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Financial Markets & Institutions ECN 324

Financial Markets & Institutions ECN 324. PHASE 1 REVIEW [Homework Questions]. TOPICS FOR CH 1 Financial Market Overview. What is the difference between [Capital] Surplus and Deficit markets What is the difference between Primary and Secondary markets?

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Financial Markets & Institutions ECN 324

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  1. Financial Markets & InstitutionsECN 324 PHASE 1 REVIEW [Homework Questions]

  2. TOPICS FOR CH 1Financial Market Overview • What is the difference between [Capital] Surplus and Deficit markets • What is the difference between Primary and Secondary markets? • What is the difference between Money and Capital markets? • Why is marketability important? • How do depository institutions differ from non-depository institutions? • What are the three main functions of financial markets?

  3. TOPICS FOR CH 2Interest Rates • Whom demands and supplies funds in the Loanable Funds Theory? • How does the supply of and demand for money [credit] impact interest rates? • What causes changes in interest rates? • What is the Fisher Effect and why is it important? • What exogenous forces affect interest rates?

  4. TOPICS FOR CH 3Term Structure • Briefly describe the main implication of the following theories; • Pure Expectations Theory • Liquidity Premium Theory • Segmented Markets Theory • What factors do we consider when investing in bonds? • Why is the normal shape of the Yield Curve (or term structure) upward sloping to the right? • What do we mean by a Before-tax equivalent yield?\ • What is a forward rate and Why is it important?

  5. TOPICS FOR CH 4Federal Reserve System • What are the principal objectives of the Federal Reserve System? • How is the Federal Reserve organized? • What is the function of the board of Governors? • What is the function of the Federal Open Market Committee (FOMC)? • What are the goals of Monetary Policy? Fiscal Policy? • How do changes in Monetary Policy affect business? • How does they Fed increase (decrease) the monetary base?

  6. TOPICS FOR CH 5Monetary Theory & Policy • How do Keynesians treat the supply of money? • How do Monetarists treat the supply of money? • Why is velocity important? • What does the Theory of Rational Expectations say about the effectiveness of government policy initiatives? • What policy tools can the Federal Reserve use to control inflation?

  7. TOPICS FOR CH 6Money Markets • What are the 4 main types of money market instruments? • What premiums do investors extract for reduced liquidity? Increases in default risk? • Who issues commercial paper? • Why is c-paper preferred to borrowing at prime? • How does the Repurchase (repo) agreement work? • Why are Fed Funds important to financial institutions? • What are Eurodollar deposits and why are they important?

  8. TOPICS FOR CH 7Bond Markets • How is buying and selling accomplished in the T-Bond market? • How does the Fed use its inventory of treasury securities? • Who issues municipals? What is their principal attraction to an investor? • What type of investor should be most interested in municipals? • What are zero-coupon bonds? Why might borrowers prefer them? • What are the two principal sources of risk in a bond investment? • What are the two sources of risk when investing in foreign bonds? • How might we minimize the risk addressed in the previous question?

  9. TOPICS FOR CH 8Bond Valuation & Risk • What cash flows are associated with bond investments? • What effects do interest rate increases (decreases) have on; • Market values of bonds? • Current yields? • Yields to maturity? • What does it mean when a bond sells; • at par, • at a discount, • at a premium? • What information is necessary in order to make good bond investments? • How do increases in expected inflation rates affect bond yields?

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