Financial Management & Financial Institutions Essay Questions (200 words min)

Financial Institutions

Unit I

(200 words min each)

1. What are primary and secondary markets? What is the difference between a primary market and a secondary market?

Primary Markets are the financial markets in which new issues of a security such as a bond or a stock are sold to initial buyers by the company or government agency borrowing the funds.

Secondary Markets are a financial market in which securities that have been previously issued can be resold.

The biggest difference between the two markets are that primary markets investors buy its securities but secondary markets investors trade its securities among itself and the company that its being traded for does not participate in the transaction. When companies publicly sell new stocks and bonds for the first time it will do so in the primary markets. When investors purchase securities on the primary market the company selling the securities will have already hired an underwriter or firm to review the goods that are being offered and create guidelines surrounding the price and many other specific details of the securities to be issued. The volume of securities sold also varies from day to day, as demand for the security fluctuates. The price paid by the investor is no longer directly associated to the initial price of the security as set when first established and the company that issued the security is not a party to any sale between two investors. This means that the company can engage in a stock buyback in the secondary market. Companies issuing securities via the primary capital market hire investment bankers to obtain commitments from large institutional investors to purchase the securities when first offered.
2. If you are an investor, why do you want to invest in the security market? Why do you want to invest in the stock market? (200 words)

3. Why do we need to study financial institutions? (200 words)

4. Review the information found on page 27 of the textbook, Table 2.1. What are the key roles of depository institutions, contractual savings institutions, and investment intermediaries? Explain each of them in detail. (200 words)

Unit II

Discussion Board II

How will the fluctuation of mortgage rates and the expected increase of housing prices affect a decision to buy a house? (For example: the mortgage rates increase from 6% to 12%, and the housing prices increase from 3% to 10%.) Discuss and provide reasons to support your opinion.

When the median home sold for $505,000 I think back in 2009 or 2006, the rate on a 30-year fixed mortgage averaged 6.68 percent interest. Since then, the Feds has lowered the federal funds rate, keeping it at or near 0 percent since 2008. That’s translated to mortgage rates as low as 3.4 percent, with the average 30-year-fixed going for less than 4 percent for the last seven months. The opportunity for a mortgage that cheap appears to be slipping away. Now that the economy has improved and unemployment is at a nine-year low, economists expect the Feds to raise the rate as early as September. The biggest question when that happens is how it will affect the housing market. Higher interest rates mean that borrowing money to buy a home gets more expensive, and limits what a person can afford to pay. If that happens, asking prices may have to come down. Everyone buying or selling is affected one way for another. This is happening to me right now. I've had my house on the market for almost a year now and have had to compete with interest rates, current market value, and competition.

Assessment II

(200 words min)

1. What are the three factors that affect supply in the Bond Market, and how do they correlate to the downward or upward shift of the supply curve? (200 words min)

2. What are the main variables that affect the demand curve for bonds, and how do they correlate to the downward or upward shift of the demand curve? (200 words min)

3. If Wilma borrows $5,000 from her brother (at 5% interest per year) and the loan matures in 10 years, how much will she have to pay annually to pay the loan off in 10 years? How much will she have to pay annually to pay the loan off in four years? (Show all work/calculations/formulas. You may use a financial calculator, but must identify your methodology.) (200 words min)

4. What are the four variables that impact demand for assets by identifying the cause and effect for each as it relates to an increase in quantity demanded? (200 words min)

Unit III

Discussion Board III

How will the interest rate of Treasuries compare to that of corporate bonds if the government issues a guarantee against corporate bankruptcy? (75-100 words)

Assessment III

(200 words min )

1. Assuming market efficiency: What is the efficient market hypothesis? If XYZ Corporation’s stock is expected to fall next year to $45 and the closing price was $60 yesterday, what would be the price today if the annual equilibrium return is 10%? (200 words min)

2. What is the term structure of interest rates, and its three facts? (200 words min)

3. Yearly rates are 4%, 5%, 6%, 7%, and 8% for the next five years. Please compute and explain the expected interest rate for both the three and four-year bonds during the period. (Show your work/calculations/formulas.) (200 words min)

4. What is evidence that does not support an efficient market hypothesis? (200 words min)

Unit IV

Unit IV Discussion Board

Discuss how the regional Federal Reserve banks affect overall monetary policy. What should they do or not do? (75-100 words min)

Unit IV Assessment

(200 word min)

1. What are the disadvantages of inflation targeting? (200 words min)

2. When applying monetary policy, the Federal Reserve System is known as “the lender of last resort.” What does this mean, and what tools are used during a lending crisis? (200 words min)

3. What are the advantages of inflation targeting? (200 words min)

4. What are the three tools of monetary policy? (200 words min)

Financial Management

Unit I

Assessment I

(75 words min)

1. Explain what a firm's goal is from both a shareholder and stakeholder approach. (75 words min)

2. Discuss three main organizational forms used in forming a business. (75 words min)

3. Distinguish between equity and debt securities and how they are used to raise capital. (75 words min)

4. Explain the link security markets provide between businesses and investors. (75 words min)

5. Explain the incremental cash flow concept and why it is important. (75 words min)

Unit II

Discussion Board II

Go to www.cnbc.com and explore the video tab in the top banner menu. In the search box, enter the key terms reporting and estimate in separate searches. As you learned in this unit, there are various sources of information. Watch at least two videos, briefly describe one of the videos viewed, and provide a summary of information the video contained and how it fits in with this unit. (75-100 words min)

Unit III

Discussion Board III

John Jetison believes he would need $500,000 to retire today and keep his same lifestyle. If Jetison estimates he will retire in 20 years, how much should he put away each month to have the equivalent of $500,000 in 20 years if the interest he can earn is 5%? If the interest rate changes to 3%, what will Jetison need to save each month? Picture cash flows on a timeline and present it when providing your answer. Think about your own retirement; what would the timeline look like? In what ways could you better prepare for retirement? (75-100 words min)

Assessment III

(75 words min)

1. After placing $13,000 in a savings account paying annual compound interest of 3%, Leona will accumulate what amount if she leaves the money in the bank for 4 years? (75 words min)

2. After placing $8,000 in a savings account paying annual compound interest of 8%, calculate the amount that will accumulate if it is left for 8 years? (75 words min)

3. To buy a new house, you must borrow $150,000. To do this, you take out a $150,000, 20-year, 10% mortgage. Your mortgage payments, which are made at the end of each year (one payment each year), include both principle and 9% interest on the declining balance. What amount will your annual payment be? (75 words min)

4. Alex Karez has taken out a loan of $180,000 with an annual rate of 10% compounded monthly to pay off hospital bills from his wife’s illness. If the most Alex can afford to pay is $3,500 a month, how long will it take to pay off the loan? How long will it take to pay off the loan if he can pay $4,000 each month? Use five decimal places for the monthly percentage rate in your calculations. If Alex can pay $3,500 a month, how many years will it take to pay off the loan? (75 words min)

5. You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: (75 words min)

Unit IV

Discussion IV

(75-100 word min)

Go to www.cnbc.com and explore the video tab by using the key term diversification. As you learned in this unit, there are various sources of information. Watch at least three videos you find, list the videos you viewed, and provide a summary of the type of information the video contained and how it relates to this unit. (75-100 words min)

Unit IV Assessment

(75 words min)

1. Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no dividends. (75 words min)

Calculate the average rate of return for each year from the above information.

What is the arithmetic average rate of return earned by investing in Caswell's stock over this period?

What is the geometric average rate of return earned by investing in Caswell's stock over this period?

Considering the beginning and ending stock prices for the five-year period are the same, which type of average rate of return best describes the annual rate of return earned over the period (arithmetic or geometric)?

The annual rate of return at the end of year 3 is what percent? (75 words min)

2. The common stock of Plaxo Enterprises had a market price of $9.45 on the day you purchased it just 1 year ago. During the past year, the stock paid a dividend of $1.43 and closed at a price of $11.66. What rate of return did you earn on your investment in Plaxo's stock? The rate of return you earned on Plaxo's stock is what percent? (75 words min)

3. Syntex is considering an investment in one of two stocks. Given the information that follows, which investment is better based on the risk (the standard deviation) and return? Given the information in the table, what percent is the rate of return for Stock B? (75 words min)

4. On December 5, 2007, the common stock of Google, Inc. (GOOG) was trading at $698.51. One year later, the shares sold for $301.99. Google has never paid a common stock dividend. What rate of return would you have earned on your investment had you purchased the shares on December 5, 2007? The rate of return you would have earned is what percent? (75 words min)