金融机构与市场答案.docx

金融机构与市场答案.docx

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金融机构与市场答案

CHAPTER1

ANOVERVIEWOFFINANCIALMARKETSANDINSTITUTIONS

ANSWERSTOEND-OF-CHAPTERQUESTIONS

2.Explaintheeconomicroleofbrokers,dealers,andinvestmentbankers.Howdoeseachmakeaprofit?

Brokers,dealers,andinvestmentbankersmakemarketsatbothprimaryandsecondarystages.Fundsareraisedandclaimsissuedinprimarymarketswiththehelpofinvestmentbankers,whopurchasesecuritiesfromissuersatonepriceandsellthemtotheinvestingpublicatahigherprice,earningtheunderwriter’sspread.Insecondarymarketsbrokershelpbringbuyersandsellersoffinancialclaimstogether,chargingcommissions,anddealerstradeclaimsinvolume,providingliquidityandpricediscoveryandearningthedifferencebetweenaskandbidprice（thebid-askspread）.

5.Explaintheconceptoffinancialintermediation.Howdoesthepossibilityoffinancialintermediationincreasetheefficiencyofthefinancialsystem?

Financialintermediationistheprocessbywhichfinancialinstitutionsmediateunmatchedpreferencesofultimateborrowers（DSUs）andultimatelenders（SSUs）.FinancialintermediariesbuyfinancialclaimswithonesetofcharacteristicsfromDSUs,thenissuetheirownliabilitieswithdifferentcharacteristicstoSSUs.Thus,financialintermediaries“transform”claimstomakethemmoreattractivetobothDSUsandSSUs.Thisincreasestheamountandregularityofparticipationinthefinancialsystem,thusmakingfinancialmarketsmoreefficient.

6.Howdofinancialintermediariesgenerateprofits?

IntermediariespaySSUslessthantheyearnfromDSUs.Operatingcostsabsorbpartofthismargin.Riskstakenbytheintermediaryarerewardedbyanyremainingprofit.Intermediariesenjoy3sourcesofcomparativeadvantage:

Economiesofscale—largevolumesofsimilartransactions;transactioncostcontrol—findingandnegotiatingdirectinvestmentslessexpensively;andriskmanagementexpertise—bridgingthe“informationgap”aboutDSUs’creditworthiness.

7.Explainthedifferencesbetweenthemoneymarketsandthecapitalmarkets.WhichmarketwouldGeneralMotorsusetofinanceanewvehicleassemblyplant?

Why?

Moneymarketsaremarketsforliquidity,whetherborrowedtofinancecurrentoperationsorlenttoavoidholdingidlecashintheshortterm.MoneymarketstendtobewholesaleOTCmarketsmadebydealers.Capitalmarketsarewhererealassetsor“capitalgoods”arepermanentlyfinanced,andinvolveavarietyofwholesaleandretailarrangements,bothonorganizedexchangesandinOTCmarkets.GMwouldfinanceitsnewplantbyissuingbondsorstockinthecapitalmarket.Investorswouldpurchasethosesecuritiestobuildwealthoverthelongterm,nottostoreliquidity.GMAC,thefinancecompanysubsidiaryofGM,wouldfinanceitsloanreceivablesbothinthemoneymarket（commercialpaper）andinthecapitalmarket（notesandbonds）.GMwouldusethemoneymarketto“store”cashinmoneymarketsecurities,whicharegenerally,safe,liquid,andshort-term.

9.MetropolitanNashvilleandDavidsonCountyissues$25millionofmunicipalbondstofinanceanewdomedstadiumfortheTennesseeTitans.Thebondshaveafacevalueof$10,000each,aresomewhatrisky,andmaturein20years.EnterpriseBankofNashvillebuysoneofthebondsusingfundsdepositedbySarahLevienandTedHawkins,whoeachpurchaseda6-month,$5,000certificateofdeposit.ExplaintheintermediationservicesprovidedbyEnterpriseBankinthistransaction.IllustratewithT-accounts.

MetropolitanNashvilleandDavidsonCountyLevien_________________________________________________________________________

Cash$10,000fromEBN||Bond$10,000toEBNCD$5,000atEBN||Cash$5,000toEBN

Hawkins

_________________________________

CD$5,000atEBN||Cash$5,000toEBN

EnterpriseBankofNashville

___________________________________________________

Bond$10,000fromMNDC||CDLevien$5,000

Cash$5,000fromLevien||CDHawkins$5,000

Cash$5,000fromHawkins||Cash$10,000toMNDC

IfSarahorTedhad$10,000andwantedtotaketheriskspresentedbythebonds,eitherofthemcouldbuyabondinthedirectmarketfromabrokerordealer.EachlikelyprefersthegovernmentguaranteeoftheCD,themoreeasilyaffordabledenominationof$5,000,andthereadyliquidity（netofsomeknown"penaltyforearlywithdrawal"）.EnterpriseBanknowhasatax-freesourceofincomefromthemunicipalbond,hasmadeitsexpertevaluationofcreditrisk,isdiversifiedwithothersecurities,andcanbuythebondswithlowtransactioncosts.Manybanksareunderwritersofmunicipalsecuritiesandcarryinventoriesasdealers.TheCityofNashvillehasfinancedacapitalproject（thestadium）byissuingfinancialclaims（thebonds）.ThebankboughtabondwithdepositfundsitraisedbyissuingSarahandTedCDs,whichareassetstothemandliabilitiestotheBank.ThebondandtheCDsareseparateclaimsvaryingindenomination,maturity,risk,andliquidity.Thebanktakesapositionofrisk,keepspartoftheinterestincomefromthebondsasarewardforthatrisk,anddistributespartofittoSarahandTedtorewardthemforpostponingcurrentconsumption.Thecity,theultimateborrowerorDSU,hasnodirectrelationshipwithSarahandTed,theultimatelendersorSSUs.

15.Whatisthedifferencebetweenmarketabilityandliquidity?

Marketabilityistheeasewithwhichasecuritycanbesoldandconvertedintocash.Liquidityistheabilitytoconvertanassetintocashquicklywithoutalossofvalue.Whilethetwoconceptsaresimilar,marketabilitydoesnotcarrytheimplicationthatthesecurity’svalueispreserved.

16.Municipalbondsareattractivetowhattypeofinvestors?

Municipalbondsarelong-termdebtofstateandlocalgovernments.Theircouponincomeisexemptfromfederalincometax.Therefore,theyareattractivetoindividualsandbusinessesinhighincometaxbrackets.

17.Whydocorporationsissuecommercialpaper?

Commercialpaperisshort-termcorporatedebt;itisissuedtomeetcorporateshort-termcashobligations.

18.Explainwhatismeantbymoralhazard.Whatproblemsdoesitpresentwhenabankmakesaloan?

Whenitcomestoloans,moralhazardoccursifborrowersengageinactivitiesthatincreasetheprobabilityofdefault.Afirmthathastakenabankloanmaytakeonveryriskyinvestmentprojectswhich,ifsuccessful,wouldresultinlargeprofits,butwhichhavehighprobabilitiesoffailure.Thereasonforsuchbehavioristhatlendersdonotsharetheupsidewithshareholdersofthefirm.Toreducemoralhazard,thebankmayimposesomerestrictionsontheborrowerstipulatedintheloancontract（e.g.,tomaintaincertainfinancialratiosatacertainlevelorbetter,tonotacquirecertainassets,ortoreduceexpenses）,andcontinuallymonitortheborrower.

19.Explaintheadverseselectionproblem.Howcanlendersreduceitseffect?

Adverseselectionarisesfromasymmetricinformationand,inthecontextofdebtmarkets,referstoborrowersofpoorcreditqualityapplyingforloans（perhapsbecausesuchborrowersneedtheloansthemostinordertosurvivefinancially）.Thelendermayreduceadverseselectionbyrequiringloanapplicantstosupplydetailedfinancialstatementsandotheradditionalinformation,tousedifferentialloanpricingforborrowersofdifferentcreditquality,ortorejectloanapplicationsiftheriskappearstoohigh.Toprocesstheinformationtheycollect,lendersoftendeveloporacquirefromthirdpartycreditscoringmodelsthathelpdetermineborrowers’creditworthiness.

20.Whyisthefinancialsystemsohighlyregulated?

Theregulationisneededtoprotectconsumersfromabusesbyunscrupulousfinancialfirmsandtoensureeconomicstability.Peopleshouldhaveconfidenceinthefinancialsystemforittofunctionwell,andawell-functioningfinancialsystemiscriticalforensuringtheflowoffundsand,inturn,economicgrowth.

CHAPTER4

THELEVELOFINTERESTRATES

ANSWERSTOEND-OF-CHAPTERQUESTIONS

1.Whatfactorsdeterminetherealrateofinterest?

Therealrateofinterestisdeterminedby:

（a）individualtimepreferenceforconsumption,and（b）thereturnthatfirmsexpecttoearnontheirrealcapitalinvestments.Inequilibrium,therealrateofinterestisdeterminedwhendesiredsavingequalsdesiredinvestment.

2.Ifthemoneysupplyisincreased,whathappenstothelevelofinterestrates?

Anincreaseinthemoneysupplyshiftsthesupplyofloanablefundstotheright,loweringinterestrates（atleastintheshortterm）.

3.WhatistheFishereffect?

Howdoesitaffectthenominalrateofinterest?

TheFishereffectisIrvingFisher’shypothesisthatexpectedinflationisembodiedincurrentnominalinterestrates.Assumingtheabilitytoforecastexpectedinflation,nominalratesshouldvarydirectlywithexpectedinflation.

4.The1-yearrealrateofinterestiscurrentlyestimatedtobe4percent.Thecurrentannualrateofinflationis6percent,andmarketforecastsexpecttheannualrateofinflationtobe8percent.Whatisthecurrent1-yearnominalrateofinterest?

AssumingtheFishereffect,thecurrent1-yearnominalrateshouldbe12percent,thesumoftherealrate（4%）plustheexpectedinflationrate（8%）,anapproximatebutillustrativewayofestimatingtheanswer.Thecorrectwaytodealwithcompoundingratesistomultiply（1+.04）（1+.08）-1=12.32%.

5.Thefollowingannualinflationrateshavebeenforecastforthenext5years:

Year13%

Year24%

Year35%

Year45%

Year54%

Usetheaverageannualinflationrateanda3%realratetocalculatetheappropriatecontractratefora1-yearanda5-yearloan.Howwouldyourcontractratesc