money and banking final ch 11-15
How are finance companies able to compete against commercial banks?
Finance companies have a small advantage over commercial banks in monitoring the value of collateral, which gives them an advantage in consumer durables, inventories, and business equipment. B. A lower degree of regulation allows finance companies to provide loans tailored to match the needs of borrowers more closely than do the standard loans that commercial banks provide.
What did bank depositors have to fear in the early 1930s?
If a bank failed, then depositors would potentially lose all their money.
Insurance companies never know the exact amounts of their future payouts. So, why do they hold large amounts of long-term, relatively illiquid assets, such as corporate bonds or private loan payments, that may be difficult to sell quickly if they need to make payments to policyholders?
If insurance companies simply held all their money in cash in case of a large payout, they would not be profitable. C. Insurance companies do keep a portion of their investments liquid for large payouts.
All of the following are reasons why one bank failure might lead to many bank failures, except:
If multiple banks have to sell the same assets, the prices of those assets are likely to rise.
What is the difference between a life insurance company and a property and casualty insurance company?
Life insurance insures against loss of life or disability, and property insurance insures against loss of property.
What would be the value of the M1 money multiplier if banks hold no excess reserves, the currency-to-deposit ratio is 0.79, and the required reserve ratio for checkable deposits is 34% Working note:
M1 money multiplier = (1+ currency to deposit ratio)/ (currency to deposit ratio + Required reserve ratio) M1 money multiplier = (1+.79)/(.79+.34) M1 money multiplier = = 1.58 Currency to deposit : 0.79 Checkable deposits: 34%
in what ways does the shadow banking system differ from the commercial banking system
commercial banking system is heavily regulated; the shadow banking system does not offer traditional banking services such as taking deposits; the shadow banking system invests in more risky assets and tends to be highly leveraged than commercial banks
the M1 money supply is
currency + checkable deposits
what benefits do employees receive from saving for retirement using 401k plans?
employees are not taxed on their contributions to the plan, or the earnings on those investments, until they are withdrawn
What are the key differences between investment banks and commercial banks?
Investment banks, among other activities, underwrite new security issues and provide advice on mergers and acquisitions, whereas commercial banks primarily take deposits and issue loans.
What is "Lehman paper"?
Lehman Brothers debt. B. Lehman Brothers commercial paper.
how are finance companies able to compete against commercial banks
finance comp. have a small advantage over commercial banks in monitoring the value of collateral, which gives them an advantage in consumer durable, inventories, and business equipment. A lower degree of regulation allows finance comp. to provide tailored to match needs of borrowers more closely than do the standard loans that commercial banks provide.
A hedge fund is a organized as a of wealthy investors that make relatively high-risk, speculative investments.
financial firm;partnership
In what sense is the Federal Reserve System both accountable to the government and independent of it?
he Board of Governors is a federal government agency, while the Federal Reserve Banks are legally the equivalent of private corporations.
what is the difference between a defined contribution pension and a defined benefit plan
in a defined contribution pension plan, the firm invests contributions for the employees, who own the value of the funds in the plan. In a defined benefit plan, the firm promises employees a particular dollar benefit payment based on each employees earnings and years of service
in what ways are insurance companies financial intermediaries
insurance companies are fin. intermediaries because they obtain funds by charging premiums to policyholders and use these funds to make investments
suppose that the interest rate on a one-year Treasury bill is currently 6% and that investors expect that the interest rates on one-year Treasury bills over the next three years will be 7%, 8%, and 6%. Use the expectations theory to calculate the current interest rates on two-year, three-year, and four-year Treasury notes.
interest on two year: 6 + 7=13/2 = 6.5 three year: 6 + 7 + 8 = 21/3 = 7 four year: 6 + 7 + 8 + 6= 27 / 4= 6.75
what are the key differences between investment banks and central banks?
investment banks, among other activities, underwrite new security issues ans provide advice on mergers and acquisitions, whereas commercial banks primarily take deposits and issue loans
in what ways are investment inst. and commercial banks different
investment inst. are different from commercial banks because they do not engage in traditional commercial banking activities such as taking deposits and making loans
Whose confidence is the country afraid of losing?
investors
Citigroup ____certain to make a profit on this deal as the price paid by Citibank's clients ______subject to the then current price of the now publicly traded stock.
is not, is
a bank run
is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close
how can an investment bank be subject to a run
it can be subject to a run when counter parties want to cash out their investments
is it easier for a central ban to be independent in a high income country or in a low income country
it is often difficult for a central bank to act independently in a low income country
why was it significant in the financial system
it signaled an unanticipated decline in value of money market mutual funds assets
why would one money market mutual fund having broken the buck cause a run on other money market funds?
it signals that the firms assets are less secure than anticipated
what are the main arguments against the feds independence
it would be more democratic for elected officials to control monetary policy; the public is unable to hold Fed officials accountable for their policies, unlike elected officials
what is "lehman paper"?
lehman brothers commercial paper and lehman brothers debt
why was the lehman paper in the funds portfolio worthless
lehman brothers went bankrupt which substantially reduced the value of its commercial paper
what is the main problem with having a central bank that is not independent of the rest of the government
less independent central banks tend to lead to higher inflation. An independent central bank can more freely focus on keeping inflation low
what is the difference between a life insurance company and a property and casualty insurance company
life insurance insures against loss of life or disability, and property insurance insures against loss of property
What does Bernanke mean by the short-term funding market?
markets not subject to the same regulations as commercial banks
what are the main arguments for the feds independence
monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake; an independent fed makes a political business cycle less likely
what are the key differences between mutual funds and hedge funds?
mutual fund activities are more transparent and provide and list of the assets that the particular mutual fund owns. Hedge funds are generally less regulated and take more risks for higher returns. Hedge funds are usually partnerships with relatively small number of wealthy investors, whereas mutual funds usually involve larger number of small investors
does a bank have to be insolvent to experience a run
no
is an investment bank that buy securities with its own capital acting as a financial intermediary?
no, by buying securities with its own capital the bank expects to get profit from the yield or the changes in price
why do pension plans have vesting periods
pension funds have vesting periods in order to reduce turn over among employees who are not yet vested
Suppose that for a price of $930 you purchase a 10-year Treasury bond that has a face value of $1000 and a coupon rate of 4%. If you sell the bond one year later for $1170, what was your rate of return for that one-year holding period?
ror= coupon/initial price + change in price / initial price 40/930 +240/930 =.301 or 30.1%
Suppose that you just bought a four-year $1000 coupon bond with a coupon rate of 6.9% when the market interest rate is 6.9%. One year later, the market interest rate falls to 4.9%. The rate of return earned on the bond during the year was
ror= coupon/purchase price + change in price. purchase price 12.36
Suppose that on January, 1, 2013, you purchased a coupon bond with the following characteristics: bullet Face value: $1000 bullet Coupon rate: 8 3/8 bullet Current yield: 7.24% bullet Maturity date: 2015 If the bond is selling for $900 on January 1, 2014, then the rate of return on this bond during the holding period of calendar year 2013 was
ror= current yield + change in price/initial price -13.078
What is an accredited investor?
A high net worth or high income individual.
What are the two methods that governments typically use to avoid bank panics?
A central bank can act as a lender of last resort. Your answer is correct.D. The government can insure deposits.
What is the shadow banking system?
A collection of nonbank financial institutions that channel money from savers to borrowers
you pay the entire 210,000 in cash. leverage ratio is equal to?
1
you make a 10% down payment leverage ratio is equal to?
10
you pay the entire 210,000 in cash. return on investment is equal to?
10%
you make a 10% down payment. return on investment is equal to?
100
you make a 5% down payment leverage ratio is equal to?
20
you make a 5% down payment. return on investment is equal to?
200
Suppose that you intend to buy a house for $210000. Calculate your leverage ratio for this investment in each of the following situations: You pay the entire $210000 price in cash. whaT is The leverage ratio?
210000/210000= 1
Suppose that you intend to buy a house for $210000. Calculate your leverage ratio for this investment in each of the following situations: You make a 20% down payment. leverage ratio?
210000/210000x0.2 = 5
you maje a 20% down payment. leverage ratio is equal to?
5
you make 20% down payment. return on investment is equal to?
50%
Money multiplier:
: E r/D= excess reserves / checkable Cd/ = from above rrd= M1 = Cd+ 1/ Cd+rrd+Er/d
Monetary Base
= currency + bank reserves
What do the authors mean by a "contagion of fear"?
A bank run that is fueled by fear of bank failure.
Why did Congress decided to establish the Federal Reserve System in 1913?
A panic and economic recession in 1907.
David Wheelock of the Federal Reserve Bank of St. Louis describes the following episode at the beginning of the Great Depression: Following the stock market crash [of October 1929], the Federal Reserve Bank of New York used open market purchases [of Treasury securities] and liberal discount window lending [to commercial banks] to inject reserves into the banking system. . . . The Federal Reserve Board reluctantly approved the New York Fed's actions ex post, but many members expressed displeasure that the New York Fed had acted independently. Source: David C.Wheelock, "Lessons Learned? Comparing the Federal Reserve's Responses to the Crises of 1929dash1933 and 2007dash2009," Federal Reserve Bank of St. Louis Review, Vol. 92, No. 2, March/April 2010, pp. 97dash98. What are the arguments for a Federal Reserve Bank operating independently?
A regional Federal Reserve Bank acting independently can act quickly to address regional issues.
What is systemic risk?
A risk to the entire financial system.
What is a private equity firm?
An investment management firm that invests money in companies in exchange for private equity.
any investment banks practice an "up or out" policy, with new hires being either fired or promoted within a few years. Many large law firms and accounting firms use a similar policy, as do colleges with respect to their tenure-track faculty. Most firms, however, do not use this policy. In a typical firm, after a short probationary period, most employees continue to work for the firm indefinitely, with no set time before they are considered for promotion. What are the advantages and disadvantages to investment banks and other firms of using an "up or out" employment policy?
An "up or out" policy persuades young people to work as much as possible at the very beginning of their careers. B. An "up or out" policy creates an incentive for new hires to take risks in order to stand out and stay at the company.
The ratio of total reserves to deposits
Bank Reserves / Checkable Deposits
Currency to deposit ratio
Currency / Checkable Deposit
Why was there a panic in the short-term funding market but not a panic among depositors at commercial banks?
Depositors at commercial banks were covered by deposit insurance.
In what ways are insurance companies financial intermediaries?
Insurance companies are financial intermediaries because they obtain funds by charging premiums to policyholders and use these funds to make investments
All of the following might be considered one of these difficult choices, except:
Investing in government bonds instead of the stock market.
If there are no advantages to employees, how are investment banks able to find people willing to work for them?
Investment banks are able to find employees because the rewards are so great that people believe it is worth the risk of not being promoted.
Suppose that National Bank of Guerneville has $36 million in checkable deposits, Commonwealth Bank has $42 million in checkable deposits, and the required reserve ratio for checkable deposits is 10%. If National Bank of Guerneville has $4 million in reserves and Commonwealth has $5 million in reserves, how much in excess reserves does each bank have? (Enter your answers rounded to one decimal place.)
National Bank of Guerneville has $ 0.4 million in excess reserves. Commonwealth Bank has $ 0.8 million in excess reserves. Now suppose that a customer of National Bank of Guerneville writes a check for $2 million to a real estate broker who deposits the check at Commonwealth. After the check clears, how much in excess reserves does each bank have? National Bank of Guerneville has $ negative 1.4 million in excess reserves. Commonwealth Bank has $ 2.6 million in excess reserves.
Are there advantages to employees?
On average, there may not be advantages to employees because even if they all use the same risky strategies, not all of them will remain employed.
In separating commercial banking from investment banking, what was Congress's main goal?
Protect people with deposits in commercial banks from risky investment activities by banks.
What became of the large, standalone investment banks during the financial crisis of 2007-2009?
Some large investment banks were taken over. Some large investment banks were converted to financial holding companies to get access to Federal Reserve lending to survive the financial meltdown. Some large investment banks went bankrupt.
Which body is more important within the Federal Reserve System, the Board of Governors or the Federal Open Market Committee?
The Board of Governors since they control reserve requirements, the discount rate, and hold a majority of the seats on the Federal Open Market Committee.
What are "traditional pension plans," and how do they differ from 401(k) plans?
Traditional plans are "defined benefit plans" whereas 401(k) plans are "defined contribution plans."
Why did the United States have no central bank between 1836 and 1913?
The authorization for a central bank expired.
According to an article in the Wall Street Journal, in 2016 J.P. Morgan Chase's leverage ratio was 6.2%. The bank's return on equity was 9%. Calculate the bank's ROA.
The banks ROA was 0.558%
In what ways does the shadow banking system differ from the commercial banking system?
The commercial banking system, unlike the shadow banking system, is heavily regulated by the government. B. The shadow banking system, unlike the commercial banking system, does not offer traditional banking services such as taking in deposits. C. The shadow banking system invests in more risky assets and tends to be highly leveraged than commercial banks.
Financial crisis typically results in a recession for all of the following reasons EXCEPT?
The government is unwilling to intervene during a financial crisis.
In what ways are contractual savings institutions similar to commercial banks?
They both borrow short and lend long.
In what ways are investment institutions similar to commercial banks?
They both borrow short and lend long.
Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, remarked about the Federal Reserve System that: open double quote[I]t was designed as a public-private partnership, accountable to, and yet independent of, the government.close double quote Source: Thomas M. Hoenig, open double quoteTwelve Banks: The Strength of the Federal Reserve System,close double quote speech delivered at Copper Mountain, Colorado, September 15, 2006. In what sense is the Federal Reserve System a open double quotepublic-private partnershipclose double quote?
While authorized by the government, it is owned by private banks.
what are the two methods that government typically use to avoid bank panics
a central bank can act as a lender of last resort; the government can insure deposits
what is the shadow banking system
a collection of non bank financial insitutions that channel money from savers to borrowers
what is a "run"?
a rush to withdraw money before everyone else does
what the disadvantages if defined benefit pension plans for employees
a wrker could lose some pension benefits if the plan is underfunded or if the employer goes out of business; the worker has no control on how the money is invested and some plans do not adjust future payouts to keep pace with inflation; the implicit return to the plan may be fairly low if plan managers do not invest well
what does "breaking the buck" mean
breaking the buck occurs when a money market mutual fund's share price falls blow $1.00
which of the following is true regarding the bursting of the housing bubble in the U.S. Economy
all of the above
what is underwriting
an activity in which an investment bank guarantees to the issuing corporation the price of a new security and then resells the security for a profit
a bubble means that
asset prices have increased beyond the point that could be justified by fundamental evaluation
U.S. Treasury bills $15 Demand deposits $36 Mortgage-backed securities $29 Loans from other banks $7 C&I loans $54 Discount loans $5 NOW accounts $37 Savings accounts $15 Reserve deposits with Federal Reserve $5 Cash items in the process of collection $6 Municipal bonds $6 Bank building $5
assets: us treasury bills, mortgage backed secu, c and i loans, reserve deposits w fed, cash items in process, municipal bonds, bank building total: 120 liabilities: demand deposits, loans from other banks, discount loans, now accounts, savings account total: 100 bank cap: 20 cap/asset ratio: 0,17
The kind of funding the author is referring to that is obtained from open double quotev arious investors who might want their money back within a short period close double quote includes all of the following, except:
bank deposits
how does deposit insurance encourage banks to take on too much risk
banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses
what became of the large, standalone investment banks during the financial crisis of 2007-2009
some large investment banks were taken over, went bankrupt, and were converted to financial holding companies to get access to fed reserve lending to survive the financial meltdown
which body is more important within the fed reserve system?
the board of governors since they control reserve requirements, the discount rate, and hold a majority of the seats on the fed open market committee
in what ways is the fed subject to external pressure
the president can exercise control over the membership of the board of governors and appoint new chairman every four years; the congress can amend the fed's charter and powers or even abolish it entirely.
what are the advantages of defined contribution plan for employees
the return may be higher, and the worker often has some control over how the money is invested
in what ways are investment institutions similar to commercial banks?
they both short and lend long
what government guarantees did commercial banks receive 75 years ago
this would refer to the FDIC
What investment banking activity was Citigroup performing in this deal?
underwriting
in what sense is an investment bank that engages in underwriting acting as a financial intermediary
underwriting is financial intermediation because the bank brings together savers and the issuers of securities
Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial crisis?
when financial institutions fail, credit marekts can be damaged, and the amount of borrowing/economic activity, can decrease, further affecting real outout