Fabozzi_金融市场与金融机构基础课后答案

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Fabozzi 金融机构基础课后答案

C H A P T E R8P E N S I O N F U N D SINTRODUCTION TO PENSION FUNDSA pension plan is a fund that is established for the payment of retirement benefits. Pension plans are set up by plan sponsors to pay retirement benefits. Monies are placed in the funds by the employer/employees and earnings compound tax-free until withdrawn at retirement. The key factor explaining pension fund growth is that the employer’s contributions and specified amount of the employee’s contributions, as well as the earnings of the fund assets, a re tax exempt. In essence, a pension is a form of employee remuneration for which the employee is not taxed until funds are withdrawn.TYPE OF PENSION PLANSDefined Benefit PlanIn a defined benefit plan, payments are specified upon retirement by the sponsor. The amount available upon retirement becomes a function of the amount placed in the fund and years of service. The pension obligations are effectively the obligation of the plan sponsor, who assumes the risk of insufficient funding to meet contractual payments. Plan sponsors often buy annuities from insurance companies, thereby shifting the risk to these companies. Such plans are called insured benefit plans, though the phrase is a misnomer in that the benefits are guaranteed only so far as the insurance company can provide the funds.The Pension Benefit Guaranty Corporation (PBGC), established under ERISA provides only for vested benefits payments in event of discontinuation by the plan sponsor. Defined benefit plans are expensive and hard to implement when few employees work for only one company over many years.Benefits become vested when employees reach a certain age and complete enough years of service to meet minimum requirement for receiving benefits. In recent years, firms have not adopted defined benefit plans. Major firms that have them have been freezing their plans. This is because they are costly and firms have found that the plans hinder their competitiveness.Defined Contribution PlansIn a defined contribution plan, the plan sponsor provide only for specified contributions to the fund. No guarantees are given as to the amount of benefits that will be available upon retirement. Thus the risk of poor performance is borne by the employee. Such plans are usually provided under Section 401 K of the Revenue Code, and the employee can usually direct what group will manage these funds. The fastest-growing sector of DCP is the 401k, 403(b) and 457. By end of 1999, over one trillion dollars had been placed in 401k. The largest public sponsor of a defined contribution plan is the Federal Retirement Thrift ($233 billion).Hybrid Pension PlansIn an effort to offset the flaws of the defined contribution and benefit plans, a number of companies have started to select hybrid pension plans, wherein an employer contributes a certain amount each year. A pre-set minimal benefit level is specified, but if the plan does not meet this goal, the employee must make up the deficit.A cash balance plan is basically a defined benefit that has some of the features of a defined contribution plan. A cash balance plan defines future pension benefits. Each participant in a cash balance plan has an account that is credited with a dollar amount that resembles an employer contribution and is generally determined as a percentage of pay. The plan usually provides benefits in the form of a lump-sum distribution as annuity. Interest is credited to the employee’s account at a rate specified in the plan and is unrelated to the investment earnings of the employer’s pensio n trust.INVESTMENTSDefined benefit plans allocate more than 65% of their funds to equities and fixed-income securities. Defined contribution plans favor insurance company GICs. Since some qualified pension funds are exempt from federal taxes they have little use for municipal bonds in their portfolio. There are no federal restrictions on foreign securities investments, although sponsors may deny management this privilege.REGULATIONBecause pension plans are crucial for U.S. workers, pension plans are regulated under the Employee Retirement Income Security Act of 1974 (ERISA). Its major provisions include:1. Minimum funding standards: a plan sponsor must make to he pension plan; cannot “pay as you go”;2. Fiduciary responsibility: must follow “prudent man” rule in investment practices;3. Minimum vesting standards; for example that after five years of employment, a participant is entitled to 25% of accrued pension benefits.4. Created PBGC for vested benefits funded by premiums under direct benefit plans.MANAGERS OF PENSION FUNDSA plan sponsor chooses one of the following to manage assets: (1) in-house staff, (2) outside money management firms, (3) combination of both. In addition to money managers, advisers called consultants provide other advisory services provided to pension plan sponsors. These include:1.Developing an investment policy and asset allocation;2.Providing actuarial advice;3.Designing benchmark performance measures;4.Monitoring performance;5.Providing specialized research.DEFINED BENEFIT CRISISToday, there is a crisis facing defined benefit pension plans. At the end of 2003, corporate pension underfunding or deficit was close to $250 billion. Some estimates double this number. In essence, corporate and public plan sponsors have systematically underestimated pension liabilities. Pension funding is a cost that affects earnings. The returns on pension assets can be an earning if the projected return exceeds liabilities. This creates a perverse incentive to overstate projected returns and understate liabilities. The bottom line is that the failure to properly value pension liabilities because of the use of an inappropriate discount rate and the impact it had on the allocation decision among major asset classes to justify a high forecast return on assets were the two major contributing factors to this financial crisis.PENSION PROTECTION ACT OF 2006The Pension Protection Act of 2006 (PPA) contains two major parts. The first part modifies ERISA in the following way:1.It required underfunded plans to pay additional premiums to the Pension BenefitGuaranty Corporation.2.It extended the requirement that companies that terminate their pension plans provideextra funding to the pension system.3.It closed loopholes that allowed underfunded plans to skip pension payments.4.It raised the caps on the amount that companies can contribute to their pension plans sothey can contribute more during prosperous times.5.It required that companies measure their pension plan obligations more accurately.6.It prevented companies with underfunded pension plans from providing extra benefits totheir workers without paying for these benefits up front.The second part of the PPA relates primarily to individuals’ use of defined contribution plans. According to the PPA, employers can automatically enroll their employees in a defined contribution plan. It also permits employers to choose default options on behalf of the planparticipants who do not make an election on how to invest their funds, and enables employers to obtain more investment advice for their employees by removing the fiduciary liability based on the perceived conflict of interest of self-interested investment advice provided by the employer.ANSWERS TO QUESTIONS FOR CHAPTER 8(Questions are in bold print followed by answers.)1. What is a plan sponsor?A plan sponsor is a corporation or public agency that establishes a retirement plan for its employees. Plan sponsors include private businesses, federal, state, and local governments, unions, not-for-profit organizations, and even individuals setting up plans for themselves.2. How does a defined-benefit plan differ from a defined-contribution plan?In a defined contribution plan, the sponsor and/or employees are responsible only for making specified (hence “defined”) contributions to the plan. There is no guarantee of what amount will be available upon retirement. Hence the employee bears the risk of whether he will have an adequate retirement income. Under a defined benefit plan the sponsor agrees to provide specified dollar payments to employees upon their retirement. The amount to be paid is usually determined by a formula, which considers length of time of employment and income level.Herein the employer takes the risk of having sufficient funding to meet future needs. Vested benefits are guaranteed by the Pension Benefit Guaranty Corporation (PBGC), wherein an employer contributes a certain amount each year. A pre-set minimal benefit level is specified, but if the plan does not meet this goal, the employee must make up the deficit.3. Why have some corporations frozen their defined benefit plans?Pension plans are too costly and some companies have found it difficult to compete with other firms.4.a.What is a cash balance plan?b.Discuss the resemblance of a cash balance plan to a defined-benefit and a defined-contribution plan.a. A cash balance plan is basically a defined benefit that has some of the features of a definedcontribution plan. It defines future pension benefits. Each participant in a cash balance plan has an account that is credited with a dollar amount that resembles an employer contribution and is generally determined as a percentage of pay. The plan usually provides benefits in the form of a lump-sum distribution a s an annuity. Interest is credited to the employee’s account at a rate specified in the plan and is unrelated to the investment earnings of the employer’s pension trust.b. A cash balance plan is similar to defined benefits in the sense that benefits are fixed based ona formula. Investment responsibility is borne by the employer, and employees areautomatically included in the plan. It is similar to defined contribution in the sense that assets are accumulated in an “account” for each employee and vested asse ts may be taken as a lump sum and rolled into an IRA.5.a.What is an insured pension plan?b.What is the function of PBGC?a.An insured plan is one administered by an insurance company providing annuities uponretirement. Unless the PBGC is involved for defined benefits, there is no further insurance. b.The Pension Benefit Guaranty Corporation insures vested benefits under defined benefitsplans in the event of corporate failures. It charges premiums for this service. Currently, the PBGC itself is close to insolvency due to fact that many corporate plans are under-funded and PBGC itself has little enforcement power. Also, many companies have dropped defined benefit plans in favor of defined contribution plans to save themselves premium payments and pass on the risks of providing adequate retirement income to the employees themselves.6. What role do mutual funds play in 401(k) plans?A 401k plan is a defined contribution plan. The employee can select a qualified plan in which to place his retirement contributions. These contributions are tax deferred as is the income generated by the fund. A mutual fund can qualify as a 401k plan, thus allowing it to generate tax-deferred earnings on behalf of the employee.7. Can and do pension plans invest in foreign securities or tax-exempt securities?U.S. pension funds are free to invest in foreign securities. However, plan sponsors may set local restrictions. It is also true for tax-exempt securities.8.a.What is the major legislation regulating pension funds?b.Does the legislation require every corporation to establish a pension fund?a.Pension plans are regulated under the Employee Retirement Income Security Act of 1974 asamended. This legislation establishes the types of plans covered, funding and vesting requirements, and the PBGC.b.There is currently no legislation that requires a corporation to establish a pension plan. But ifit does so, it must comply with ERISA regulations.9. Discuss ERISA’s “prudent man” rule.ERISA’s “prudent man role” establishes fiduciary stand ards for pension fund trustees and managers. The rule seeks to determine which investments are proper to make sure that the trustee takes the role seriously in acquiring and using the information pertinent to making an investment decision.10. Who are plan sponsor consultants and what is their role?In addition to money managers, advisors call plan sponsor as consultants they provide other advisory services to pension plan sponsors. Among the functions that consultants provide to plan sponsors include developing plan for investment policy, providing actuarial advice, designing benchmarks and measuring and monitoring the performance of the fund’s money managers.11. In 2001, investor Warren Buffett had this to say about pension accounting: Unfortunately, the subject of pension [return] assumptions, critically important though it is, almost never comes up in corporate board meetings. . . . And now, of course, the need for discussion is paramount because these assumptions that are being made, with all eyes looking backward at the glories of the 1990s, are so extreme.a.What does Mr. Buffett mean by the “pension return assumption”?b.Why is the pension return assumption important in pension accounting inaccordance with generally accepted accounting principles?c.Why is the pension return assumption important in pension accounting inaccordance with Internal Revenue rules?d.Mr. Buffet went on to warn that too high an assumed return on pension assets riskslitigation for a company’s chief financial officer, its board, and its auditors. Why? a.The assumptions that management or plan administrator uses to project pension fund growthrates, and amounts of assets and liabilities.b.The assumptions determine whether plan assets can meet liabilities. Overly optimistic returnlead to conclusions that liabilities will be met and that the fair value of the plan is positive.c.There are IRS regulations that determine the actual amount of funding required.d.Too high an assumed return on pension assets may mislead plan participants on the issue ofplan solvency. Such deception may lead to litigation.。

(完整word版)Fabozzi_金融市场与金融机构基础课后答案

The role of central banks can be categorized as: (1) risk assessment, (2) risk reduction, （3) oversight of payment systems, （4） crisis management.One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason，central banks are sometimes called monetary authority. In implementing monetary policy, central banks，acting as a reserve bank，require private banks to maintain and deposit the required reserves with the central bank. In times of financial crisis，central banks perform the role of lender of last resort for the banking system。

fabozzi_金融市场与金融机构基础课后答案.doc

CHAPTER 4THE U.S. FEDERAL RESERVEAND THE CREATION OF MONEYCENTRAL BANKS AND THEIR PURPOSEThe primary role of a central bank is to maintain the stability of the currency and money supply for a country or a group of countries. The role of central banks can be categorized as: (1) risk assessment, (2) risk reduction, (3) oversight of payment systems, (4) crisis management.One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason, central banks are sometimes called monetary authority. In implementing monetary policy, central banks, acting as a reserve bank, require private banks to maintain and deposit the required reserves with the central bank. In times of financial crisis, central banks perform the role of lender of last resort for the banking system. Countries throughout the world may have central banks. Additionally, the European Central Bank is responsible for implementing monetary policy for the member countries of the European Union.There is widespread agreement that central banks should be independent of the government so that decisions of the central bank will not be influenced for short-term political purposes such as pursuing a monetary policy to expand the economy but at the expense of inflation.In implementing monetary and economic policies, the United States is a member of an informal network of nations. This group started in 1976 as the Group of 6, or G6: US, France, Germany, UK, Italy, and Japan. Thereafter, Canada joined to for the G7. In 1998, Russia joined to form the G8.THE CENTRAL BANK OF THE UNITED STATES: THE FEDERAL RESERVE SYSTEMThe Federal Reserve System consists of 12 banking districts covering the entire country. Created in 1913, the Federal Reserve is the government agency responsible for the management of the US monetary and banking systems. It is independent of the political branches of government. The Fed is managed by a seven-member Board of Governors, who are appointed by the President and approved by Congress.The Fed's tools for monetary management have been made more difficult by financial innovations. The public's increasing acceptance of money market mutual funds has funneled a large amount of money into what are essentially interest-bearing checking accounts. Securitization permits commercial banks to change what once were illiquid consumer loans of several varieties into securities. Selling these securities gives the banks a source of funding that is outside the Fed's influence.INSTRUMENT OF MONETARY POLICY: HOW THE FED INFLUENCES THE SUPPLY OF MONEYThe Fed has three instruments at its disposal to affect the level of reserves.Reserve RequirementsUnder our fractional reserve banking system have to maintain specified fractional amounts of reserves against their deposits. The Fed can raise or lower these required reserve ratios, thereby permitting banks to decrease or increase their lending and investment portfolios. A bank's total reserves equal its required reserves plus any excess reserves.Open Market OperationsThe Fed's most powerful instrument is its authority to conduct open market operation. It buys and sells in open debt markets government securities for its own accounts. The Fed prefers to use Treasury bills because it can make its substantial transactions without seriously disrupting the prices or yields of bills.The Federal Open Market Committee, or FOMC, is the unit that decides on the general issues of changing the rate of growth in the money supply, by open market sales or purchases of securities. The implementation of policy through open market operations is the responsibility of the trading desk of the Federal Reserve Bank of New York.Open Market Repurchase AgreementsThe Fed often employs variants of simple open market purchases and sales, these are called the repurchase agreement (or repo) and the reverse repo. In a repo, the Fed buys a particular amount of securities from a seller that agrees to repurchase the same number of securities for a higher price at some future time. In a reverse repo, the Fed sells securities and makes a commitment to buy them back at a higher price later.Discount RateA bank borrowing from the Fed is said to use the discount window. The discount rate is the rate charged to banks borrowing directly from the Fed. Raising the rate is designed to discourage such borrowing, while lowering should have the opposite effect.DIFFERENT KINDS OF MONEYMoney is that item which serves as a numeraire. In a basic sense money can be defined as anything that serves as a unit of account and medium of exchange. We measure prices in dollars and exchange dollars for goods. Hence coins, currency, and any items readily exchanged into dollars (checking deposits or NOW accounts) constitute our money supply.MONEY AND MONETARY AGGREGATESMonetary aggregates measure the amount of money available to the economy at any time. The monetary base is defined as currency in circulation (coins and federal reserve notes) and reserves in the banking system. The instruments that serve as a medium of exchange can be narrowly defined as Mi, which is currency and demand deposits. M2 is Mi plus time and savings accounts, and money market mutual funds. Finally, M3 is M? plus short-term Treasury liabilities. While all three aggregates are watched and monitored, Mi is the most common form of the money supply, with its trait as being the most liquid. The ratio of the money supply to the economy's income is known as the velocity of money.THE MONEY MULTIPIER: THE EXPANSION OF THE MONEY SUPPLYThe money multiplier effect arises from the fact that a small change in reserves can produce a large change in the money supply. Through our fractional reserve system, a small increase will allow an individual bank, to lend out the greater part of these additional funds. These loans subsequently become deposits in other banks allowing them to expand proportionately. So, while one bank can expand its loans (or deposits) by an amount 1% of reserves required, all banks in the system can do likewise. Thus, in a simple format total change in deposits can be stated as change in reserves divided by the reserve requirement, which is also the formula for perpetuity. For example, if the change in the level of reserves is $100 and the reserve requirement is 20%, the change in total deposits will be $500 for a multiplier of 5. Of course, major assumptions are that banks will fully loan out their excess reserves and that depositors will not withdraw any of these extra reserves. THE IMPACT OF INTEREST RATES ON THE MONEY SUPPLYHigh rates of interest may make keeping excess reserves costly, since unused funds represent loans not made and interest not earned. High rates of interest will also affect the public's demand for holding cash. If deposits pay competitive interest rates, customers will be more willing to hold such bank liabilities and less cash. Therefore, a higher rate of interest can actually spur growth of the money supply. More likely, however, it will deter borrowing and slow monetary growth.THE MONEY SUPPLY PROCESS IN AN OPEN ECONOMYIn the modern era, almost every country has an open economy. Foreign commercial and central banks hold dollar accounts in the United States. Their purchases and sales of these deposits can affect exchange rates of the dollar against their own currency. The Fed has responsibility for maintaining stability in exchange rates. A purchase of foreign exchange with dollars depreciates the dollar's value, but it also adds dollars to the accounts of foreign banks in this country, thus adding to the U.S. monetary base. Most central banks of large economies own or stand ready to own a large amount of each of the world's major currencies, which are considered international reserves. Sales of foreign exchange transactions have monetary base implication and hence consequences for the domestic money supply, emphasis is given to coordinating monetarypolicies among developed nations.ANSWERS TO QUESTIONS FOR CHAPTER 4(Questions are in bold print followed by answers.)1.What is the role of a central bank?The role of a central bank has several functions: risk assessment, risk reduction, oversight of payment systems, and crisis management. It can do this through monetary policies, and through the implementation of regulations.2.Why is it argued that a central bank should be independent of the government?Central banks should be independent of the short-term political interests and political influences generally in setting economic policies.3.Identify each participant and its role in the process by which the money supply changes and monetary policy is implemented.The Fed determines monetary policy and seeks to implement it through changes in reserves. It is up to the nation's banking system to act on changes in reserves thereby affecting deposits, which constitute the greater part of the M| definition of the money supply.4.Describe the structure of the board of governors of the Federal Reserve System.The Board of Governors of the Federal Reserve System consists of 7 members who are appointed to staggered 14-year terms. The Board reviews discount operations and sets legal reserve requirements. In addition, all 7 members of the Board serve on the Federal Open Market Committee (FOMC), which determines the direction and magnitude of open-market operations. Such operations constitute the key instrument for implementing monetary policy.5.a・ Explain what is meant by the statement "the United States has a fractional reserve banking system."b. How are these items related: total reserves, required reserves, and excess reserves?a. A fractional reserve system requires that a fraction or percent of a bank's reserve be placedeither in currency in vault or with the Federal Reserve System.b.Total reserves are the amounts that banks hold in cash or at the Fed. Required reserves areamounts required by the Fed to meet some specific or legal reserve ratio to deposits. Excess reserves are bank reserves in currency and at the Fed which are in excess of legal requirements.Since these amounts are non-interest bearing, banks are often willing to lend these surplus funds to deficit banks at the Fed funds rate.5.What is the required reserve ratio, and how has the 1980 Depository Institutions Deregulation and Monetary Control Act constrained the Fed's control over the ratio?The required reserve ratio is the fraction of deposits a bank must hold as reserves. The DIDMCA constrained the Fed's control over the ratio by letting Congress set ranges of reserves for demand and time deposits.6.In what two forms can a bank hold its required reserves?A bank can hold its reserves in the form of currency in vault or in deposit at the Fed.8.a.What is an open market purchase by the Fed?b.Which unit of the Fed decides on open market policy, and what unit implements thatpolicy?c.What is the immediate consequence of an open market purchase?a.An open market purchase by the Fed consists of the purchase of U.S. Treasury securities.b.The FOMC decides on open market policy and directs the Federal Reserve Bank of New Yorkto implement it through sales and purchases of these securities.c.The immediate consequence of an open market purchase is to supply the seller of the securitywith a check on the Federal Reserve System that he can deposit in his bank, therebyimmediately increasing the excess reserves and thus nation's money supply.7.Distinguish between an open market sale and a matched sale (which is the same as a matched sale-purchase transaction or a reverse repurchase agreement).A matched sale or reverse repo involves the sale of a Treasury security with an agreement to buy it back at a later date and at a higher price as the cost for borrowing the funds. This contrasts with an outright sale at some discounted or premium price.8.What is the discount rate, and to what type of action by a bank does it apply?The discount rate is the rate a bank pays to borrow a t the "discount window” of the Fed. Such borrowings are often undertaken to meet temporary liquidity needs. Bank needs are monitored and the Fed likes to state that borrowing from it is a "privilege and not a right.”IL Define the monetary base and M2The monetary base includes total bank reserves plus currency in the hands of the public. M2 = Mi (currency and demand deposits) + savings and time deposits.12.Describe the basic features of the money multiplier.The money multiplier is crucial to the concept of money creation and is analogous to the idea of the autonomous spending multiplier and formula for a perpetuity. It is the inverse of the required reserve ratio (1/rr). If the reserve ratio is .2 then the money supply will expand five times any increase in new deposits. The multiplier will be less if banks hold excess reserves or experience cash drains.13.Suppose the Fed were to inject $100 million of reserves into the banking system by an open market purchase of Treasury bills. If the required reserve ratio were 10%, what is the maximum increase in Mi that the new reserves would generate? Assume that banks make all the loans their reserves allow, that firms and individuals keep all their liquid assets in depository accounts, and no money is in the form of currency.The maximum increase in Mi will be $1 billion assuming no cash drains in the system, and banks are fully loaned up.14.Assume the situation from question 13, except now assume that banks hold a ratio of0.5% of excess reserves to deposits and the public keeps 20% of its liquid assets in the form of cash. Under these conditions, what is the money multiplier? Explain why this value of the multiplier is so much lower than the multiplier from question 13.Substitute the given values of currency ratio, required reserves ratio, and excess reserves ratio of 20%, 10% and 0.5% respectively into the formula given on page 94 of the textbook. Now we have a lower multiplier value of 3.9=1.20A 305. This is because public and banks do not deposit or lend, all they can.。

Fabozzi_金融市场与金融机构基础课后答案12

C H A P T E R12R I S K/R E T U R N A N D A S S E T P R I C I N G M O D E L S PORTFOLIO THEORYPortfolio theory proceeds from the axiom that investors seek to maximize returns given some risk level they are willing to accept. Portfolios that maximize the expected return from an investment subject to a given level of risk are said to be efficient. From among efficient portfolios, the one which risk-averse investors prefer, is said to be an optimal portfolio. To construct an efficient portfolio, it is necessary to understand what is meant by expected return and risk.Investment ReturnThe return on an investment portfolio during a given interval of time is equal to the change in value of the portfolio plus any distributions received from the assets in the portfolio. These returns are expressed as a fraction of the initial portfolio value.R = (V1– V0 + D) / V0where V1 = portfolio value at the end of intervalV0 = portfolio value at the beginning of intervalD = cash distribution during intervalFor purposes of comparison, returns are expressed per unit of time, usually a year. If several years of units are included in the time horizon, then the return can be computed by averaging the return over the several unit intervals. There are three averaging methods in use: (1) the arithmetic average return (simple average of total return divided by number of time units), (2) time-weighted rate of return (also referred to as the geometric average), (3) dollar weighted return. One measure of risk is the extent to which future portfolio values are likely to diverge from the expected value.Portfolio RiskPortfolio risk can be measured in terms of the dispersion of returns about the expected value or mean return. The variance of return is a weighted sum of the squared deviations from the expected return. The standard deviation is the square root of the variance.Expected Portfolio ReturnA particularly useful way to quantify the uncertainty about the portfolio return is to specify the probability associated with each of the possible future returns and calculate the expected value of the portfolio return. The expected value is the weighted average of the possible outcomes, where the weights are the relative chances of occurrence. The expected return on the portfolio isexpressed as:E(R) = P1 R1 + P2 R2 + . . . + P N R NProbability distributions can take various shapes. For a symmetrical distribution, the dispersion of returns on one side of the expected return is the same as the dispersion on the other side of the expected return. The risk of a portfolio is measured by the variance and standard deviation of returns.DiversificationDiversification results from combining securities whose returns are less than perfectly correlated in order to reduce portfolio risk. It smoothes out the variation of returns and reduces the variability. Much of the total risk is diversifiable. But not all risks can be eliminated via diversification. Unsystematic risk (that which relates uniquely to the security or issuing firm) can be substantially reduced with a large, well-diversified portfolio. Still some risks remain which affect all firms to some degree (e.g. business cycles and interest rate changes). This is the market or systematic risk.Mathematically, a security’s return is compos ed of: R =βrm + e where, beta is a market sensitivity index, indicating how sensitive the security return is to changes in the market level. The unsystematic return is independent of the market return and is represented by the epsilon e. The systematic risk of a security is equal to β times the standard deviation of the market return. The unsystematic risk equals the standard deviation of the residual return factor. Portfolio systematic risk is equal to the portfolio beta factor times the risk of the market index. The portfolio beta factor is simply the average of the individual security betas, weighted by the proportion of each security in the portfolio.The Risk of Individual SecuritiesThe systematic risk of an individual security is that portion of its total risk that cannot be eliminated by combining it with other securities in a well diversified portfolio. Thus, we have: Security Return = Systematic Return + Unsystematic ReturnThe security return may be expressed as:R = β R M + ε where ε is unsystematic returnThe security return model is usually written in such a way that the average value of the unsystematic return is zero. This is accomplished by adding a factor alphaαto the model to represent the average value of the unsystematic returns over time.R = α + β R M + ε where ε is unsystematic returnThis model for security returns is referred to as the market model.Estimating BetaBeta can be estimated by regressing returns of a security on the returns of a market portfolio. Since historical data are employed the beta computed will vary with the time period used, number of observations, and market index employed. Thus a question may be raised about the stability of beta over time.THE CAPITAL ASSET PRICING MODELThe capital asset pricing model (CAPM) asserts that the expected return on a portfolio should exceed the risk-less rate of return by an amount that is proportional to the portfolio beta. The relationship between expected return and risk should be linear.Underlying AssumptionsThe model contains several critical assumptions: (1) investors are risk-averse; (2) investors have common time horizon; (3) investors have homogeneous expectations; (4) perfect markets exist, with no transactions costs and borrowing rates are equal to lending rates.Tests of the CAPMOne major difficulty in testing the CAPM is that the model is stated in terms of investor expectations and not in terms of required returns. Yet a number of tests have been tried, the results suggesting that there is indeed a linear risk/return relationship. More noted is Roll’s critique which states while the CAPM is testable in principle, no correct test of the theory has yet been presented. There is only one potentially testable hypothesis, namely that the true market portfolio is mean-variance efficient. Because the true market portfolio must contain all worldwide assets, the value of most of which cannot be observed, the hypothesis is in all probability untestable.THE MULTIFACTOR CAPMThe CAPM assumes the only risk is uncertainty about future market prices. But Robert Merton suggests that there exist extra-market sources of risk of concern to investors as well, such as future income, inflation, future investment opportunities. These risks affect ability to consume goods and to invest in securities in the future. Thus Merton has developed a “multifactor CAPM” to incorporate these extra-market risks in the model. In essence a security’s return has a Beta sensitivity to several factors. What these precise factors are and how many, however, has not been established. Thus this model is even harder to test than the straight CAPM.ARBITRAGE PRICING THEORY MODELDeveloped by Stephen Ross, the arbitrage pricing model (APT) assumes that there are several factors that determine the rate of return on a security, not just one as in the case of the CAPM. Rather, a security’s return is linearly related to “H” factors, but what they are is not specified. It is like the multifactor CAPM but distinguished from it in that it does not require a market index or standard deviation of returns.Empirical EvidenceEmpirical work suggests the following four plausible factors:1. unanticipated changes in industrial production;2. unanticipated changes in the spread between the yield on low grade and high grade bonds;3. unanticipated changes in interest rates and the shape of the yield curve;4. unanticipated changes in inflation.ATTACKS ON THE THEORYPortfolio theory is a normative theory. It describes how investors should behave. However, a number of positive theories have challenged portfolio theory by showing disparities between how investors should behave and how they actually behave.Asset Return Distribution and Risk MeasuresThere is empirical evidence to suggest that the probability distribution of returns is not normal, but is skewed. This means that between periods when the market exhibits relatively modest changes in returns, there will be periods when there are changes that are much higher (i.e., crashes and bubbles) than the normal distribution predicts.Assault by the Behavioral Finance Theory CampBehavioral finance looks at how psychology affects investor decisions and the implications not only for portfolio theory but also asset pricing theory and market efficiency. There are three themes in the behavioral finance literature: (1) investors err in making investment decisions because they rely on rules of thumb, (2) investors are influenced by form as well as substance in making investment decisions, (3) prices in the financial market are affected by errors and decision frames.The first theme involves heuristics, a term meaning a rule of thumb strategy to follow in order to shorten the time it takes to make a decision. There are circumstances where heuristics can workfairly well. But it can also lead to cognitive biases, or heuristic-driven biases.The second theme involves the concept of framing, meaning the way in which a situation or choice is presented to an investor can drive results. For example, investors often fail to treat the value of their stock portfolio at market value. Instead, they have a “mental account” where they continue to market the value of each stock in their portfolio at the purchase price despite the change in the market value.The third them of behavioral finance involves how errors caused by heuristics and framing dependence affect the pricing of assets.ANSWERS TO QUESTIONS FOR CHAPTER 12(Questions are in bold print followed by answers.)1. A friend has asked you to help him figure out a statement he received from his broker. It seems that, at the start of last year, your friend paid $900 for a bond, and sold it at the end of the year for $890. During the year, he received a single coupon payment of $110. The statement claims that his return (not including commissions and taxes) is 11.11% for the year. Is this claim correct?Returns can be measured by taking all the cash flows (interest payments and capital gains) and dividing by the cost of the security. The formula is:R=(I+P1-P0)/P0=$110+$890-$900/$900=11.11%,so the statement is correct.2. Suppose the probability distribution for the one-period return of some asset is as follows:Return Probability0.20 0.100.15 0.200.10 0.300.03 0.25-0.06 0.15a. W hat is this asset’s expected one-period return?b. What is this asset’s variance and standard deviation for the one-period return?a.The expected return for the asset is:(0.20) (0.10) + (0.15) (0.20) + (0.10) (0.30) + (0.03) (0.25) + (-0.06) (0.15) = 7.85%b.The asset’s return variance is:(0.10) [0.20-0.0785]2+(0.20) [0.15-0.0785]2+(0.30) [0.10-0.0785]2+(0.25) [0.03-0.0785]2+(0.15) [(-0.06) -0.0785] 2=0.006102.The square root of the variance is the standard deviation. Hence, the standard deviation is 0.07812.3. “A portfolio’s expected return and variance of return are simply the weighted average of the expected return and variance of the individual assets.” Do you agree with this statement?This statement is only partially correct. A portfolio’s expe cted return is a weighted average of the expected return of the assets comprising the portfolio. But the portfolio variance is not because it also depends on the correlation (covariance) of the asset returns.4. In the January 25, 1991, issue of The Value Line Investment Survey, you note the following:Company Beta (β)IBM 0.95Bally Manufacturing 1.40Cigna Corporation 1.00British Telecom 0.60a.How do you interpret these betas?b.Is it reasonable to assume that the expected return on British Telecom is less thanthat on IBM shares?c.“Given that Cigna Corporation has a β of 1.00, one can mimic the performance ofthe stock market as a whole by buying only these shares.” Do you agree with thisstatement?a.These figures represent the systematic risk of these stocks; how the stock’s return shouldmove relative to a market index return.b.According to the CAPM, the higher the beta, the greater the expected return. So, accordingtot he reported values for beta, the expected return for British Telecom is less than for IBM.c.This statement is not true. Investing in only these shares will still expose the investor to muchunsystematic risk, which can only be diversified away by investing in a portfolio of different securities.5. Assume the following:Expected market return = 15%Risk-free rate = 5.7%If a security’s beta is 1.3, what is its expected return according to the CAPM?The expected return is:.07+1.3 (.15-.07) =.174=17.4%, (assume risk free rate =7%).6. Professor Harry Markowitz, corecipient of the 1990 Nobel Prize in Economics, wrote the following:A portfolio with sixty different railway securities, for example, wouldnot be as well diversified as the same size portfolio with some railroad,some public utility, mining, various sorts of manufacturing, etc.Why is this true?This is true because railway securities are likely to be highly correlated with each other, whereas a well-diversified portfolio of issues from different industries leads to elimination of unsystematic risk.7. Following is an excerpt from an article, “Risk and Reward,” in The Economist of October 20, 1990:Next question: is the CAPM supported by the facts? That iscontroversial, to put it mildly. It is a tribute to Mr. Sharpe [cowinnerof the 1990 Nobel Prize in Economics] that his work, which dates fromthe early 1960s, is still argued over so heatedly. Attention has latelyturned away from beta to more complicated ways of carving up risk.But the significance of CAPM for financial economics would be hardto exaggerate.a.Summarize Roll’s argument on the problems inherent in empirically verifying theCAPM.b.What are some of the other “more complicated ways of carving up risk”?a.Roll argues that while the CAPM is testable in principle, no correct test of the theory has yetbeen presented. He also argues that there is practically no possibility that a correct test will be done because there is only one potentially testable hypothesis associated with the CAPM, namely that the true market portfolio is mean-variance efficient. Since this portfolio must contain all worldwide assets, the value of most of which cannot be observed, the hypothesis is probably untestable.b.CAPM assumes investors are only concerned with one risk -- the future prices of their assets.Merton asserts that there are other investor concerns, such as the ability to consume goods and services in the future. He has tried to incorporate more than one risk factor in his model.8.a.What are the difficulties in practice of applying the arbitrage pricing theory model?b.Does Roll’s criticism also apply to this pricing model?c.“In the CAPM investors should be compensated for accepting systematic risk: forthe APT model, investors are rewarded for accepting both systematic risk andunsystematic risk.” Do you agree with this statement?a.The difficulty lies in identifying the systematic factors.b.Roll’s criticism does not apply to the APT model because that model does not rely on a truemarket index.c.This statement is true for the CAPM, but not for the APT model. The latter also asserts thatinvestors should be compensated only for accepting systematic risk. But unlike the CAPM, there is more than one systematic risk.9.a.What does it mean that a return distribution has a fat tail?b.What is the implication if a return distribution is assumed to be normallydistributed but is in fact a fat-tailed distribution?a.Probability distributions are not normal, but are instead skewed. The tails of the distributionare more likely than predicted by a normal probability distribution.b.The implication is that between periods when the market exhibits relatively modest changesin returns, there will be periods when there are changes that are much higher (i.e., crashes and bubbles) than the normal distribution predicts.10. How does the behavioral finance approach differ from the standard finance theory approach?Standard financial theory assumes investors are rational utility maximizers. Behavioral finance theory challenges this assumption. It argues that investors are systematically subject to cognitive biases and errors. They make decisions based on mental shortcuts, called heuristics, and these shortcuts are not necessarily consistent with rational wealth maximizing behavior as predicted by the standard finance theory.。

金融市场与金融机构基础Fabozzi Chapter01

Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones)Chapter 1 IntroductionMultiple Choice Questions1 Financial Assets1) An asset is a possession that has value in an exchange and can be classified as ________.A) financial or intangible.B) financial or variable.C) tangible or intangible.D) fixed or variable.Answer: CDiff: 2Topic: 1.1 Financial AssetsObjective: 1.5: the various ways to classify financial markets2) The financial asset is referred to as a ________ if the claim is a fixed dollar.A) debt instrument.B) common equity instrument.C) derivative instrument.D) preferred equity instrument.Answer: ADiff: 2Topic: 1.1 Financial AssetsObjective: 1.4: the distinction between debt instruments and equity instruments3) A basic economic principle is that the price of any financial asset ________ the present value of its expected cash flow, even if the cash flow is not known with certainty.A) is greater thanB) is equal toC) is less thanD) is equal to or greater thanAnswer: BDiff: 2Topic: 1.1 Financial AssetsObjective: 1.1: what a financial asset is and the principal economic functions of financial assets4) A(n) ________ such as plant or equipment purchased by a business entity shares at least one characteristic with a financial asset: Both are expected to generate future cash flow for their owner.A) tangible assetB) intangible assetC) balance sheet assetD) cash assetAnswer: ADiff: 1Topic: 1.1 Financial AssetsObjective: 1.2: the distinction between financial assets and tangible assets5) Financial assets have two principal economic functions. Which of the below is ONE of these?A) A principal economic function is to transfer funds from those who have surplus funds to borrow to those who need funds to invest in intangible assets.B) A principal economic function is to transfer funds in such a way as to redistribute the avoidable risk associated with the cash flow generated by intangible assets among those seeking and those providing the funds.C) A principal economic function is to transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds.D) A principal economic function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in intangible assets.Answer: CComment: Financial assets have two principal economic functions.(1) The first is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets.(2) The second economic function is to transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds.Diff: 3Topic: 1.1 Financial AssetsObjective: 1.1: what a financial asset is and the principal economic functions of financial assets6) A principal economic function to transfer funds from those who have ________ to invest to those who need funds to invest in ________.A) deficit funds; tangible assets.B) surplus funds; intangible assets.C) deficit funds; intangible assets.D) surplus funds; tangible assets.Answer: DComment: Financial assets have two principal economic functions.(1) The first is to transfer funds from those who have surplus f unds to invest to those who need funds to invest in tangible assets.(2) The second economic function is to transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds.Diff: 2Topic: 1.1 Financial AssetsObjective: 1.1: what a financial asset is and the principal economic functions of financial assets 2 Financial Markets1) Financial markets provide three economic functions. Which of the below is NOT one of these?A) The interactions of buyers and sellers in a financial market determine the price of the traded asset.B) Financial markets provide a mechanism for an investor to sell a financial asset.C) Financial markets increases the cost of transacting.D) The interactions of buyers and sellers in a financial market determine the required return on a financial asset.Answer: CComment: Financial markets provide three economic functions.First, the interactions of buyers and sellers in a financial market determine the price of the traded asset. Or, equivalently, they determine the required return on a financial asset. As the nducement for firms to acquire funds depends on the required return that investors demand, it is this feature of financial markets that signals how the funds in the economy should be allocated among financial assets. This is called the price discovery process.Second, financial markets provide a mechanism for an investor to sell a financial asset. Because of this feature, it is said that a financial market offers liquidity, an attractive feature when circumstances either force or motivate an investor to sell. If there were not liquidity, the owner would be forced to hold a debt instrument until it matures and an equity instrument until the company is either voluntarily or involuntarily liquidated.While all financial markets provide some form of liquidity, the degree of liquidity is one of the factors that characterize different markets. The third economic function of a financial market is that it reduces the cost of transacting. There are two costs associated with transacting: search costs and information costs.Diff: 3Topic: 1.2 Financial MarketsObjective: 1.3: what a financial market is and the principal economic functions it performs2) The shifting of the financial markets from dominance by retail investors to institutional investors is referred to as the ________ of financial markets.A) globalizationB) institutionalizationC) securitizationD) diversificationAnswer: BDiff: 2Topic: 1.2 Financial MarketsObjective: 1.5: the various ways to classify financial markets3) Financial markets can be categorized as those dealing with newly issued financial claims that are called the ________, and those for exchanging financial claims previously issued that are called the ________.A) secondary market; primary market.B) financial market; secondary market.C) OTC market; NYSE/AMEX market.D) primary market; secondary market.Answer: DDiff: 2Topic: 1.2 Financial MarketsObjective: 1.6: the differences between the primary and secondary markets4) Business entities include nonfinancial and financial enterprises. ________ manufacture products such as cars and computers and/or provide nonfinancial services such as transportation and utilities.A) Financial enterprisesB) Nonfinancial enterprisesC) Both financial and nonfinancial enterprisesD) None of theseAnswer: BDiff: 1Topic: 1.2 Financial MarketsObjective: 1.7: the participants in financial markets3 Globalization of Financial Markets1) Which of the below is NOT a factor that has led to the integration of financial markets?A) A factor is liberalization of markets and the activities of market participants in key financial centers of the world.B) A factor is deregulation of markets and the activities of market participants in key financial centers of the world.C) A factor is technological advances for monitoring world markets, executing orders, and analyzing financial opportunities.D) A factor is decreased institutionalization of financial markets.Answer: DComment: The factors that have led to the integration of financial markets are (1) deregulation or liberalization of markets and the activities of market participants in key financial centers of the world; (2) technological advances for monitoring world markets, executing orders, and analyzing financial opportunities; and (3) increased institutionalization of financial markets.Diff: 3Topic: 1.3 Globalization of Financial MarketsObjective: 1.8: reasons for the globalization of financial markets2) A factor leading to the integration of financial markets is ________.A) decreased institutionalization of financial markets.B) increased monitoring of markets.C) technological advances for monitoring domestic markets, executing orders, and analyzing financial opportunities.D) technological advances for monitoring world markets, executing orders, and disregarding financial opportunities.Answer: DComment: The factors that have led to the integration of financial markets are (1) deregulation or liberalization of markets and the activities of market participants in key financial centers of the world; (2) technological advances for monitoring world markets, executing orders, and analyzing financial opportunities; and (3) increased institutionalization of financial markets.Diff: 2Topic: 1.3 Globalization of Financial MarketsObjective: 1.8: reasons for the globalization of financial markets3) From the perspective of a given country, financial markets can be classified as either internal or external. The internal market is composed of two parts: the domestic market and the foreign market. The domestic market is ________.A) where the securities of issuers not domiciled in the country are sold and traded.B) where issuers domiciled in a country issue securities and where those securities are subsequently traded.C) where securities are offered simultaneously to investors in a number of countries.D) where issuers domiciled in a country issue securities and where those securities are NOT subsequently traded.Answer: BDiff: 2Topic: 1.3 Globalization of Financial MarketsObjective: 1.10: the distinction between a domestic market, a foreign market, and the Euromarket 4) A reason for a corporation using ________ is a desire by issuers to diversify their source of funding so as to reduce reliance on domestic investors.A) EuromarketsB) domestic equity marketsC) domestic government marketsD) None of theseAnswer: ADiff: 1Topic: 1.3 Globalization of Financial MarketsObjective: 1.11: the reasons why entities use foreign markets and Euromarkets4 Derivative Markets1) The two basic types of derivative instruments are ________ and ________.A) insurance contracts; options contractsB) futures/forward contracts; indenturesC) futures/forward contracts; legal contractsD) futures/forward contracts; options contractsAnswer: DDiff: 2Topic: 1.4 Derivative MarketsObjective: 1.12: what a derivative instrument is and the two basic types of derivative instruments2) Derivative instruments derive their value from ________.A) market conditions at time of delivery.B) market conditions at time of issue.C) the underlying instruments to which they relate.D) variations in the future claims conveyed from spot markets.Answer: CDiff: 2Topic: 1.4 Derivative MarketsObjective: 1.13: the role of derivative instruments3) Derivative contracts provide ________.A) issuers and investors an expensive but efficient way of controlling some major risks.B) issuers and investors an inexpensive way of controlling some major risks.C) issuers and investors an inexpensive but inefficient way of controlling all major risks.D) issuers and investors an expensive way of controlling some minor risks.Answer: BDiff: 1Topic: 1.4 Derivative MarketsObjective: 1.13: the role of derivative instruments4) Derivative markets may have at least three advantages over the corresponding cash (spot) market for the same financial asset. Which of the below is ONE of these advantages?A) Transactions typically can be accomplished faster in the derivatives market.B) It will always cost more to execute a transaction in the derivatives market in order to adjust the risk exposure of an investor's portfolio to new economic information than it would cost to make that adjustment in the cash market.C) All derivative markets can absorb a greater dollar transaction without an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market.D) Some derivative markets can absorb a greater dollar transaction but with an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market.Answer: AComment: Derivative markets may have at least three advantages over the corresponding cash (spot) market for the same financial asset.First, depending on the derivative instrument, it may cost less to execute a transaction in the derivatives market in order to adjust the risk exposure of an investor’’s portfolio to new economic information than it would cost to make that adjustment in the cash market.Second, transactions typically can be accomplished faster in the derivatives market.Third, some derivative markets can absorb a greater dollar transaction without an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market.Diff: 3Topic: 1.4 Derivative MarketsObjective: 1.13: the role of derivative instruments5 The Role of the Government in Financial Markets1) Which of the following statements is FALSE?A) Because of the prominent role played by financial markets in economies, governments have long deemed it necessary to regulate certain aspects of these markets.B) In their regulatory capacities, governments have had little influence on the development and evolution of financial markets and institutions.C) It is important to realize that governments, markets, and institutions tend to behave interactively and to affect one another's actions in certain ways.D) A sense of how the government can affect a market and its participants is important to an understanding of the numerous markets and securities.Answer: BComment: In their regulatory capacities, governments have greatly influenced the development and evolution of financial markets and institutions.Diff: 2Topic: 1.5 The Role of the Government in Financial MarketsObjective: 1.15 the different ways that governments regulate markets, including disclosure regulation, financial activity regulation, financial institution regulation, regulation of foreign firm participation, and regulation of the monetary system2) Which of the below statements is TRUE?A) Because of differences in culture and history, different countries regulate financial markets and financial institutions in varying ways, emphasizing some forms of regulation more than others.B) The standard explanation or justification for governmental regulation of a market is that the market, left to itself, will produce its particular goods or services in an efficient manner and at the lowest possible cost.C) Governments in most developed economies have created elaborate systems of regulation for financial markets, in part because the markets themselves are simple and in part because financial markets are unimportant to the general economies in which they operate.D) Financial activity regulation are free of rules about traders of securities and trading on financial markets.Answer: AComment: The standard explanation or justification for governmental regulation of a market is that the market, left to itself, will not produce its particular goods or services in an efficient manner and at the lowest possible cost.Governments in most developed economies have created elaborate systems of regulation for financial markets, in part because the markets themselves are complex and in part because financial markets are so important to the general economies in which they operate.Financial activity regulation consists of rules about traders of securities and trading on financial markets.Diff: 3Topic: 1.5 The Role of the Government in Financial MarketsObjective: 1.14: the typical justification for governmental regulation of markets3) The regulatory structure in the United States is largely the result of ________.A) the first IPO bubble in the 20th century.B) the boom in the stock market experienced in the 1990s.C) bull markets that have occurred at various times.D) financial crises that have occurred at various times.Answer: DDiff: 1Topic: 1.5 The Role of the Government in Financial MarketsObjective: 1.16 the U.S. Department of the Treasury's proposed plan for regulatory reform4) The proposal by the U.S. Department of the Treasury, popularly referred to as the "Blueprint for Regulatory Reform" or simply Blueprint, would replace the prevailing complex array of regulators with a regulatory system based on functions. More specifically, there would be three regulators. Which of the below is NOT one of these?A) market stability regulatorB) prudential regulatorC) uninhibited regulatorD) business conduct regulatorAnswer: CDiff: 2Topic: 1.5 The Role of the Government in Financial MarketsObjective: 1.15 the different ways that governments regulate markets, including disclosure regulation, financial activity regulation, financial institution regulation, regulation of foreign firm participation, and regulation of the monetary system6 Financial Innovation1) ________ increase the liquidity of markets and the availability of funds by attracting new investors and offering new opportunities for borrowers.A) Market-broadening instrumentsB) Market-management instrumentsC) Risk-management instrumentsD) Arbitraging-broadening instrumentsAnswer: AComment: The Economic Council of Canada classifies financial innovations into the following three broad categories:(1) market-broadening instruments, which increase the liquidity of markets and the availability of funds by attracting new investors and offering new opportunities for borrowers(2) risk-management instruments, which reallocate financial risks to those who are less averse to them, or who offsetting exposure and thus are presumably better able to should them(3) arbitraging instruments and processes, which enable investors and borrowers to take advantage of differences in costs and returns between markets, and which reflect differences in the perception of risks, as well as in information, taxation, and regulationsDiff: 2Topic: 1.6 Financial InnovationObjective: 1.17 the primary reasons for financial innovation2) The Economic Council of Canada classifies financial innovations into three broad categories. Which of the below is NOT one of these?A) market-broadening instrumentsB) risk-management instrumentsC) risk-broadening instrumentsD) arbitraging instruments and processesAnswer: CComment: The Economic Council of Canada classifies financial innovations into the following three broad categories:(1) market-broadening instruments, which increase the liquidity of markets and the availability of funds by attracting new investors and offering new opportunities for borrowers(2) risk-management instruments, which reallocate financial risks to those who are less averse to them, or who offsetting exposure and thus are presumably better able to should them(3) arbitraging instruments and processes, which enable investors and borrowers to take advantage of differences in costs and returns between markets, and which reflect differences in the perception of risks, as well as in information, taxation, and regulationsDiff: 2Topic: 1.6 Financial InnovationObjective: 1.17 the primary reasons for financial innovation3) There are two extreme views of financial innovation. Which of the below is ONE of these?A) Some hold that the essence of innovation is the introduction of financial assets that are less efficient for redistributing risks among market participants.B) There are some who believe that the minor impetus for innovation has been the endeavor to circumvent regulations and find loopholes in tax rules.C) Some hold that the essence of innovation is the introduction of financial instruments that are more efficient for redistributing risks among market participants.D) None of theseAnswer: CComment: There are two extreme views of financial innovation.There are some who believe that the major impetus for innovation has been the endeavor to circumvent (or arbitrage) regulations and find loopholes in tax rules.At the other extreme, some hold that the essence of innovation is the introduction of financial instruments that are more efficient for redistributing risks among market participants.Diff: 2Topic: 1.6 Financial InnovationObjective: 1.17 the primary reasons for financial innovation4) An ultimate and important cause of financial innovation does not involve ________.A) incentives to follow existing regulation and and tax laws.B) increased volatility of interest rates, inflation, equity prices, and exchange rates.C) changing global patterns of financial wealth.D) financial intermediary competition.Answer: AComment: It would appear that many of the innovations that have passed the test of time and have not disappeared have been innovations that provided more efficient mechanisms for redistributing risk. Other innovations may just represent a more efficient way of doing things. Indeed, if we consider the ultimate causes of financial innovation,the following emerge as the most important:1. Increased volatility of interest rates, inflation, equity prices, and exchange rates.2. Advances in computer and telecommunication technologies.3. Greater sophistication and educational training among professional market participants.4. Financial intermediary competition.5. Incentives to get around existing regulation and and tax laws.6. Changing global patterns of financial wealth.Diff: 2Topic: 1.6 Financial InnovationObjective: 1.17 the primary reasons for financial innovationTrue/False Questions1 Financial Assets1) An equity instrument (also called a residual claim) obligates the issuer of the financial asset to pay the holder an amount based on earnings, if any, after holders of debt instruments have been paid.Answer: TRUEDiff: 1Topic: 1.1 Financial AssetsObjective: 1.4: the distinction between debt instruments and equity instruments2) A intangible asset is one whose value depends on particular physical properties such as buildings, land, or machinery. Tangible assets, by contrast, represent legal claims to some future benefit.Answer: FALSEComment: A tangible asset is one whose value depends on particular physical properties such as buildings, land, or machinery. Intangible assets, by contrast, represent legal claims to some future benefit.Diff: 1Topic: 1.1 Financial AssetsObjective: 1.2: the distinction between financial assets and tangible assets3) Financial assets have two principal economic functions. One function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets. Answer: TRUEDiff: 1Topic: 1.1 Financial AssetsObjective: 1.1: what a financial asset is and the principal economic functions of financial assets 2 Financial Markets1) The three economic functions of financial markets are: to improve the price discovery process; to lessen liquidity; and, to reduce the cost of transacting.Answer: FALSEComment: The three economic functions of financial markets are: to improve the price discovery process; to enhance liquidity; and to reduce the cost of transacting.Diff: 2Topic: 1.2 Financial MarketsObjective: 1.3: what a financial market is and the principal economic functions it performs2) The market participants include households, business entities, national governments, national government agencies, state and local governments, supranationals, and regulators.Answer: TRUEDiff: 1Topic: 1.2 Financial MarketsObjective: 1.3: what a financial market is and the principal economic functions it performs3) One economic function of a financial market is to reduce the cost of transacting. There are two costs associated with transacting: search costs and information costs.Answer: TRUEDiff: 1Topic: 1.2 Financial MarketsObjective: 1.3: what a financial market is and the principal economic functions it performs3 Globalization of Financial Markets1) Globalization means the integration of financial markets throughout the world into an international financial market.Answer: TRUEDiff: 1Topic: 1.3 Globalization of Financial MarketsObjective: 1.8: reasons for the globalization of financial markets2) The domestic market in any country is the market where the securities of issuers not domiciled in thecountry are sold and traded.Answer: FALSEComment: The foreign market in any country is the market where the securities of issuers not domiciled in the country are sold and traded.Diff: 1Topic: 1.3 Globalization of Financial MarketsObjective: 1.10: the distinction between a domestic market, a foreign market, and the Euromarket 3) Global competition has forced governments to exercise control various aspects of their financial markets so that their financial enterprises can compete effectively around the world.Answer: FALSEComment: Global competition has forced governments to deregulate (or liberalize) various aspects of their financial markets so that their financial enterprises can compete effectively around the world.Diff: 1Topic: 1.3 Globalization of Financial MarketsObjective: 1.8: reasons for the globalization of financial markets4 Derivative Markets1) Derivative instruments play a critical role in global financial markets.Answer: TRUEDiff: 1Topic: 1.4 Derivative MarketsObjective: 1.13: the role of derivative instruments2) IBM pension fund owns a portfolio consisting of the common stock of a large number of companies. Suppose the pension fund knows that two months from now it must sell stock in its portfolio to pay beneficiaries $20 million. The risk that IBM pension fund faces is that two months from now when the stocks are sold, the price of most or all stocks may be higher than they are today.Answer: FALSEComment: IBM pension fund owns a portfolio consisting of the common stock of a large number of companies. Suppose the pension fund knows that two months from now it must sell stock in its portfolio to pay beneficiaries $20 million. The risk that IBM pension fund faces is that two months from now when the stocks are sold, the price of most or all stocks may be lower than they are today.Diff: 2Topic: 1.4 Derivative MarketsObjective: 1.13: the role of derivative instruments3) When the option grants the owner of the option the right to buy a financial asset from the other party, the option is called a put option.Answer: FALSEComment: When the option grants the owner of the option the right to buy a financial asset from the other party, the option is called a call option.Diff: 2Topic: 1.4 Derivative MarketsObjective: 1.13: the role of derivative instruments5 The Role of the Government in Financial Markets1) The market stability regulator would take on the traditional role of the Federal Reserve by giving it the responsibility and authority to ensure overall financial market stability.Answer: TRUEDiff: 1Topic: 1.5 The Role of the Government in Financial MarketsObjective: 1.15 the different ways that governments regulate markets, including disclosure regulation, financial activity regulation, financial institution regulation, regulation of foreign firm participation, and regulation of the monetary system2) Blueprint regulation is the form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors.Answer: FALSEComment: Disclosure regulation is the form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors.Diff: 1Topic: 1.5 The Role of the Government in Financial MarketsObjective: 1.16 the U.S. Department of the Treasury's proposed plan for regulatory reform3) Financial activity regulation is the form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors.Answer: FALSEComment: Disclosure regulation is the form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors.NOTE. Financial activity regulation consists of rules about traders of securities and trading on financial markets.Diff: 1Topic: 1.5 The Role of the Government in Financial MarketsObjective: 1.14: the typical justification for governmental regulation of markets。

金融市场与金融机构基础Fabozzi Chapter01

金融市场与金融机构基础(第17章) 英文版答案

ANSWERS TO QUESTIONS FOR CHAPTER 17(Questions are in bold print followed by answers.)1. What are the three factors contributing to the significant changes in the common market over the past 50 years?The stock markets have also changed since the early 1960s, due to (1) institutionalization (small investors now play only a minor role); (2) changes in government regulations, e.g. disclosure, types of trades, margin requirements; (3) innovations, e.g. computer technology permits program trading.2.a. How does common stock differ from preferred stock?b. Why is preferred stock viewed as a senior corporate security?a.Preferred stock is entitled to a fixed participation in the form of dividends of the earnings ofthe company. Dividends must be declared and ordinarily they are at the discretion of the board. Common stock is entitled to the residual cashflow, and is junior to the preferred stock both in terms of distribution and liquidation preference.b.Preferred stock is considered a senior instrument because dividends must be paid before anydistribution of dividends can be made to the common stockholders. Also, in a liquidation, the preferred stockholders are paid before the common stockholders, who are considered residual claimants.3. What is the difference between ordinary dividends and qualified dividends and how is each treated for tax purposes?Ordinary dividends are taxed at the income tax bracket. Qualified dividends receive preferential tax rate, either 5% or 15%, depending on the individual’s re gular income tax rate.4. What is meant by a long-term capital gain and how is it treated for tax purposes?Long-term capital gains are appreciations in value of the stock that has been held for more than one year. It is entitled to preferential tax rat e, either 5% or 15% depending on the individual’s regular income tax rate.5. The following quote is taken from Wayne H. Wagner, “The Taxonomy of Trading Strategies,” in Katrina F. Sherrerd (ed.), Trading Strategies and Execution Costs (Charlottesville, VA: The Institute of Chartered Financial Analysts, 1988).When a trader decides how to bring an order to the market, he or shemust deal with some very important issues; to me, the most importantis: What kind of trade is this? It could be either an active or a passivetrade. The type of trade will dictate whether speed of execution ismore or less important than cost of execution. In other words, do Iwant immediate trading (a market order); or am I willing to forgo theimmediate trade for the possibility of trading less expensively if I amwilling to “give” on the timing of the trade (a limit order)?a.What is meant by a market order?b.Why would a market order be placed when an investor wants immediate trading?c.What is meant by a limit order?d.What are the risks associated with a limit order?a. A market order is one which is sent to the floor for immediate execution as soon as it isreceived. The buyer or seller receives the market price at the time the trade is executed.b. A market order is executed as soon as possible.c. A limit order is executed when the price reaches a predetermined level.d.The limit may not be reached. The investor cannot predict the timing of the execution.6. Suppose that Mr. Mancuso has purchased a stock for $45 and that he sets a maximum loss that he will accept on this stock of $6.What type of order can Mr. Mancuso place?He will put a sell stop order setting the stop price at $45.7.a.What is a program trade?b.What are the various types of commission arrangements for executing a programtrade and the advantages and disadvantages of each?a. A program trade is an institutional buy or sell of a large basket of stocks.b.If a program trade is executed on an agency basis, commissions are bid for by a group ofbrokerage firms. The advantage is that the commissions tend to be lower, but the disadvantage is that the execution price may not be the best because the impact costs and the potential for front-running. Dealers can also execute a program trade on a principal basis, which means that they buy or sell the amounts from inventory and bear the risk of distribution. The advantage is that the investor knows the trading price in advance, but pays a higher commission.8.a.Explain the mechanics and some key rules of a short sale.b.What restrictions are imposed on short selling activities?a. A short seller borrows the stocks to sell on the market, giving the proceeds of the sale to hisbroker as collateral. Should prices decline he will buy the stocks, return them to the broker and obtain the sales proceeds.b. A short sale must be announced at the time the order is given , and it can occur only after anuptick in the market price of the stock. The short seller is also responsible for paying any dividends due on the stocks before he covers them with a purchase.9. What role does the broker call rate play in a margin purchase?The broker call rate is the rate paid on a bank loan by a broker, who is lending the cash to a customer buying stocks on margin. The broker will normally add a slight service charge to this fee. This rate will affect the margin transaction’s profitability.10.a.What is meant by maintenance margin when stocks are purchased on margin?b.What is meant by debit balance?c.What is meant by credit balance?a.The maintenance margin is the minimum amount of equity in the investor's margin account. Ifthe value of the securities changes enough to erode the value of equity, the investor must provide additional cash to supplement the amount posted.b. A debit balance is the value of the equity less the borrowed amount in a margin purchase.c. A credit balance is the value of the equity plus the borrowed amount in a short sale.11. The following statements are taken from Greta E. Marshall’s article “Execution Costs: The Plan Sponsor’s View,” which appears in Trading Strategies and Execution Costs, published by The Institute of Chartered Financial Analysts in 1988. (The publication is the product of a conference held in New York City on December 3, 1987):a.“There are three components of trading costs. First there a re direct costs which maybe measured—commissions. Second, there are indirect—or market impact—costs.Finally, there are the undefined costs of not trading.” What are market impact costs, and what do you think the “undefined costs of not trading” represent?b.“Market impact, unlike broker commissions, is difficult to identify and measure.”Why is market impact cost difficult to measure?a.Market impact costs are the increases in the bid-ask spread faced by investors who wish toexecute large transactions on a timely basis. Large transactions tend to drive prices in a direction which is adverse to the investor. The “undefined costs of not trading” are opportunity costs that investors face because they failed to make a transaction at the proper time to take advantage of a certain price.b.It is difficult to determine how much of a change in price is due to ordinary market fluctuationsand how of the price rise or drop is due to the costs of absorbing a large trade. The opportunity cost of not trading is also difficult to measure.12.a.What is meant by “soft dollars”?b.What is the concern with soft dollars?a.Soft dollars is compensation to customers in the form of information and preferential timingwhich is “paid” by broker/dealers in exchange for commitments of orde r flow.b.The concern is that the client is not free to shop around for the best bid or best offer, net ofcommissions, for all their transactions, but have to do an agreed amount of transaction volume with the specific broker/dealer. The SEC does not ban soft dollars, but it does regulate it.13.a.What is meant by tick size?b.What is the tick size for common stock?a.The tick size is the minimum price variation for a security.b.The minimum tick size is a penny.14. Why were price limits and collars imposed on stock in the United States?Circuit breakers and trading collar rules halts trading when certain temporary forces, such as emotional trading or a panicked market, threatens stability of market prices. These reforms were made after the stock market crash of October 19, 1987.15.a.What is meant by the circuit breaker rule?b.What is meant by the trading collar rule?a. A circuit breaker is a set of trading rules that stop trading once the market reaches certaindownside benchmarks.b. A trading collar restricts index arbitrage trading. If the DJIA moves up or down 2% fro theprevious closing value, program trading orders to buy or sell the S&P 500 stocks as a part of the index arbitrage strategies must be entered with directions to have the order executions affected in a manner that stabilizes share prices.16. What are the three general types of stock market indicators?Stock market indicators can be classified into three groups: (1) those produced by stock exchanges based on all stocks traded on the exchange; (2) those produced by organizations that subjectively select the stocks to be included in indexes; (3) those where stock selection is based on an objective measure, such as the market capitalization of the company.17. What is the difference between a market-value-weighted index and an equally weighted index?While the stock market indicators rise and fall in unison, several factors differentiate these. One of these is the relative weight assigned to the stock in the index. A market value weighted index is weighting by the market value of the company (capitalization). An equally weighted index will assign weight to each company equally regardless of its market value. The Dow Jones Industrial is a price-weighted index, where as value line composite average is an equally weighted index.18. What are the main features of the S&P 500 common stock index?The S&P 500 index is broad based measurement of changes in stock market conditions of 500 widely held common stocks. The composition of the 500 stocks is flexible. It represents stocks chosen from the two major national stock exchanges and the over-the-counter market.19. “The stocks selected for the S&P 500 are the largest 500 companies in the United States.” Indicate whether you agree or disagree with thi s statement.Disagree .The index captures overall stock market conditions as reflected by a broad range of economic indicators.20. There are participants and analysts in the stock market that are called chartists or technical analysts. What does the theory that the market is weak-form efficient say about these investors’ chances of beating the market?The weak form of the efficient market hypothesis states that past prices cannot predict future trends. Price changes are statistically independent of each other. Thus chartists or technical analysts may not gain superior returns.21. The November 1985 prospectus of the Merrill Lynch Phoenix Fund, Inc., a mutual fund, stated the following investment objective:Based upon the belief that the pricing mechanism of the securitiesmarkets lacks perfect efficiency so that prices of securities of troubledissuers are often depressed to a greater extent than warranted by thecondition of the issuer and that, while investment in such securitiesinvolves a high degree of risk, such investments offer the opportunityfor significant capital gains.What does this strategy assume about the pricing efficiency of the stock market?This strategy assumes pricing inefficiency of the stock market. The prices of these securities do not reflect the true intrinsic value and thus may offer opportunities for reaping abnormal returns.22. Why should an investor who believes that the market is efficient pursue an indexing strategy?This is a strategy that capital market theory suggests captures the efficiency of the market. If the market is truly efficient, investors cannot outperform a market index after adjustments for risk and transaction costs.。

金融市场与金融机构基础 Fabozzi Chapter17

Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones)Chapter 17 Markets for Common Stock: The Basic CharacteristicsMultiple Choice Questions1 Common Stock Characteristics1) Equity securities represent ________ interest in a corporation. Holders of equity securities are entitled to the earnings of the corporation when those earnings are distributed in the form of________. The key distinction between common stock and preferred stock lies in the degree to which they may participate in any distribution of earnings and the priority given to each in the________.A) an ownership; dividends; retainment of earningsB) an ownership; interest; distribution of earningsC) an ownership; dividends; distribution of earningsD) a potential; interest; retainment of earningsAnswer: CComment: Equity securities represent an ownership interest in a corporation. Holders of equity securities are entitled to the earnings of the corporation when those earnings are distributed in the form of dividends. They are also entitled to a pro rata share of the remaining equity in case of liquidation. The two types of equity securities are common stock and preferred stock. The key distinction between these two forms of equity securities lies in the degree to which they may participate in any distribution of earnings and the priority given to each in the distribution of earnings.Diff: 2Topic: 17.1 Common Stock CharacteristicsObjective: 17.9 the implications of pricing efficiency for a common stock strategy2) For common stock investors, the return realized by holding this investment comes from________.A) dividend paymentsB) decrease in the price of the common stockC) decrease in the price of the common stockD) All of theseAnswer: DComment: For common stock investors, the return realized by holding this investment comes from two sources: dividend payments and the change in the price of the common stock. The change can be either a decrease or increase.Diff: 2Topic: 17.1 Common Stock CharacteristicsObjective: 17.8 evidence on the pricing efficiency of the stock market3) Which of the below statements is TRUE?A) Dividends (which are typically in the form of stock) are are distributions made by a corporation to its owners that represent a return on their investment.B) Dividends paid to common stockholders are not legal obligations of a corporation and some corporations do not pay cash dividends.C) At one time, dividend payments were taxed solely as ordinary income. Ordinary income means that the tax rate applicable is based on the investor's average tax bracket.D) Depending on the individual's income tax rate, preferential dividends are taxed at either 5% or 15%.Answer: BComment: Dividends (which are typically in the form of cash) are are distributions made by a corporation to its owners that represent a return on their investment.At one time, dividend payments were taxed solely as ordinary income. Ordinary income means that the tax rate applicable is based on the investor’s regular marginal tax bracket. Depending on the individual’s income tax rate, qualified dividends are taxed at either 5% or 15%.Diff: 2Topic: 17.1 Common Stock CharacteristicsObjective: 17.8 evidence on the pricing efficiency of the stock market4) If the price at a future date ________ the purchase price, then there is a ________.A) less than; capital gainB) less than; a taxable gainC) exceeds; capital lossD) exceeds; capital gainAnswer: DComment: If the price at a future date exceeds the purchase price, then there is a capital gain; if the price at a future date is less than the purchase price, then there is a capital loss.Diff: 2Topic: 17.1 Common Stock CharacteristicsObjective: 17.8 evidence on the pricing efficiency of the stock market2 Trading Mechanics1) In regards to types of order, which of the below statements is FALSE?A) The simplest type of order is the market order, an order to be executed at the best price available in the market.B) The danger of a market order is that an adverse move may take place between the time the investor places the order and the time the order is executed.C) A buy limit order indicates that the stock may be purchased only at the designated price or lower, while a sell limit order indicates that the stock may be sold at the designated price or higher.D) The key advantage of a limit order is that there is no guarantee that it will be executed at all; the designated price may simply not be obtainable.Answer: DComment: The key disadvantage of a limit order is that there is no guarantee that it will be executed at all; the designated price may simply not be obtainable.Diff: 2Topic: 17.2 Trading MechanicsObjective: 17.1 trading mechanisms such as the types of orders, short selling, and margin transactions2) The ________ is a conditional order and is executed only if the limit price or a better price can be obtained. Another type of conditional order is the ________, which specifies that the order is not to be executed until the market moves to a designated price, at which time it becomes a________.A) limit order; stop order; market orderB) stop order; limit order; market orderC) limit order; market order; stop orderD) market order; stop order; limit orderAnswer: AComment: The limit order is a conditional order and is executed only if the limit price or a better price can be obtained. Another type of conditional order is the stop order, which specifies that the order is not to be executed until the market moves to a designated price, at which time it becomes a market order.Diff: 2Topic: 17.2 Trading MechanicsObjective: 17.1 trading mechanisms such as the types of orders, short selling, and margin transactions3) In a ________ stop order, the designated price is ________ than the current market price of the stock, while in a ________ limit order, the designated price is ________ than the current market price of the stock.A) buy; lower; buy; higherB) sell; lower; buy; lowerC) sell; higher; buy; lowerD) sell; lower; sell; lowerAnswer: BComment: In a sell (buy) stop order, the designated price is lower (higher) than the current market price of the stock, while in a sell (buy) limit order, the designated price is higher (lower) than the current market price of the stock.Diff: 2Topic: 17.2 Trading MechanicsObjective: 17.1 trading mechanisms such as the types of orders, short selling, and margin transactions4) Which of the below statements is TRUE?A) Stock prices often exhibit abrupt price changes, so the direction of a change in a stock price may be quite permanent, resulting in the premature trading of a stock.B) A stop-limit order, a hybrid of a stop order and a limit order, is a stop order that designates a price limit.C) The stop-limit order cannot be used to cushion the market impact of a stop order.D) We can think of the stop order as an order designed to get out of an existing position at an acceptable price (by specifying the exact price), and the market if touched order as an order designed to get into a position at an acceptable price (also by specifying the exact price). Answer: BComment: Stock prices sometimes exhibit abrupt price changes, so the direction of a change in a stock price may be quite temporary, resulting in the premature trading of a stock.The stop-limit order can be used to cushion the market impact of a stop order.We can think of the stop order as an order designed to get out of an existing position at an acceptable price (without specifying the exact price), and the market if touched order as an order designed to get into a position at an acceptable price (also without specifying the exact price). Diff: 2Topic: 17.2 Trading MechanicsObjective: 17.1 trading mechanisms such as the types of orders, short selling, and margin transactions5) ________ involves the sale of a security not owned by the investor at the time of sale.A) Short buyingB) Long sellingC) Short sellingD) Long buyingAnswer: CDiff: 1Topic: 17.2 Trading MechanicsObjective: 17.1 trading mechanisms such as the types of orders, short selling, and margin transactions6) A transaction in which an investor borrows to buy shares using the shares themselves as collateral is called ________.A) buying on margin.B) selling on margin.C) buying on loan.D) selling on loan.Answer: ADiff: 1Topic: 17.2 Trading MechanicsObjective: 17.1 trading mechanisms such as the types of orders, short selling, and margin transactions7) ________ is the minimum proportion of (1) the equity in the investor's margin account to (2) the total market value.A) preservation margin requirementB) maintenance boundary requirementC) maintenance margin conditionD) maintenance margin requirementAnswer: DDiff: 1Topic: 17.2 Trading MechanicsObjective: 17.1 trading mechanisms such as the types of orders, short selling, and margin transactions3 Transaction Costs1) ________ are the direct costs of trading, such as broker commissions, fees, and taxes.A) Embedded costsB) Operation costsC) Implicit costsD) Explicit costsAnswer: DComment: Transaction costs, also referred to as trading costs, can be decomposed into two major components: explicit costs and implicit costs. Explicit costs are the direct costs of trading, such as broker commissions, fees, and taxes. Implicit costs represent such indirect costs as the price impact of the trade and the opportunity costs of failing to execute in a timely manner or at all. Whereas explicit costs are associated with identifiable accounting charges, no such reporting of implicit costs occurs.Diff: 2Topic: 17.3 Transaction CostsObjective: 17.2 the types of transaction costs encountered when trading stocks2) Investors often choose their ________ based on who will give them the best execution at the ________ on a specific transaction, and also based on who will provide ________ over a period of time.A) customers; highest transaction cost; required servicesB) broker/dealer; highest transaction cost; required servicesC) broker/dealer; lowest transaction cost; complementary servicesD) customers; lowest transaction cost; complementary servicesAnswer: CComment: Investors often choose their broker/dealer based on who will give them the best execution at the lowest transaction cost on a specific transaction, and also based on who will provide complementary services (such as research) over a period of time.Diff: 2Topic: 17.3 Transaction CostsObjective: 17.2 the types of transaction costs encountered when trading stocks3) An investor preferentially routes their order to the broker/dealer specified in the soft dollar relationship and does not have to pay real money, for the research or other services. This practice is called paying "________" (i.e., directing their order flow) for the ancillary research.A) "hard dollars"B) "soft dollars"C) "ancillary dollars"D) "real money dollars"Answer: BDiff: 2Topic: 17.3 Transaction CostsObjective: 17.2 the types of transaction costs encountered when trading stocks4) Implicit trading costs include ________.A) influence costs, timing costs, and sunk costs.B) impact costs, time period costs, and sunk costs.C) influence costs, time period costs, and opportunity costs.D) impact costs, timing costs, and opportunity costs.Answer: DDiff: 2Topic: 17.3 Transaction CostsObjective: 17.2 the types of transaction costs encountered when trading stocks5) ________ is the "cost" of securities not traded.A) The sunk costB) The impact costC) The timing costD) The opportunity costAnswer: DDiff: 2Topic: 17.3 Transaction CostsObjective: 17.2 the types of transaction costs encountered when trading stocks4 Trading Arrangements for Retail and Institutional Investors1) Which of the below statements is FALSE?A) Trades are executed by individuals (wholesale investors) and institutions.B) Institutions typically transact much larger orders than individuals.C) Consistent with their larger size, institutions typically pay lower commissions than individuals.D) Although both an individual and an institution can trade through a broker-dealer, the ways in which their orders are entered and executed may be considerably different, even if the trades are through the same broker-dealer.Answer: AComment: Trades are executed by individuals (retail investors) and institutions.Diff: 2Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades2) ________ may be sent to the broker-dealer's floor broker, and ________ orders may be transacted with another broker-dealer or internalized at a competitive bid or offer.A) Exchange orders; OTCB) Exchange orders; NYSEC) Floor orders; AMEXD) Floor orders; OTCAnswer: ADiff: 2Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades3) During the past 50 years, common stock holdings in the United States have become increasingly institutionalized. The major institutional holders include ________.A) pension funds and asset management companies.B) life insurance companies and bank trusts.C) endowments and foundations.D) All of theseAnswer: DDiff: 2Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades4) ________ are orders requiring the execution of trades in a large number of different stocks at as near the same time as possible.A) Retail tradesB) Program tradesC) Mutual fund tradesD) Block tradesAnswer: BDiff: 2Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades5) What type of trades requires require the execution of a trade of a large number of shares of a given stock?A) Program tradesB) Pension fund tradesC) Block tradesD) Execution tradesAnswer: CDiff: 1Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades6) Participants in the upstairs market play a key role ________.A) by providing liquidity to the market so that institutional trades can be executed.B) through arbitrage activities that help to integrate the mended institutional market.C) by providing liquidity to the market so as to integrate the fragmented stock market.D) by providing arbitrage opportunities to the market so that institutional trades can be executed. Answer: AComment: Participants in the upstairs market play a key role (1) by providing liquidity to the market so that institutional trades can be executed, and (2) by arbitrage activities that help to integrate the fragmented stock market.Diff: 2Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades7) Which of the below statements is FALSE?A) The NYSE defines block as trades of either at least 10,000 shares of a given stock or trades of shares with a market value of at least $200,000.B) When sales traders find enough institutions to take an entire block, then the balance of the block trade order is given to the brokerage firm's market maker.C) Program trades involve the buying and/or selling of a large number of names simultaneously.D) The two major applications of program trades are asset allocation and index arbitrage. Answer: BComment: If sales traders cannot find enough institutions to take an entire block, then the balance of the block trade order is given to the brokerage firm’s market maker.Diff: 2Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades8) Which of the below statements is FALSE?A) The growth of mutual fund sales and massive equity investments by pension funds and insurance companies during the 1990s have all given an impetus to such methods to trade baskets or bundles of stocks efficiently.B) Program trading is used for a strategy called index arbitrage.C) Several commission arrangements are available to an institution for a program trade, and each arrangement has numerous variants.D) From a dealer's perspective, program trades can be conducted in only one way and this on a principal basis.Answer: DComment: From a dealer’s perspective, program trades can be conducted in two ways, namely, on an agency basis and on a principal basis.Diff: 2Topic: 17.4 Trading Arrangements for Retail and Institutional InvestorsObjective: 17.3 trading arrangements to accommodate institutional traders such as block trades and program trades5 Basic Functioning of Stock Markets1) The Consolidated Tape Association (CTA) ________.A) oversees the dissemination of real-time trade and quote information (market data) from the NYSE and Amex listed securities (stocks and bonds).B) manages two systems to govern the collection, processing and dissemination of trade and quote data: the Consolidated Tape System (CTS) and the Consolidate Quotation System (CQS).C) conducts price reporting in the U.S. stock markets.D) All of theseAnswer: DComment: Price reporting in the U.S. stock markets is conducted by the Consolidated Tape Association (CTA). The CTA oversees the dissemination of real-time trade and quote information (market data) from the NYSE and Amex listed securities (stocks and bonds). The CTA is an independent, industry-wide organization. CTA manages two systems to govern the collection, processing and dissemination of trade and quote data. The two systems are: the Consolidated Tape System (CTS), which governs trades, and the Consolidate Quotation System (CQS), which governs quotes. Since the late 1970s, all SEC-registered exchanges and market centers that trade NYSE or Amex-listed securities send their trades and quotes to a central consolidator where the CTS and CQS data streams are produced and distributed worldwide. Diff: 2Topic: 17.5 Basic Functioning of Stock MarketsObjective: 17.6 the role played by stock market indicators and how those indicators are constructed2) The ________ is the electronic service that provides last sale and trade data for issues listed on the NYSE, Amex, and U.S. regional stock exchanges and was introduced in April 1976.A) Consolidated Tape System (CTS)B) Consolidated Quotation System (CQS)C) National Best Bid and Offer (NBBO)D) Self-Regulating Organizations (SROs)Answer: AComment: NOTE: CQS is the electronic service that provides quotation information for issues listed on the NYSE, Amex, and U.S. regional stock exchanges.Diff: 2Topic: 17.5 Basic Functioning of Stock MarketsObjective: 17.6 the role played by stock market indicators and how those indicators are constructed3) Which of the below statements is TRUE?A) The basis for the federal government regulation of the stock market resides with the CQS.B) The SEC of the NYSE has been responsible for the member regulation, enforcement, and arbitration functions of the NYSE.C) All clearance and settlement services for U.S equities market (as well as corporate bonds, municipal bonds, exchange-traded funds, and unit investment trusts trades) are provided by the Consolidated Quotation System (CQS).D) After a stock trade is completed, the delivery of the shares by the seller and the payment of cash by the buyer must occur quickly and efficiently.Answer: DComment: The basis for the federal government regulation of the stock market resides with the SEC.The SRO of the NYSE has been responsible for the member regulation, enforcement, and arbitration functions of the NYSE.All clearance and settlement services for U.S equities market (as well as corporate bonds, municipal bonds, exchange-traded funds, and unit investment trusts trades) are provided by the National Securities Clearance Corporation (NSCC).Diff: 2Topic: 17.5 Basic Functioning of Stock MarketsObjective: 17.6 the role played by stock market indicators and how those indicators are constructed4) The NYSE and Nasdaq reduced the tick size to pennies 2001. This reduction in the tick size narrowed the bid-offer spread considerably, which ________.A) increased the costs to market makers and the profits of the customers.B) reduced the costs to market makers and the profits of the customers.C) reduced the costs to customers and the profits of the market makers.D) increased the costs to customers and the profits of the market makers.Answer: CDiff: 2Topic: 17.5 Basic Functioning of Stock MarketsObjective: 17.5 price limits and collars imposed by exchanges5) A ________ is a temporary halting of trading during a severe market decline.A) price limitB) circuit breakerC) collarD) block tradeAnswer: BDiff: 1Topic: 17.5 Basic Functioning of Stock MarketsObjective: 17.5 price limits and collars imposed by exchanges6) ________ important because of the interrelationship between the stock market, stock index futures market, and stock index options markets.A) Trading restrictions areB) Ineptness across markets isC) Awkwardness across markets isD) Coordination across markets isAnswer: DDiff: 1Topic: 17.5 Basic Functioning of Stock MarketsObjective: 17.5 price limits and collars imposed by exchanges6 Stock Market Indicators1) Stock market indicators ________.A) have come to perform a variety of functions, from serving as benchmarks for evaluating the performance of professional money managers to answering the question "How did the market do today?"B) have not yet become a part of everyday life.C) are used interchangeably because each indicator applies to, and measures, the same facet of the stock market.D) are inaccurate assessments of how the markets are performing.Answer: AComment: Stock market indicators have come to perform a variety of functions, from serving as benchmarks for evaluating the performance of professional money managers to answering the quest ion “How did the market do today?” Thus, stock market indicators (indexes or averages) have become a part of everyday life. Even though many of the stock market indicators are used interchangeably, it is important to realize that each indicator applies to, and measures, a different facet of the stock market.Stock market indicators are accurate assessments of how the markets are performing.Diff: 2Topic: 17.6 Stock Market IndicatorsObjective: 17.6 the role played by stock market indicators and how those indicators are constructed2) Stock market ________.A) indexes rise and fall in difference patterns.B) indexes are constructed by using a few stocks represented by the sample underlying the index.C) indicators can be classified into a group produced by stock exchanges based on some stocks traded on the exchange.D) indicators can be classified into a group produced by organizations that subjectively select the stocks to be included in indexes.Answer: DComment: In general, stock market indexes rise and fall in fairly similar patterns. The indexes do not move in exactly the same ways at all times. The differences in movement reflect the different ways in which the indexes are constructed. Three factors enter into that construction: the universe of stocks represented by the sample underlying the index, the relative weights assigned to the stocks included in the index, and the method of averaging across all the stocks in the index.Stock market indicators can be classified into three groups:• those prod uced by stock exchanges based on all stocks traded on the exchanges.• those produced by organizations that subjectively select the stocks to be included in indexes. • those where stock selection is based on an objective measure, such as the market capit alization of the company.Diff: 2Topic: 17.6 Stock Market IndicatorsObjective: 17.6 the role played by stock market indicators and how those indicators are constructed3) With the exception of the ________, all of the most widely used indexes are market-value weighted.A) Wilshire 5000B) S&P 500C) Dow Jones averages (such as the DJIA)D) Russell 3000Answer: CDiff: 2Topic: 17.6 Stock Market IndicatorsObjective: 17.7 various stock market indicators of interest to market participants7 Pricing Efficiency of the Stock Market1) ________ means that the price of the security reflects the past price and trading history of the security.A) Weak-form efficiencyB) Semistrong-form efficiencyC) Strong-form efficiencyD) All of theseAnswer: ADiff: 2Topic: 17.7 Pricing Efficiency of the Stock MarketObjective: 17.9 the implications of pricing efficiency for a common stock strategy2) ________ means that the price of the security fully reflects all public information (which includes but is not limited to historical price and trading patterns).A) Weak-form efficiencyB) Semistrong-weak efficiencyC) Semistrong-form efficiencyD) Strong-form efficiencyAnswer: CDiff: 2Topic: 17.7 Pricing Efficiency of the Stock MarketObjective: 17.9 the implications of pricing efficiency for a common stock strategy3) ________ exists in a market where the price of a security reflects all information, whether it is publicly available or known only to insiders such as the firm's managers or directors.A) Weak-form efficiencyB) Weak efficiencyC) Semistrong-form efficiencyD) Strong-form efficiencyAnswer: DDiff: 2Topic: 17.7 Pricing Efficiency of the Stock MarketObjective: 17.9 the implications of pricing efficiency for a common stock strategy4) The preponderance of empirical evidence supports the claim that the common stock market is efficient in ________.A) the weak form.B) semistrongweak form.C) ultrastrong form.D) strong form.Answer: ADiff: 1Topic: 17.7 Pricing Efficiency of the Stock MarketObjective: 17.8 evidence on the pricing efficiency of the stock market5) Empirical evidence on insider trading argues against the notion that the market is efficient in the ________ sense.A) weak formB) true formC) strong-formD) None of theseAnswer: CDiff: 2Topic: 17.7 Pricing Efficiency of the Stock MarketObjective: 17.8 evidence on the pricing efficiency of the stock market6) Which of the below statements is FALSE?A) Common stock investment strategies can be classified into two general categories: active strategies and passive strategies.B) Investors who believe that the market prices stocks efficiently should accept the implication that any attempts to outperform the market cannot be systematically successful, except by luck.C) The decision to pursue a passive strategy must be based on the belief that there is some type of gain from such costly efforts, but gains are possible only if pricing inefficiencies exist.D) Market capitalization-weighted indexes have a growth tilt and fundamental indexes have a value tilt.Answer: CComment: The decision to pursue an active strategy must be based on the belief that there is some type of gain from such costly efforts, but gains are possible only if pricing inefficiencies exist.Diff: 2Topic: 17.7 Pricing Efficiency of the Stock MarketObjective: 17.9 the implications of pricing efficiency for a common stock strategy7) Which of the below statements is FALSE?A) In practice, capitalization weighting continues to be the dominant practice, but fundamentally weighted mutual funds and ETFs have been introduced.B) Fundamentally weighted portfolios do not necessarily clear the market and require rebalancing as stock price change.C) Indexing is an example of an active strategy.D) According to modern portfolio theory, the market portfolio offers the highest level of return per unit of risk in a market that is price efficient.Answer: CComment: Indexing is an example of a passive strategy.Diff: 2Topic: 17.7 Pricing Efficiency of the Stock MarketObjective: 17.9 the implications of pricing efficiency for a common stock strategy。

金融市场与金融机构基础-Fabozzi-Chapter14

Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones)Chapter 14 Secondary MarketsMultiple Choice Questions1 Function of Secondary Markets1) The key distinction between a primary market and a secondary market is that, in the secondary market, ________.A) funds flow from the seller of the asset to the buyer.B) the issuer of the asset receives funds from the buyer.C) funds flow from the buyer of the asset to the seller.D) the existing issue changes hands in the primary market.Answer: CComment: The key distinction between a primary market and a secondary market is that, in the secondary market, the issuer of the asset does not receive funds from the buyer. Rather, the existing issue changes hands in the secondary market, and funds flow from the buyer of the asset to the seller.Diff: 2Topic: 14.1 Function of Secondary MarketsObjective: 14.1 the definition of a secondary market2) Without a secondary market, issuers would be unable to ________, or they would have to paya higher rate of return, as investors would ________ in compensation for expected illiquidity in the securities.A) sell new securities; increase the discount rateB) sell new securities; decrease the discount rateC) buy new securities; decrease the priceD) sell new securities; increase the priceAnswer: ADiff: 2Topic: 14.1 Function of Secondary MarketsObjective: 14.12 the implications of pricing efficiency for market participants3) Investors in financial assets receive ________.A) illiquidity for their assets.B) information about the assets' fair or consensus values.C) increased the costs of searching for likely buyers and sellers of assets.D) the disadvantage of higher transaction costs.Answer: BComment: Investors in financial assets receive several benefits from a secondary market. Such a market obviously offers them liquidity for their assets as well as information about the assets’ fair or consensus values. Furthermore, secondary markets bring together many interested parties and thereby reduce the costs of searching for likely buyers and sellers of assets. Moreover, by accommodating many trades, secondary markets keep the cost of transactions low. By keeping the costs of both searching and transacting low, secondary markets encourage investors to purchase financial assets.Diff: 2Topic: 14.1 Function of Secondary MarketsObjective: 14.12 the implications of pricing efficiency for market participants2 Trading Locations1) One indication of the usefulness of secondary markets is that they exist throughout ________.A) the United States.B) Europe and Asia.C) each state.D) the world.Answer: DDiff: 1Topic: 14.2 Trading LocationsObjective: 14.2 the need for secondary markets for financial assets2) In the United States, secondary trading of common stock occurs ________.A) in a number of trading locations.B) in Dallas, Texas.C) in each major city.D) None of theseAnswer: ADiff: 1Topic: 14.2 Trading LocationsObjective: 14.2 the need for secondary markets for financial assets3) Which of the below statements is TRUE?A) In the United States, secondary shares are traded on major national stock exchanges (the largest of which is the American Stock Exchange) and regional stock exchanges.B) In the United States, significant trading in stock takes place on the so-called over-the-counter or OTC market, which involves specific geographical locations.C) In the United States, the dominant OTC market for stocks in the United States is the New York Stock Exchange.D) In the United States, some bonds are traded on exchanges, but most trading in bonds in the United States and throughout the world occurs in the OTC market.Answer: DComment: In the United States, secondary trading of common stock occurs in a number of trading locations. Many shares are traded on major national stock exchanges (the largest of which is the New York Stock Exchange) and regional stock exchanges, which are organized and somewhat regulated markets in specific geographical locations. Additional significant trading in stock takes place on the so-called over-the-counter or OTC market, which is a geographically dispersed group of traders linked to one another via telecommunication systems. The dominant OTC market for stocks in the United States is Nasdaq. Some bonds are traded on exchanges, but most trading in bonds in the United States and throughout the world occurs in the OTC market.Diff: 2Topic: 14.2 Trading LocationsObjective: 14.2 the need for secondary markets for financial assets3 Market Structures1) In a continuous market, prices may vary ________.A) because of the basic situation of supply and demand.B) are determined discontinuously throughout the trading day.C) are determined continuously throughout the trading day even if buyers and sellers are not submitting orders.D) with the pattern of orders reaching the market.Answer: DComment: Many secondary markets are continuous, which means that prices are determined continuously throughout the trading day as buyers and sellers submit orders. For example, given the order flow at 10:00 A.M., the market clearing price of a stock on some organized stock exchange may be $70; at 11:00 A.M. of the same trading day, the market-clearing price of the same stock, but with different order flows, may be $70.75. Thus, in a continuous market, prices may vary with the pattern of orders reaching the market and not because of any change in the basic situation of supply and demand.Diff: 2Topic: 14.3 Market StructuresObjective: 14.3 the difference between a continuous and a call market2) ________, orders are grouped together for simultaneous execution at the same price.A) In a bull marketB) In an efficient marketC) In a call marketD) In a bear marketAnswer: CDiff: 2Topic: 14.3 Market StructuresObjective: 14.3 the difference between a continuous and a call market3) Which of the below statements is FALSE?A) In a call market, a market maker holds an auction for a stock at certain times in the trading day (or possibly more than once in a day).B) Many secondary markets are continuous, which means that prices are determined continuously throughout the trading day as buyers and sellers submit orders.C) In a call market, a market maker holds an auction for a stock at the same time each day.D) An auction in a call market may be oral or written.Answer: CComment: In a call market, a market maker holds an auction for a stock at certain times in the trading day (or possibly more than once in a day).Diff: 2Topic: 14.3 Market StructuresObjective: 14.3 the difference between a continuous and a call market4 Perfect Markets1) Perfect market results when ________.A) the number of buyers and sellers is sufficiently small, and all participants are small enough relative to the market so that no individual market agent can influence the commodity's price. B) the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that all individual market agent can influence the commodity's price. C) the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that no individual market agent can influence the commodity's price. D) the number of buyers and sellers is sufficiently small, and all participants are small enough relative to the market so that all individual market agent can influence the commodity's price. Answer: CComment: In general, a perfect market results when the number of buyers and sellers is sufficiently large, and all participants are small enough relative to the market so that no individual market agent can influence the commodity’s price.Diff: 2Topic: 14.4 Perfect MarketsObjective: 14.4 the requirements of a perfect market2) A perfect market results when all buyers and sellers are ________, and the market price is determined where there is ________.A) price-takers; equality of supply and demand.B) price-makers; equality of supply and demand.C) price-takers; inequality of supply and demand.D) price-makers; inequality of supply and demand.Answer: ADiff: 2Topic: 14.4 Perfect MarketsObjective: 14.4 the requirements of a perfect market3) A market is not perfect only because market agents are price takers but is also free of transactions costs and any impediment to the interaction of supply and demand for the commodity. Economists refer to these various costs and impediments as frictions. Frictions include ________.A) bid-ask spreads charged by dealers and order handling and clearance charges.B) taxes (but not on capital gains) and government-imposed transfer fees.C) costs of acquiring information about the financial asset and restrictions on market takers.D) financial liability that a buyer or seller may take and taxes on capital gains.Answer: AComment: A market is not perfect only because market agents are price takers. A perfect market is also free of transactions costs and any impediment to the interaction of supply and demand for the commodity. Economists refer to these various costs and impediments as frictions. The costs associated with frictions generally result in buyers paying more than in the absence of frictions and/or in sellers receiving less commissions charged by brokers. Frictions include: bid—ask spreads charged by dealers.order handling and clearance charges.taxes (notably on capital gains) and government-imposed transfer fees.costs of acquiring information about the financial asset.trading restrictions, such as exchange-imposed restrictions on the size of a position in the financial asset that a buyer or seller may take.restrictions on market makers.halts to trading that may be imposed by regulators where the financial asset is traded.Diff: 2Topic: 14.4 Perfect MarketsObjective: 14.4 the requirements of a perfect market4) This practice of selling securities that are not owned at the time of sale is referred to as________.A) buying short.B) selling short.C) selling long.D) buying and selling simultaneously.Answer: BDiff: 2Topic: 14.4 Perfect MarketsObjective: 14.4 the requirements of a perfect market5) In the absence of an effective short-selling mechanism, security prices will tend to be biased toward the ________, causing a market to depart from the standards of a perfect price-setting situation.A) view of more pessimistic investorsB) view of the market makerC) view of more optimistic investorsD) view of the market takerAnswer: CDiff: 2Topic: 14.4 Perfect MarketsObjective: 14.4 the requirements of a perfect market5 Role of Brokers and Dealers in Real markets1) ________ are necessary to the smooth functioning of a secondary market.A) Inexperienced investorsB) Initial public offeringsC) Investment bankersD) Brokers and dealersAnswer: DDiff: 2Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.6 why brokers are necessary2) Investors need brokers to help ________.A) execute their orders.B) find other parties wishing to sell or buy.C) negotiate for good prices.D) All of theseAnswer: DComment: Investors need brokers to receive and keep track of their orders for buying or selling, to find other parties wishing to sell or buy, to negotiate for good prices, to serve as a focal point for trading, and to execute the orders.Diff: 1Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.6 why brokers are necessary3) Which of the following statements is FALSE?A) It is important to realize that the brokerage activity requires the broker to buy and sell or hold in inventory the financial asset that is the subject of the trade.B) A broker is an entity that acts on behalf of an investor who wishes to execute orders. In economic and legal terms, a broker is said to be an agent of the investor.C) The broker receives, transmits, and executes investors' orders with other investors.D) Services provided by brokers include research, recordkeeping, and advising.Answer: AComment: It is important to realize that the brokerage activity does not require the broker to buy and sell or hold in inventory the financial asset that is the subject of the trade.Diff: 2Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.6 why brokers are necessary4) Which of the following statements is FALSE?A) A real market might also differ from the perfect market because of the possibly frequent event of a temporary imbalance in the number of buy and sell orders that investors may place for any security at any one time.B) An unmatched or unbalanced flow of buy and sell orders causes a problem in that the security's price may change abruptly, even if there has been no shift in either supply or demand for the security.C) The fact of imbalances in buy and sell orders cannot explain the need for the dealer or market maker, who stands ready and willing to buy a financial asset for its own account (to add to an inventory of the financial asset) or sell from its own account (to reduce the inventory of the financial asset).D) An unmatched or unbalanced flow of buy and sell orders causes a problem in that buyers may have to pay higher than market-clearing prices (or sellers accept lower ones) if they want to make their trade immediately.Answer: CComment: The fact of imbalances in buy and sell orders explains the need for the dealer or market maker, who stands ready and willing to buy a financial asset for its own account (to add to an inventory of the financial asset) or sell from its own account (to reduce the inventory of the financial asset).Diff: 3Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making5) The ________ can be viewed as the price charged by dealers for supplying immediacy together with short-run price stability (continuity or smoothness) in the presence of short-term order imbalances.A) bid-ask feeB) bid-ask priceC) bid-ask spreadD) bid-ask imbalanceAnswer: CDiff: 1Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making6) By taking the opposite side of a trade when there are no other orders, the dealer prevents the price from ________ from the price at which a recent trade was consummated.A) materially convergingB) materially divergingC) immaterially concurringD) immaterially divergingAnswer: BDiff: 1Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making7) Dealers also have to be compensated for bearing risk. A dealer's position may involve carrying inventory of a security (a long position) or selling a security that is not in inventory (a short position). There are three types of risks associated with maintaining a long or short position in a given security. Two of these include ________.A) the risk of trading with someone who has inferior information and the expected time it will take the dealer to unwind a position and its uncertainty.B) the uncertainty about the future price of the security and the expected time it will take the dealer to unwind a position and its uncertainty.C) the risk of trading with someone who has inferior information and the uncertainty about the future price of the security.D) the certainty about the future price of the security and the expected time it will take the dealer to unwind a position and its uncertainty.Answer: BComment: First, there is the uncertainty about the future price of the security. A dealer who has a net long position in the security is concerned that the price will decline in the future; a dealer who is in a net short position is concerned that the price will rise. The second type of risk has to do with the expected time it will take the dealer to unwind a position and its uncertainty. And this, in turn, depends primarily on the thickness of the market for the security. Finally, while a dealer may have access to better information about order flows than the general public, there are some trades where the dealer takes the risk of trading with someone who has better information. This results in the better-informed trader obtaining a better price at the expense of the dealer. Consequently, a dealer in establishing the bid-ask spread for a trade will assess whether or not the trader might have better information.Diff: 2Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making6 Market Efficiency1) In ________, investors can obtain transaction services as cheaply as possible, given the costs associated with furnishing those services.A) an internally inefficient marketB) an externally efficient marketC) a pricing efficient marketD) an operationally efficient marketAnswer: DDiff: 2Topic: 14.6 Market EfficiencyObjective: 14.8 what is meant by the operational efficiency of a market2) In its "Big Bang" of 1986, the London Stock Exchange ________.A) abolished fixed brokerage commissions.B) abolished competitive brokerage commissions.C) adopted fixed brokerage commissions.D) shot down all types of brokerage commissions.Answer: ADiff: 2Topic: 14.6 Market EfficiencyObjective: 14.8 what is meant by the operational efficiency of a market3) Effective August 24, 2000, the minimum spread was reduced to ________ ("decimals"), with trades on all stocks in decimals beginning on August 9, 2001.A) one-eighthB) one-sixteenthC) one centD) two centsAnswer: CDiff: 2Topic: 14.6 Market EfficiencyObjective: 14.8 what is meant by the operational efficiency of a market4) ________ refers to a market where prices at all times fully reflect all available information that is relevant to the valuation of securities.A) Internal inefficiencyB) External efficiencyC) Operational efficiencyD) Pricing efficiencyAnswer: DDiff: 2Topic: 14.6 Market EfficiencyObjective: 14.9 what is meant by the pricing efficiency of a market5) Which of the below statements is TRUE?A) In a passive strategy, investors seek to capitalize on what they perceive to be the mispricing of a security or securities.B) In a market that is price efficient, active strategies will not consistently generate a return after ignoring transactions costs and the risks associated with a strategy of frequent trading.C) In a market which seems to be price efficient, one investment strategy is simply to buy and hold a broad cross section of securities in the marketD) Matching in an investment strategy that has the goal of matching the performance of some financial index from the market.Answer: CComment: A price efficient market has implications for the investment strategy that investors may wish to pursue. In an active strategy, investors seek to capitalize on what they perceive to be the mispricing of a security or securities. In a market that is price efficient, active strategies will not consistently generate a return after taking into consideration transactions costs and the risks associated with a strategy of frequent trading. The other strategy, in a market which seems to be price efficient, is simply to buy and hold a broad cross section of securities in the market. Some investors pursue this strategy through indexing, which is a policy that has the goal of matching the performance of some financial index from the market.Diff: 2Topic: 14.6 Market EfficiencyObjective: 14.10 the implications of pricing efficiency7 Electronic Trading1) Because the bond business has been ________ rather than ________ business, the capital of the market makers is critical.A) a financial; an accountingB) an accounting; a financialC) an agency; a principalD) a principal; an agencyAnswer: DDiff: 2Topic: 14.7 Electronic TradingObjective: 14.5 frictions that cause actual financial markets to differ from a perfect market2) There are several related reasons for the transition to the electronic trading of bonds. Which of the below reasons is NOT one of these?A) The profitability of bond market making has declined since many of the products have become less commodity-like.B) The increase in the volatility of bond markets has increased the capital required of bond broker-dealers.C) Making markets in bonds has become more risky for the market makers because the size of the orders has increased tremendously.D) The profitability of bond market making has declined and their bid-offer spreads have decreased.Answer: AComment: The profitability of bond market making has declined since many of the products have become more commodity-like and their bid-offer spreads have decreased.Diff: 2Topic: 14.7 Electronic TradingObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making3) The same Wall Street firms that have been the major market makers in bonds have also been the ________ of electronic trading in bonds.A) cynicsB) attackersC) supportersD) detractorsAnswer: CDiff: 2Topic: 14.7 Electronic TradingObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making4) There are a variety of types of electronic trading systems for bonds. The two major types of electronic trading systems are ________.A) the customer-to-dealer systems and the exchange systems.B) the dealer-to-customer systems and the leverage systems.C) the broker-to-dealer systems and the exchange systems.D) the dealer-to-customer systems and the exchange systems.Answer: DDiff: 2Topic: 14.7 Electronic TradingObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making5) Which of the below statement is FALSE?A) The multi-customer system simply computerizes the traditional customer-dealer market making mechanism.B) Single-dealer systems are based on a customer dealing with a single, identified dealer over the computer.C) Dealer-to-customer systems can be a single-dealer system or multiple-dealer system.D) Multi-dealer systems provide some advancement over the single- dealer method since a customer can select from any of several identified dealers whose bids and offers are provided on a computer screen.Answer: AComment: The single-dealer system simply computerizes the traditional customer-dealer market making mechanism.Diff: 2Topic: 14.7 Electronic TradingObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making6) Among the overall advantages of electronic trading are ________.A) providing liquidity to the government.B) price discovery (particularly for less liquid markets).C) utilization of old technologies.D) trading and portfolio management inefficiencies.Answer: BComment: Among the overall advantages of electronic trading are (1) providing liquidity to the markets, (2) price discovery (particularly for less liquid markets), (3) utilization of new technologies, and (4) trading and portfolio management efficiencies.Diff: 1Topic: 14.7 Electronic TradingObjective: 14.12 the implications of pricing efficiency for market participants7) Which of the below statement is FALSE?A) According to the exchange system, dealer and customer bids and offers are entered into the system on an anonymous basis, and the clearing of the executed trades is done through a common process.B) Although there is a common clearinghouse for bonds, there is none for common stocks.C) According to the exchange system, dealer and customer bids and offers are entered into the system on an anonymous basis, and the clearing of the executed trades is done through a common process.D) The exchange system is quite different rom the dealer-to-customer systems and has potentially significantly greater value added.Answer: BComment: Although there is a common clearinghouse for common stocks (Depository Trust Company), there is none for bonds.Diff: 2Topic: 14.7 Electronic TradingObjective: 14.7 the role of a dealer as a market maker and the costs associated with market makingTrue/False Questions1 Function of Secondary Markets1) Primary markets help the issuer of securities to track their values and required returns. Answer: FALSEComment: Secondary markets help the issuer of securities to track their values and required returns.Diff: 1Topic: 14.1 Function of Secondary MarketsObjective: 14.1 the definition of a secondary market2) Secondary markets hurt investors by providing liquidity.Answer: FALSEComment: Secondary markets benefit investors by providing liquidity.Diff: 1Topic: 14.1 Function of Secondary MarketsObjective: 14.12 the implications of pricing efficiency for market participants2 Trading Locations1) In the United States, secondary trading of common shares are traded on major national stock exchanges and regional stock exchanges, which are organized and somewhat regulated markets in specific geographical locations.Answer: TRUEDiff: 1Topic: 14.2 Trading LocationsObjective: 14.11 the different forms of pricing efficiency2) The dominant OTC market for stocks in the United States is AMEX.Answer: FALSEComment: The dominant OTC market for stocks in the United States is Nasdaq.Diff: 1Topic: 14.2 Trading LocationsObjective: 14.2 the need for secondary markets for financial assets3 Market Structures1) Some markets conduct the day's initial trades with a call method and most other trades in a continuous way.Answer: TRUEDiff: 1Topic: 14.3 Market StructuresObjective: 14.3 the difference between a continuous and a call market2) In a call market, the auction may be oral but not written.Answer: FALSEComment: In a call market, the auction may be oral or writte n.Diff: 1Topic: 14.3 Market StructuresObjective: 14.3 the difference between a continuous and a call market4 Perfect Markets1) Suppose that an investor expects that the price her security will decline. She can still benefit should the price actually decline if she can arrange to sell the security without owning it. Answer: TRUEDiff: 1Topic: 14.4 Perfect MarketsObjective: 14.12 the implications of pricing efficiency for market participants2) A perfect market does not allow the sale of borrowed securities.Answer: FALSEComment: A perfect market must also permit short selling, which is the sale of borrowed securities.Diff: 1Topic: 14.4 Perfect MarketsObjective: 14.4 the requirements of a perfect market5 Role of Brokers and Dealers in Real Markets1) A dealer acts as an auctioneer in all market structures, thereby providing order and fairness in the operations of the market.Answer: FALSEComment: A dealer acts as an auctioneer in some market structures, thereby providing order and fairness in the operations of the market.Diff: 1Topic: 14.5 Role of Brokers and Dealers in Real MarketsObjective: 14.7 the role of a dealer as a market maker and the costs associated with market making。

金融市场与金融机构基础 Fabozzi Chapter10(精品WORD文档)

Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones)Chapter 10 The Level and Structure of Interest RatesMultiple Choice Questions1 The Theory of Interest Rates1) An interest rate is the price paid by a ________ to a ________ for the use of resources during some interval.A) borrower; debtorB) lender; creditorC) borrower; lenderD) lender; borrowerAnswer: CComment: An interest rate is the price paid by a borrower (or debtor) to a lender (or creditor) for the use of resources during some interval.Diff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.1 Fisher's classical approach to explaining the level of the interest rate2) By the ________, we mean the rate on a loan whose borrower will not default on any obligation.A) risk-free rateB) short termC) real rateD) long termAnswer: AComment: The interest rate that provides the anchor for other rates is the short-term rate:risk-free plus real rate. By short term, we mean the rate on a loan that has one year to maturity. (All other interest rates differ from this rate according to particular aspects of the loan, such as its maturity or risk of default, or because of the presence of inflation.) By the risk-free rate, we mean the rate on a loan whose borrower will not default on any obligation. By the real rate, we mean the rate that would prevail in the economy if the average prices for goods and services were expected to remain constant during the loan’s life.Diff: 1Topic: 10.1 The Theory of Interest RatesObjective: 10.4 the structure of Fisher's Law, which states that the nominal and observable interest rate is composed of two unobservable variables; the real rate of interest and the premium for expected inflation3) By the ________, we mean the rate that would prevail in the economy if the average prices for goods and services were expected to remain constant during the loan's life.A) risk-free rateB) short termC) real rateD) long termAnswer: CComment: The interest rate that provides the anchor for other rates is the short-term rate:risk-free plus real rate. By short term, we mean the rate on a loan that has one year to maturity. (All other interest rates differ from this rate according to particular aspects of the loan, such as its maturity or risk of default, or because of the presence of inflation.) By the risk-free rate, we mean the rate on a loan whose borrower will not default on any obligation. By the real rate, we mean the rate that would prevail in the economy if the average prices for goods and services were expected to remain constant during the loan’s life.Diff: 1Topic: 10.1 The Theory of Interest RatesObjective: 10.4 the structure of Fisher's Law, which states that the nominal and observable interest rate is composed of two unobservable variables; the real rate of interest and the premium for expected inflation4) By the ________, we mean the rate on a loan that has one year to maturity.A) risk-free rateB) short termC) real rateD) long termAnswer: BComment: The interest rate that provides the anchor for other rates is the short-term rate:risk-free plus real rate. By short term, we mean the rate on a loan that has one year to maturity. (All other interest rates differ from this rate according to particular aspects of the loan, such as its maturity or risk of default, or because of the presence of inflation.) By the risk-free rate, we mean the rate on a loan whose borrower will not default on any obligation. By the real rate, we mean the rate that would prevail in the economy if the average prices for goods and services were expected to remain constant during the loan’s life.Diff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.1 Fisher's classical approach to explaining the level of the interest rate5) Which of the below statements about consumptions and savings is FALSE?A) A chief influence on the saving decision is the individual's marginal rate of time preference, which is the willingness to trade some consumption now for more future consumption.B) Generally, higher current income means the person will save more, although people with the same income may have different time preferences.C) A variable affecting savings is the reward for saving, or the rate of interest on loans that savers make with their unconsumed income.D) The total savings (or the total supply of loans) available at any time is the sum of everybody's savings and a negative function of the interest rate.Answer: DComment: The total savings (or the total supply of loans) available at any time is the sum of everybody’s savings and a positive function of the interest rate.Diff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.2 the role in Fisher's theory of the saver's time preference and the borrowing firm's productivity of capital6) Which of the below statements about the rate of interest and cost of capital is FALSE?A) The maximum that a firm will invest depends on the rate of interest, which is the cost of loans; the firm will invest only as long as the marginal productivity of capital exceeds or equals the rate of interest.B) Firms will reject only projects whose gain is not less than their cost of financing.C) The firm's demand for borrowing is negatively related to the interest rate; if the rate is high, only limited borrowing and investment make sense.D) At a low rate of interest, more projects offer a profit, and the firm wants to borrow more; his negative relationship exists for each and all firms in the economy.Answer: BComment: The maximum that a firm will invest depends on the rate of interest, which is the cost of loans. The firm will invest only as long as the marginal productivity of capital exceeds or equals the rate of interest. In other words, firms will accept only projects whose gain is not less than their cost of financing. Thus, the firm’s demand for borrowing is negatively related to the interest rate. If the rate is high, only limited borrowing and investment make sense. At a low rate, more projects offer a profit, and the firm wants to borrow more. This negative relationship exists for each and all firms in the economy.Diff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.2 the role in Fisher's theory of the saver's time preference and the borrowing firm's productivity of capital7) The ________ rate of interest is determined by interaction of the supply and demand functions. As a cost of borrowing and a reward for lending, the rate must reach the point where total supply of savings ________ total demand for borrowing and investment.A) equilibrium; is greaterB) minimum; equalsC) equilibrium; equalsD) minimum; is greaterAnswer: CDiff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.3 the meaning of equilibrium and how changes in the demand and supply function affect the equilibrium level of the interest rate8) In the absence of inflation, the nominal rate ________ the real rate.A) equalsB) is greater thanC) is less thanD) greater than or equal toAnswer: ADiff: 1Topic: 10.1 The Theory of Interest RatesObjective: 10.3 the meaning of equilibrium and how changes in the demand and supply function affect the equilibrium level of the interest rate9) The relationship between inflation and interest rates is the well-known Fisher's Law, which can be expressed this way: (1 + i) = (1 + r) × (1 + i) where ________.A) r is the nominal rate.B) i is the real rate.C) p is the expected percentage change in the price level of goods and services over the loan's life.D) the nominal rate, p, reflects both the real rate and expected inflation.Answer: CComment: The relationship between inflation and interest rates is the well-known Fisher’s Law, which can be expressed this way: (1 + i) = (1 + r) × (1 + i) where i is the nominal rate, r is the real rate, and p is the expected percentage change in the price level of goods and services over the loan’s life. This equation shows that the nominal rate, i, reflects both the real rate and expected inflation.Diff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.4 the structure of Fisher's Law, which states that the nominal and observable interest rate is composed of two unobservable variables; the real rate of interest and the premium for expected inflation10) Which of the below IS considered by Fisher's theory.A) Fisher's theory takes into account the power of the government (in concert with depository institutions) to create money.B) Fisher's theory considers the government's often large demand for borrowed funds, which is frequently immune to the level of the interest rateC) Fisher's theory takes into account the possibility that individuals and firms might invest in cash balances.D) Fisher's theory considers an interest rate on loans that embodies no premium for default risk because borrowing firms are assumed to meet all obligations.Answer: DComment: Fisher’s theory is a general one and obviously neglects certain practical matters, such as the power of the government (in concert with depository institutions) to create money and the government’s often la rge demand for borrowed funds, which is frequently immune to the level of the interest rate. Also, Fisher’s theory does not consider the possibility that individuals and firms might invest in cash balances. Expanding Fisher’s theory to encompass these situations produces the loanable funds theory of interest rates.Diff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.4 the structure of Fisher's Law, which states that the nominal and observable interest rate is composed of two unobservable variables; the real rate of interest and the premium for expected inflation11) The loanable funds theory of interest rates proposes that the general level of interest rates is determined by the complex interaction of two forces. Which of the below is ONE of these forces?A) One force is that the total demand for funds by firms, governments, and households (or individuals) is negatively related to the interest rate including the government's demand.B) One force affecting the level of the interest rate is the total supply of funds by firms, governments, banks, and individuals with rising rates causing banks to be less eager to extend more loans.C) One force is that the total demand for funds by firms, governments, and households (or individuals) is positively related to the interest rate except the government's demand.D) One force affecting the level of the interest rate is the total supply of funds by firms, governments, banks, and individuals with rising rates causing firms and individuals to save and lend more.Answer: DComment: The loanable funds theory of interest rates proposes that the general level of interest rates is determined by the complex interaction of two forces. The first is the total demand for funds by firms, governments, and households (or individuals), which carry out a variety of economic activities with those funds. This demand is negatively related to the interest rate (except for the government’s demand, which may frequently not depend on the level of the interest rate). The second force affecting the level of the interest rate is the total supply of funds by firms, governments, banks, and individuals. Supply is positively related to the level of interest rates, if all other economic factors remain the same. With rising rates, firms and individuals save and lend more, and banks are more eager to extend more loans. (A rising interest rate probably does not significantly affect the government’s supply of savings.)Diff: 3Topic: 10.1 The Theory of Interest RatesObjective: 10.5 the loanable funds theory, which is an expansion of Fisher's theory12) The ________, originally developed by John Maynard Keynes,analyzes the equilibrium level of the interest rate through the interaction of the supply of money and the public's aggregate demand for holding money.A) loanable funds theory of interest ratesB) expectation theory of interest ratesC) liquidity preference theoryD) Fisher theoryAnswer: CDiff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.6 the meaning of liquidity preference in Keynes's theory of the determination of interest rates13) The public (consisting of individuals and firms) holds money for several reasons. Which of the below is three of these?A) Difficulty of translations, precaution against expected events, and speculation about possible rises in the interest rate.B) Ease of transactions, precaution against unexpected events, and speculation about possible rises in the interest rate.C) Ease of unexpected events, precaution against transactions, and speculation about possible rises in the interest rate.D) Speculation about transactions, fear against unexpected events, and precaution about possible rises in the interest rate.Answer: BDiff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.6 the meaning of liquidity preference in Keynes's theory of the determination of interest rates14) The ________ represents the initial reaction of the interest rate to a change in the money supply.A) Income effectB) Price expectation effectC) Liquidity effectD) Interest rate effectAnswer: CDiff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.7 how an increase in the money supply can affect the level of the interest rate through an impact on liquidity, income, and price expectations15) Which of the below statements is FALSE?A) Although an increase in the money supply is an economically expansionary policy, the resultant increase in income depends substantially on the amount of slack in the economy at the time of the Fed's action.B) In Fisher's terms, the interest rate reflects the interaction of the savers' marginal rate of time preference and borrowers' marginal productivity of capital.C) Changes in the money supply can affect the level of interest rates through the liquidity effect, the income effect, and the price expectations effect; their relative magnitudes depend upon the level of economic activity at the time of the change in the money supply.D) Because the price level (and expectations regarding its changes) affects the money demand function, the liquidity effect is an increase in the interest rate.Answer: DComment: Because the price level (and expectations regarding its changes) affects the money demand function, the price expectations effect is an increase in the interest rate.Diff: 2Topic: 10.1 The Theory of Interest RatesObjective: 10.7 how an increase in the money supply can affect the level of the interest rate through an impact on liquidity, income, and price expectations2 The Determinants of the Structure of Interest Rates1) A ________ is an instrument in which the issuer (debtor/borrower) promises to repay to the lender/investor the amount borrowed plus interest over some specified period of time.A) bondB) common stockC) preferred stockD) T-billAnswer: ADiff: 1Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.8 the features of a bond issue2) The ________ should reflect the coupon interest that will be earned plus either (1) any capital gain that will be realized from holding the bond to maturity, or (2) any capital loss that will be realized from holding the bond to maturity.A) yield on a bond investmentB) dividend yield on a bond investmentC) bid-ask spreadD) yield on a stock investmentAnswer: ADiff: 1Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.8 the features of a bond issue3) The ________ the market price, the higher the yield to maturity.A) higherB) less riskyC) more safeD) lowerAnswer: DDiff: 1Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.8 the features of a bond issue4) The ________ of a bond is the amount that the issuer agrees to repay the bondholder at the maturity date.A) principal value (or simply principal)B) face valueC) redemption valueD) All of theseAnswer: DComment: The principal value (or simply principal) of a bond is the amount that the issuer agrees to repay the bondholder at the maturity date. This amount is also referred to as the par value, maturity value, redemption value, or face value.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.8 the features of a bond issue5) The yield to maturity is determined by a trial-and-error process. The first step in this trial and error process is ________.A) Compute the present value of each cash flow using the best guess interest rate.B) Total the present value of the cash flows using the best guess interest rate.C) Select an interest rate.D) Compare the total present value using the best guess interest rate with the market price of the bond.Answer: CComment: The yield to maturity is determined by a trial-and-error process. Even the algorithm in a calculator or computer program, which computes the yield to maturity (or internal rate of return) in an apparently direct way, uses a trial-and-error process. The steps in that process are as follows:Step 1: Select an interest rate.Step 2: Compute the present value of each cash flow using the interest rate selected in Step 1. Step 3: Total the present value of the cash flows found in Step 2.Step 4: Compare the total present value found in Step 3 with the market price of the bond and, if the total present value of the cash flows found in Step 3 is• equal to the market price, then the interest rate used in Step 1 is the yield to maturity;• greater than the market price, then the interest rate is not the yield to maturity. Therefore, go back to Step 1 and use a higher interest rate;• less than the market price, then the interest rate is not the yield to maturity. Therefore, go back to Step 1 and use a lower interest rate.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.9 how the yield to maturity of a bond is calculated6) There are several interesting points about the relationship among the coupon rate, market price, and yield to maturity. Which of the below is NOT one of these.A) If the market price is equal to the par value, then the yield to maturity is equal to the coupon rate.B) If the market price is less than the par value, then the yield to maturity is greater than the coupon rate.C) If the market price is greater than the par value, then the yield to maturity is greater than the coupon rate.D) If the market price is greater than the par value, then the yield to maturity is less than the coupon rate.Answer: CComment: There are several interesting points about the relationship among the coupon rate, market price, and yield to maturity as summarized below.1. If the market price is equal to the par value, then the yield to maturity is equal to the coupon rate;2. If the market price is less than the par value, then the yield to maturity is greater than the coupon rate, and;3. If the market price is greater than the par value, then the yield to maturity is less than the coupon rate.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.9 how the yield to maturity of a bond is calculated7) Consider an 20-year bond with a coupon rate of 8% and a par value of $1,000. The cash flow for this bond is ________ every six months for the first 39 semi-annual periods and then________ for the last (or 40th) six-month period.A) $1,040; $40B) $40; $1,040C) $80; $1,080D) $80; $1,000Answer: BComment: Consider an 20-year bond with a coupon rate of 8% and a par value of $1,000. The cash flow for this bond is $40 every six months for the first 39 semi-annual periods and then $1,040 for the last (or 40th) six-month period.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.8 the features of a bond issue8) The difference between the yield on any two bond issues is called a ________.A) yield differenceB) difference spreadC) coupon rate spreadD) yield spreadAnswer: DDiff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.13 what factors affect the yield spread between two bonds9) Treasury securities are used to develop the benchmark interest rates. There are two categories of U.S. Treasury securities: ________.A) discount and coupon securities.B) discount and coupon stocks.C) interest rate and coupon securities.D) discount and compound securities.Answer: ADiff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.1 Fisher's classical approach to explaining the level of the interest rate10) The most recently auctioned Treasury issues for each maturity are referred to as ________.A) off-the-run issues or current coupon issues.B) minimum interest rate or base interest rateC) on-the- run or current coupon issues.D) benchmark interest rate or minimum interest rate.Answer: CComment: The most recently auctioned Treasury issues for each maturity are referred to as on-the- run or current coupon issues. Issues auctioned prior to the current coupon issues are typically referred to as off-the- run issues; they are not as liquid as on-the-run issues, and, therefore, offer a higher yield than the corresponding on-the-run Treasury issue. The minimum interest rate or base interest rate that investors will demand for investing in a non-Treasury security is the yield offered on a comparable maturity on-the-run Treasury security. The base interest rate is also referred to as the benchmark interest rate.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.10 why historically the yields on securities issued by the U.S. Department of the Treasury have been used as the benchmark interest rates throughout the world11) Market participants talk of interest rates on non-Treasury securities as ________ to a particular on-the-run Treasury security (or a spread to any particular benchmark interest rate selected). This spread reflects the additional risks the investor faces by acquiring a security thatis not issued by the U.S. government and, therefore, can be called a ________.A) "trading at a premium"; risk premiumB) "trading at a spread"; risk premiumC) "trading at a premium"; risk spreadD) "trading at a discount"; discount premiumAnswer: BComment: Market participants talk of interest rates on non-Treasury securities as “trading at a spread” to a particular on-the-run Treasury security (or a spread to any particular benchmark interest rate selected). For example, if the yield on a 10-year non-Treasury security on May 20, 2008, is 4.78%, then the spread is 100 basis points over the 3.78% Treasury yield. This spread reflects the additional risks the investor faces by acquiring a security that is not issued by the U.S. government and, therefore, can be called a risk premium.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.13 what factors affect the yield spread between two bonds12) The factors that affect the spread include ________.A) the type of issuer and the expected liquidity of the issueB) the provisions that grant either the issuer or the investor the obligation to do something and the taxability of the interest received by the issuerC) the investor's perceived creditworthiness and the term or maturity of the investor's horizon.D) All of theseAnswer: AComment: The factors that affect the spread are (1) the type of issuer, (2) the issuer’s perceived creditworthiness, (3) the term or maturity of the instrument, (4) provisions that grant either the issuer or the investor the option to do something, (5) the taxability of the interest received by investors, and (6) the expected liquidity of the issue.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.13 what factors affect the yield spread between two bonds13) Within the corporate market sector, issuers are classified as ________.A) (1) utilities, (2) industrials, (3) finance, and (4) banks.B) (1) high-risk, (2) medium-risk, (3) low-risk, and (4) no-risk.C) (1) foreign, (2) domestic, (3) European, and (4) Asian.D) (1) intramarket, (2) extramarket, (3) ultramarket, and (4) intermarket.Answer: AComment: Within the corporate market sector, issuers are classified as follows: (1) utilities, (2) industrials, (3) finance, and (4) banks.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.12 the different types of bonds14) The highest-grade bonds are designated by Moody's by the symbol ________.A) BaB) AC) AaD) AaaAnswer: DComment: In all systems, the term high grade means low credit risk, or conversely, high probability of future payments. The highest-grade bonds are designated by Moody’s by the symbol Aaa, and by S&P and Fitch by the symbol AAA. The next highest grade is denoted by the symbol Aa (Moody’s) or AA (S&P and Fitch); for the third grade, all rating systems use A. The next three grades are Baa or BBB, Ba or BB, and B, respectively. There are also C grades. Moody’s uses 1, 2, or 3 to provi de a narrower credit quality breakdown within each class, andS&P and Fitch use plus and minus signs for the same purpose.Diff: 1Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.12 the different types of bonds15) Which of the below statements is FALSE?A) The spread between Treasury securities and non-Treasury securities that are identical in all respects except for credit quality is referred to as a credit spread.B) The spread between any two maturity sectors of the market is called a maturity spread or yield curve spread.C) An option that is included in a bond issue is referred to as a prepayment option.D) The most common type of option in a bond issue is a call provision.Answer: CComment: It is not uncommon for a bond issue to include a provision that gives either the bondholder and/or the issuer an option to take some action against the other party. An option that is included in a bond issue is referred to as an embedded option.Diff: 2Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.12 the different types of bondsTrue/False Questions1 The Theory of Interest Rates1) The liquidity preference theory is Keynes's view that the rate of interest is set in the market for money balances.Answer: TRUEDiff: 1Topic: 10.1 The Theory of Interest RatesObjective: 10.6 the meaning of liquidity preference in Keynes's theory of the determination of interest rates2) Interest is the price paid for the permanent use of resources, and the amount of a loan is its principal.Answer: FALSEComment: Interest is the price paid for the temporary use of resources, and the amount of a loan is its principal.Diff: 1Topic: 10.1 The Theory of Interest RatesObjective: 10.7 how an increase in the money supply can affect the level of the interest rate through an impact on liquidity, income, and price expectations3) In Fisher's terms, the interest rate reflects the interaction of the savers' marginal productivity of capital and borrowers' marginal rate of time preference.Answer: FALSEComment: In Fisher’s terms, the interest rate reflects the interaction of the savers’ marginal rate of time preference and borrowers’ marginal productivity of capital.Diff: 1Topic: 10.1 The Theory of Interest RatesObjective: 10.2 the role in Fisher's theory of the saver's time preference and the borrowing firm's productivity of capital4) The loanable funds theory is an extension of Fisher's theory and proposes that the equilibrium rate of interest reflects the demand and supply of funds, which depend on savers' willingness to save, borrowers' expectations regarding the profitability of investing, and the government's action regarding money supply.Answer: TRUEDiff: 1Topic: 10.1 The Theory of Interest RatesObjective: 10.5 the loanable funds theory, which is an expansion of Fisher's theory2 The Determinants of the Structure of Interest Rates1) Convertible bonds are securities issued by state and local governments and by their creations, such as "authorities" and special districts.Answer: FALSEComment: Municipal bonds are securities issued by state and local governments and by their creations, such as “authorities” and special districts.Diff: 1Topic: 10.2 The Determinants of the Structure of Interest RatesObjective: 10.11 the reason why the yields on U.S. Treasury securities are no longer as popular as benchmark interest rates and what alternative benchmarks are being considered by market participants。

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C H A P T E R4T H E U.S.F E D E R A L R E S E R V EA N D T H E C R E A T I O N O F M O N E YCENTRAL BANKS AND THEIR PURPOSEThe primary role of a central bank is to maintain the stability of the currency and money supply for a country or a group of countries. The role of central banks can be categorized as: (1) risk assessment, (2) risk reduction, (3) oversight of payment systems, (4) crisis management.One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason, central banks are sometimes called monetary authority. In implementing monetary policy, central banks, acting as a reserve bank, require private banks to maintain and deposit the required reserves with the central bank. In times of financial crisis, central banks perform the role of lender of last resort for the banking system. Countries throughout the world may have central banks. Additionally, the European Central Bank is responsible for implementing monetary policy for the member countries of the European Union.There is widespread agreement that central banks should be independent of the government so that decisions of the central bank will not be influenced for short-term political purposes such as pursuing a monetary policy to expand the economy but at the expense of inflation.In implementing monetary and economic policies, the United States is a member of an informal network of nations. This group started in 1976 as the Group of 6, or G6: US, France, Germany, UK, Italy, and Japan. Thereafter, Canada joined to for the G7. In 1998, Russia joined to form the G8.THE CENTRAL BANK OF THE UNITED STATES: THE FEDERAL RESERVE SYSTEMThe Federal Reserve System consists of 12 banking districts covering the entire country. Created in 1913, the Federal Reserve is the government agency responsible for the management of the US monetary and banking systems. It is independent of the political branches of government. The Fed is managed by a seven-member Board of Governors, who are appointed by the President and approved by Congress.The Fed’s tools for monetary management have been made more difficult by financial innovations. The public’s increasing acceptance of money market mutual funds has funneled a large amount of money into what are essentially interest-bearing checking accounts. Securitization permits commercial banks to change what once were illiquid consumer loans of several varieties into securities. Selling these securities gives the banks a source of funding that is outside the Fed’s influence.INSTRUMENT OF MONETARY POLICY: HOW THE FED INFLUENCES THE SUPPLY OF MONEYThe Fed has three instruments at its disposal to affect the level of reserves.Reserve RequirementsUnder our fractional reserve banking system have to maintain specified fractional amounts of reserves against their deposits. The Fed can raise or lower these required reserve ratios, thereby permitting banks to decrease or increase their lending and investment portfolios. A bank’s total reserves equal its required reserves plus any excess reserves.Open Market OperationsThe Fed’s most powerful instrument is its authority to conduct open market operation. It buys and sells in open debt markets government securities for its own accounts. The Fed prefers to use Treasury bills because it can make its substantial transactions without seriously disrupting the prices or yields of bills.The Federal Open Market Committee, or FOMC, is the unit that decides on the general issues of changing the rate of growth in the money supply, by open market sales or purchases of securities. The implementation of policy through open market operations is the responsibility of the trading desk of the Federal Reserve Bank of New York.Open Market Repurchase AgreementsThe Fed often employs variants of simple open market purchases and sales, these are called the repurchase agreement (or repo) and the reverse repo. In a repo, the Fed buys a particular amount of securities from a seller that agrees to repurchase the same number of securities for a higher price at some future time. In a reverse repo, the Fed sells securities and makes a commitment to buy them back at a higher price later.Discount RateA bank borrowing from the Fed is said to use the discount window. The discount rate is the rate charged to banks borrowing directly from the Fed. Raising the rate is designed to discourage such borrowing, while lowering should have the opposite effect.DIFFERENT KINDS OF MONEYMoney is that item which serves as a numeraire. In a basic sense money can be defined as anything that serves as a unit of account and medium of exchange. We measure prices in dollars and exchange dollars for goods. Hence coins, currency, and any items readily exchanged into dollars (checking deposits or NOW accounts) constitute our money supply.MONEY AND MONETARY AGGREGATESMonetary aggregates measure the amount of money available to the economy at any time. The monetary base is defined as currency in circulation (coins and federal reserve notes) and reserves in the banking system. The instruments that serve as a medium of exchange can be narrowly defined as M1, which is currency and demand deposits. M2 is M1 plus time and savings accounts, and money market mutual funds. Finally, M3 is M2 plus short-term Treasury liabilities. While all three aggregates are watched and monitored, M1is the most common form of the money supply, with its trait as being the most liquid. The ratio of the money supply to the economy’s income is known as the velocity of money.THE MONEY MULTIPIER: THE EXPANSION OF THE MONEY SUPPLYThe money multiplier effect arises from the fact that a small change in reserves can produce a large change in the money supply. Through our fractional reserve system, a small increase will allow an individual bank, to lend out the greater part of these additional funds. These loans subsequently become deposits in other banks allowing them to expand proportionately. So, while one bank can expand its loans (or deposits) by an amount 1% of reserves required, all banks in the system can do likewise. Thus, in a simple format total change in deposits can be stated as change in reserves divided by the reserve requirement, which is also the formula for perpetuity. For example, if the change in the level of reserves is $100 and the reserve requirement is 20%, the change in total deposits will be $500 for a multiplier of 5. Of course, major assumptions are that banks will fully loan out their excess reserves and that depositors will not withdraw any of these extra reserves.THE IMPACT OF INTEREST RATES ON THE MONEY SUPPLYHigh rates of interest may make keeping excess reserves costly, since unused funds represent loans not made and interest not earned. High rates of interest will also affect the public’s demand for holding cash. If deposits pay competitive interest rates, customers will be more willing to hold such bank liabilities and less cash. Therefore, a higher rate of interest can actually spur growth of the money supply. More likely, however, it will deter borrowing and slow monetary growth.THE MONEY SUPPLY PROCESS IN AN OPEN ECONOMYIn the modern era, almost every country has an open economy. Foreign commercial and central banks hold dollar accounts in the United States. Their purchases and sales of these deposits can affect exchange rates of the dollar against their own currency. The Fed has responsibility for maintaining stability in exchange rates. A purchase of foreign exchange with dollars depreciates the dollar’s value, but it also adds dollars to the accounts of foreign banks in this country, t hus adding to the U.S. monetary base. Most central banks of large economies own or stand ready to own a large amount of each of the world’s major currencies, which are considered international reserves. Sales of foreign exchange transactions have monetary base implication and hence consequences for the domestic money supply, emphasis is given to coordinating monetarypolicies among developed nations.ANSWERS TO QUESTIONS FOR CHAPTER 4(Questions are in bold print followed by answers.)1. What is the role of a central bank?The role of a central bank has several functions: risk assessment, risk reduction, oversight of payment systems, and crisis management. It can do this through monetary policies, and through the implementation of regulations.2. Why is it argued that a central bank should be independent of the government?Central banks should be independent of the short-term political interests and political influences generally in setting economic policies.3. Identify each participant and its role in the process by which the money supply changes and monetary policy is implemented.The Fed determines monetary policy and seeks to implement it through changes in reserves. It is up to the nation’s banking system to act on changes in reserves thereb y affecting deposits, which constitute the greater part of the M1 definition of the money supply.4. Describe the structure of the board of governors of the Federal Reserve System.The Board of Governors of the Federal Reserve System consists of 7 members who are appointed to staggered 14-year terms. The Board reviews discount operations and sets legal reserve requirements. In addition, all 7 members of the Board serve on the Federal Open Market Committee (FOMC), which determines the direction and magnitude of open-market operations. Such operations constitute the key instrument for implementing monetary policy.5.a.Explain what is meant by the statement “the United States has a fractional reservebanking system.”b.How are these items related: total reserves, required reserves, and excess reserves?a. A fractional reserve system requires that a fraction or percent of a bank’s reserve be placedeither in currency in vault or with the Federal Reserve System.b.Total reserves are the amounts that banks hold in cash or at the Fed. Required reserves areamounts required by the Fed to meet some specific or legal reserve ratio to deposits. Excess reserves are bank reserves in currency and at the Fed which are in excess of legal requirements. Since these amounts are non-interest bearing, banks are often willing to lend these surplus funds to deficit banks at the Fed funds rate.6. What is the required reserve ratio, and how has the 1980 Depository Institutions Deregulation and Monetary Control Act constrained the Fed’s control over the ratio?The required reserve ratio is the fraction of deposits a bank must hold as reserves. The DIDMCA constrained the Fed’s control over the ratio by letting Congress set ranges of reserves for demand and time deposits.7. In what two forms can a bank hold its required reserves?A bank can hold its reserves in the form of currency in vault or in deposit at the Fed.8.a.What is an open market purchase by the Fed?b.Which unit of the Fed decides on open market policy, and what unit implementsthat policy?c.What is the immediate consequence of an open market purchase?a.An open market purchase by the Fed consists of the purchase of U.S. Treasury securities.b.The FOMC decides on open market policy and directs the Federal Reserve Bank of NewYork to implement it through sales and purchases of these securities.c.The immediate consequence of an open market purchase is to supply the seller of the securitywith a check on the Federal Reserve System that he can deposit in his bank, thereby immediately in creasing the excess reserves and thus nation’s money supply.9. Distinguish between an open market sale and a matched sale (which is the same as a matched sale-purchase transaction or a reverse repurchase agreement).A matched sale or reverse repo involves the sale of a Treasury security with an agreement to buy it back at a later date and at a higher price as the cost for borrowing the funds. This contrasts with an outright sale at some discounted or premium price.10. What is the discount rate, and to what type of action by a bank does it apply?The discount rate is the rate a bank pays to borrow at the “discount window” of the Fed. Such borrowings are often undertaken to meet temporary liquidity needs. Bank needs are monitored and the Fed likes to sta te that borrowing from it is a “privilege and not a right.”11. Define the monetary base and M2The monetary base includes total bank reserves plus currency in the hands of the public. M2 = M1 (currency and demand deposits) + savings and time deposits.12. Describe the basic features of the money multiplier.The money multiplier is crucial to the concept of money creation and is analogous to the idea of the autonomous spending multiplier and formula for a perpetuity. It is the inverse of the required reserve ratio (1/rr). If the reserve ratio is .2 then the money supply will expand five times any increase in new deposits. The multiplier will be less if banks hold excess reserves or experience cash drains.13. Suppose the Fed were to inject $100 million of reserves into the banking system by an open market purchase of Treasury bills. If the required reserve ratio were 10%, what is the maximum increase in M1 that the new reserves would generate? Assume that banks make all the loans their reserves allow, that firms and individuals keep all their liquid assets in depository accounts, and no money is in the form of currency.The maximum increase in M1 will be $1 billion assuming no cash drains in the system, and banks are fully loaned up.14. Assume the situation from question 13, except now assume that banks hold a ratio of 0.5% of excess reserves to deposits and the public keeps 20% of its liquid assets in the form of cash. Under these conditions, what is the money multiplier? Explain why this value of the multiplier is so much lower than the multiplier from question 13.Substitute the given values of currency ratio, required reserves ratio, and excess reserves ratio of 20%, 10% and 0.5% respectively into the formula given on page 94 of the textbook. Now we have a lower multiplier value of 3.9=1.20/. 305. This is because public and banks do not deposit or lend, all they can.。