Assignment 1: Textbook Questions
The following Course Outcome is assessed in this assignment:
GF500-4: Evaluate the different types of financial institutions.
Please work on the following assignment to further your knowledge regarding financial institutions, interest rates, and financial markets. Throughout your career you will be exposed to financial institutions.
Review and complete the following:
Unit 1 - Assignment 1
· Chapter One: Question 16 (Page 60 of PDF)
Question 16.
Comparing Financial Institutions Classify the types of financial institutions mentioned in this chapter as either depository or nondepository. Explain the general difference between depository and nondepository institution sources of funds. It is often said that all types of financial institutions have begun to offer services that were previously offered only by certain types. Consequently, the operations of many financial institutions are becoming more similar. Nevertheless, performance levels still differ significantly among types of financial institutions. Why?
· Chapter Two: Question 13 and Problem 1 and 2 (Question 13 page 79 of PDF) (Problem 1 & 2 page
Question 13.
Global Interaction of Interest Rates Why might you expect interest rate movements of various industrialized countries to be more highly co
elated in recent years than in earlier years?
Problem 1:
Nominal Rate of Interest Suppose the real interest rate is 6 percent and the expected inflation rate is 2 percent. What would you expect the nominal rate of interest to be?
Problem 2:
2. Real Interest Rate Suppose that Treasury bills are cu
ently paying 9 percent and the expected inflation rate is 3 percent. What is the real interest rate?
· Chapter Three: Question 20 and Problem 4 and 5 (Question 20 page 105 of PDF)
Question 20.
Assessing Interest Rate Differentials among Countries In countries experiencing high inflation, the annual interest rate may exceed 50 percent; in other countries, such as the United States and many European countries, annual interest rates are typically less than 10 percent. Do you think such a large difference in interest rates is due primarily to the difference between countries in the risk-free rates or in the credit risk premiums? Explain
Problem 4:
4. After-Tax Yield You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which would you invest in?
Problem 5:
5. Deriving Cu
ent Interest Rates Assume that interest rates for one-year securities are expected to be 2 percent today, 4 percent one year from now, and 6 percent two years from now. Using only pure expectations theory, what are the cu
ent interest rates on two-year and three-year securities?
Also answer the below question of the Point/Counter-Point Exercise
Point/Counter-Point: Should a Yield Curve Influence a Bo
ower’s Prefe
ed Maturity of a Loan?
Point: Yes. If there is an upward-sloping yield curve, a bo
ower should pursue a short-term loan to capitalize on the lower annualized rate charged for a short-term period. The bo
ower can obtain a series of short-term loans rather than one loan to match the desired maturity.
Counter-Point: No. The bo
ower will face uncertainty regarding the interest rate charged on subsequent loans that are needed. An upward-sloping yield curve would suggest that interest rates will rise in the future, which will cause the cost of bo
owing to increase. Overall, the cost of bo
owing may be higher when using a series of loans than when matching the debt maturity to the time period in which funds are needed.
Who Is Co
ect? Use the Internet to learn more about this issue. Offer your own opinion on this issue.
Directions for Submitting your Assignment
One Word® file, including a title page, should be submitted to the Dropbox for the Unit 1 Assignment. The Questions and Applications and Point-Counter Point Activity should be answered in paragraph form fully addressing each aspect of the question or scenario presented.
Any problems should be done in Excel® and pasted into the Word® document using the “Paste Special-Excel Worksheet Object” feature. This will allow the instructor to double click on the students work to see the formulas and calculations used to answer the selected problems.
Financial Markets and Institutions 12th edition Jeff Madura
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Financial Markets
and Institutions
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Financial Markets and Institutions,
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Brief Contents
PART 1: Overview of the Financial Environment 1
1 Role of Financial Markets and Institutions 3
2 Determination of Interest Rates 27
3 Structure of Interest Rates 47
PART 2: The Fed and Monetary Policy 77
4 Functions of the Fed 79
5 Monetary Policy 101
PART 3: Debt Security Markets 131
6 Money Markets 133
7 Bond Markets 159
8 Bond Valuation and Risk 185
9 Mortgage Markets 219
PART 4: Equity Markets 247
10 Stock Offerings and Investor Monitoring 249
11 Stock Valuation and Risk 285
12 Market Microstructure and Strategies 325
PART 5: Derivative Security Markets 351
13 Financial Futures Markets 353
14 Option Markets 377
15 Swap Markets 415
16 Foreign Exchange Derivative Markets 445
PART 6: Commercial Banking 479
17 Commercial Bank Operations 481
18 Bank Regulation 503
19 Bank Management 533
20 Bank Performance 563
PART 7: Nonbank Operations 583
21 Thrift Operations 585
22 Finance Company Operations 607
23 Mutual Fund Operations 619
24 Securities Operations 651
25 Insurance Operations 679
26 Pension Fund Operations 703
Appendix A: Comprehensive Project 727
Appendix B: Using Excel to Conduct Analyses 737
Glossary 741
Index 753
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Contents
Preface, xxvi
About the Author, xxxiii
PART 1: Overview of the Financial Environment 1
1: ROLE OF FINANCIAL MARKETS AND INSTITUTIONS 3
1-1 Role of Financial Markets, 3
1-1a Accommodating Corporate Finance Needs, 4
1-1b Accommodating Investment Needs, 4
1-2 Securities Traded in Financial Markets, 5
1-2a Money Market Securities, 5
1-2b Capital Market Securities, 5
1-2c Derivative Securities, 7
1-2d Valuation of Securities, 8
1-2e Securities Regulations on Financial Disclosure, 10
1-2f Government Intervention in Financial Markets, 11
1-2g International Financial Markets