1- Why are financial markets important to the health of the economy?
2- When interest rates rise, how might businesses and consumers change their economic behavior?
3- How can a change in interest rates affect the profitability of financial institutions?
4- Is everybody worse off when interest rates rise?
5- What effect might a fall in stock prices have on business investment?
6- What effect might a rise in stock prices have on consumersÕ decisions to spend?
7- How does a decline in the value of pound sterling affect British consumers?
8- How does an increase in the value of the pound sterling affect American businesses?
9- How can changes in foreign exchange rates affect the profitability of financial institutions?
10-Using www.bloomberg.com find a chart of the US dollar vs British Pound exchange rate for the past 5 years. In what year would an American have found it cheapest to visit London? In what year would an English citizen have found it cheapest to visit the Grand Canyon?
11-What is the basic activity of banks?
12-What are other important financial intermediaries in the economy besides banks?
13-Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better or worse off? In what way?
14-What types of risks do financial institutions face?
15-Why do managers of financial institutions care so much about the activities of the Federal Reserve System?
16-
The following table lists foreign exchange rates between U.S. dollars and British pounds during April:
|
Date |
U.S.
Dollars per GBP |
Date |
U.S.
Dollars per GBP |
|
4/1 |
1.9564 |
4/18 |
1.7504 |
|
4/4 |
1.9293 |
4/19 |
1.7255 |
|
4/5 |
1.914 |
4/20 |
1.6914 |
|
4/6 |
1.9374 |
4/21 |
1.672 |
|
4/7 |
1.961 |
4/22 |
1.6684 |
|
4/8 |
1.8925 |
4/25 |
1.6674 |
|
4/11 |
1.8822 |
4/26 |
1.6857 |
|
4/12 |
1.8558 |
4/27 |
1.6925 |
|
4/13 |
1.796 |
4/28 |
1.7201 |
|
4/14 |
1.7902 |
4/29 |
1.7512 |
|
4/15 |
1.7785 |
|
|
Which day would have been the best day to convert $200 into British pounds?
Which day would have been the worst day? What would be the difference in pounds?
1. Why is a share of Microsoft common stock an asset for its owner and a liability for Microsoft?
2. If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling anvil seller should I take out a loan from Larry the loan shark at 90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan-sharking?
3. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?
4. The U.S. economy borrowed heavily from the British in the 19th century to build a railroad system. What was the principal debt instrument used? Why did this make both countries better off?
5. ÒBecause corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets.Ó Comment.
6. If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
7. How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger?
8. Think of one example in which you have had to deal with the adverse selection problem.
9. Why do loan sharks worry less about moral hazard in connection with their borrowers than some other lenders do?
10. If you are an employer, what kinds of moral hazard problems might you worry about with your employees?
11. If there were no asymmetry in the information that a borrower and a lender had, could there still be a moral hazard problem?
12. ÒIn a world without information and transaction costs, financial intermediaries would not exist.Ó Is this statement true, false or uncertain? Explain your answer.
13. Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate rather than lend her the funds yourself?
14. How does risk sharing benefit both financial intermediaries and private investors?
15. Discuss some of the manifestations of the globalization of world capital markets.
¥ Think about investments on www.prosper.com.
– What potential returns are described on the website?
– What are the significant risks to investing?
– When investing through the website what does one buy?
– On the website are large numbers of borrowers seeking funds. What alternatives might these borrowers have for raising funds? What reasons might drive them to raise funds here over those alternatives?
– Is there a secondary market for an investment on Prosper.com? How does it work?
¥ On the website www.vanguard.com look up information about the fund VFISX. Within the summary prospectus find:
– Over the past 10 years what are the max and min annual return for this fund?
– What are the significant risks for investing in this fund?