. In financial economics, what does the term "derivative" refer to? a) Financial instruments whose value is derived from the value of underlying assets b) Investments in real estate properties c) Securities issued by governments to finance budget deficits d) Insurance policies against default risk on loans and bonds
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- 1. The structure of financial markets is influenced by the problems relating to asymmetric information. For each of the market characteristics below, indicate whether the problem arises because of Adverse Selection or Moral Hazard. (1=Adverse Selection, 2=Moral Hazard) The SEC requires disclosure of annual operations to current shareholders. The most used sources of extern funds for a company are loans, not stocks o bonds. JCPenney will find it easier to issi stock than the Charlie's Store in downtownVermillion. Loan contracts include language- restricting the borrower's actionsQ1: Define and differentiate between: a) Organized exchanges and Over the counter markets b) Open Ended vs Closed Ended Mutual Funds c) Moral Hazard and Adverse selection Q2: What is meant by asset transformation and how is it the basis for differentiating between indirect finance and direct finance? Q3: What are the three main reasons for regulating financial markets and institutions? Also list the major regulation examples under each of the three reasons. Q4: What value do mutual funds add for individual investors and how? Q5: Using the relevant financial securities and institutions, explain the chain of events which lead to the 2007 global financial crisis. Q6: Last year Fauji Fertilizer Company Limited (FFCL) gave an annual dividend per share of Rs. 8.85 which is expected to grow at 5%, forever. Calculate the per share price of the stock if its required rate of return is 14%? Q7: Calculate the duration of a 7-year coupon bond having a 11% coupon rate. The current market…Assume that Annovo Financial and Bennovo Financial were banks with the same financial condition, except that Annovo Financial had bought fewer CDSs that provided insurance against defaults on mortgages. (Note: Assuming that the companies are almost identical isolates the impact of the one difference.) If many homeowners began to default on their mortgages, Annovo Financial's financial condition would become better/worse than Bennovo Financial's condition. If most financial institutions were like Annovo Financial, financial institutions could be less/more confident in lending to each other, and a tight credit market would be less/more likely.
- 5. Consider the set-up in the lecture slides on credit: There are two borrowers (denoted by S and R respectively) each of whom need 1 unit of credit for an investment. There is one lender (denoted by L) with one unit of credit and can only lend to one borrower. both the lender and borrowers are risk-neutral (that is, they only care about the expected profits and expected returns respectively). Further, the borrowers and lender have a reservation return of zero (that is, they will undertake to borrow or lend as long as the expected return or profit is strictly greater than zero). Finally, each borrower will repay if she is able to and nothing is repaid if the investment fails (i.e. there is limited liability). (a) Suppose that there are two states of the world (g,b) each occurring with equal probability. In state g the return to S is 1.4 and R’s return is 1 + d for some d > 0. In state b, S’s return is 1.4 and R’s return is 0. Suppose that the bank can charges a separate interest…QUESTION 7 Which of the following statements about efficient market hypothesis (EMH), behaviour finance, or efficiently inefficient markets is incorrect? A. EMH implies that security prices reflect information available to investors and traders could not beat the market using an active strategy. B. Behaviour finance argues that asset prices could deviate their intrinsic value for a long period of time. C. Efficiently inefficient markets are efficient enough that managers can not be compensated for their costs and risks through superior performance. • Efficiently inefficient markets are efficient enough that the rewards of investment management after all costs do not encourage entry of new investment or additional capital. O E. Active investing can beat the market if the market is inefficient due to investor irrationality and behavioral bias.E3 The demand curve and supply curve for one-year discount bonds were estimated using the following equations: Bd Price=-2/5Quantity+990 Bs Price=Quantity+500 As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a result, the new market interest rate increased to 19.65%, but the equilibrium quantity remained unchanged. What are the new demand and supply equations? Assume parallel shifts in the equations
- Why are financial intermediaries the most heavily regulated businesses in the economy? Explain why stock market is an important factor in business investment decisions? What is inflation? What explains inflation? If there is a recession, will it be more difficult to find a job when you graduate? Explain. What are the six types of regulations the government employs in an attempt to ensure the soundness of our financial intermediaries? Explain. Explain the difference between debt and equity markets. primary and secondary markets, exchange and over the counter markets and money and capital markets. What is the difference between foreign bond and a Eurobond? Which institutions are subject to Federal Deposit Insurance corporation (FDIC) regulations, and what is the nature of the regulations? What are the reasons for high transaction costs to exist in a barter economy? What separates the assets included in M1 from the assets included in M2? Does it matter what definition of money policy…In 2008 there was an increase in uncertainty about the quality of structured financial products that were backed by mortgages (MBS - mortgaged backed securities). So that the market for these securities dried up (became less liquid). What policies the government could do to jump start (improve liquidity of) the marketWhat role does executive compensation play in risk-taking and accountability? Why do some people partially blame compensation for the failures of the subprime mortgage and financial industries in 2008-2009?
- 1) The interest rate earned on a money market deposit account is generally higher than the interest earned on a Bank savings account. 2) What are short-term notes of debt issued by the federal government commonly called? A) T-Bills B) T-Notes C) T-Bonds D) T-Accounts E) None of the above are correct. 3) What is the name for comprehensive financial services packages offered by brokerage firms? A) asset management accounts B) comprehensive management accounts C) platinum management accounts D) consolidated management accounts E) None of the above are correct. 4) Money market mutual funds provide an alternative to traditional liquid investments offered by financial institutions. Advantages of MMMFs include which of the following? A) high interest rates B) check-writing privileges C) minimal risk D) convenience--deposits made through payroll deductions E) All of the above are correct. 5) A savings alternative that pays a fixed rate…1. What are two methods Doyle broadly mentioned for measuring output in the financial sector? What assumptions must be made about the opportunity costs of various participants in the market in order to derive each?6) The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease 7) The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 8) In the Baumol-Tobin analysis of transactions demand for money, either an increase in ________ or a decrease in ________ increases money demand. A) income; interest rate B) interest rates; brokerage fees C) brokerage fees; income D) interest rate; income 9) In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand. A) income;…