Capital Markets Midterm Questions and Solutions Essay Example for Free

Capital Markets Midterm Questions and Solutions Essay 2 percent for each question 1. Liquidity is the ease with which an asset can be exchanged for money 2. The concept of adverse selection helps to explain why the ï ¬ nancial system is heavily regulated 3. The Fed can inï ¬â€šuence the fed fund interest rate by selling T-bills, which ____reserves, thereby ____the federal fund rate. removes, raising 4. Standard Repos are very low risk loans 5. A 4-year bond pays an annual coupon of 3.5%. If the interest rate equals 2.75% per year, how much do you have to pay to buy the equivalent of a $1,000,000 bond face value? $10 0280 000 6. Unanticipated deï ¬â€šation implies a a decline in net worth, as price levels fall while debt burden remains unchanged. 7. What is the annualized discount rate on a Treasury bill that you purchase for $9,900 and that will mature in 91 days for $10,000? 3.96% 8. Moral hazard is a problem arising from only A and B of the above 9. A discount loan by the Fed to a bank causes a(n) ____ in reserves in the banking system and a(n) ____ in the monetary base. increase; increase 10. The standard deï ¬ nition of the shadow banking systemt includes money market funds, hedge funds, and pools of securitized assets Comprehensive Questions (30 percent) 6 percent for each question 1) The ï ¬ nancial system is important because it channels funds, reduces asymmetric information problems, provides an eï ¬Æ'cient payment system, and helps to manage risk. Explain the remaining functions that the ï ¬ nancial system performs. Besides these functions, the ï ¬ nancial system provides ways for invididuals to pool their resources. For instance, some investment projects generate a positive NPV, but require a large initial down payment. Dividing ownership into many individual shares provides an eï ¬Æ'cient way to pool individual resources in order to ï ¬ nance these investment projects. The ï ¬ nancial system also provides liquidity to market participants. This is important because corporations and individuals do not have the same time-horizon. Therefore, it would be very diï ¬Æ'cult for corporations to get long-term sources of funding without these liquidity services. Finally, the ï ¬ nancial system provides important information to ï ¬ nancial investors, corporate managers, and political leaders. This information is critical to improve the decision-making process. For instance, managers may use the information observed in the ï ¬ nancial system to compute the NPV of investment projects. 2) One of your friend tells you: The main function of the ï ¬ nancial system is to channel funds from lenders to borrowers. This function can be performed interchangeably by capital markets or ï ¬ nancial institutions. Do you agree? Why? It is true that both capital markets and ï ¬ nancial institutions are useful in channeling funds from lenders to borrowers. However, they diï ¬â‚¬er in a fundamental way. Contrary to capital markets, ï ¬ nancial institutions are extremely good at dealing with asymmetric information problems. This is due to the private nature of their activities. By avoiding free-riding, banks can bare the substantial costs of screening and monitoring borrowers. Therefore, corporations for which asymmetric information problems are substantial (e.g., small corporations), rely heavily on banks’ funding. If banks cut lending, as it was the case during the recent crisis, these companies do not have the option of receiving funding from capital makets, and must reduce their activities. Therefore, some of the functions performed by banks cannot be performed interchangeably by capital markets. 3) What is Quantitative Easing and how does it diï ¬â‚¬er from the standard tool used by the Fed to expand the monetary base? What was the stated purpose of Quantitative Easing? Quantitative Easing refers to the central bank’s policy of buying long-term securities, speciï ¬ cally mortgage-backed securities and 10—year Treasury bonds. This is diï ¬â‚¬erent from the standard approach used by the Fed. Traditionally, the Fed expands the monetary base by implementing an open-market purchase of T-bills. The stated purpose of Quantitative Easing was to decrease the yield of these long-term securities. From the viewpoint of borrowers, this decrease would help them get lower reï ¬ nancing conditions, thus easing pressure in these markets. From the viewpoint of lenders, this decrease in yield may render these securities less attractive. Therefore, lenders may be willing to start buying risky assets again, thus improving economic conditions. 4) One student argues: If more customers want to borrow funds at the prevailing interest rate, a ï ¬ nancial institution can easily increase its proï ¬ ts by raising interest rates on its loan. Is this statement true, false, uncertain? Explain your answer. The situation faced by the bank is the following: it has limited resources and sees a lot of clients willing to borrow money, creating excess demand. The statement above is uncertain. A priori, we might believe that if the bank increases the interest rate, it is able to eliminate this excess demand and generate additional proï ¬ ts (there would be an increase in both the proï ¬ t per loan and the quantity of loans). However, this reasoning assumes that the credit quality of the borrowers stays constant. This may not be true because raising the interest rate also increases adverse selection. To illustrate, consider the used-car market. If buyers observe an increase in the number of people interested in selling their cars, they may want to oï ¬â‚¬er a lower price. But a lower price gives incentive to the sellers of good cars to leave the market, leaving only sellers of lemons. As a result, the average quality of the cars purchased by buyers will decrease. A large part of the excess demand observed by the bank is driven by poor credit ï ¬ rms. After increasing the interest rate, the bank observes that these ï ¬ rms still agree to borrow, i.e., their poor credit quality should be charged an even higher interest rate. On the contrary, this higer interest rate may discourage good ï ¬ rms from borrowing from this bank because the loan becomes too expensive. As a result, the relative importance of bad ï ¬ rms over good ones increases, leading to a decrease in the average ï ¬ rm quality. This decrease in quality may lead to higher default rates and to a decrease in the bank’s proï ¬ t. 5) What is meant by a ï ¬â€šight to safety/liquidity? When does it occur? How can it trigger these negative spirals on the value of the banks’ balance sheet? A ï ¬â€šight to safety/liquidity commonly describes the behaviour of investors when they attempt to sell the risky/illiquid assets they hold in their portfolio and move towards safe/liquid assets. This ï ¬â€šight typically occurs in times of crisis when the investors’ willingness to take risks decreases signiï ¬ cantly. Since banks mostly hold risky and illiquid assets, these ï ¬â€šights to safety have a strong impact on their asset value. As their capital gets curtailed, their risk proï ¬ le increases, making investors and depositors more worried about the potential losses they may incur. Because these lenders give money on a short-term basis, they can quickly go to the bank and ask for their money back. Then, banks have to scramble for liquidity and sell their risky/illiquid assets. When many banks try to sell simultaneously, the price of these assets will go further down. For instance, suppose that in normal times, the bank would have to sell 15% of its assets to reimburse lenders. As many institutions sell simultaneously, the bank has to sell more than 15%. Observing these additional losses, investors and depositors may want to further reduce the amount they are willing to lend, aggravating the liquidity issues face by banks. Overall, these eï ¬â‚¬ects reinforce each other, creating a spiraling eï ¬â‚¬ect. Understanding Interest Rates (30 percent) 15 percent for question 1, 10 for question 2, and 5 for question 3 1) In February 2010, a column in the Wall Street Journal warns: Be wary of long-term bonds The risk of higher expected inï ¬â€šation is in due course. Longer-term bonds are the most at risk. Using the supply and demand analysis studied in class, plot a graph that clearly explains the eï ¬â‚¬ect of an increase in expected inï ¬â€šation on the bond price. Why are longer-term bonds more at risk? Explain whether your analysis would be diï ¬â‚¬erent if you were to examine the impact on the price of TIPS. Since the coupon rate paid by US government bonds is ï ¬ xed in nominal terms, news of higher expected inï ¬â€šation leads to a decrease in the real rate of return oï ¬â‚¬ered by these bonds. As a result, the demand curve moves to the left as investors want to invest their money in securities with better return prospects. In addition, the supply curve moves to the right as corporations can borrow at lower costs in real terms. Because of these two shifts, we observe a large excess supply of bonds at the initial interest level. This excess supply will lead to a decrease in the bond price and a increase in the interest rate until the new equilibrium is reached. This eï ¬â‚¬ect, called the Fisher eï ¬â‚¬ect, is shown in the graph below: The eï ¬â‚¬ect is likely to be stronger for long-term bonds because investors are stuck with ï ¬ xed nominal payments for a long-time period. As a result, the only way to be compensated for higher inï ¬â€šation during many years is to buy the bond at a suï ¬Æ'ciently low price today. Intuitively, we can capture this price sensitivity using duration, as we know that the duration of a long-term bond is above that of a short-term bond. The analysis would be completely diï ¬â‚¬erent for TIPS because their coupon payments adjust for changes in inï ¬â€šation. As a result, any news of future inï ¬â€šation simply means that the future coupon payments in nominal terms will be higher. As a result, the price is not sensitive to changes in expected inï ¬â€šation. 2) In the Financial Times in February 2011, Professor Siegel from the Wharton School talks about the decline in the real yield of TIPS: Recently, the yields on these bonds have collapsed to levels that would have been uninimaginable just a few years ago. Last October, the real yield on the US 10-year TIPS plunged to 36 basis points. Professor Siegel argues that an important factor driving this result is the increase in inï ¬â€šation risk. Why do US investors currently perceive that inï ¬â€šation risk is higher than usual? Explain why this increase in inï ¬â€šation risk can lead to (i) an increase in the demand for TIPS relative to bonds; and (ii) a decrease in the TIPS interest rate. There are two sources of concerns regarding future inï ¬â€šation. First, the central bank has greatly expanded its monetary base during the recent ï ¬ nancial crisis—at the end of 2009, its value was close to $2 trillion. For the moment, banks are not aggressively lending, implying that the growth rate of the monetary base is somewhat disconnected from that of the money supply. But failure from the Fed to reduce the monetary base as lending activity resumes may lead to higher inï ¬â€šation. Second, the ï ¬ scal position of the US government has deteriorated substantially over the past few years, leading to a downgrade of the credit rating attached to its bonds. If the future growth rate in the economy is not suï ¬Æ'ciently high and if the US government is not able to reduce deï ¬ cits, it may have no option but inï ¬â€šate the debt away. This will of course lead to higher inï ¬â€šation. Overall, these two issues create important uncertainty about the future path of inï ¬â€šation. Contrary to bonds, TIPS are protected against inï ¬â€šation. If there is higher inï ¬â€šation risk, bonds become riskier relative to TIPS. Using our supply and demand framework, the demand for bonds moves to the left, while the demand for TIPS moves to the right. At the initial price, there is an excess demand for TIPS, driving the TIPS price up and its interest rate down, consistent with Professor Siegel’s arguments. 3) Professor Siegel also argues that: As economic growth recovers and real rates rise, the price of TIPS will fall. Can you ï ¬ nd a simple explanation of this statement based on our supply and demand framework? Economic growth means that the business cycle is in an expanding phase. In this case, we can rely on the relation between business cycle expansions and the interest rate seen in class. First, the demand curve for bonds move to the right because of the wealth eï ¬â‚¬ect, as people have more money to invest in the capital market (bonds, stocks,). On the supply side, business cycle expansions are related to an increase in the ï ¬ rms’ expected proï ¬ tability. As a result, the supply curve moves to the right. Based on empirical evidence, the move of the supply curve tends to be more important than the one observed for the demand. At the initial level of interest rate, there is an excess supply, leading to an decrease in bond price, and an increase in the interest rate. This is consistent with the yield reaction discussed by Professor Siegel. Bond Market (20 percent) 5 percent for each question Consider the following bonds: Annual interest rate Maturity Annual coupon Price Duration Bond X 5% 8 years 3% 87.1 7.2 Bond Y 8% 3 years 3% 87.1 ? 1) One of your friends tells you: the fact that the price of these two bonds is the same is not consistent with theory. Without making any computation, explain whether you agree with your friend. Your friend is not right. These two bonds are both quoted below par value, because their respective yield to maturity is lower than the coupon rate. If these two bonds had the same maturity, the price of bond Y should be lower than the price of bond X because investors require a higher interest rate to hold bond Y. However, the maturity of bond Y is lower. Although the annual diï ¬â‚¬erential between the interest rate and the coupon rate is higher for bond Y, this diï ¬â‚¬erential has to be given during 3 years only. For bond X, the annual diï ¬â‚¬erential between the interest rate and the coupon rate is lower, but it has to be given during 8 years. In our case, these two eï ¬â‚¬ects (diï ¬â‚¬erent ratings and diï ¬â‚¬erent maturities) oï ¬â‚¬set each other and the two prices are exactly the same. The information shown in the table is therefore perfectly consistent with theory. 2) Compute the duration of bond Y and compare it with that of bond X. Is the diï ¬â‚¬erence consistent with theory?

Jonathan Swifts Gullivers Travels Essay -- essays research papers

Although Gulliver's Travels by Jonathan Swift has long been thought of as a children's story, it is actually a dark satire on the fallacies of human nature. The four parts of the book are arranged in a planned sequence, to show Gulliver's optimism and lack of shame with the Lilliputians, decaying into his shame and disgust with humans when he is in the land of the Houyhnhmns. The Brobdingnagians are more hospitable than the Lilliputians, but Gulliver's attitude towards them is more disgusted and bitter. Gulliver's tone becomes even more critical of the introspective people of Laputa and Lagado, and in Glubbdubdrib he learns the truth about modern man. Gulliver finds the Luggnuggians to be a "polite and generous people" (III, 177), until he learns that the Struldbruggs' immortality is a curse rather than a blessing. Throughout the course of Gulliver’s Travels, Gulliver’s encounters with each culture signify a progression from benevolence towards man to misanthr opy, resulting in Gulliver's final insanity. In the first part of the book, Gulliver arrives on a strange island and wakes up tied to the ground by a culture of six-inch tall Lilliputians. Gulliver is amazed by the skill of the Lilliputians in handling him, but he is offended by their disrespect: â€Å"†¦in my Thoughts I could not sufficiently wonder at the Intrepidity of these diminutive Mortals, who durst venture to mount and walk on my Body, while one of my Hands was at Liberty, without trembling at the very Sight of so prodigious a Creature as I must appear to them† (I, 8). However, Gulliver complies with every inconvenience that the Lilliputians bestow on him, because he allows them to take him prisoner even though he could destroy them with one stomp. It is rather amusing that Gulliver surrenders to these tiny people so quickly: â€Å"†¦when I felt the Smart of their Arrows upon my Face and Hands†¦I gave Tokens to let them know that they might do with me what they pleased† (I, 9). They also tie Gulliver up as if he were a dog, and search his pockets in order to confiscate any weapons, among numerous other actions in which Gulliver placidly succumbs. No matter how respectful Gulliver is, however, it is negated by his lack of shame. By urinating on the queen’s palace to put out a fire, he does not realize that he offended the queen immensely, and this is the cause for his impeachment. By making th... ...is own race begins to turn on him ironically when he describes the culture of his native country to the Houyhnhnms. The rational beings conclude that Gulliver really is a Yahoo because the civilized people of Gulliver’s culture are just as corrupt as the less civilized Yahoos. Upon realizing the morose fact that he is indeed a Yahoo dressed up like a civilized man, Gulliver’s psyche collapses and he is transformed into a misanthrope, forever alienated from the rest of society. All four books of Gulliver’s Travels form a rapid descent into the dark nature of man. Swift is satirizing the elements that make men human, from small pettiness to corruptness and greed. When a sane man such as Gulliver is exposed to the different aspects of human immorality, Swift shows how these influence his life and the effect, ultimately, is the deterioration of his mind. At the end of the book, Gulliver cannot even look at his family without feeling disgust. Above all, he is disgusted with himself for being a part of such a corrupt race as man. But Gulliver is â€Å"an honest Man, and a good Sailor, but a little too positive in his own Opinions, which was the Cause of his Destruction† (IV, 191).

The ability to formulate concepts ad think abstractly disappears

Alzheimer’s disease is a progressive, irreversible, degenerative neurologic disease that begins insidiously and is characterized by gradual losses of cognitive function and disturbances in behavior and affect. Alzheimer’s disease is not found exclusively in the elderly; in 1 % to 10% of cases, its onset occurs in middle age. A family history of Alzheimer’s disease and the presence of Down syndrome are two established risk factors for Alzheimer’s disease.Of family members have at least one other relative with Alzheimer’s disease, then a familial component, which non- specifically includes both environmental triggers and genetic determinants, is said to exist. Genetic studies show that autosomal- dominant forms of Alzheimer’s disease are associated with early onset and early death. In 1987, chromosome 21 was first implicated in early-onset familial Alzheimer’s disease. Soon after, the gene coding fro amyloid precursor protein or APP was also found to be on chromosome 21.Not until 1991 was an actual mutation in association with familial Alzheimer’s disease found in the APP gene of chromosome 21. For those with this gene, onset of Alzheimer’s disease began in their 50’s. Only a few of the cases of familial Alzheimer’s disease have been found to involve this genetic mutation. In 1992, chromosome 14 was found to contain an unidentified mutation also linked to familial Alzheimer’s disease. Since 1995, molecular biologists have been discovering even more- specific genetic information about the various forms of Alzheimer’s disease, including genetic differences between early- and late- onset Alzheimer’s disease.These genetic differences are helping to pinpoint risk factors associated with the disease, although the genetic indicators are not specific enough to be used as reliable diagnostic markets. A. Causes/ Risk Factors Symptoms of AD are usually subtle in onset and often progress slowly until they are obvious and devastating. The changes characteristic of AD into three general categories: cognitive, functional, and behavioral. Reversible causes of AD include alcohol abuse, medication use, psychiatric disorders, and normal- pressure hydrocephalus.Increasing age is the leading risk factor of people getting Alzheimer’s disease. II. Symptoms, Changes by Psychological and Behavioral A. Dementia Symptoms are usually subtle in onset and often progress slowly until they are obvious and devastating. The changes characteristics of dementia fall into three general categories: cognitive, functional and behavioral. In the early stages of Alzheimer’s disease, forgetfulness and subtle memory loss occur. The patient may experience small difficulties in work or social activities but has adequate cognitive function to hide the loss and can function independently.Depression may occur at this time. With further progression of the disease, the deficits ca n no longer be concealed. Forgetfulness is manifested in many daily actions. These patients may lose their ability to recognize familiar faces, places, and objects and may get lost in a familiar environment. They may repeat the same stories because they forget that they have already told them. Trying to reason with the person and using reality orientation only increase the patient’s anxiety without increasing function. Conversation becomes difficult, and there are word- finding difficulties.The ability to formulate concepts ad think abstractly disappears; for instance, the patient can interpret a proverb only in concrete terms. The patient is often unable to recognize the consequences of his or her actions and will therefore exhibit impulsive behavior. For example, on a hot day, the patient may decide to wade in the city fountain fully clothed. The patient has difficulty with everyday activities, such as operating simple appliances and handling money. Personality changes are also usually evident. The patient may become depressed, suspicious, paranoid, hostile, and even combative.Progression of the disease intensifies the symptoms: speaking skills deteriorate to nonsense syllables, agitation and physical activity increase, and the patient may wander at night. Eventually, assistance is needed for most ADL’s including eating and toileting, since dysphagia occurs and incontinence develops. The terminal stage, in which the patient is usually mobile and requires total care, may last for months or years. Occasionally, the patient may recognize family or caretakers. Death occurs as a result of complications such as pneumonia, malnutrition, or dehydration.

The American War The Vietnam War - 1379 Words

Consider the Vietnam War, The Cold War, or even the Spanish-American War: it’s safe to assume that the mere mention of these wars evoke some feeling of recognition, whether it resurfaces a rather passionate opinion or an unwelcome flashback to U.S history class. The Philippine-American War illicites a much tamer response, unless, of course, you’re asking a Filipino or a history buff. In fact, the Philippine-American War is often times referred to as ‘The Forgotten War’ for that very reason. Despite its lack of recognition amongst average Americans, the Philippine-American War wasn’t just some battle the U.S won years ago, some footnote in history that had no impact. It was so much more than that. While the Philippine-American War marked the end of the Philippine Revolution, it occurred over a longer period of time with even more casualties than the more recognized Spanish-American War, changed the United States’ role in the world as an imperi alist nation, and established a relationship between the two nations that still affect the world to this day. ‘I don’t get it,’ you might be thinking, ‘What does the Philippine Revolution have to do with the conflict between the United States and the Philippines?’ The answer is this: everything. Before Spain ‘attacked’ the USS Maine and the U.S decided it cared about Cuba, there was a little disturbance in the archipelagos south of China. 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