Exam 2 Flashcards
ch6. explain how the Treasury uses the primary market to obtain adequate funding for the US government
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.
ch6. how can investors using the primary T-bill market be assured that their bid will be accepted
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.
ch6. why do large corporations typically make competitive bids rather than noncompetitive bids for t-bills
Large corporations make competitive bids because noncompetitive bidders are limited to the size of noncompetitive bids.
ch6. describe the activity in the secondary t-bill market. how can this degree of activity benefit investors in t-bills?
he secondary market for Treasury bills is very active, which makes Treasury bills more attractive because it enhances their liquidity.
ch6. why might a financial institution sometimes consider T-bills as a potential source of funds
Financial institutions that have previously purchased Treasury bills can sell these securities in the secondary market whenever they need cash.
ch6. who issues commercial paper
Commercial paper is normally issued by well-known, creditworthy firms.
ch6. which types of financial institutions issue commercial paper
Bank holding companies and finance companies commonly issue commercial paper.
ch6. why do some firms create a department that can directly place commercial paper
ch6. which criteria affect the decision to create such a department
ch6. why do ratings agencies assign to commercial paper
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
ch6. how can small investors participate in investments in negotiable certificates of deposits (NCDs)
ch6. would you expect repurchase agreements to have a lower or high annualized yield than commercial paper
ch6. explain how each of the following would use bankers acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks, and (d) investors
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
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
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
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?
ch7. what is a bond indenture?
ch7. what is the function of a trustee with respect to the bond indenture
ch7. explain the use of a sinking fund provision. how can it reduce the investors risk
ch7. what are protective covenants? why are they needed
ch7. explain the use of call provisions on bonds.
ch7. how can a call provision affect the price of a bond
ch7. explain the use of bond collateral, and identify the common types of collateral for bonds
ch7. what are debentures? how do they differ from subordinated debentures
ch7. what are the advantages and disadvantages to a firm that issues low or zero coupon bonds
ch7. are variable rate bonds attractive to investors who expect interest rates to decrease? explain?
ch7. would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future
ch7. why can convertible bonds be issued by firms at a higher price than other bonds
ch7. if bond yields in Japan rise, how might US bond yields be affected? why
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
ch7. explain the guidelines for credit rating agencies that resulted from the Financial reform act of 2010
ch7. explain the conditions that led to the debt crisis in Greece
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.
ch8. based on your forecast of interest rates, would you recommend that investors purchase bonds today
ch8. explain the impact of a decline in interest rates on :
- an investors required rate of return
- the present value of existing bonds
- the prices of existing bonds
ch8. why is the relationship between interest rates and bond prices important to financial institutions
ch8. determine the direction of bond prices over the last year and explain the reason for it
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)
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
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
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
ch8. why does the required rate of return for a particular bond change over time
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
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
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
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
ch8. explain how bond prices may be affected by money supply growth, oil prices, and economic growth
ch8. assume that oil producing countries have agreed to reduce their oil production by 30%. how would bond prices be affected by this announcement
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
ch9. distinguish between FHA and conventional mortgages
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
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
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
ch9. explain the use of a balloon payment mortgage. why might a finanical institution prefer to offer this type of mortgage
describe the growing equity mortgage. how does it differ from a graduated payment mortgagech9.
ch9. why are second mortgages offered by some home sellers
ch9. describe the shared application mortgage
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?
ch9. describe the factors that affect mortgage prices
ch9. explain why some financial institutions prefer to sell the mortgages they originate
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
ch9. what types of financial institutions finance residential mortgages? what type of financial instituting finances the majority of commercial mortgages
ch10. explain the rights of common stockholders that are not available to other individuals
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
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
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
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
ch10. describe the process of bookbuilding. why is bookbuilding sometimes criticized as a means of setting the offer price
ch10. describe a lockup provision and explain why it might be required by the lead underwriter
ch10. what is the meaning of an initial return for an IPO
ch10. what does it mean to flip shares? why would investors want to flip shares
ch10. how do IPOs perfrom over the long run
ch10. discuss the concept of asymmetric information. explain why it may motivate firms to repurchase some of their stock
ch10. explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares
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
ch10. explain how ADRs enable US investors to become part owners of foreign exchanges
ch10. explain why stocks traded on the NY stock exchange generally exhibit less risk than stocks that are traded on other exchanges
ch10. are organized stock exchanges used to place newly issued stock
