金融市场习题

1、Moral hazard: The risk that one party to a transaction will engage in behavior that is undesirable from the other party's point of view.Yield to maturity : The interest rate that equates the present value of payments received from a credit market instrument with its value today.Option contracts:

2、 Contracts that give the purchaser the option to buy or sell the underlying financial instrument ata specified price, called the exercise price or strike price, within a specific period of time.Capital market: A financial market in which longer-term debt (maturity of greater than one year) and equit

3、y instruments are traded.If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?You would rather be holding long-term bonds because their price would increase more than the price of t

4、he short-term bonds, giving them a higher return.What effect will a sudden increase in the volatility of gold prices have on interest rates?Interest rates would rise. A sudden increase in people' s expectations of future real ethetexpeded'aisesreturn on real estate relative to bonds, so the

5、demand for bonds falls. The demand curve Bd shifts to the left, and the equilibrium interest rate rises.What characteristics define the money markets?The money markets can be characterized as having securities that trade in one year or less, are of large denomination, and are very liquid.1. Why are

6、finance markets important to the health of the economy?Because they channel funds from those who do not have a productive use for them to those who do, thereby resulting in higher economic efficiency.2. When interest rate rise, how might businesses and consumers change their economic behavior?Busine

7、sses would cut investment spending because the cost of financing this spending is now higher, and consumers would be less likely to purchase a house or a car because the cost of financing their purchase is higher.3. How can a change in interest rates affect the profitability of financial institution

8、s?A change in interest rates affects the cost of acquiring funds for financial institutions as well as changes the income on assets such as loans, both of which affect profits. In addition, changes in interest rates affect the price of assets such as stock and bonds that the financial institution ow

9、ns which can lead to profits or losses.4. Is everybody worse off when interest rates rise?No. People who borrow to purchase a house or a car are worse off because it costs them more to finance their purchase; however, savers benefit because they can earn higher interest rates on their savings.5. Wha

10、t effect might a fall in stock prices have on business investment?The lower price for a firm ' shares means that it can raise a smaller amount of funds, and so investment in plant and equipment will fall.6. What effect might a rise in stock prices have on consumers decisions to spend?Higher stoc

11、k prices mean that consumers' wealth is higher and so they will be more likely to increase their spending.7. How does a decline in the value of the pound sterling affect British consumers?It makes foreign goods more expensive and so British consumers will buy less foreign goods and more domestic

12、 goods.8. How does a decline in the value of the pound sterling affect American businesses?It makes British goods more expensive relative to American goods. America businesses will find it easier to sell their goods in the United States and abroad, and the demand for their products will rise.9. How

13、can changes in foreign exchange rates affect the profitability of financial institutions?Changes in foreign exchange rates change the value of assets held by financial and thus lead to gains and losses on these assets. Also changes in foreign exchange rates affect the profits made by traders in fore

14、ign exchange who work for financial institutions.10. Looking at Figure 3.in what years would you have chosen to visit the Grand Canyon in Arizona rather than the Tower of London?In the mid- to late 1970s and the late 1980s and early 1990s, the value of the dollar was low, making travel abroad relati

15、vely more expensive; that would have been a good time to vacation in the United States and see the Grand Canyon. As the dollar's value rose in the19e8a0rlsy, travel abroad became relatively cheaper, making it a goodtime to visit the Tower of London.11. What is the basic activity of banks?Banks a

16、ccept deposits and then use the resulting funds to make loans.12. What are the other important financial intermediaries in the economy besides banks?Savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual funds, pension funds, and finance companies.13. Can you

17、 think of any financial innovation in the past ten years that has affected you personally? Has it made you better or worse off? In what way?Answers will vary.14. What types of risks do financial institutions face?The profitability of financial institutions is affected by changes in interest rates, s

18、tock prices, and foreign exchange rates; fluctuations in these variables expose these institutions to risk.15. Why do managers of financial institutions care so much about the activities of the Federal Reserve System?Because the Federal Reserve affects interest rates, inflation, and business cycles,

19、 all of which have an important impact on the profitability of financial institutions.1. Why is a share of IBM common stock an asset for its owner and a liability for IBM?The share of IBM stock is an asset for its owner because it entitles the owner to a share of the earnings and assets of IBM. The

20、share is a liability for IBM because it is a claim on its earnings and assets by the owner of the share.2. IF I can buy a car today for $5000 and it is worth $10000 next year in extra income to me because it enables me to get a job as a traveling anvil seller, should I take out a loan from Larry the

21、 Loan Shark at a 90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan-sharking?Yes, I should take out the loan, because I will be better off as a result of doing so. My interest payment will b

22、e $4,500 (90% of $5,000), but as a result, I will earn an additional $10,000, so I will be ahead of the game by $5,500. Since Larry ' s l-osahnarking business can make some people better off, as in this example, loan sharking may have social benefits. (One argument against legalizing loan sharki

23、ng, however, is that it is frequently a violent activity.)3. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?Yes, because the absence of financial markets me

24、ans that funds cannot be channeled to people who have the most productive use for them. Entrepreneurs then cannot acquire funds to set up businesses that would help the economy grow rapidly.4. In the nineteenth century the U.S. economy borrowed heavily from the British to build a railroad system. Wh

25、at was the principal debt instrument used? Why did this make both countries better off?The principal debt instruments used were foreign bonds which were sold in Britain and denominated in pounds. The British gained because they were able to earn higher interest rates as a result of lending to Americ

26、ans, while the Americans gained because they now had access to capital to start up profitable businesses such as railroads.5. “Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets. ”Comment.This statement is false. Pri

27、ces in secondary markets determine the prices that firms issuing securities receive in primary markets. In addition, secondary markets make securities more liquid and thus easier to sell in the primary markets. Therefore, secondary markets are, if anything, more important than primary markets.6. If

28、you suspect that a company will go bankrupt next year, which would you rather hold-bonds issued by the company or equities issued by the company? Why?You would rather hold bonds, because bondholders are paid off before equity holders, who are the residual claimants.7. How can the adverse selection p

29、roblem explain why you are more likely to make a loan to a family member than to a stranger?Because you know your family member better than a stranger, you know more about the borrower 'hsonesty, propensity for risk taking, and other traits. There is less asymmetric information than with a stran

30、ger and less likelihood of an adverse selection problem, with the result that you are more likely to lend to the family member.8. Think of one example in which you have had to deal with the adverse selection problem.9. Why do loan sharks worry less about moral hazard in connection with their borrowe

31、rs than some other lenders do?Loan sharks can threaten their borrowers with bodily harm if borrowers take actions that might jeopardize paying off the loan. Hence borrowers from a loan shark are less likely to engage in moral hazard.10. If you are an employer, what kinds of moral hazard problems mig

32、ht you worry about with your employees?They might not work hard enough while you are not looking or may steal or commit fraud.11. If there were no asymmetry in the information that a borrow and a lender had, could there still be moral hazard problem?Yes, because even if you know that a borrower is t

33、aking actions that might jeopardize paying off the loan, you must still stop the borrower from doing so. Because that may be costly, you may not spend the time and effort to reduce moral hazard, and so moral hazard remains a problem.12. “In a world without information and transaction costs, financia

34、l intermediaries would not exist. ”Is this statement true, false, or uncertain? Explain your answer.True. If there are no information or transactions costs, people could make loans to each other at no cost and would thus have no need for financial intermediaries.13. Why might you be willing to make

35、a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank loan her the funds at a 10% interest rate, rather than loan her the funds yourself?Because the costs of making the loan to your neighbor are high (legal fees, fees for a credit ch

36、eck, and so on), you will probably not be able to earn 5% on the loan after your expenses even though it has a 10% interest rate. You are better off depositing your savings with a financial intermediary and earning 5% interest. In addition, you are likely to bear less risk by depositing your savings

37、 at the bank rather than lending them to your neighbor.14. How does risk sharing benefit both financial intermediaries and private investors?Risk sharing enabling them to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold

38、, and helping individuals to diversify and thereby lower the amount of risk to which they are exposed 。15. Discuss some of the manifestations of the globalization of world capital markets.Increased discussion of foreign financial markets in the U.S. press and the growth in markets for international

39、financial instruments such as Eurodollars and Eurobonds.1. Write down the formula that is used to calculate the yield to maturity on a 20-year 10% coupon bond with $1000 face value that sells for $2000.$2000 = $100/(1 + i) + $100/(1 + i)2 + . . . + $100/(1 + i)20 + $1000/(1 + i)20.2. If there is a d

40、ecline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?You would rather be holding long-term bonds because their price would increase more than the price of the short-term bonds, giving them a highe

41、r return.3. A financial adviser has just given you the following advice: “Long-term bonds are a great investment because their interest rate is over 20%.”Is the financial adviser necessarily right?No. If interest rates rise sharply in the future, long-term bonds may suffer such a sharp fall in price

42、that their return might be quite low, possibly even negative.4. If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices from 2% to 9%, are people more or less likely to buy house?People are more likely to buy houses because the real interest rate when purchasing a h

43、ouse has fallen from 3 percent (=5 percent percent) to 1 percent (=10 percent -9 percent). The real cost of financing the house is thus lower, even though mortgage rates have risen. (If the tax deductibility of interest payments is allowed for, then it becomes even more likely that people will buy h

44、ouses.)1. Explain why you would be more or less willing to buy a share of Polaroid stock in the following situations:a. Your wealth falls.b. You expect it to appreciate in value.c. The bond market becomes more liquid.d. You expect gold to appreciate in value.e. Prices in the bond market become more

45、volatile.(a) Less, because your wealth has declined;(b) more, because its relative expected return has risen;(c) less, because it has become less liquid relative to bonds;(d) less, because its expected return has fallen relative to gold;(e) more, because it has become less risky relative to bonds.2.

46、 Explain why you would be more or less willing to buy a house under the following circumstances:a. You just inherited %100,000.b. Real estate commissions fall from 6% of the sales price to 4% of the sales price.c. You expect Polaroid stock to double in value next year.d. Prices in the stock market b

47、ecome more volatile.e. You expect housing prices to fall.(a) More, because your wealth has increased;(b) more, because it has become more liquid;(c) less, because its expected return has fallen relative to Polaroid stock;(d) more, because it has become less risky relative to stocks;(e) less, because

48、 its expected return has fallen.3. “The more risk-averse people are, the more likely they are to diversify. ”Is this statement true, false, or uncertain? Explain your answer.True, because the benefits to diversification are greater for a person who cares more about reducing risk.4. I own a professio

49、nal football team, and I plan to diversify by purchasing shares in either a company that owns a pro basketball team or a pharmaceutical company. Which of these two investments is more likely to reduce the overall risk I face? Why?Purchasing shares in the pharmaceutical company is more likely to redu

50、ce my overall risk because the correlation of returns on my investment in a football team with the returns on the pharmaceutical company shares should be low. By contrast, the correlation of returns on an investment in a football team and an investment in a basketball team are probably pretty high,

51、so in this case there would be little risk reduction if I invested in both.5. “No one who is risk-averse will ever buy a security that has a lower expected return, more risk, and less liquidity than another security. ”Is this statement true, false, or uncertain? Explain your answer.True, because for

52、 a risk averse person, more risk, a lower expected return and less liquidity make a security less desirable.6. An important way in which the Federal Reserve decreases the money supply is by selling bonds to the public. Using a supply and demand analysis for bonds, show what effect this action has on

53、 interest rates.When the Fed sells bonds to the public, it increases the supply of bonds, thus shifting the supply curve Bs to the right. The result is that the intersection of the supply and demand curves Bs and Bd occurs at a higher equilibrium interest rate, and the interest rate rises. With the

54、liquidity preference ramework, the decrease in the money supply shifts the money supply curve Ms to the left, and the equilibrium interest rate rises. The answer from the loanable funds framework is consistent with the answer from the liquidity preference framework.7. Using the supply and demand for

55、 bonds framework, show why interest rates are procyclical (rising when the economy is expanding and falling during recessions).When the economy booms, the demand for bonds increases: the public' s income and wealth riseswhile the supply of bonds also increases, because firms have more attractive

56、 investment opportunities. Both the supply and demand curves (Bd and Bs) shift to the right, but as is indicated in the text, the demand curve probably shifts less than the supply curve so the equilibrium interest rate rises. Similarly, when the economy enters a recession, both the supply and demand

57、 curves shift to the left, but the demand curve shifts less than the supply curve so that the interest rate falls. The conclusion is hat interest rates rise during booms and fall during recessions: that is, interest rates are procyclical8. Why should a rise in the price level (but not in expected in

58、flation) cause interest rates to tise when the nominal money supply is fixed?When the price level rises, the quantity of money in real terms falls (holding the nominal supply of money constant); to restore their holdings of money in real terms to their former level, people will want to hold a greate

59、r nominal quantity of money. Thus the money demand curve Md shifts to the right, and the interest rate rises.9. Find the “Credit Markets ”column in the Wall Street Journal. Underline the column that explain bond price movements, and draw the appropriate supply and demand diagrams that support these statements.Interest rates fall. The increased volatility of gold prices makes bonds relatively less risky rel