banks traditionally serve the credit needs of the residential real estate market. Third, life insurance and pension funds commonly are encouraged to provide mechanisms to transfer wealth across generations. Fourth, depository institutions efficiently provide payment services to benefit the economy. Finally, mutual funds provide denomination intermediation by allowing small investors to purchase pieces of assets with large minimum sizes such as negotiable CDs and commercial paper issues.16. How do depository institutions such as commercial banks assist in theimplementation and transmission of monetary policyThe Federal Reserve Board can involve directly the commercial banks in the implementation of monetary policy through changes in the reserve requirements and the discount rate. The open market sale and purchase of Treasurysecurities by the Fed involves the banks in the implementation of monetary policy in a less direct manner.17. What is meant by credit allocation regulation What social benefit isthis type of regulation intended to provideCredit allocation regulation refers to the requirement faced by FIs to lend to certain sectors of the economy, which are considered to be socially important. These may include housing and farming. Presumably the provision of credit to make houses more affordable or farms more viable leads to a more stable and productive society.18. Which intermediaries best fulfill the intergenerational wealth transferfunction What is this wealth transfer processLife insurance and pension funds often receive special taxation relief and other subsidies to assist in the transfer of wealth from one generation to another. In effect, the wealth transfer process allows the accumulation of wealth by one generation to be transferred directly to one or more younger generations by establishing life insurance policies and trust provisions in pension plans. Often this wealth transfer process avoids the full marginal tax treatment that a direct payment would incur.19. What are two of the most important payment services provided by financialinstitutions To what extent do these services efficiently providebenefits to the economyThe two most important payment services are check clearing and wire transfer services. Any breakdown in these systems would produce gridlock in the payment system with resulting harmful effects to the economy at both the domestic and potentially the international level.20. What is denomination intermediation How do FIs assist in this processDenomination intermediation is the process whereby small investors are able to purchase pieces of assets that normally are sold only in large denominations. Individual savers often invest small amounts in mutual funds. The mutual funds pool these small amounts and purchase negotiable CDs which can only be sold in minimum increments of $100,000, but which often are sold in million dollar packages. Similarly, commercial paper often is sold only in minimum amounts of $250,000. Therefore small investors can benefit in the returns and low risk which these assets typically offer.21. What is negative externality In what ways do the existence of negativeexternalities justify the extra regulatory attention received byfinancial institutionsA negative externality refers to the action by one party that has an adverse affect on some third party who is not part of the original transaction. For example, in an industrial setting, smoke from a factory that lowers surrounding property values may be viewed as a negative externality. For financial institutions, one concern is the contagion effect that can arise when the failure of one FI can cast doubt on the solvency of otherinstitutions in that industry.22. If financial markets operated perfectly and costlessly, would there be aneed for financial intermediariesTo a certain extent, financial intermediation exists because of financial market imperfections. If information is available costlessly to all participants, savers would not need intermediaries to act as either their brokers or their delegated monitors. However, if there are social benefits to intermediation, such as the transmission of monetary policy or credit allocation, then FIs would exist even in the absence of financial market imperfections.23. What is mortgage redliningMortgage redlining occurs when a lender specifically defines a geographic area in which it refuses to make any loans. The term arose because of the area often was outlined on a map with a red pencil.24. Why are FIs among the most regulated sectors in the world When is netregulatory burden positiveFIs are required to enhance the efficient operation of the economy. Successful financial intermediaries provide sources of financing that fund economic growth opportunity that ultimately raises the overall level of economic activity. Moreover, successful financial intermediaries provide transaction services to the economy that facilitate trade and wealth accumulation.Conversely, distressed FIs create negative externalities for the entire economy. That is, the adverse impact of an FI failure is greater than just the loss to shareholders and other private claimants on the FI's assets. For example, the local market suffers if an FI fails and other FIs also may be thrown into financial distress by a contagion effect. Therefore, since some of the costs of the failure of an FI are generally borne by society at large, the government intervenes in the management of these institutions to protect society's interests. This intervention takes the form of regulation.However, the need for regulation to minimize social costs may impose private costs to the firms that would not exist without regulation. This additional private cost is defined as a net regulatory burden. Examples include the cost of holding excess capital and/or excess reserves and the extra costs of providing information. Although they may be socially beneficial, these costs add to private operating costs. To the extent that these additional costshelp to avoid negative externalities and to ensure the smooth and efficient operation of the economy, the net regulatory burden is positive.25. What forms of protection and regulation do regulators of FIs impose toensure their safety and soundnessRegulators have issued several guidelines to insure the safety and soundness of FIs:a. FIs are required to diversify their assets. For example, banks cannotlend more than 10 percent of their equity to a single borrower.b. FIs are required to maintain minimum amounts of capital to cushion anyunexpected losses. In the case of banks, the Basle standards require aminimum core and supplementary capital of 8 percent of their risk-adjusted assets.c. Regulators have set up guaranty funds such as BIF for commercial banks,SIPC for securities firms, and state guaranty funds for insurance firms to protect individual investors.d. Regulators also engage in periodic monitoring and surveillance, such ason-site examinations, and request periodic information from the FIs.26. In the transmission of monetary policy, what is the difference betweeninside money and outside money How does the Federal Reserve Board try to control the amount of inside money How can this regulatory positioncreate a cost for the depository financial institutionsOutside money is that part of the money supply directly produced andcontrolled by the Fed, for example, coins and currency. Inside money refers to bank deposits not directly controlled by the Fed. The Fed can influence this amount of money by reserve requirement and discount rate policies. In cases where the level of required reserves exceeds the level considered optimal by the FI, the inability to use the excess reserves to generate revenue may be considered a tax or cost of providing intermediation.27. What are some examples of credit allocation regulation How can thisattempt to create social benefits create costs to the private institutionThe qualified thrift lender test (QTL) requires thrifts to hold 65 percent of their assets in residential mortgage-related assets to retain the thrift charter. Some states have enacted usury laws that place maximum restrictions on the interest rates that can be charged on mortgages and/or consumer loans. These types of restrictions often create additional operating costs to the FIand almost certainly reduce the amount of profit that could be realizedwithout such regulation.28. What is the purpose of the Home Mortgage Disclosure Act What are thesocial benefits desired from the legislation How does the implementation of this legislation create a net regulatory burden on financialinstitutionsThe HMDA was passed by Congress to prevent discrimination in mortgage lending. The social benefit is to ensure that everyone who qualifies financially is provided the opportunity to purchase a house should they so desire. The regulatory burden has been to require a written statement indicating the reasons why credit was or was not granted. Since 1990, the federal regulators have examined millions of mortgage transactions from more than 7,700institutions each calendar quarter.29. What legislation has been passed specifically to protect investors whouse investment banks directly or indirectly to purchase securities Give some examples of the types of abuses for which protection is provided.The Securities Acts of 1933 and 1934 and the Investment Company Act of 1940 were passed by Congress to protect investors against possible abuses such as insider trading, lack of disclosure, outright malfeasance, and breach of fiduciary responsibilities.30. How do regulations regarding barriers to entry and the scope of permittedactivities affect the charter value of financial institutionsThe profitability of existing firms will be increased as the direct andindirect costs of establishing competition increase. Direct costs include the actual physical and financial costs of establishing a business. In the case of FIs, the financial costs include raising the necessary minimum capital to receive a charter. Indirect costs include permission from regulatory authorities to receive a charter. Again in the case of FIs this cost involves acceptable leadership to the regulators. As these barriers to entry are stronger, the charter value for existing firms will be higher.31. What reasons have been given for the growth of investment companies atthe expense of “traditional” banks and insurance companiesThe recent growth of investment companies can be attributed to two major factors:a. Investors have demanded increased access to direct securities markets.Investment companies and pension funds allow investors to take positions in direct securities markets while still obtaining the riskdiversification, monitoring, and transactional efficiency benefits offinancial intermediation. Some experts would argue that this growth isthe result of increased sophistication on the part of investors; otherswould argue that the ability to use these markets has caused theincreased investor awareness. The growth in these assets is inarguable.b. Recent episodes of financial distress in both the banking and insuranceindustries have led to an increase in regulation and governmentaloversight, thereby increasing the net regulatory burden of“traditional” companies. As such, the costs of intermediation haveincreased, which increases the cost of providing services to customers.32. What are some of the methods which banking organizations have employed toreduce the net regulatory burden What has been the effect onprofitabilityThrough regulatory changes, FIs have begun changing the mix of businessproducts offered to individual users and providers of funds. For example, banks have acquired mutual funds, have expanded their asset and pension fund management businesses, and have increased the security underwriting activities. In addition, legislation that allows banks to establish branches anywhere inthe United States has caused a wave of mergers. As the size of banks has grown, an expansion of possible product offerings has created the potentialfor lower service costs. Finally, the emphasis in recent years has been on products that generate increases in fee income, and the entire bankingindustry has benefited from increased profitability in recent years.33. What characteristics of financial products are necessary for financialmarkets to become efficient alternatives to financial intermediaries Can you give some examples of the commoditization of products which werepreviously the sole property of financial institutionsFinancial markets can replace FIs in the delivery of products that (1) have standardized terms, (2) serve a large number of customers, and (3) are sufficiently understood for investors to be comfortable in assessing their prices. When these three characteristics are met, the products often can be treated as commodities. One example of this process is the migration of over-the-counter options to the publicly traded option markets as trading volume grows and trading terms become standardized.34. In what way has Regulation 144A of the Securities and Exchange Commissionprovided an incentive to the process of financial disintermediationChanging technology and a reduction in information costs are rapidly changing the nature of financial transactions, enabling savers to access issuers of securities directly. Section 144A of the SEC is a recent regulatory change that will facilitate the process of disintermediation. The private placement of bonds and equities directly by the issuing firm is an example of a product that historically has been the domain of investment bankers. Although historically private placement assets had restrictions against trading, regulators have given permission for these assets to trade among large investors who have assets of more than $100 million. As the market grows, this minimum asset size restriction may be reduced.。

《金融英语》习题答案unit1-10

“高职高专商务英语专业规划教材”Unit 1 Financial Market Research练习参考答案I.Read through the text and answer the following questions.1.A financial market is a mechanism that allows people to easily buy andsell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis.2.The raising of capital ;the transfer of risk and international trade3.Capital markets,commodity markets,money markets, derivative markets,insurance markets and foreign exchange markets .4.Financial markets fit in the relationship between lenders andborrowers.5.Individuals, companies, governments, municipalities and publiccorporations.II. Paraphrase the following expressions or abbreviations and translate them into ChineseCheck the answers from the Special Term Lists.III. Fill in the blanks with the proper wordsThe global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.IV.Translation.1.金融市场包括很多方面，包括资本市场，华尔街，甚至是市场本身。

Madura_FMI9e_IM_Ch11

mance
Sharpe Index Treynor Index
Stock Market Efficiency
Forms of Efficiency Tests of the Efficient Market Hypothesis
Foreign Stock Valuation and Performance
WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion on this issue.
ANSWER: There is no perfect answer, and there are valid arguments for and against whether markets are efficient. However, an abrupt decline of stock prices does not refute market efficiency. If new information about stock market conditions (such as a weakening economy) occurs, prices could possibly fully reflect all information and yet adjust abruptly as the new information becomes available.
Chapter 11
Stock Valuation and Risk
Outline
Stock Valuation Methods
Price-Earnings (PE) Method Dividend Discount Model Adjusting the Dividend Discount Model Free Cash Flow Model

金融市场与机构课后答案chapter01

Chapter1Role of Financial Markets and Institutions OutlineOverview of Financial MarketsMoney Versus Capital MarketsPrimary Versus Secondary MarketsOrganized Versus Over-the-Counter MarketsSecurities Traded in Financial MarketsMoney Market SecuritiesCapital Market SecuritiesDerivative SecuritiesValuation of Securities in Financial MarketsMarket Pricing of SecuritiesMarket EfficiencyFinancial Market RegulationDisclosureOther RegulationsFinancial Market GlobalizationRole of the Foreign Exchange MarketForeign Exchange RatesRole of Financial Institutions in Financial MarketsRole of Depository InstitutionsRole of Nondepository InstitutionsComparison of Roles Among Financial InstitutionsOverview of Financial InstitutionsCompetition Between Financial InstitutionsConsolidation of Financial Institutions12E Chapter1/Role of Financial Markets and InstitutionsGlobal Expansion by Financial InstitutionsKey Concepts1.Explain the role of financial intermediaries in transferring funds from surplus units to deficit units.2.Introduce the types of financial markets available and their functions.3.Introduce the various financial institutions that facilitate the flow of funds.4.Provide a preview of the course outline.Emphasize the linkages between the various sections of thecourse.Questions1.Explain the meaning of surplus units and deficit units.Provide an example of each.ANSWER:Surplus units provide funds to the financial markets while deficit units obtain funds from the financial markets.Surplus units include households with savings,while deficit units include firms or government agencies that borrow funds.2.Distinguish between primary and secondary markets.ANSWER:Primary markets are used for the issuance of new securities while secondary markets are used for the trading of existing securities.3.Distinguish between money and capital markets.ANSWER:Money markets facilitate the trading of short-term(money market)instruments while capital markets facilitate the trading of long-term(capital market)instruments.4.Distinguish between perfect and imperfect security markets.ANSWER:With perfect financial markets,all information about any securities for sale would be freely available to investors,information about surplus and deficit units would be freely available, and all securities could be unbundled into any size desired.In reality,markets are imperfect,so that surplus and deficit units do not have free access to information,and securities can not be unbundled as desired.5.Explain why the existence of imperfect markets creates a need for financial institutions.ANSWER:Financial intermediaries are needed to facilitate the exchange of funds between surplus and deficit units.They have the information to provide this service and can even repackage deposits to provide the amount of funds borrowers desire.6.Explain the meaning of efficient markets.Why might we expect markets to be efficient most of thetime?ANSWER:If markets are efficient then prices of securities available in these markets properly reflect all information.We should expect markets to be efficient because if they weren't,investors would capitalize on the discrepancy between what prices are and what they should be.This action would force market prices to represent the appropriate prices as perceived by the market.7.In recent years,several securities firms have been guilty of using inside information when purchasingsecurities,thereby achieving returns well above the norm(even when accounting for risk).Does this suggest that the security markets are not efficient?Explain.ANSWER:Efficiency is often defined with regard to publicly available information.In this case, markets can be efficient,but investors with inside information could possibly outperform the market on a consistent basis.A stronger version of efficiency would hypothesize that even access to inside information will not consistently outperform the market.Chapter1/Role of Financial Markets and Institutions E3 8.What was the purpose of the Securities Act of1933?What was the purpose of the SecuritiesExchange Act of1934?Do these laws prevent investors from making poor investment decisions?Explain.ANSWER:The Securities Act of1933was intended to assure complete disclosure of relevantfinancial information on publicly offered securities,and prevent fraudulent practices when selling these securities.The Securities Exchange Act of1934extended the disclosure requirements tosecondary market issues.It also declared a variety of deceptive practices illegal,but does not prevent poor investments.9.If barriers to international securities markets are reduced,will a country's interest rate be more or lesssusceptible to foreign lending or borrowing activities?Explain.ANSWER:If international securities market barriers are reduced,a country's interest rate will likely become more susceptible to foreign lending and borrowing activities.Without barriers,funds will flow more freely in between countries.Funds would seek out countries where expected returns are high.Then,the amount of foreign funds invested in any country could adjust abruptly and affect interest rates.10.In what way could the international flow of funds cause a decline in interest rates?ANSWER:If a large volume of foreign funds was invested in the United States,it could placedownward pressure on U.S.interest rates.Without this supply of foreign funds,U.S.interest rates would have been higher.11.Distinguish between the functions of a broker and those of a dealer,and explain how each iscompensated.ANSWER:Brokers are commonly compensated with commissions on trades,while dealers arecompensated on their positions in particular securities.Some dealers also provide brokerage services.12.Why is it necessary for securities to be somewhat standardized?ANSWER:Securities can be more easily traded when they are standardized because the specifics of the security transaction are well known.If securities were not standardized,transactions would be slowed considerably as participants would have to negotiate all the provisions.13.What are the functions of securities firms?ANSWER:Securities firms provide a variety of functions(such as underwriting and brokerage)that either enhance a borrower's ability to borrow funds or an investor’s ability to invest funds.14.Explain why some financial flows of funds cannot occur through the sale of standardized securities.ANSWER:Some financial flows,such as most commercial loans,must be provided on a personal basis,since the firms requesting loans have particular needs.15.If securities were not standardized,how would this affect the volume of financial transactionsconducted by brokers?ANSWER:If securities were not standardized,the volume of financial transactions conducted by brokers would be reduced,because the documentation would be greater.mercial banks use some funds to purchase securities and other funds to make loans.Why are thesecurities more marketable than loans in the secondary market?ANSWER:Securities are more standardized than loans and therefore can be more easily sold in the secondary market.The excessive documentation on commercial loans limits a bank's ability to sell loans in the secondary market.17.How have the asset compositions of savings and loan associations differed from those of commercialbanks?Explain why and how this distinction may change over time.ANSWER:Savings and loan associations have traditionally concentrated in mortgage lending,while commercial banks have concentrated in commercial lending.Savings and loan associations are now4E Chapter1/Role of Financial Markets and Institutionsallowed to diversify their asset portfolio to a greater degree and will likely increase theirconcentration in commercial loans(but not to the same degree as commercial banks.18.With regard to the profit motive,how are credit unions different from other financial institutions?ANSWER:Credit unions are non-profit financial institutions.pare the main sources and uses of funds for finance companies,insurance companies,andpension funds.ANSWER:Finance companies sell securities to obtain funds,while insurance companies receive insurance premiums and pension funds receive employee/employer contributions.Finance companies use funds to provide direct loans to consumers and businesses.Insurance companies and pension funds purchase securities.20.What is the function of a mutual fund?Why are mutual funds popular among investors?ANSWER:A mutual fund sells shares to investors,pools the funds,and invests the funds in aportfolio of securities.Mutual funds are popular because they can help individuals diversify while using professional expertise to make investment decisions.21.How does a money market mutual fund differ from a stock or bond mutual fund?ANSWER:A money market mutual fund invests in money market securities,whereas other mutual funds normally invest in stocks or bonds.22.Classify the types of financial institutions mentioned in this chapter as either depository ornondepository.Explain the general difference between depository and nondepository institution sources of funds.ANSWER:Depository institutions include commercial banks,savings and loan associations,and credit unions.These institutions differ from nondepository institutions in that they accept deposits.Nondepository institutions include finance companies,insurance companies,pension funds,mutual funds,and money market funds.23.It is often stated that all types of financial institutions have begun to offer services that werepreviously offered only by certain types.Consequently,many financial institutions are becoming more similar in terms of their operations.Yet,the performance levels still differ significantly among types of financial institutions.Why?ANSWER:Even though financial institutions are becoming more similar,they often differ distinctly from each other in terms of sources and uses of funds.Therefore,their performance levels differ as well.24.Look in a recent business periodical for news about a recent financial transaction that involves twofinancial institutions.For this transaction,determine the following:a.How will each institution's balance sheet be affected?b.Will either institution receive immediate income from the transaction?c.Who is the ultimate user of funds?d.Who is the ultimate source of funds?ANSWER:This exercise will force students to understand how the balance sheet and incomestatement of a financial institution is affected by various transactions.When a financial institution simply acts as a middleman,income(fees or commissions)are earned,but the institution's asset portfolio is not significantly affected.25.Which types of financial institutions do you deal with?Explain whether you are acting as a surplusunit or a deficit unit in your relationship with each financial institution.ANSWER:This exercise allows students to realize that they constantly interact with financialinstitutions,and that they often play the role of a deficit unit(on car loans,tuition loans,etc.).Chapter1/Role of Financial Markets and Institutions E5 26.Explain how the privatization of companies in Europe can lead to the development of new securitiesmarkets.ANSWER:The privatization of companies will force these companies to finance with stocks and debt securities,instead of relying on the federal government for funds.Consequently,secondary markets for stocks and debt securities will be developed over time.Interpreting Financial News“Interpreting Financial News”tests your ability to comprehend common statements made by Wall Street analysts and portfolio managers who participate in the financial markets.Interpret the following statements made by Wall Street analysts and portfolio managers.a.“The price of IBM will not be affected by the announcement that its earnings have increased asexpected.”The earnings level was anticipated by investors,so that IBM’s stock price already reflected this anticipation.b.“The lending operations at Bank of America should benefit from strong economic growth.”High economic growth encourages expansion by firms,which results in a strong demand forloans provided by Bank of America.c.“The brokerage and underwriting performance at Merrill Lynch should benefit from strongeconomic growth.”High economic growth may result in a large volume of stock transactions in which Merrill Lynch may serve as a broker.Also,Merrill Lynch underwriters new securities that are issued whenfirms raise funds to support expansion;firms are more willing to issue new securities to expand during periods of high economic growth.Managing in Financial MarketsAs a financial manager of a large firm,you plan to borrow$70million over the next year.a.What are the more likely alternatives for you to borrow$70million?You could attempt to borrow$70million from commercial banks,savings institutions,or finance companies in the form of commercial loans.Alternatively,you may issue debt securities.b.Assuming that you decide to issue debt securities,describe the types of financial institutions thatmay purchase these securities.Financial institutions such as mutual funds,pension funds,and insurance companies commonly purchase debt securities that are issued by firms.Other financial institutions such as commercial banks and savings institutions may also purchase debt securities.c.How do individuals indirectly provide the financing for your firm when they maintain deposits atdepository institutions,invest in mutual funds,purchase insurance policies,or invest in pensions?Individuals provide funds to financial institutions in the form of bank deposits,investment inmutual funds,purchases of insurance policies,or investment in pensions.The financialinstitutions may channel the funds toward the purchase of debt securities(and even equitysecurities)that were issued by large corporations,such as the one where you work.。

《金融专业英语》习题答案

《金融专业英语》习题答案第一篇：《金融专业英语》习题答案《金融专业英语》习题答案Chapter OneFunctions of Financial Markets 一． Translate the following sentences into Chinese.1.China’s banking industry is now supervised by the PBC and CBRC.In addition, the MOF is in charge of financial accounting and taxation part of banking regulation and management.目前中国银行业主要由中国人民银行和银监会进行监管。

此外，财政部负责银行业监管的财务会计及税收方面。

2.Currently Chinese fund management companies are engaged in the following business: securities investment fund, entrusted asset management, investment consultancy, management of national social security funds, enterprise pension funds and QDII businesses.目前中国的基金管理公司主要从事以下业务：证券投资基金业务、受托资产管理业务、投资咨询业务、社保基金管理业务、企业年金管理业务和合格境内机构投资者业务等。

3.China's economy had 10% growth rate in the years before the world financial crisis of 2008.That economic expansion resulted from big trade surpluses and full investment.Now China is seeking to move away from that growth model.The country is working to balance exports with demand at home.在2008年世界经济危机之前的那些年，中国经济增长速度曾达到10%。

金融学(博迪)英文版课后习题答案

金融学(博迪)英文版课后习题答案CONTENTSChapter 1: Financial Economics 1-1Chapter 2: Financial Markets and Institutions 2-1Chapter 3: Managing Financial Health and Performance 3-1Chapter 4: Allocating Resources Over Time 4-1Chapter 5: Household Saving and Investment Decisions 5-1Chapter 6: The Analysis of Investment Projects 6-1Chapter 7: Principles of Market Valuation 7-1Chapter 8: Valuation of Known Cash Flows: Bonds 8-1Chapter 9: Valuation of Common Stocks 9-1Chapter 10: Principles of Risk Management 10-1Chapter 11: Hedging, Insuring, and Diversifying 11-1Chapter 12 Portfolio Opportunities and Choice 12-1Chapter 13: Capital Market Equilibrium 13-1Chapter 14: Forward and Futures Markets 14-1Chapter 15: Markets for Options and Contingent Claims 15-1Chapter 16: Financial Structure of the Firm 16-1Chapter 17: Real Options 17-1CHAPTER 1 – Financial EconomicsEnd-of-Chapter ProblemsDefining Finance1. What are your main goals in life? How does finance play a part in achieving those goals? What are themajor tradeoffs you face?SAMPLE ANSWER:Finish schoolGet good paying job which I likeGetmarried and have childrenOwn my own homeProvide for familyPay for children’s educationRetireHow Finance Plays a Role:SAMPLE ANSWER:Finance helps me pay for undergraduate and graduate education and helps me decide whether spending themoney on graduate education will be a good investment decision or not.Higher education should enhance my earning power and ability to obtain a job I like.Once I am married and have children I will have additional financial responsibilities (dependents) and Iwill have to learn how to allocate resources among individuals in the householdand learn how to set aside enoughmoney to pay for emergencies, education, vacations etc. Finance also helps me understand how to manage risks suchas for disability, life and health.?Finance helps me determine whether the home I want to buy is a good value or not. The study of financealso helps me determine the cheapest source of financing for the purchase of that home.Finance helps me determine how much money I will have to save in order to pay for my children’seducation as well as my own retirement.Major Tradeoffs:SAMPLE ANSWERSpend money now by going to college (and possibly graduate school) but presumably make more moneyonce I graduate due to my higher education.Consume now and have less money saved for future expenditures such as for a house and/or car or savemore money now but consume less than some of my friends。

金融机构与市场答案

CHAPTER 1AN OVERVIEW OF FINANCIAL MARKETS AND INSTITUTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS2. Explain the economic role of brokers, dealers, and investment bankers. How does each make aprofit?Brokers, dealers, and investment bankers make markets at both primary and secondary stages.Funds are raised and claims issued in primary markets with the help of investment bankers, whopurchase securities from issuers at one price and sell them to the investing public at a higher price, earning the und erwriter’s spread. In secondary markets brokers help bring buyers and sellers offinancial claims together, charging commissions, and dealers trade claims in volume, providingliquidity and price discovery and earning the difference between ask and bid price (the bid-askspread).5. Explain the concept of financial intermediation. How does the possibility of financialintermediation increase the efficiency of the financial system?Financial intermediation is the process by which financial institutions mediate unmatchedpreferences of ultimate borrowers (DSUs) and ultimate lenders (SSUs). Financial intermediaries buy financial claims with one set of characteristics from DSUs, then issue their own liabilities with different characteristics to SSUs. Th us, financial intermediaries ―transform‖ claims to make them more attractive to both DSUs and SSUs. This increases the amount and regularity of participation in the financial system, thus making financial markets more efficient.6. How do financial intermediaries generate profits?Intermediaries pay SSUs less than they earn from DSUs. Operating costs absorb part of this margin.Risks taken by the intermediary are rewarded by any remaining profit. Intermediaries enjoy 3sources of comparative advantage: Economies of scale —large volumes of similar transactions;transaction cost control—finding and negotiating direct investments less expensively; and riskmanagement expertise—bridging the ―information gap‖ about DSUs’ creditworthiness.7. Explain the differences between the money markets and the capital markets. Which market wouldGeneral Motors use to finance a new vehicle assembly plant? Why?Money markets are markets for liquidity, whether borrowed to finance current operations or lent to avoid holding idle cash in the short term. Money markets tend to be wholesale OTC markets made by dealers. Capital markets are where real assets or ―capital goods‖ are permanently financed, and involve a variety of wholesale and retail arrangements, both on organized exchanges and in OTC markets. GM would finance its new plant by issuing bonds or stock in the capital market. Investors would purchase those securities to build wealth over the long term, not to store liquidity. GMAC, the finance company subsidiary of GM, would finance its loan receivables both in the money market (commercial paper) and in the capital market (notes and bonds). GM would use the money market to ―store‖ cash in money market securities, which are generally, safe, liquid, and sh ort-term.9. Metropolitan Nashville and Davidson County issues $25 million of municipal bonds to finance anew domed stadium for the Tennessee Titans. The bonds have a face value of $10,000 each, are somewhat risky, and mature in 20 years. Enterprise Bank of Nashville buys one of the bonds using funds deposited by Sarah Levien and Ted Hawkins, who each purchased a 6-month, $5,000certificate of deposit. Explain the intermediation services provided by Enterprise Bank in thistransaction. Illustrate with T-accounts.Metropolitan Nashville and Davidson County Levien________________________________________ _________________________________Cash $10,000 from EBN || Bond $10,000 to EBN CD $5,000 at EBN || Cash $5,000 to EBNHawkins_________________________________CD $5,000 at EBN || Cash $5,000 to EBNEnterprise Bank of Nashville___________________________________________________Bond $10,000 from MNDC || CD Levien $5,000Cash $5,000 from Levien || CD Hawkins $5,000Cash $5,000 from Hawkins || Cash $10,000 to MNDCIf Sarah or Ted had $10,000 and wanted to take the risks presented by the bonds, either of themcould buy a bond in the direct market from a broker or dealer. Each likely prefers the government guarantee of the CD, the more easily affordable denomination of $5,000, and the ready liquidity (net of some known "penalty for early withdrawal"). Enterprise Bank now has a tax-free source ofincome from the municipal bond, has made its expert evaluation of credit risk, is diversified with other securities, and can buy the bonds with low transaction costs. Many banks are underwriters of municipal securities and carry inventories as dealers. The City of Nashville has financed a capital project (the stadium) by issuing financial claims (the bonds). The bank bought a bond with deposit funds it raised by issuing Sarah and Ted CDs, which are assets to them and liabilities to the Bank.The bond and the CDs are separate claims varying in denomination, maturity, risk, and liquidity.The bank takes a position of risk, keeps part of the interest income from the bonds as a reward for that risk, and distributes part of it to Sarah and Ted to reward them for postponing currentconsumption. The city, the ultimate borrower or DSU, has no direct relationship with Sarah and Ted, the ultimate lenders or SSUs.15. What is the difference between marketability and liquidity?Marketability is the ease with which a security can be sold and converted into cash. Liquidity is the ability to convert an asset into cash quickly without a loss of value. While the two concepts aresimilar, marketability does not carry the implication that the security’s value is preserved.16. Municipal bonds are attractive to what type of investors?Municipal bonds are long-term debt of state and local governments. Their coupon income is exempt from federal income tax. Therefore, they are attractive to individuals and businesses in high income tax brackets.17. Why do corporations issue commercial paper?Commercial paper is short-term corporate debt; it is issued to meet corporate short-term cashobligations.18. Explain what is meant by moral hazard. What problems does it present when a bank makes a loan?When it comes to loans, moral hazard occurs if borrowers engage in activities that increase theprobability of default. A firm that has taken a bank loan may take on very risky investment projectswhich, if successful, would result in large profits, but which have high probabilities of failure. The reason for such behavior is that lenders do not share the upside with shareholders of the firm. Toreduce moral hazard, the bank may impose some restrictions on the borrower stipulated in the loan contract (e.g., to maintain certain financial ratios at a certain level or better, to not acquire certain assets, or to reduce expenses), and continually monitor the borrower.19. Explain the adverse selection problem. How can lenders reduce its effect?Adverse selection arises from asymmetric information and, in the context of debt markets, refers to borrowers of poor credit quality applying for loans (perhaps because such borrowers need the loans the most in order to survive financially). The lender may reduce adverse selection by requiring loan applicants to supply detailed financial statements and other additional information, to usedifferential loan pricing for borrowers of different credit quality, or to reject loan applications if the risk appears too high. To process the information they collect, lenders often develop or acquire from third party credit scoring models that help determine borrowers’ creditworthiness.20. Why is the financial system so highly regulated?The regulation is needed to protect consumers from abuses by unscrupulous financial firms and to ensure economic stability. People should have confidence in the financial system for it to function well, and a well-functioning financial system is critical for ensuring the flow of funds and, in turn, economic growth.CHAPTER 4THE LEVEL OF INTEREST RATESANSWERS TO END-OF-CHAPTER QUESTIONS1. What factors determine the real rate of interest?The real rate of interest is determined by: (a) individual time preference for consumption, and (b) the return that firms expect to earn on their real capital investments. In equilibrium, the real rate ofinterest is determined when desired saving equals desired investment.2. If the money supply is increased, what happens to the level of interest rates?An increase in the money supply shifts the supply of loanable funds to the right, lowering interest rates (at least in the short term).3. What is the Fisher effect? How does it affect the nominal rate of interest?The Fisher effect is Irving Fisher’s hypothesis that expect ed inflation is embodied in current nominal interest rates. Assuming the ability to forecast expected inflation, nominal rates should vary directly with expected inflation.4. The 1-year real rate of interest is currently estimated to be 4 percent. The current annual rate ofinflation is 6 percent, and market forecasts expect the annual rate of inflation to be 8 percent. What is the current 1-year nominal rate of interest?Assuming the Fisher effect, the current 1-year nominal rate should be 12 percent, the sum of the realrate (4%) plus the expected inflation rate (8%), an approximate but illustrative way of estimating the answer. The correct way to deal with compounding rates is to multiply (1+.04)(1+.08) - 1 = 12.32%.5. The following annual inflation rates have been forecast for the next 5 years:Year 1 3%Year 2 4%Year 3 5%Year 4 5%Year 5 4%Use the average annual inflation rate and a 3% real rate to calculate the appropriate contract rate for a 1-year and a 5-year loan. How would your contract rates change if the Year 1 inflationforecast increases to 5%? Discuss the difference in the impact on the contract rates from the change in inflation.A lender would require compensation for both opportunity cost and loss of purchasing power. Thesum of the real rate, 3%, plus the expected rate of inflation, 3%, would be roughly 6% and accurately,(1.03)(1.03) -1 = 6.09%. The 5-year rate would be the sum of the real rate plus the average inflationrate expected: (1.03)(1.04197) - 1 = 7.32%. If the 1-year expected inflation rate were 5%, thegeometric average expected rate of inflation would be 4.6%, found as[(1.05)(1.04)(1.05)(1.05)(1.04)]1/5– 1 = [(1.05)3(1.04)2]1/5– 1 = 0.046, and the contract rate would likely be (1.03)(1.046) -1 = 7.74%. Nominal rates include the real rate plus the expected inflation rate.9. An investor purchased a 1-year Treasury security with a promised yield of 10 percent. The investorexpected the annual rate of inflation to be 6 percent; however, the actual rate turned out to be 10 percent. What were the expected and the realized real rate of interest for the investor?The expected real rate is r e = (1+i)/(1+ΔP e) – 1 = (1.1/1.06) – 1 = 3.77%; the realized real rate is(1.1/1.1) – 1 = 0.12.Explain what is meant by the term positive time preference for consumption. How does it affect therate of interest?Most people prefer to consume goods sooner rather than later. This is known as a positive timepreference for consumption. The higher this time preference is, the higher interest rate a personshould be offered to forgo consumption and make an investment.CHAPTER 5BOND PRICES AND INTEREST RATE RISKANSWERS TO END-OF-CHAPTER QUESTIONS3. Find the price of a corporate bond maturing in 5 years that has a 5% coupon (annual payments),a $1,000 face value, and an AA rating. A local newspaper's financial section reports that the yieldson 5 year bonds are: AAA = 6%, AA = 7%, and A = 8%.The price of the corporate bond (P b) is:4. What is the yield-to-maturity of a corporate bond with a 3-year maturity, 5 percent coupon(semi-annual payments), a $1,000 face value, if the bond sold for $978.30?Payments comprise an ordinary annuity of $25 every 6 months for 3 years plus a lump sum of $1,000 at end of 3 years. What discount rate equates this payment stream to $978.30?Calculator: 6 N 25 PMT -978.30 PV 1,000 FV I = 2.899% (semiannual yield, or i/2 in the equation above); double to annualize: 5.80%.7. Carol Chastain purchases a one-year discount bond with a face value of $1,000 for $862.07. Whatis the yield of the bond?Rearranging Equation (5.3), i = (1,000/862.07) – 1 = 16%.8. David Hoffman purchases a $1,000 20-year bond with an 8% coupon rate (annual payments).Yields on comparable bonds are 10%. David expects that, two years from now, yields on comparable bonds will have declined to 9%. Find his expected yield, assuming the bond is sold in two years.Based on the YTM of 10% at the time of purchase, the purchasing price is $829.73:Calculator: 1000 FV 20 N 10 I 80 PMT PV = $829.73.In two years, based on 18 years remaining to maturity and the YTM of 9%, the bond price is expected to be $912.44:The expected yield is the rate that discounts the cash flows the investor expects to receive (in this case, two annual coupons of $80 and the selling price of $912.44) to the amount the investment was purchased for (in this case, $829.73):Calculator: 912.44 FV 2 N PV = -$829.73. 80 PMT I = 14.29%9. Calculate the duration of a $1,000 4-year bond with an 8% coupon (annual payments) that iscurrently selling at par.The following table is useful for the duration calculation:________________________________________________________________Early cash flows (high reinvestment risk) will be weighted at a low value, thus lowering duration.If the bond is held 3.577 years, the investor will earn the yield to maturity, 8%. If held to maturity, price risk is eliminated, but realized yield will be higher/lower than 8% depending on reinvestment rates.10. Calculate the duration of a $1,000, 12-year zero coupon bond using annual compounding and a currentmarket rate of 9%.Duration = 12 years; the duration of a zero coupon bond is, by definition, its term to maturity.Check: D = (1,000*12/1.0912)/(1,000/1.0912) = 1211. Define interest rate risk. Explain the two types of interest rate risk. How can an investor with agiven holding period use duration to reduce interest rate risk?Interest rate risk is the potential deviations of realized yields from expected yields caused by changes in market interest rates. Interest rate risk comprises two subsidiary risks. Price risk is the potential variability in price (capital gains/losses) as price varies inversely with yields. Reinvestment risk is the potential variability in reinvestment rates, relative to the yield to maturity, caused by changing market interest rates. Selecting an investment with duration equal to the planned holding period locks in the yield to maturity.12. Calculate the duration for a $1000, 4-year bond with a 4.5% annual coupon, currently selling atpar. Use duration to estimate the percentage change in the bond’s price for a decrease in themarket rate to 3.5%. How different is your answer from the actual price change calculated using Equation 5.6?Duration is the sum of the time-weighted cash flows divided by the price of the bond: $3748.97/ $1000 or 3.75 years. Per Equation 5.8, %ΔPB ≈ (-3.75)(-0.01/1.045)(100) ≈ 3.59%; compared to the actual price change of 3.67% (found by comparing the totals of Columns 3 and 5 above (the price rises from $1,000 to $1,036.73) or by applying Equation 5.6).13. A bond with 3 years to maturity and a coupon of 6.25% is currently selling at $932.24. Assumeannual coupon payments.a.What is its yield to maturity?pute its duration using Equation 5.7 and the YTM calculated above at the discount rate.c.If interest rates are expected to decrease by 50 basis points, what is the expected dollar change inprice? Percentage change in price?a.Calculator: 1,000 FV 3 N PV = -$932.24. 62.50 PMT I = 8.92%b. D = (62.5/1.0892 + 62.5*2/1.08922 +1,062.5*3/1.08923)/932.24 = 2,629.51/932.24 = 2.82.c.Per Equation 5.8, %ΔPB ≈ (-2.82)(-0.005/1.0892)(100) = 1.29%. Based on the initial will be priceof $932.24, the dollar change in price is 1.29% of $932.24, or $12.03, and the new price is $944.27.This is an approximation. The actual new price will be $944.50:Calculator: 1,000 FV 3 N I = 8.42 62.50 PMT PV = 944.50.This represents a $12.26, or a 1.31%, increase in the bond price.CHAPTER 63THE STRUCTURE OF INTEREST RATESANSWERS TO END-OF-CHAPTER QUESTIONS3. A commercial bank made a five-year term loan at 13 percent. The bank's economics departmentforecasts that one and three years in the future, the two-year interest rate will be 12 percent and 14 percent, respectively. The current one-year rate is 7 percent. Given that the bank's forecast isreliable, has the bank set the five-year rate correctly?Given the bank's forecast, the five-year rate (t R5) should be equal to 10.64 percent using Equation(6.1):[(1.07)(1.12)2(1.14)2]1/5 -1 = 11.77%. The bank's loan rate is higher, likely to compensate thebank for the default risk of the loan.5. What do bond ratings measure? Explain some of the important factors in determining a security'sbond rating.Bond ratings measure default risk. Among the important determinants of a firm’s bond rating are: (1) the firm’s expected cash flows; (2) the amount of the firm’s fixed contractual cash payments; (3) the length of time the firm has been profitable; and (4) the variability of the firm’s earnings.7. Explain the importance of a call provision to investors. Do callable bonds have higher or loweryields than similar non-callable bonds? Why?A call provision allows an issuer to retire a bond prior to its stated maturity. Callable bonds havehigher yields than similar non-callable bonds because of the possibility of not receiving the expected yield to maturity if a bond is retired before its maturity (e.g., calling for refunding purposes).8. Define marketability. Explain why marketability of a security is important to both investor andissuer.Marketability refers to the ease with which an investor can sell an asset. For investors, marketability means that the security can be sold easily in some secondary market; for issuers, marketablesecurities have lower borrowing costs.9. A new-issue municipal bond rated Aaa by Moody's Investor Service is priced to yield 8 percent. Ifyou are in the 33 percent tax bracket, what yield would you need to earn on a taxable bond to be indifferent?Using Equation 6.4: 8% = i bt (1-.33); find i bt = 8%/(1 - .33) = 11.94%11. Under which scenario, rising interest rates or falling interest rates, would a bond investor be mostlikely to exercise a put option on a bond? Explain.A put option would give the bondholder the option of selling the bond back to the issuer. This islikely only if current interest rates are above the coupon rate on the bond. Such bonds are not likely to trade at a discount relative to the put price, for they are redeemable by the issuer if rates increase.12. Suppose the 7-year spot interest rate is 9 percent and the 2-year spot rate is 6 percent. The4forecasted 3-year rate two years from now is 7.25 percent. What is the implied forward rate on a 2-year bond originating 5 years from now? {HINT: Under the expectations hypothesis, inequilibrium an investor with a 7-year holding period will be indifferent between investing in a7-year bond or a combination of securities over the same period.}One must calculate the rate on a 2-year bond (t+5f 2) acquired after investments for two years (1.06)2 and three more years (1.0725)3 that makes an investor indifferent to a 7-year bond at 9 percent(1.09)7.1.097 = 1.062 1.07253(1 + t+5f 2)2(1+ t+5f 2)2 = 1.097/(1.062 1.0725)3 or (1+t+5f 2) = [1.8280/1.3861]1/2t+5f 2 = (1.3188)1/2 - 1 = 14.84%Proof: 1.062 1.07253 1.14842 = 1.09713. Suppose you hold a corporate bond that is convertible into the firm's stock. Stock prices are falling and interest rates are also falling. Would it be a good idea to exercise your conversion option under these conditions? Why?Assuming that the firm's stock price has also been falling, the value of the conversion option is low. With interest rates falling, the bond is likely to be selling at a premium over the stock conversion value. In that situation, conversion would cost the investor money! It is not likely that one would convert to stock at this time.16.Assume that the term structure of U.S. Treasury securities includes the following rates:Using this information, calculate: (a) the six-month annualized yield expected in the second half of the current year, and (b) the one-year expected for year 3. [HINT: To answer (a), you willneed to adjust the term structure formula for semiannual compounding.]a. %47.410226.10452.11)0457.1()0452.1(225.015.05.0=-⎥⎦⎤⎢⎣⎡=-⎥⎦⎤⎢⎣⎡=+f tb. %42.41)0451.1()0448.1(2312=-=+f t17. The observed yields on 1-year and 3-year securities are 8 percent and 11 percent, respectively. Whatis the expected yield on a 2-year security 1 year from now?%53.121)08.1()11.1(2/1321=-⎥⎦⎤⎢⎣⎡=+f t18. An investor has an investment horizon of four years. The yield on a 2-year security today is 6 percentand the implied forward rate on a 2-year security two years from now is 6.75 percent. What should be the yield on a 4-year security today such that the investor is indifferent between investing in a 4-year security versus a combination of two-year securities?Since (1 + t R 4) = [(1 + t R 2)2(1 + t+2f 2)2]1/4, t R 4= (1.062*1.06752)1/4 – 1 = 6.37%CHAPTER 7MONEY MARKETSANSWERS TO END-OF-CHAPTER QUESTIONS1. Calculate the bond equivalent yield for a 180-day T-bill that is purchased at a 6% asked yield. If thebill has a face value of $10,000, calculate its price.First calculate the price of the T-bill using eq. 7.3 which is derived from eq. 7.1 in the text:700,9$300000,10$000,10$36018006.0000,10$3600=-=⎥⎦⎤⎢⎣⎡⨯⨯-=⎥⎦⎤⎢⎣⎡⨯⨯-=f d f P n y P Pwhere P f is the face value ($10,000), y d is the bank discount rate (6%) and n is the number of days (180).The bond equivalent yield (y be ) uses the net amount of funds invested or price as the divisor and 365 days (See Eq. 7.2):%27.6%100180365700,9$700,9$000,10$%10036500=⨯⨯-=⨯⨯-=nP P P y f be2.What are the characteristics of money market instruments ? Why must a financial claim possess these characteristics to function as a money market instrument ?The three fundamental characteristics of money market instruments are: (a) low default risk, (b) short-term to maturity, and (c) high marketability. These characteristics give money marketinstruments their characteristic of being low risk. Money market investors demand low-risksecurities because their cash excesses are only temporary.8.Suppose Fargood Corporation engages in a repurchase agreement with The National Bank of Nebraska. In the agreement, Fargood sells $9,987,950 worth of Treasury securities to the bank and agrees to repurchase the securities in 30 days for $10,000,000. a. Is this transaction a loan, and if so, who is the borrower and who is the lender? Defend youranswer.The transaction is a repurchase agreement for Fargood and a reverse repurchase agreement for the bank. The bank is the lender because it is buying (investment of funds) the Treasuries owned by Fargood, the borrower of the funds for the period of the repo. Technically, it is not a loan but a purchase with agreement to resell, but the effect is the same as a loan to a customer. b. Is the loan collateralized? What is the collateral? Who holds the collateral during the termof the agreement?The loan is collateralized because the securities sold serve as collateral. The bank or offsite depository would hold the securities during the contract period. c. What interest rate (or yield) is earned by the lender?The annualized yield to the bank (cost to Fargood) would be:%45.130360950,987,9$950,987,9$000,000,10$3600=⨯-=⨯-=nP P P y repo repod. Draw T-accounts for this transaction, similar to the example earlier in the chapter. Showthe assets and liabilities for each party before and after the transaction.Fargood Corp National Bank1) +Deposit 1) +T.Sec. 1)+Deposit (Fargood) in bank $9,987,950 $9,987,950 $9,987,950 -T Sec. $9,987,950 2) -Deposit 2)-Capital 2) -T.Sec. 2)-Deposit (Fargood) $10,000,000 loss on repo $10,000,000 $10,000,000 $12,050 2)+Capital gain +T. Sec. $12,050 $10,000,000 9. Suppose 7-day fed funds trade at 1.65 percent annually. What is the yield on fed funds on abond-equivalent basis?To compare yields in the fed funds market with those of other money market instruments, the fed funds rate must be converted into a bond equivalent yield.%673.1360365%65.1360365=⎪⎭⎫⎝⎛=⎪⎭⎫ ⎝⎛=ff be y yCHAPTER 8 BOND MARKETSANSWERS TO END-OF-CHAPTER QUESTIONS1. Calculate the gross profit that an underwriter would make if it sold $10 million worth of bonds at par (face value) and paid the firm that sold the bonds 99.25% of par.The gross profit would be 0.75% of the $10 million raised in the market or:0.0075 (10,000,000) = $75,000.2. If a bond dealer bought a $100,000 municipal bond at 90% of par and sold it at 93% of par, how much money did the dealer make on the bid-ask spread?The spread of 3% of $100,000 is $3,000.3.If a corporate bond paid 9% interest, and you are in the 28% income tax bracket, what rate would you have to earn on a general obligation municipal bond of equivalent risk and maturity in order to be equally well off? Given that municipal bonds are often not easily marketable, would you want to earn a higher or lower rate than the rate you just calculated?The after tax yield on the taxable corporate bond is 6.48% or [9%(1-0.28)] and is the comparable rate of a tax-free municipal bond. For any added risk on the muni bond (e.g., lower marketability), the investor would pay less or require a higher rate of return (i.e., above 6.48%).8.Define the following terms: (a) private placement, (b) asset-backed security, (c) callable securities, (d) sinking fund provisions, and (e) convertible features of securities .The above terms are explained as follows:(a) private placement is the sale of bonds to a single investor or small group ofsophisticated investors, that meet the guidelines for avoiding registration and disclosure requirements of the SEC and state laws. SEC requires that the issue be sold to no more than 35 investors to qualify as a private placement.(b) asset-backed securities are the financial claims issued when loans are securitized; (c) callable securities can be retired by the issuer's option prior to their stated maturityat a pre-specified price called the call price. Advantage is to issuers and investors have to be compensated with a call premium in the form of a higher yield.(d) sinking fund provisions require the issuer to retire a percentage of a bond issue onan annual basis. It reduces the risk of default to investors.(e) convertible features of securities are options of the investor to convert the securityinto another form of security, typically into an equity security12. What is a credit spread? What happened to credit spreads during the financial crisis of2007-2009?A credit spread is the difference between yields of otherwise similar debt securities withdifferent credit risk. The credit spreads started to widen in the middle of 2007 and peaked in December 2008. The Baa-Treasury spread widened much more than the Aaa-Treasury spread. This is a manifestation of a flight to quality. The credit spreads narrowed in thesecond half of 2009 and 2010, when the bond markets returned to relative normalcy.CHAPTER 10EQUITY MARKETSANSWERS TO END-OF-CHAPTER QUESTIONS2. Why are convertible securities more attractive to investors than simply holding a firm's preferredstock or corporate bonds?Convertibles provide a set, prior claim if the common equity does not perform. If the stockappreciates, the convertibles may participate in the good fortune of the company, created with their funds. The tradeoff is a lower yield on convertible securities.4. Weber Corporation has 10 million shares of a preferred stock issue outstanding that pays acumulative $6 annual dividend on a quarterly basis. As a result of poor profitability, however, the company has not paid the preferred stock dividend for the previous five quarters. The company also has 20 million shares of common stock outstanding. Weber Corporations’ profitability hasimproved recently and the board of directors believes that the company can pay $100 million individends next quarter. How much of a dividend can the company pay on its common stock?Of the $100 Million available for total dividends, the preferred stock is cumulative so that dividend arrearages must be paid before any dividend may be paid to common.Preferred Dividends to be paid:Quarterly preferred dividend = $6.00/4 = $1.50Accumulated preferred dividend to be paid first = $1.50*5 = $7.50/shareTotal Preferred Dividends to be paid = $7.50 x 10 million shares = $75 million Before paying a common dividend, the current quarter’s preferred dividend must be paid.Amount due to preferred stockholders = ($1.50 x 10 Mil) = $15 Million,Common Dividends to be paid:Amount available for common stockholders = $10 MillionCommon dividends per share = $10 Mil/20 Mil. Shares = $0.50 per share。

金融市场与金融机构中文

金融市场与金融机构答案中文【篇一：fabozzi_ 金融市场与金融机构基础课后答案】the u.s. federal reserveand the creation of moneycentral banks and their purposethe primary role of a central bank is to maintain the stabilityof the currency and money supply for a country or a group of countries. the role of central banks can be categorized as: (1)risk assessment, (2) risk reduction, (3) oversight of payment systems, (4) crisis management.one of the major ways a central bank accomplishes its goalsis through monetary policy. for this reason, central banks are sometimes called monetary authority. in implementingmonetary policy, central banks, acting as a reserve bank,require private banks to maintain and deposit the requiredreserves with the central bank. in times of financial crisis,central banks perform the role of lender of last resort for the banking system. countries throughout the world may havecentral banks. additionally, the european central bank is responsible for implementing monetary policy for the member countries of the european union.there is widespread agreement that central banks should be independent of the government so that decisions of the central bank will not be influenced for short-term political purposessuch as pursuing a monetary policy to expand the economybut at the expense of inflation.in implementing monetary and economic policies, the unitedstates is a member of an informal network of nations. thisgroup started in 1976 as the group of 6, or g6: us, france, germany, uk, italy, and japan. thereafter, canada joined to forthe g7. in 1998, russia joined to form the g8.the central bank of the united states: the federal reservesystemthe federal reserve system consists of 12 banking districts covering the entire country. created in 1913, the federalreserve is the government agency responsible for the management of the us monetary and banking systems. it is independent of the political branches of government. the fed ismanaged by a seven-member board of governors, who are appointed by the president and approved by congress.the fed ’s tools for monetary management have been made more difficult by financial innovations. the public ’s increasing acceptance of money market mutual funds has funneled a large amount of money into what are essentially interest- bearing checking accounts. securitization permits commercial banks to change what once were illiquid consumer loans of several varieties into securities. selling these securities gives the banks a source of funding that is outside the fed ’s influence.instrument of monetary policy: how the fed influences the supply of moneythe fed has three instruments at its disposal to affect the level of reserves.under our fractional reserve banking system have to maintain specified fractional amounts of reserves against their deposits. the fed can raise or lower these required reserve ratios, thereby permitting banks to decrease or increase their lending and investment portfolios. a bank ’s total reserves equal its required reserves plus any excess reserves.the fed ’s most powerful instrument is its authority to conduct open market operation. it buys and sells in open debt markets government securities for its own accounts. the fed prefers to use treasury bills because it can make its substantial transactions without seriously disrupting the prices or yieldsof bills.the federal open market committee, or fomc, is the unit that decides on the general issues of changing the rate of growth in the money supply, by open market sales or purchases of securities. the implementation of policy through open market operations is the responsibility of the trading desk of the federal reserve bank of new york.the fed often employs variants of simple open market purchases and sales, these are called the repurchase agreement (or repo) and the reverse repo. in a repo, the fed buys a particular amount of securities from a seller that agrees to repurchase the same number of securities for a higher price at some future time. in a reverse repo, the fed sells securitiesand makes a commitment to buy them back at a higher price later.a bank borrowing from the fed is said to use the discount window. the discount rate is the rate charged to banks borrowing directly from the fed. raising the rate is designed to discourage such borrowing, while lowering should have the opposite effect.different kinds of moneymoney is that item which serves as a numeraire. in a basic sense money can be defined as anything that serves as a unit of account and medium of exchange. we measure prices in dollars and exchange dollars for goods. hence coins, currency, and any items readily exchanged into dollars (checking deposits or now accounts) constitute our money supply.money and monetary aggregatesmonetary aggregates measure the amount of money available to the economy at any time. the monetary base is defined as currency in circulation (coins and federal reserve notes) and reserves in the banking system. the instruments that serve as a medium of exchange can be narrowly defined as m1, which is currency and demand deposits. m2 is m1 plus time and savings accounts, and money market mutual funds. finally, m3 is m2 plus short-term treasury liabilities. while all three aggregates are watched and monitored, m1 is the most common form of the money supply, with its trait as being the most liquid. the ratio of the money supply to the economy ’s income is known as the velocity of money.the money multipier: the expansion of the money supplythe money multiplier effect arises from the fact that a small change in reserves can produce a large change in themoneysupply. through our fractional reserve system, a small increasewill allow an individual bank, to lend out the greater part of these additional funds. these loans subsequently become deposits in other banks allowing them to expand proportionately. so, while one bank can expand its loans (or deposits) by an amount 1% of reserves required, all banksinthe system can do likewise. thus, in a simple format total change in deposits can be stated as change in reserves divided by the reserve requirement, which is also theformulafor perpetuity. for example, if the change in the level ofreserves is $100 and the reserve requirement is 20%, the change in total deposits will be $500 for a multiplier of 5. of course, major assumptions are that banks will fully loan out their excess reserves and that depositors will not withdraw any of these extra reserves.the impact of interest rates on the money supplyhigh rates of interest may make keeping excess reserves costly, since unused funds represent loans not made and interest not earned. high rates of interest will also affect the pub lic ’s demand for holding cash. if deposits pay competitive interest rates, customers will be more willing to hold suchbank liabilities and less cash. therefore, a higher rate of interest can actually spur growth of the money supply. more likely, however, it will deter borrowing and slow monetary growth.the money supply process in an open economyin the modern era, almost every country has an open economy. foreign commercial and central banks hold dollar accounts in the united states. their purchases and sales of these deposits can affect exchange rates of the dollar against their own currency. the fed has responsibility for maintaining stability in exchange rates. a purchase of foreign exchange with dollars depreciates the dollar ’s value, but it also adds dollars to the accounts of foreign banks in this country, thus adding to the u.s. monetary base. most central banks of large economies own or stand ready to own a large amount of each of the world ’s major currencies, which are considered international reserves. sales of foreign exchange transactions have monetary base implication and hence consequences for the domestic money supply, emphasis is given to coordinating monetarypolicies among developed nations.answers to questions for chapter 4(questions are in bold print followed by answers.)1. what is the role of a central bank?the role of a central bank has several functions: risk assessment, risk reduction, oversight of payment systems,and crisis management. it can do this through monetary policies, and through the implementation of regulations.2. why is it argued that a central bank should be independent of the government?central banks should be independent of the short-term political interests and political influences generally in setting economic policies.3. identify each participant and its role in the process by which the money supply changes and monetary policy is implemented.the fed determines monetary policy and seeks to implement it through changes in reserves. it is up to the nation ’s banking system to act on changes in reserves thereby affecting deposits, which constitute the greater part of the m1 definition of the money supply.4. describe the structure of the board of governors of the federal reserve system.the board of governors of the federal reserve system consists of 7 members who are appointed to staggered 14-year terms. the board reviews discount operations and sets legal reserve requirements. in addition, all 7 members of the board serve on the federal open market committee (fomc), which determines the direction and magnitude of open-market operations. such operations constitute the key instrument for implementing monetary policy.5.a. explain what is meant by the statement “the united states has a fractional reserve banking system. ”b. how are these items related: total reserves, required reserves, and excess reserves?a. a fractional reserve system requires that a fraction or percent of a bank ’s reserve be placed either in currency in vault or with the federal reserve system.b. total reserves are the amounts that banks hold in cash or at the fed. required reserves are amounts required by the fed to meet some specific or legal reserve ratio to deposits. excess reserves are bank reserves in currency and at the fed which are in excess of legal requirements. since these amounts are non-interest bearing, banks are often willing to lend these surplus funds to deficit banks at the fed funds rate.【篇二：米什金《金融市场与金融机构》课后习题及其答案】class=txt>345【篇三：金融市场习题及答案】>1．金融市场是一个包含很多子系统的大系统；子系统之间也其实不是简单的并列关系。

Fabozzi金融市场与金融机构基础课后答案

F a b o z z i金融市场与金融机构基础课后答案(总12页)--本页仅作为文档封面，使用时请直接删除即可----内页可以根据需求调整合适字体及大小--C H A P T E R6I N S U R A N C E C O M P A N I E STYPE OF INSURANCE COMPANIESInsurance companies sell insurance policies for a premium. They have two sources of income: underwriting income, and investment income.Life InsuranceThe life insurance company pays the beneficiary of the life insurance policy in the event of the death of the insured.Health InsuranceThe health insurance company pays the insured all or a portion of the medical treatment of the insured. Until the last decade, the major type of health insurance available was indemnity insurance. Due to the lack of constraints and incentives for cost savings, the medical service insured by indemnity insurance became very expensive. In response, various forms of managed health care have been developed. In general, these forms of managed health care put constraints on the choice of the provider by the insured and on the types of service provided by the provider.Property and Casualty InsuranceProperty and casualty (P&C) insurance companies insure the risk of damage to various types of property.Liability InsuranceThe risk insured against is litigation, or the risk of lawsuits against the insured due to actions by the insured or others. This is typically a third-party claim.Disability InsuranceDisability insurance insures against the inability of employed persons to earn an income. Typically, “own occ” disability insurance is written for professionals in white-collar occupations, and “any occ” for blue-collar workers. There are two types of policies regarding the sustainability of the policy. First, guaranteed renewable is a term where the issuer has to sustainthe policy for a specified period of time, but can change the premium rates for the entire class. The other type is noncancellable and guaranteed renewable whereby the issuer has no right to make any changes in any policy during the specified period.Long-Term Care InsuranceLong-term care insurance provides coverage for custodial care for the aged who are no longer able to care for themselves.Structured SettlementsStructured settlements are fixed, guaranteed periodic payments over a long period of time, typically resulting from a settlement on a disability policy or other type of policy.Investment Oriented ProductsA guaranteed investment contract or guaranteed income contract (or simply GIC), is a pure investment product. In a GIC, a life insurance company agrees, for a single premium, to pay the principal amount and a predetermined annual crediting rate over the life of the investment, all of which is paid at the maturity date. A life insurance company agrees in return for a premium to pay the principal amount and a predetermined annual crediting rate over the life of the investment. Effectively, a GIC is a zero coupon bond issued by a life insurance company and as such exposes the investor to the same credit risk. Some GICs require a single premium payment (bullet), others provide windows wherein deposits are accepted over time at the same interest rate. GICs are popular contracts for pension funds, since interest rate risk assumed by insurance company. But investors still have to worry about the credit risk of the insurance company.AnnuityAn annuity is often described as a mutual fund in an insurance wrapper. The income and realized gains are not taxable if not withdrawn from the annuity product. Thus, the “inside buildup” of returns receives a favorable tax treatment. Annuities can be either fixed, or variable. For a single payment or premium the insurance company will provide fixed payments for the life of the policyholder. It can also provide a “lump sum” payment to the retiree after a number of years of accumulating and investing premium payments.Monoline Insurance CompaniesMonoline insurers guarantee the timely repayment of the bond principal and interest when a bond insurer defaults on these payments. The insured securities have traditionally been municipal bonds, but they now includestructured finance bonds, CDOs, CLOs, and asset-backed bonds. Monoline insurers have been rated AAA and must have this high rating to be effective since they transfer their rating to the bond issue being insured.INSURANCE COMPANIES VERSUS TYPES OF PRODUCTSTraditionally, life and health products were coupled by an insurance company because of some of the similarities of the products. Property and casualty products were also provided by P&C companies. Companies that provide both types of insurances (life, health, property, casualty) are called multiline insurance companies. Investment products tend to be sold by life insurance companies.Recently, health insurance companies have separated from life insurance. This change has been due to mainly federal regulation of the health industry. Life insurance companies have focused on investment products. Also, disability insurance is now sold primarily by pure disability companies.FUNDAMENTALS OF INSURANCE INDUSTRYA fundamental aspect of the insurance industry results from the relationship between the revenues and costs. A company collects its premium income initially and invests these receipts in its portfolio. The payments on the insurance policy occur later and, depending on the type of insurance, in a perhaps very unpredictable manner. The payments are contingent on potential future events.An insurance policy is a binding contract for which the policyholder pays premium in exchange for the insurance company’s promise to pay specified amounts contingent on future events. The accepted policy is an asset for the owner and a liability for the insurance company.Life insurance and property and casualty insurance companies are financial intermediaries that, for a price, will make a payment if a certain event occurs. They function as risk bearers. The principal event that the life insurance company insures against is death: a life insurance company agrees to make either a lump sum payment to the beneficiary of the policy or make a series of payments. However, life insurance protection is not the only financial product sold by these companies. A major portion of the business of life insurance companies is now in the area of providing retirement benefits. The key distinction between life insurance and property and casualty insurance (P&C) companies is the difficulty of projecting whether a policyholder will be paid off and how much the payment will be.REGULATIONS OF INSURANCE INDUSTRYRegulation is primarily at the state level as a result of 1945 federal statute (McCarran-Ferguson Act). Model laws and regulations are developed by National Association of Insurance Commissioners(NAIC). Insurance companies are also rated by the rating agencies.To assure financial stability, insurance companies must maintain reserves or surplus, which are the excess of assets over liabilities. State statutory surplus requirements are called statutory surplus, which is distinguished from generally accepted accounting principles (GAAP) surplus.STRUCTURE OF INSURANCE COMPANIESInsurance companies are really a composite of three companies. First there is the “home office” or actual insurance company. Second, there is the investment component, which invests the premium collected in the investment portfolio. This is the investment company. The third is the distribution component of the sales force. There are different typed of distribution forces. Finally there are also brokers who sell insurance products of many companies.Insurance companies are attracted by commercial bank customer contacts. As a result, commercial bank distribution of insurance company products has grown. This relationship is called bankassurance.FORMS OF INSURANCE COMPANIESThere are two forms of insurance companies: stock and mutual. A stock insurance company is similar in structure to any corporation or public company. Shares (of ownership) are owned by independent shareholders and are traded publicly. The shareholders care only about the performance of their shares that is the stock appreciation and the dividends. The insurance policies are simply the products or business of the company. In contrast, mutual insurance companies have no stock and no external owners. Their policyholders are also their owners. The owners, that is the policyholders, care primarily or even solely about the performance on their insurance policies, notably the company’s ability to pay on the policy. Since theses payments may occur considerably into the future, the policyholders view may be long term.Finally a new form of insurance company, which is a hybrid between a pure mutual and a pure stock company has been approved by some states and implemented by some insurance companies in these states since their introduction in 1996. This form is called a mutual holding company (MHC).INDIVIDUAL VERSUS GROUP INSURANCEInsurance products can be sold on individual and group bases. Also, in the P&C business, insurers can sell personal lines and commercial lines of insurance products.TYPES OF LIFE INSURANCEThere are two fundamentally different types of life insurance: term (life) insurance and cash value life insurance.Term InsuranceTerm policies pay off only on death. Three are no investment benefits and so the premiums are substantially lower than those on whole life policies. Most group policies are t erm policies. “Term” implies that coverage is available only during the premium-paying term of the contract.Cash Value or Permanent Life InsuranceThere is a broad classification of life insurance, which is cash value, or permanent or investment type life insurance. A common type of cash value life insurance is whole life insurance. This cash value can be withdrawn and can also be borrowed against by the owner of the policy. If the owner wishes to let the policy lapse, he or she can withdraw the cash value. A major advantage of this type of policy is that the inside buildup is not subject to tax, ., is taxed as either income or capital gains. Neither is the beneficiary subject to income tax.Guaranteed cash value life insurance:This insurance provides a cash value based on a minimum dividend paid on the policy. Additionally, the policy can be either participating or nonparticipating. For a nonparticipating policy, the minimum dividend and the minimum cash value on the policy are the guaranteed amounts. For the participating policy, the dividend paid on the policy is based on the realized actuarial experience of the company and its investment portfolio.Variable life insurance:Contrary to the guaranteed or fixed cash value policies based on the general account portfolio of the insurance company, variable life insurance policies allow the policy owner to, within limits, allocate their premium payments to and among separate investment accounts maintained by the insurance company. Variable life insurance, which typically has common stock investment options, has grown quickly with the stock market rally of the 1990’s.Flexible premium policies—universal life insurance:The key element of universal life is the flexibility of the premium. The policy cash value is set up as the cash value fund to which the investment income is credited and from which the cost of term insurance for the insured is debited. This separation of the cash value from the pure insurance is called the unbundling of the traditional life insurance policy.Variable universal life insurance: Variable universal life insurance combines the features of variable life and universal life policies, ., the choice of separate account investment products and flexible premiums.Survivorship (Second to Die) InsuranceAn added dimension of the whole life policies is that two people are jointly insured and the policy pays the death benefit not when the first person dies,but when the second person dies. This is called survivorship insurance or second-to-die insurance.GENERAL ACCOUNT AND SEPARATE ACCOUNT PRODUCTSThe general account of an insurance company refers to the investment portfolio of the overall company. Insurance companies must support the guaranteed performance of their general account products to the extent of their solvency. These are called general account products.Other types of insurance products receive no guarantee from the insurance company’s general account, and their performance is not based on the performance of the insurer’s general account but solely on the performance of an account separate from the general account of the insurer. These products are called separate account products.PARTICIPATING POLICIESThe performance of some general account products is not affected by the performance of the general account portfolio. The policy performance may not participate in the investment performance of the insurer’s general account investment portfolio. Such a policy is nonparticipating policy. Other general insurance products participate in the performance of the company’s general account performance. Such a policy is called a participating policy. Both stock and mutual insurance companies write both general and separate account products, but most participating general account products are written in mutual companies.INSURANCE COMPANIES INVESTMENT STRATEGIESIn general the characteristics of insurance company investment portfolio should reflect their liabilities - the insurance products they underwrite. There are many differences among the various types of insurance policies. Among them are:The expected time at which the average payment will be made by theinsurance company (Technically, the “duration” of the payments)The statistical or actuarial accuracy of estimatesOther factorsThe key distinction between life insurance, property and casualty insurance companies lies in the difficulty of projecting whether or not a policyholder will be paid off and how much the payment will be. There are also differences in investment strategy between public (or stock) and mutual insurance companies of the same type. The major difference is that stock companies tend to have less common stock than mutual companies.Most insurance company assets consist of debt, both public and private. In fact, life insurers as a group are the largest holders of bonds. Since life insurers are effectively taxed at very low rates, there are no advantages to holding municipals. The reason for bond holdings are (1) to match maturities, since liabilities are often long-term and at a fixed rate, and (2) regulations require that bonds be booked at cost, while stocks must be written at market value.CHANGES IN THE INSURANCE INDUSTRYThere have been three major types of changes in the insurance industry in the last two decades: (1) deregulation of the financial system; (2) internationalization of the insurance industry; (3) demutulization.Deregulation of the Financial SystemIn 1933, Congress passed the Glass-Steagall Act, which separated commercial banking, investment banking, and insurance. This act resulted in the breakup of the House of Morgan into separate investment banking and commercial banking entities. . On November 12, 1999 the Gramm-Leach-Bliley Act (GLB), called the Financial Modernization Act of 1999, was signed into law. This act removed the 50 year old “anti-affiliation restrictions” among commercial banks, investments banks and insurance companies. The passage of this act has eliminated the barriers between insurance companies, commercial banks, and investment banks and various combinations of these types of companies will continue to evolve. Since then, however, Citigroup sold its insurance business (Travelers) to MetLife, and no other major combinations between banking and insurance have taken place.Internationalization of the Insurance IndustryGlobalization has occurred in many industries, including insurance industry. With respect to the . globalization operates in two directions. First, . insurance companies have both acquired and entered into agreements with international insurance companies and begun operations in other countries. Second, international insurance companies, mainly European, have become even more active in acquiring . insurance and investment companies. The reasons are: (1) more rapid growth of the US financial business, (2) attractive demographics and income potential of the US market, and (3) less regulations.DemutualizationSince the mid-1990s, several insurance companies have changed from mutual to stock companies. Many industry observers believe that the recent demutualized insurance companies will either acquire other financial companies or will be acquired by other financial companies.EVOLUTION OF INSURANCE INVESTMENT AND RETIREMENT PRODUCTSEven prior to the Financial Modernization Act of 1999, there was an increasing overlap of insurance, investment and pension products and the distribution of those products. The passage of this Act has accelerated this convergence.Three decades ago there were three distinct types of products for individuals: insurance, savings/investment, and retirement. Retirement products include individual retirement accounts. During the last two decades, many productshave been developed that fit into two or even three of these categories. Products that are hybrid of retirement and investment products are 401k and Roth 401k.401(k) Plans and Roth 401(k) Plans401(k) plans are plans provided by an employer whereby an employee may elect to contribute pretax dollars to a qualified tax-deferred retirement plan.IRAs and Roth IRAsWhile a 401(k) is an employer-sponsored retirement program, the most common types of IRAs are personal tax-deferred retirement plans. Individually sponsored IRAs include traditional IRA, Roth IRA, and rollover IRA. Employer-sponsored IRA included Simplified Employee Pension (SEP) plans, and Savings Incentives Matching Plan for Employees (SIMPLE).ANSWERS TO QUESTIONS FOR CHAPTER 6(Questions are in bold print followed by answers.)1.a.What are the major sources of revenue for an insurance companyb.How are its profits determineda.An insurance company's revenue is generated from two sources: (1) premiumincome for policies written during the year; (2) investment income resulting from the investment of both the reserves established to pay off future claims and the P&C's surplus (asset less liabilities).b.Profit is determined by subtracting from the revenue for the year (asdefined above in question 1a) each of the following items: (1) claim expenses: funds that must be added to reserves for new claims for policies written during the year; (2) claim adjustment expenses: funds that must be added to reserves because of underestimates of actuarially projected claims from previous years; (3) taxes; (4) administrative and marketing expenses associated with issuing policies. If annual premiums exceed the sum of (1),(2) and (4), the difference is said to be the underwriting profit. Anunderwriting loss results otherwise.2. Name the major types of insurance and investment oriented products sold by insurance companies.The major types of insurance products sold are: Life insurance, Health insurance, Property and casualty insurance, Liability insurance, Disability insurance, long-term care insurance, GIC and annuities.3.a.What is a GICb.Does a GIC carry a “guarantee” like a government obligationa. A guaranteed investment contract (GIC) guarantees a fixed interest incomecompounded over the life of the contract. It is like a zero-coupon bond issued by an insurance company, usually to pension funds. A GIC shifts the interest rate risk from a pension fund to the issuer.b.The guarantee is given only by the insurance company. There is nogovernment bailout in case of insolvency of the issuer.4. What are some key differences between a mutual fund and an annuityIn a mutual fund, all income is taxable, and no guarantees are given in its performance. An annuity is an investment product often called a “mutual fund is in an insurance wrapper”. The wr apper is the guarantee by the insurance company. The company will pay the annuity holder.5. Why should a purchaser of life insurance be concerned about the credit rating of his or her insurance companyThe credit rating of an insurance company is extremely important to the purchaser of the LIC product. The credit risk of insurance company has been prominent by the default of several major issues of GIC . mutual Benefits and Executive Life in 1991.6.a.Does the SEC regulate all insurance companiesb.If not, who regulates thema.No. The insurance industry is regulated by individual states and only theSEC regulates those insurance companies whose stock is publicly traded.b.State laws and NAIC, a voluntary association of state insurancecommissioners.7. Does the insurance industry have a self-regulatory group and, if so, what is its roleModel laws and regulations are developed by the National Association of Insurance Commissioners (NAIC), a voluntary association of the state insurance commissioners, for application on insurance companies in all states. An adoption of a model law or regulation by the NAIC is not, however, binding on any state. States typically use these as a model when writing their own laws and regulations.8. What is the statutory surplus and why is it an important measure for an insurance companyFor an insurance company, surplus is simply total assets minus liabilities, or net worth. Due to state regulations the size of the surplus dictates the amount of common stock that an insurance company can hold and ultimately the amount of business it can write.9. What is bank assurance“Banc assurance” means combining the activities of banking and insurance companies. Several factors could explain the growing interest in banc assurance in certain regions: (1) deregulation and increased competition are forcing banking and insurance firms to seek new markets and products, (2) agrowth in savings, and (3) an increased demand for insurance with investment features.10.a.What is meant by “demutualization”b.What are the perceived advantages of demutualizationa.Demutualization refers to changing structure of insurance companies frombeing mutual companies stocks to ownership companies. This recent trend of demutualization in 1990’s is changing th e landscape of insurance industry.b.The advantages of demutualization is more competition, transparency andpressure for better performance for the shareholders.11. Comment on the following quotation from Frank J. Jones, “An Overview of Institutional Fix ed Income Strategies,” in Volume 1 of Professional Perspectives on Fixed Income Portfolio Management (Hoboken, NJ: John Wiley & Sons, 2000):An important impediment to the use of the total rate of return objective by stock life insurance companies is the role of equity analysts on WallStreet. . . . These equity analysts emphasize the stability of earnings and thereby prefer stable income to capital gains. Therefore, they consider only income and not capital gains, either realized or unrealized, in operating income—an important measure in their overall rating. While this practice of not considering capital gains may be appropriate for bonds, it certainly is inappropriate for common stock and provides a significant disincentive tolife insurance companies for owning common stock in their portfolios. . . . this equity analyst practice does a disservice to policyholders of stock life insurance companies since their insurance companies end up having inferior asset allocations.The statement by Jones has elements of subjective judgment and has several dimensions. It begs the merit of stocks vs. mutual structure of ownership and the respective rates of returns for the shareholders. It may be true that equity analysts emphasize the stability of earnings at the cost of capital gains. But those capital gains are reflected in the current price of the stock. It is up to the shareholders to realize those gains. Thus, the total rate of return objective by stock life insurance companies is not a real impediment.12. What are term insurance, whole life insurance, variable life insurance, universal life insurance, and survivorship insuranceTerm insurance is pure life. If the insured person dies while the policy is intact, the beneficiary receives the death benefit.Whole life insurance pays off a stated amount upon the death of the insured and accumulates a cash value that can be redeemed by the policyholder.Universal life pays a dividend that is tied to market interest rates. Essentially, the cash value of a universal life policy builds and is used to buy term insurance.Variable life insurance provides a death benefit that depends on the market value of the investment at the time of the insured’s death. The premiums are typically invested in common stock; hence such policies are referred to as equity-linked policies. While the death benefits are variable, there is a guaranteed minimum death benefit that the insurer agrees to pay regardless of the market value of the portfolio.Universal Life Insurance: the main element of the universal life insurance is the flexibility of premium for the policyholder. It separates term insurance from cash value element of the policy.13. Why are all participating policies written in an insurance company’s general accountAll participating policies by the insurance company are written in the general account. The general account of an insurance company refers to the investment portfolio of the overall company. Such products “Written by the company itself” are said to have a “general account guarantee” . they are a liability of the insurance company. The rating agencies provide a credit rating based on products written by or guaranteed by the general account.14. Whose liabilities are harder to predict, life insurers or property and casualty insurers Explain why.Property and casualty insurers P&Cs. Life insurance actuaries can predict death rates among various age groups based upon historical data. With P&Cs, the timing and amount of payoffs are almost random by nature. Past experience provides little predictive assistance. Homeowner claims are just as likely to arise in the first year of a policy or ten years later. Even then, the dollar amount of damage claims can be small or for the entire value of the policy.15. How does the Financial Modernization Act of 1999 affect the insurance industryThe Financial Modernization Act of 1999 will affect significantly the insurance industry in several ways. Even before this act, there was an increase overlap of insurance, investment, pension products and the distribution of products. The passage of this act has accelerated this convergence. This act has eliminated the barriers between insurance companies,commercial banks, and investment banks and various combinations will continue to evolve.。