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Financial Markets & Institutions > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

ch6. explain how the Treasury uses the primary market to obtain adequate funding for the US government

A

treasury issues T-Bills through a weekly auction. Investors can submit competitive bid, where the Treasury accepts the highest bids first. Alternatively, investors can submit noncompetitive bids which are automatically accepted. The price to be paid by noncompetitive will be the weighted average price of accepted bids.

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2
Q

ch6. how can investors using the primary T-bill market be assured that their bid will be accepted

A

Investors can ensure their bid will be accepted at competitive bids. Large corporations will use competitive bids since there is a capacity for the amount if noncompetitive bids you can make.

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3
Q

ch6. why do large corporations typically make competitive bids rather than noncompetitive bids for t-bills

A

Large corporations make competitive bids because noncompetitive bidders are limited to the size of noncompetitive bids.

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4
Q

ch6. describe the activity in the secondary t-bill market. how can this degree of activity benefit investors in t-bills?

A

he secondary market for Treasury bills is very active, which makes Treasury bills more attractive because it enhances their liquidity.

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5
Q

ch6. why might a financial institution sometimes consider T-bills as a potential source of funds

A

Financial institutions that have previously purchased Treasury bills can sell these securities in the secondary market whenever they need cash.

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6
Q

ch6. who issues commercial paper

A

Commercial paper is normally issued by well-known, creditworthy firms.

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7
Q

ch6. which types of financial institutions issue commercial paper

A

Bank holding companies and finance companies commonly issue commercial paper.

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8
Q

ch6. why do some firms create a department that can directly place commercial paper

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9
Q

ch6. which criteria affect the decision to create such a department

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10
Q

ch6. why do ratings agencies assign to commercial paper

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11
Q

ch6. explain how investors preferences for commercial paper change during a recession? how would this reaction affect the difference between commercial paper rates and T-bill rates during recessionary periods

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12
Q

ch6. how can small investors participate in investments in negotiable certificates of deposits (NCDs)

A
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13
Q

ch6. would you expect repurchase agreements to have a lower or high annualized yield than commercial paper

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14
Q

ch6. explain how each of the following would use bankers acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks, and (d) investors

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15
Q

ch6. explain how the yield on a foreign money market security would be affected if the foreign currency denominating that security declined to a significant degree

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16
Q

ch6. the maximum maturity of commercial paper is 270 days. why would a firm issue commercial paper instead of longer term securities, even if it needs fund for a long period of time

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17
Q

ch6. you have the choice of investing in top rated commercial paper or commercial paper that has a lower risk rating. how do you think the risk and return performances of the two investments differ

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18
Q

ch6. how do you think the shape of the yield curve for commercial paper and other money market instruments compares to the yield curve for treasury securities?

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19
Q

ch7. what is a bond indenture?

A
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20
Q

ch7. what is the function of a trustee with respect to the bond indenture

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21
Q

ch7. explain the use of a sinking fund provision. how can it reduce the investors risk

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22
Q

ch7. what are protective covenants? why are they needed

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23
Q

ch7. explain the use of call provisions on bonds.

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24
Q

ch7. how can a call provision affect the price of a bond

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25
Q

ch7. explain the use of bond collateral, and identify the common types of collateral for bonds

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26
Q

ch7. what are debentures? how do they differ from subordinated debentures

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27
Q

ch7. what are the advantages and disadvantages to a firm that issues low or zero coupon bonds

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28
Q

ch7. are variable rate bonds attractive to investors who expect interest rates to decrease? explain?

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29
Q

ch7. would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future

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30
Q

ch7. why can convertible bonds be issued by firms at a higher price than other bonds

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31
Q

ch7. if bond yields in Japan rise, how might US bond yields be affected? why

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32
Q

ch7. explain how the credit crisis that began in 2008 affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds

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33
Q

ch7. explain the guidelines for credit rating agencies that resulted from the Financial reform act of 2010

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34
Q

ch7. explain the conditions that led to the debt crisis in Greece

A
35
Q

ch7. explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors who currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future.

A
36
Q

ch8. based on your forecast of interest rates, would you recommend that investors purchase bonds today

A
37
Q

ch8. explain the impact of a decline in interest rates on :

  1. an investors required rate of return
  2. the present value of existing bonds
  3. the prices of existing bonds
A
38
Q

ch8. why is the relationship between interest rates and bond prices important to financial institutions

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39
Q

ch8. determine the direction of bond prices over the last year and explain the reason for it

A
40
Q

ch8. how would a finaical insitution with a large bond portfolio be affected by falling interest rates. would it be affected to a greater extent than a Financial institution with a greater concentration of bonds (and fewer short term securities)

A
41
Q

ch8. since fixed rate mortgages and bonds have similar payment flows, how is a Financial institution with a large portfolio of fixed rate mortgages affected by rising interest rates

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42
Q

ch8. if a bonds coupon rate is greater than the investors required rate of return on the bond, would the bond’s price be greater than or less than its par value

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43
Q

ch8. is the price of a long term bond or the price of a short term security more sensitive to a change in interest rates

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44
Q

ch8. why does the required rate of return for a particular bond change over time

A
45
Q

ch8. assume that inflation is expected to decline in the near future. how could this affect future bond prices. would you recommend that financial institutions increase or decease their concentration in long term bonds based on this expectation

A
46
Q

ch8. explain the concept of bond price elasticity. would bond price elasticity suggest a higher price sensitivity for zero coupon bonds or high coupon bonds that are offering the same yield to maturity. what does this suggest about the market value volatility of mutual funds containing zero coupon treasury bonds vs high coupon treasury bonds

A
47
Q

ch8. an analyst recently suggested that there will be a major economic expansion that will favorable affect the prices of high rated, fixed rate bonds because the credit risk of bonds will decline as corporations improve their performance. assuming that the economic expansion occurs, do you agree with the conclusion

A
48
Q

ch8. when the tensions rise or a war erupts in the middle east, bond prices in many countries tend to decline. what is the link between problems in the middle east and bond prices? would you expect bond prices to decline more in Japan or in the united kingdom as a result of the crisis

A
49
Q

ch8. explain how bond prices may be affected by money supply growth, oil prices, and economic growth

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50
Q

ch8. assume that oil producing countries have agreed to reduce their oil production by 30%. how would bond prices be affected by this announcement

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51
Q

ch8. assume that breaking news causes bond portfolio managers to suddenly expect much higher economic growth. how might bond prices be affected by this expectation? now assume that breaking news causes bond portfolio managers to suddenly anticipate a recession. how might bond prices be affected

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52
Q

ch9. distinguish between FHA and conventional mortgages

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53
Q

ch9. what is the general relationship between mortgage rates and long term government security rates? explain how mortgage lenders can be affected by interest rate movements. also explain how they can insulate themselves against interest rate movements

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54
Q

ch9. how does the initial rate on adjustable rate mortgages (ARMs) differ from the rate on fixed rate mortgages? explain how caps on ARMs can affect a financial institutions exposure to interest rate risk

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55
Q

ch9. why is the 15 year mortgage attractive to homeowners? is the interest rate risk to the financial institution higher for a 15 year mortgage or a 30 year mortgage

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56
Q

ch9. explain the use of a balloon payment mortgage. why might a finanical institution prefer to offer this type of mortgage

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57
Q

describe the growing equity mortgage. how does it differ from a graduated payment mortgagech9.

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58
Q

ch9. why are second mortgages offered by some home sellers

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59
Q

ch9. describe the shared application mortgage

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60
Q

ch9. mortgage lenders with fixed rate mortgages should benefit when interest rates decline, yet research has shown that this favorable impact is dampened. by what?

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61
Q

ch9. describe the factors that affect mortgage prices

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62
Q

ch9. explain why some financial institutions prefer to sell the mortgages they originate

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63
Q

ch9. compare the secondary market activity for mortgages to the activity for other capital market instruments (such as stocks and bonds). provide a general explanation for the difference in the activity level

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64
Q

ch9. what types of financial institutions finance residential mortgages? what type of financial instituting finances the majority of commercial mortgages

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65
Q

ch10. explain the rights of common stockholders that are not available to other individuals

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66
Q

ch10. what is the danger of issuing too much stock? what is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock

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67
Q

ch10. why do firms engage in IPOs? what is the amount of fees that the lead underwriter and its syndicate charge a firm that is going public? why are there many IPOs in some periods and few IPOs in other periods

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68
Q

ch10. explain the difference between obtaining funds from a venture capital firm and engaging in an IPO. explain how the IPO may serve as a means by which the venture capital firm can cash out

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69
Q

ch10. explain the use of a prospectus developed before an IPO. why does a firm do a road show before its IPO. what factors influence the offer price of stock at the time of the IPO

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70
Q

ch10. describe the process of bookbuilding. why is bookbuilding sometimes criticized as a means of setting the offer price

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71
Q

ch10. describe a lockup provision and explain why it might be required by the lead underwriter

A
72
Q

ch10. what is the meaning of an initial return for an IPO

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73
Q

ch10. what does it mean to flip shares? why would investors want to flip shares

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74
Q

ch10. how do IPOs perfrom over the long run

A
75
Q

ch10. discuss the concept of asymmetric information. explain why it may motivate firms to repurchase some of their stock

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76
Q

ch10. explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares

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77
Q

ch10. describe how the interactions between buyers and sellers affects the market value of a firm, and explain how that value can subject a firm to the market for corporate conrol

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78
Q

ch10. explain how ADRs enable US investors to become part owners of foreign exchanges

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79
Q

ch10. explain why stocks traded on the NY stock exchange generally exhibit less risk than stocks that are traded on other exchanges

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80
Q

ch10. are organized stock exchanges used to place newly issued stock

A

Financial Markets & Institutions (2 decks)

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