BCOR 3110 Markets & Institutions Final

According to the BLS, $10,000 in January 1985 would have the same buying power as ____________ exactly 35 years later.

$24,452.23 https://www.bls.gov/data/tools.htm Calculators ----> Inflation (CPI Inflation Calculator)

If a bond has a coupon rate of 6%, the market rate is 8%, and the face value of the bond is $1,000. How much can someone expect to earn in interest each year from that bond?

$60

A $1,000 bond has an annual coupon rate of 7%, payments are made quarterly. It matures in 10 years. Comparable debt is yielding 5%. What is the annual income of the bond?

$70

41) List 4 things that differentiate a public company from a private company.

1) How the company handles public disclosure of its financial statements, which is an indicator of its financial position and value in the market. If the company is traded on a public stock exchange, the SEC requires quarterly earnings reports to be made available to the public. Private companies are not required to disclose their financial statements to anyone. 2) Public companies can gain access to capital by tapping into the stock market and issuing stocks and bonds instead of relying on other types of business loans. 3) By issuing stocks and shares of the company, the owners or founders no longer have all of the equity. Instead, their investors and shareholders are also the owners of the organization and usually have a say in the decisions of the company as discussed in board meetings. Private companies are owned only by their founders or a group of private investors. 4) Private companies can typically be large, but also ranges from small, mid to large market capitalization. However, many large companies still decide to remain private for more freedom and less public scrutiny. They also have fewer regulations from the SEC that they have to abide to.

43) List 6 things an investment banker is responsible for in the IPO process.

1) Pitch for the deal and select an underwriter 2) Hold the kick-off meeting 3) Draft the S-1 filing 4) Pre-sell the offering 5) Conduct the IPO roadshow 6) Hold the IPO pricing meeting

42) List three economic characteristics that exist during stagflation and answer what the Volcker policy was for ending stagflation in the 1970's.

1) economy is stagnating/declining- low demand for products and services, 2) high unemployment, 3) high inflation. The Volcker policy raised the feds fund rate to the highest it's ever been in history to end inflation that was in the double digits (greater than 10%). This rule prohibited banks from using their customer's deposits to trade for their profits. Paul Volcker is awarded the title, "the man who ended stagflation."

Pensions were not optimal because: 1) Withdrawal payments were taxed 2) Funds were managed by the company 3) Payments ended when the surviving spouse died 4) They terminated with termination in employment before retirement 5) Deposits to the pension fund were tax-deductible

1,2,4

A $1,000 bond has an annual coupon rate of 7%, payments are made quarterly. It matures in 10 years. Comparable debt is yielding 5%. What is the value that you would put for I in your financial calculator?

1.25 (5/4)

33) Today, there is about _________ % of U.S. currency in actual bill and coin form being circulated.

10%

John is single and makes $40,000. How much will he pay in taxes?

11.5%; $4,602.50 $987.50+ 12% of $30,125= $3,615 $987.50+$3,615= $4,602.50

Using the Expenditure approach, what is GDP if: Consumption is 8 Investment is 2 Government spending is 3 Imports are 4 Exports are 3 *Numbers are in trillions

12 GDP= C+I+G+(X-M)

What year was the Federal Reserve founded?

1913

What decade is considered to be the Depression decade?

1929-1939

Capital Structure refers to the amount of debt and equity used to finance operations. Optimal Capital Structure is one that focuses on reducing: 1) Taxes 2) Debt 3) Equity 4) WACC

4 only (Weighted Average Cost of Capital) A weighted average cost of equity and the cost of debt. You want a lower ratio.

21) The FED/FOMC set which rate(s)? a) Discount b) Federal Funds c) LIBOR d) Prime e) SOFR

A & B

38) When the FOMC votes on interest rates, the vote includes votes from: A) Board of Governors B) President of the New York Federal Reserve Bank C) All 12 regional bank presidents D) The President of the U.S. E) The Chairman/woman of the Treasury

A & B Only

In your own words, describe what happened with Game Stop.

A popular Reddit page called "WallStreetBets" collectively decided to teach the multi-billionaires company and Wall Street a lesson by pumping a lot of money into GameStop stocks. The increase in demand caused the stock price to rise astronomically. Their actions also caused the people who were shorting GameStop stocks and other hedge funds to take a loss on their earnings as they try to buy it back. The market price for GameStop stocks started at around $15 per share before the unprecedented events, and jumped to $347 by the end of it.

What is a public company?

A publicly listed or traded company with stock shares that trade on secondary exchanges.

45) Explain what the FOMC forward guidance is:

A tool used by the central banks to manipulate financial decisions by issuing statements. These statements include the current status of the economy, issues the bank is watching for, or intended actions of the bank in the upcoming future. All of these issues concern interest rates and under what conditions it would change its current policies. Their main goal is to monitor and regulate business, investing and individual activities with monetary policy changes that could cause disruptions to the market.

36) When a corporate Board of Directors meet and discuss the Net Income on the Income Statement, they have the following choices: A) Pay dividends B) Retain earnings and reinvest into the organization C) Pay interest D) Create new stock shares E) Buy back stock shares

A, B & E

30) Commercial banks offer which of the following: A) Checking, Savings, and Money Market Accounts B) Brokerage services C) Intermediary exchange (ease of transactions) D) Liquidity and access to capital E) Safety

All but B

37) Dealers (also known as Specialists or Market Makers) do which of the following: A) Post Bid & Ask prices B) Set the allotment C) Charge a brokerage fee D) Trade in round lots E) Make money based on the spread

All but C

32) For a currency to work, it must: A) Be a medium of exchange B) Be a unit of account C) Be a store of value D) Be a standard for deferred payment

All of the above

40) The New Deal included which of the following: A) Ended Prohibition B) Allowed employee unions C) Passed Social Security Act D) Founded the SEC E) Created the WPA

All of the above

According to your reading, who calculates GDP? A) The World Bank B) IMF (International Monetary Fund) C) OECD (Organization for Economic Cooperation) D) BEA (Bureau of Economic Analysis)

All of the above

23) Choose all that apply. Which of the following can be dictated by the FED to affect the economy?

Bank Reserves, Interest Rates, Money Supply

26) An example of quantitative easing would be:

Buying long-term debt securities from open markets.

25) Which of the following is not correct about a bond investment? A) An investor can make money from capital appreciation. B) An investor can make money from interest. C) An investor can make money from dividends. D) Bond investors are paid before stock investors during a company liquidation. E) Bond investors are owners of the company.

C & E only.

The Federal Reserve is an example of what kind of bank?

Central

Describe how a commercial bank works.

Commercial banks provide common banking services to individuals and businesses. These banking products include: checking, and savings accounts, personal loans, line of credit, mortgages, and low-risk investment options such as money markets or CD's. Commercial banks play an important role in the economy because 1) they provide an ease of transaction and 2) banks help "create" money by taking the money that their customers deposit and lend it out to others. The Federal Reserve requires that banks keep 10% of deposits in case there is a certain urgency to withdraw from the public.

22) The FED dual mandate is to:

Control inflation & unemployment

27) Post Great ________, the FDIC was created to protect bank deposits; the amount currently being up to ________ per person, per insured banking institution.

Depression; $250,000

34) The _________ is the rate the FED charges banks for overnight loans; whereas the _________ is the rate banks charge each other.

Discount rate; Federal Funds Rate

With equity investments, you can make money from which of the following?

Dividends and capital gains

What is the dividend conundrum?

Double taxation on dividends.

29) The FED meets how often per year?

Eight (Twice per quarter)

13) The GameStop saga was fueled by Reddit users shorting en masse GameStop stock.

False

19) The Covid-19 pandemic has led to lower interest rates, thus creating more equality and making it easier for lower-income individuals to save.

False

8) Lower interest rates discourage spending and trading.

False

Banking, especially investment banking, offers typical 9-5 work hours and skills learned "on the job."

False

Central banks are motivated by profit.

False

In a MARGINAL tax system, if a person makes enough income to get taxed at the highest rate, they will be taxed a flat rate of 37% on all of their income. (If they make $1 million, they will get taxed 37% on that million dollar)

False

In reference to capital structure, debt is higher risk, ALLOWS ownership rights, and has a higher return.

False

Investing in stock is a equity investment; so the company pays the investor back in interest payments.

False

Series EE bonds are expensive bonds with a high coupon rate issued by the federal government.

False

The OECD points to wearing masks as the number 1 way to eradicate Covid-19 and experience global economic recovery.

False

The U.S. has a progressive, marginal tax system where taxpayers pay taxes on all of their income, at their marginal rate; which is determined by their income level.

False

Treasury bond yields went down and the stock market went up on March 18th, after the Feds' latest meeting.

False

17) Dealers (also known as specialists or market makers) sell to investors at the Bid price and buy from investors at the Ask price.

False (Dealers buy at the bid price and sell at the ask price.)

2) The Fed was created in the aftermath and in response to the Great Depression.

False (It was created in 1913- before the start of the Great Depression)

According to the Economist and Burgernomics, using PPP Principles, the "correct" price of a Big Mac in Costa Rica should be higher. It is undervalued by approx. 28%.

False (Purchasing Power Parity) https://www.economist.com/big-mac-index It is undervalued by approx. 32.4%

1) An investor can place a limit order to buy or sell a stock at a specific price. When the market price of the stock matches the limit price, the order is guaranteed to be executed and the trader is guaranteed to receive the specified limit buy or sell price of the stock.

False A limit order is not guaranteed execution.

Businesses generally react more favorably and make more money when interest rates rise.

False Note: When CPI goes up, interest tends to follow.

Segmentation Theory determines the slope of the curve yield.

False Segmentation Theory is a theory that long and short term interest rates are not related to each other. The curve yield is determined by supply & demand. Also determined by different classes of investors. Advocates of the segmentation theory says that the yield curve is not useful.

5) Central Banks insure deposits up to $250,000 per person per bank account.

False (The Federal Deposit Insurance Corporation insures deposits up to $250,000 per person per account.)

9) Investment bankers spread the risk of funding, marketing, and underwriting an IPO by forming a synthesis group.

False (They will form a syndicate.)

According to the Khan Academy video, when the bond price goes up, the yield ______.

Goes down

TIPS protect against _______.

Inflation (Treasury inflation-protected securities)

What does the abbreviation IPO stand for?

Initial Public Offering

You can earn a return from an investment in a debt security through:

Interest and capital gains

Which of the following is NOT one of the functions of money?

Interest bearing

Which kind of banker is brought in to help a company raise capital for growth and expansion as well as manage initial public offerings?

Investment Banker

Describe what caused the Great Depression.

It's one of the biggest controversies among economists and historians of what caused the Great Depression. To my understanding, the banking panics and failures caused by the crash of the stock market in 1929 caused the Great Depression. People rushed to their bank to withdraw everything they had, which caused the banks to come up short and caused them to take out loans with other banks. Over the next several years, consumer spending, investments, and employment rates dropped drastically and the economy was stuck in a vicious cycle of steep declines.

28) In order to short stock, an investor must have a(n) _______ account set up with a(n) ________.

Margin; brokerage

If you are a small company and have a hard time paying off your debt, you are likely ________.

Over-leveraged

Consider a bond that pays $80 in annual coupon interest, matures in 5 years and market rates comparable debt are 7%. Is it a discount, premium, or par bond?

Premium bond

24) The following is information on ABC's stock: 1- Nov Bid 20.00 Ask 20.10 1- Dec Bid 19.00 Ask 19.10 An investor shorts 100 shares on November 1st and covers on December 1st. What is the financial outcome?

Profit of $90.

44) Explain 2 pros and 2 cons to raising the minimum wage.

Pros: 1) Reduced state/federal expenditures- the government will spend less on financial aid and assistance programs, therefore, freeing up more capital in the market. 2) Boosts economic growth- increased consumer wages can lead to more spending and economic activities. Cons: 1) Increased unemployment- since minimum wage law is an unfunded mandate, the payroll expense will fall on the business, which can often lead to a company choosing between bankruptcy or layoffs. 2) Fuels inflation and prices- businesses must raise prices to match operating and employee wages expense which devalues the dollar.

35) Consumption smoothing refers to:

Saving moderate amounts of income at all stages of life.

An inverted yield means that:

Short-term rates > long term rates.

According to the Khan Academy video, what was the original dollar backed by?

Silver

A ______ order to buy or sell a stock becomes a ______ order once the specified order occurs.

Stop, market

Investment bankers spread the risk of funding, marketing, and underwriting an IPO by forming a ________

Syndicate

Roth IRA contributions are ________ and subsequent withdrawals (at retirement age) are ________.

Taxable; Not Taxed

What industry does the NASDAQ follow?

Technology

Using a Hot Fudge Sundae, explain the concept of value.

The Hot Fudge Sundae example from the reading describes the third function of money: store of value. Money act as a way of postponing the satisfaction obtained from consuming a good/service until a later time. For example, if he were to purchase a gift certificate from an ice cream shop for a $2 hot fudge sundae, he could store the value of it in a gift certificate and redeem it whenever he pleases. He could keep the $2 stashed away until he can make the purchase a week later. In this example, he has stored the value of the hot fudge sundae in the form of money.

What was the SEC established to do and who was the first commissioner?

The Securities and Exchange Commission was created by U.S. Congress after the Great Depression in the 1920s to help protect investors and the banking system by passing regulations and enforcing laws against market manipulation. To achieve this mandate, the SEC requires that public companies provide and publish annual reports to investors and stakeholders. They also ensure that these financial statements meet a certain set of standards and criteria. Joseph P. Kennedy was the first commissioner appointed by President Franklin D Roosevelt during the 1930's.

What does the term time value of money mean?

The concept that the money you have now is worth more than the identical sum in the future.

10) Equity= Assets - Liabilities

True

11) Microfinance companies essentially bring banking functions to underdeveloped areas of the world, thus enabling economic activity and money flow to occur.

True

12) Every single investment has risk.

True

15) Generally speaking, an investor can have a higher future value in their retirement account by starting to save in their 20's and depositing small amounts rather than starting in their 40's, after establishing a career, and depositing larger amounts.

True

16) The SEC was established post Great Depression to ensure that all investors are privy to pertinent public information and that it is illegal to profit off of inside information and/or market manipulation.

True

18) The U.S. Treasury is in charge of printing money and collecting tax revenue, but the FED is in charge of actually "creating" money via open market operations and fractional reserve banking.

True

20) Using time value of money principles, the price (present value) of a bond can be determined by discounting and then summing all future income generated by the bond (interest and principal payments.)

True

3) Lower reserve requirements, in fractional reserve banking environment, means there is more money to be loaned out, thus increasing the money supply by "creating" new loans.

True

4) M1, M2 & M3 (money aggregates) are measurements of the United State's money supply and are important indicators to the FED because higher money aggregates suggest more money flowing in the market which in turn should spur spending and economic activity.

True

7) U.S. Treasury Debt securities include T-Bills, T-Notes, and T-Bonds. Selling these takes money out of circulation and tightens the economy while buying these puts money into circulation and loosens the economy.

True

A change in the market price of stock changes the company's market capitalization value often, but the range (small-cap, mid-cap, large-cap) for a company does not change often.

True

A commercial bank investment is generally seen as low risk due to FDIC insurance that insures up to $250,000 per person.

True

Investing in debt means that you are loaning money and in turn will receive interest for the use of your money.

True

Investors looking for a fixed income should invest in preferred stock over growth stock.

True

Nearly all of the mortgage payment in the first 120 months is paid towards interest.

True

The Federal Reserve is a central bank.

True

The GameStop article discussed the sell/side analyst dropping coverage.

True

Using the income approach to GDP, one would adjust for sales taxes.

True

You can write checks through a money market account.

True

6) After doing analysis, an investor with a bullish attitude would be inclined to buy shares long.

True (Bullish investors believe that the price of a stock will go up in the future.)

From your 15 minutes on government websites, you noted that US GDP for Q4 2020 was _______ by ________ and the deficit went ________ by _______.

Up 4.1%, Up 4.2% https://www.bea.gov/

39) Negative inflation is ________, steady inflation of 2-3% is _________, high inflation is ________.

bad, good, bad