金融市场习题.docx

金融市场习题.docx

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金融市场习题

Moralhazard:

Theriskthatonepartytoatransactionwillengageinbehaviorthatisundesirablefromtheotherparty’spointofview.

Yieldtomaturity:

Theinterestratethatequatesthepresentvalueofpaymentsreceivedfromacreditmarketinstrumentwithitsvaluetoday.

Optioncontracts:

Contractsthatgivethepurchasertheoptiontobuyorselltheunderlyingfinancialinstrumentataspecifiedprice,calledtheexercisepriceorstrikeprice,withinaspecificperiodoftime.

Capitalmarket:

Afinancialmarketinwhichlonger-termdebt（maturityofgreaterthanoneyear）andequityinstrumentsaretraded.

Ifthereisadeclineininterestrates,whichwouldyouratherbeholding,long-termbondsorshort-termbonds?

Why?

Whichtypeofbondhasthegreaterinterest-raterisk?

Youwouldratherbeholdinglong-termbondsbecausetheirpricewouldincreasemorethanthepriceoftheshort-termbonds,givingthemahigherreturn.

Whateffectwillasuddenincreaseinthevolatilityofgoldpriceshaveoninterestrates?

Interestrateswouldrise.Asuddenincreaseinpeople’sexpectationsoffuturerealestatepricesraisestheexpectedreturnonrealestaterelativetobonds,sothedemandforbondsfalls.ThedemandcurveBdshiftstotheleft,andtheequilibriuminterestraterises.

Whatcharacteristicsdefinethemoneymarkets?

Themoneymarketscanbecharacterizedashavingsecuritiesthattradeinoneyearorless,areof

largedenomination,andareveryliquid.

1.Whyarefinancemarketsimportanttothehealthoftheeconomy?

Becausetheychannelfundsfromthosewhodonothaveaproductiveuseforthemtothosewhodo,therebyresultinginhighereconomicefficiency.

2.Wheninterestraterise,howmightbusinessesandconsumerschangetheireconomicbehavior?

Businesseswouldcutinvestmentspendingbecausethecostoffinancingthisspendingisnowhigher,andconsumerswouldbelesslikelytopurchaseahouseoracarbecausethecostoffinancingtheirpurchaseishigher.

3.Howcanachangeininterestratesaffecttheprofitabilityoffinancialinstitutions?

Achangeininterestratesaffectsthecostofacquiringfundsforfinancialinstitutionsaswellaschangestheincomeonassetssuchasloans,bothofwhichaffectprofits.Inaddition,changesininterestratesaffectthepriceofassetssuchasstockandbondsthatthefinancialinstitutionownswhichcanleadtoprofitsorlosses.

4.Iseverybodyworseoffwheninterestratesrise?

No.Peoplewhoborrowtopurchaseahouseoracarareworseoffbecauseitcoststhemmoretofinancetheirpurchase;however,saversbenefitbecausetheycanearnhigherinterestratesontheirsavings.

5.Whateffectmightafallinstockpriceshaveonbusinessinvestment?

Thelowerpriceforafirm’ssharesmeansthatitcanraiseasmalleramountoffunds,andsoinvestmentinplantandequipmentwillfall.

6.Whateffectmightariseinstockpriceshaveonconsumers’decisionstospend?

Higherstockpricesmeanthatconsumers’wealthishigherandsotheywillbemorelikelytoincreasetheirspending.

7.HowdoesadeclineinthevalueofthepoundsterlingaffectBritishconsumers?

ItmakesforeigngoodsmoreexpensiveandsoBritishconsumerswillbuylessforeigngoodsandmoredomesticgoods.

8.HowdoesadeclineinthevalueofthepoundsterlingaffectAmericanbusinesses?

ItmakesBritishgoodsmoreexpensiverelativetoAmericangoods.AmericabusinesseswillfinditeasiertoselltheirgoodsintheUnitedStatesandabroad,andthedemandfortheirproductswillrise.

9.Howcanchangesinforeignexchangeratesaffecttheprofitabilityoffinancialinstitutions?

Changesinforeignexchangerateschangethevalueofassetsheldbyfinancialandthusleadtogainsandlossesontheseassets.Alsochangesinforeignexchangeratesaffecttheprofitsmadebytradersinforeignexchangewhoworkforfinancialinstitutions.

10.LookingatFigurewhatyearswouldyouhavechosentovisittheGrandCanyoninArizonaratherthantheTowerofLondon?

Inthemid-tolate1970sandthelate1980sandearly1990s,thevalueofthedollarwaslow,makingtravelabroadrelativelymoreexpensive;thatwouldhavebeenagoodtimetovacationintheUnitedStatesandseetheGrandCanyon.Asthedollar’svalueroseintheearly1980s,travelabroadbecamerelativelycheaper,makingitagoodtimetovisittheTowerofLondon.

11.Whatisthebasicactivityofbanks?

Banksacceptdepositsandthenusetheresultingfundstomakeloans.

12.Whataretheotherimportantfinancialintermediariesintheeconomybesidesbanks?

Savingsandloanassociations,mutualsavingsbanks,creditunions,insurancecompanies,mutual

funds,pensionfunds,andfinancecompanies.

13.Canyouthinkofanyfinancialinnovationinthepasttenyearsthathasaffectedyoupersonally?

Hasitmadeyoubetterorworseoff?

Inwhatway?

Answerswillvary.

14.Whattypesofrisksdofinancialinstitutionsface?

Theprofitabilityoffinancialinstitutionsisaffectedbychangesininterestrates,stockprices,andforeignexchangerates;fluctuationsinthesevariablesexposetheseinstitutionstorisk.

15.WhydomanagersoffinancialinstitutionscaresomuchabouttheactivitiesoftheFederalReserveSystem?

BecausetheFederalReserveaffectsinterestrates,inflation,andbusinesscycles,allofwhichhaveanimportantimpactontheprofitabilityoffinancialinstitutions.

1.WhyisashareofIBMcommonstockanassetforitsownerandaliabilityforIBM?

TheshareofIBMstockisanassetforitsownerbecauseitentitlestheownertoashareoftheearningsandassetsofIBM.TheshareisaliabilityforIBMbecauseitisaclaimonitsearningsandassetsbytheowneroftheshare.

2.IFIcanbuyacartodayfor$5000anditisworth$10000nextyearinextraincometomebecauseitenablesmetogetajobasatravelinganvilseller,shouldItakeoutaloanfromLarrytheLoanSharkata90%interestrateifnooneelsewillgivemealoan?

WillIbebetterorworseoffasaresultoftakingoutthisloan?

Canyoumakeacaseforlegalizingloan-sharking?

Yes,Ishouldtakeouttheloan,becauseIwillbebetteroffasaresultofdoingso.Myinterestpaymentwillbe$4,500（90%of$5,000）,butasaresult,Iwillearnanadditional$10,000,soIwillbeaheadofthegameby$5,500.SinceLarry’sloan-sharkingbusinesscanmakesomepeoplebetteroff,asinthisexample,loansharkingmayhavesocialbenefits.（Oneargumentagainstlegalizingloansharking,however,isthatitisfrequentlyaviolentactivity.）

3.Someeconomistssuspectthatoneofthereasonsthateconomiesindevelopingcountriesgrowsoslowlyisthattheydonothavewell-developedfinancialmarkets.Doesthisargumentmakesense?

Yes,becausetheabsenceoffinancialmarketsmeansthatfundscannotbechanneledtopeoplewhohavethemostproductiveuseforthem.Entrepreneursthencannotacquirefundstosetupbusinessesthatwouldhelptheeconomygrowrapidly.

4.InthenineteenthcenturytheU.S.economyborrowedheavilyfromtheBritishtobuildarailroadsystem.Whatwastheprincipaldebtinstrumentused?

Whydidthismakebothcountriesbetteroff?

TheprincipaldebtinstrumentsusedwereforeignbondswhichweresoldinBritainanddenominatedinpounds.TheBritishgainedbecausetheywereabletoearnhigherinterestratesasaresultoflendingtoAmericans,whiletheAmericansgainedbecausetheynowhadaccesstocapitaltostartupprofitablebusinessessuchasrailroads.

5.“Becausecorporationsdonotactuallyraiseanyfundsinsecondarymarkets,theyarelessimportanttotheeconomythanprimarymarkets.”Comment.

Thisstatementisfalse.Pricesinsecondarymarketsdeterminethepricesthatfirmsissuingsecuritiesreceiveinprimarymarkets.Inaddition,secondarymarketsmakesecuritiesmoreliquidandthuseasiertosellintheprimarymarkets.Therefore,secondarymarketsare,ifanything,moreimportantthanprimarymarkets.

6.Ifyoususpectthatacompanywillgobankruptnextyear,whichwouldyouratherhold-bondsissuedbythecompanyorequitiesissuedbythecompany?

Why?

Youwouldratherholdbonds,becausebondholdersarepaidoffbeforeequityholders,whoaretheresidualclaimants.

7.Howcantheadverseselectionproblemexplainwhyyouaremorelikelytomakealoantoafamilymemberthantoastranger?

Becauseyouknowyourfamilymemberbetterthanastranger,youknowmoreabouttheborrower’shonesty,propensityforrisktaking,andothertraits.Thereislessasymmetricinformationthanwithastrangerandlesslikelihoodofanadverseselectionproblem,withtheresultthatyouaremorelikelytolendtothefamilymember.

8.Thinkofoneexampleinwhichyouhavehadtodealwiththeadverseselectionproblem.

9.Whydoloansharksworrylessaboutmoralhazardinconnectionwiththeirborrowersthansomeotherlendersdo?

Loansharkscanthreatentheirborrowerswithbodilyharmifborrowerstakeactionsthatmightjeopardizepayingofftheloan.Henceborrowersfromaloansharkarelesslikelytoengageinmoralhazard.

10.Ifyouareanemployer,whatkindsofmoralhazardproblemsmightyouworryaboutwithyouremployees?

Theymightnotworkhardenoughwhileyouarenotlookingormaystealorcommitfraud.

11.Iftherewerenoasymmetryintheinformationthataborrowandalenderhad,couldtherestillbemoralhazardproblem?

Yes,becauseevenifyouknowthataborroweristakingactionsthatmightjeopardizepayingofftheloan,youmuststillstoptheborrowerfromdoingso.Becausethatmaybecostly,youmaynotspendthetimeandefforttoreducemoralhazard,andsomoralhazardremainsaproblem.

12.“Inaworldwithoutinformationandtransactioncosts,financialintermed