金融市场案例答案.doc

第一章Managing in Financial MarketsAs a financial manager of a large firm, you plan to borrow $70 million over the next year.a.What are the more likely alternatives for you to borrow $70 million?You could attempt to borrow $70 million from commercial banks, savings institutions, or finance companies in the form of commercial loans. Alternatively, you may issue debt securities.b.Assuming that you decide to issue debt securities, describe the types of financial institutions that may purchase these securities.Financial institutions such as mutual funds, pension funds, and insurance companies commonly purchase debt securities that are issued by firms. Other financial institutions such as commercial banks and savings institutions may also purchase debt securities.c.How do individuals indirectly provide the financing for your firm when they maintain deposits at depository institutions, invest in mutual funds, purchase insurance policies, or invest in pensions?Individuals provide funds to financial institutions in the form of bank deposits, investment in mutual funds, purchases of insurance policies, or investment in pensions. The financial institutions may channel the funds toward the purchase of debt securities (and even equity securities) that were issued by large corporations, such as the one where you work.第二章Managing in Financial MarketsAs the treasurer of a manufacturing company, your task is to forecast the direction of interest rates. You plan to borrow funds and may use the forecast of interest rates to determine whether you should obtain a loan with a fixed interest rate or a floating interest rate. The following information can be considered when assessing the future direction of interest rates:Economic growth has been high over the last two years, but you expect that it will be stagnant over the next year.Inflation has been 3 percent over each of the last few years, and you expect that it will be about the same over the next year.The federal government has announced major cuts in its spending, which should have a major impact on the budget deficit.The Federal Reserve is not expected to affect the existing supply of loanable funds over the next year.The overall level of savings by households is not expected to change.a.Given the preceding information, determine how the demand for and the supply of loanable funds would be affected (if at all), and determine the future direction of interest rates.The demand for loanable funds should decline in response to: (1) stagnant economic growth (because a relatively low level of borrowing will be needed), and (2) a major cut in government spending. The supply of loanable funds should remain unchanged because the savings level is not expected to change, and the Fed is not expected to affect the existing money supply. Given a large decline in the demand for loanable funds and no significant change in the supply of loanable funds, U.S. interest rates should decline.b.You can obtain a one-year loan at a fixed-rate of 8 percent or a floating-rate loan that is currently at 8 percent but would be revised every month in accordance with general interest rate movements. Which type of loan is more appropriate based on the information provided?Since interest rates are expected to decline, you should prefer the floating-rate loan. As interest rates decline, the rate charged on this type of loan would decline.c.Assume that Canadian interest rates have abruptly risen just as you have completed your forecast of future U.S. interest rates. Consequently, Canadian interest rates are now 2 percentage points above U.S. interest rates. How might this specific situation place pressure on U.S. interest rates? Considering this situation along with the other information provided, would you change your forecast of the future direction of U.S. interest rates?This situation could encourage U.S. individuals and firms to withdraw their savings from U.S. financial institutions and send their funds to Canada to earn a higher interest rate (although they would have to convert their U.S. dollars into Canadian dollars and are therefore exposed to exchange rate risk). To the extent that savings are withdrawn from U.S. financial institutions, there would be a reduction in the supply of loanable funds in the U.S. Consequently, this specific situation places upward pressure on the U.S. interest rates.While this specific situation places upward pressure on U.S. interest rates, the economic growth and the budget deficit are expected to place downward pressure on interest rates. Therefore, you would still forecast a decline in U.S. interest rates, unless you believe that the impact of the Canadian situation would overwhelm the impact of the economic growth and the budget deficit.第三章Managing in Financial MarketsMonitoring Yield Curve AdjustmentsAs an analyst at a bond rating agency, you have been asked to interpret the implications of the recent shift in the yield curve. Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, the long-term yields declined, while short-term yields remained the same. Analysts stated that the shift was due to revised expectations of interest rates.a.Given the shift in the yield curve, does it appear that firms increased or decreased their demand for long-term funds over the last six months?The lower long-term yields may be attributed to a reduced demand for long-term funds. That is, firms may have reduced their issuance of long-term securities.b.Interpret what the shift in the yield curve suggests about the markets changing expectations of future interest rates.The yield curve six months ago implied the expectation of a slight decline in interest rates. The yield curve today implied the expectation of a larger decline in interest rates.c.Recently, an analyst argued that the underlying reason for the yield curve shift was that many of the large U.S. firms anticipate a recession. Explain why an anticipated recession could force the yield curve to shift as it has.When the economic conditions are expected to deteriorate, the demand for loanable funds by firms tends to decrease (because firms reduce their borrowing when they cut back on their expansion plans). Therefore, the long-term yields decline, and the yield curve developed a steeper downward slope. So this shift in the yield curve can indicate to the market that firms are reducing their amount of borrowing, in response to their assessment of future economic conditions.d.What could the specific shift in the yield curve signal about the ratings of existing corporate bonds? What types of corporations would be most likely to experience a change in their bond ratings as a result of the specific shift in the yield curve?To the extent that the downward shift in the yield curve signals an anticipated recession (or at least a reduction in economic growth), it could also signal that the creditworthiness of some corporations will decline. Therefore, the bond ratings of some corporations would be downgraded.Corporations that are more sensitive to economic downturns would be more susceptible to a bond rating downgrade in response to a yield curve shift that signals an anticipated recession.Problems1.a.Assume that as of today, the annualized two-year interest rate is 13 percent, while the one-year interest rate is 12 percent. Use only this information to estimate the one-year forward rate.ANSWER:b.Assume that the liquidity premium on a two-year security is 0.3 percent. Use this information to re-estimate the one-year forward rate.ANSWER:|2.Assume that as of today, the annualized interest rate on a three-year security is 10 percent, while the annualized interest rate on a two-year security is 7 percent. Use only this information to estimate the one-year forward rate two years from now.ANSWER:3.If , what is the market consensus forecast about the one-year forward rate one year from now? Is this rate above or below todays one-year interest rate? Explain.ANSWER:The one-year forward rate one year from now is:If , then the one-year forward rate one year from now must be below todays one-year interest rate.4.You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which one would you invest in?ANSWER:Yat = Ybt (1 T)Yat = 11% (1 0.30) = 7.7%prefer the corporate bond.5. Assume that interest rates for one-year bonds are expected to be 2 percent today, 4 percent one year from now and 6 percent two years from now. Using only the pure expectations theory, what are the current interest rates on two-year and three-year bonds as of now?ANSWER:(1 + ti2 )2 = (1 + ti1) (1 + t+1r1)(1 + ti2 )2 = (1 + 0.02) (1 + 0.04)(1 + ti2 )2 = 1.06081+ ti2 = 1.02995ti2 = 0.0299(1 + ti3)3 = (1 + ti1) (1 + t+1r1) (1 + t+2r1)(1 + ti3)3 = (1+0.02) (1+0.04) (1+0.06)(1 + ti3)3 = 1.1244481 + ti3 = 1.0398ti3 = 0.03986a.A corporation is planning to sell its 90-day commercial paper to investors offering an 8.4 percent yield. If the three-month T-bills annualized rate is 7 percent, the default risk premium is estimated to be 0.6 percent and there is a 0.4 percent tax adjustment, what is the appropriate liquidity premium?ANSWER:Ycp, n = Rf,n + DP + LP + TALP = Ycp,n Rf,n DP TALP = 8.4% 7% 0.6% 0.4%LP = 0.4%b.If due to unexpected changes in the economy the default risk premium increases to 0.8 percent, what is the appropriate yield to be offered on the commercial paper (assuming no other changes occur)?ANSWER:Ycp,n = Rf,n + DP + LP + TAYcp,n = 7% + 0.8% + 0.4% + 0.4% = 8.6%第四章Managing in Financial MarketsAs a manager of a large U.S. firm, one of your assignments is to monitor U.S. economic conditions so that you can forecast the demand for products sold by your firm. You recognize that the Federal Reserve attempts to implement monetary policy to affect economic growth and inflation. In addition, you recognize that the administration of the federal government implements spending and tax policies (fiscal policy) to affect economic growth and inflation. Yet, it is difficult to achieve high economic growth without igniting inflation. It is often said that the Federal Reserve is independent of the administration in Washington, D.C. yet, there is much interaction between monetary and fiscal policies.Assume that the economy is currently stagnant, and some economists are concerned about the possibility of a recession. Some industries, however, are experiencing high growth, and inflation is higher this year than in the previous five years. Assume that the Federal Reserve chairmans term will expire in four months and that the president of the United States will have to appoint a new chairman (or reappoint the existing chairman). It is widely known that the existing chairman would like to be reappointed. Also assume that next year is an election year for the administration.a.Given the circumstances, do you expect that the administration will be more concerned about increasing economic growth or reducing inflation?While answers may vary among students, the administration is normally most concerned with resolving the unemployment problem by increasing economic growth. This would be especially true just before an election year.b.Given the circumstances, do you expect that the Fed will be more concerned about increasing economic growth or reducing inflation?The Fed tends to focus on maintaining a low level of inflation, because of the possibility that sustained high inflation can cause high interest rates, which may result in a sluggish economy in the long run. It is not unusual for the Fed to focus on fighting inflation while the administration is more concerned about economic growth. However, given that the chairman of the Fed wants to be reappointed, he may be more willing to endorse a monetary policy that is desired by the administration (assuming that he is politically motivated).c.Your firm is relying on you for some insight on how the government will influence economic conditions and therefore the demand for your firms products. Given the circumstances, what is your forecast of how the government will affect economic conditions?There is no definite answer, but some possible expectations are as follows. First, both policies may focus on economic growth for political or other reasons. In this case, there is a high probability that the policies will be somewhat successful. Alternatively, the Fed may focus more on solving inflation while the administration focuses on economic growth. In this case, it is difficult to know whether either policy will be successful. Thus, there may not be much of an effect on the economic conditions. The key to this question is to create class discussion, and make sure students realize how difficult it is to forecast the impact of the government. Students should also recognize how politics can play a role in the effect on the economy.第五章Managing in Financial MarketsAs a manager of a firm, you are concerned about a potential increase in interest rates, which would reduce the demand for your firms products. The Fed is scheduled to meet in one week to assess the economic conditions and set monetary policy. Economic growth has been high, but inflation has also increased from 3 percent to 5 percent (annualized) over the last four months. The level of unemployment is very low and cannot possibly go much lower.a.Given the situation, is the Fed likely to adjust monetary policy? If so, how?The Fed would likely use a more restrictive monetary policy in order to reduce inflation. While this could cause higher interest rates, it may be necessary to dampen inflation, even if it also slows economic growth. Given that economic growth is high and that unemployment is very low, the Fed may believe that it could afford to slow the economy down without creating any major adverse effects.b.Recently, the Fed has allowed the money supply to expand beyond its long-term target range. Does this affect your expectation of what the Fed will decide at its upcoming meeting?This gives the Fed one more reason for using a more restrictive monetary policy, because it encourages the Fed to reduce money supply growth in order to meet the existing target range.c.Some economists have stated that if the Fed raises the discount rate as a form of monetary policy, it may reduce money supply growth even if there is no adjustment in open market operations. Do you agree that if the discount rate is raised, the Fed will not need to use open market operations?No. Even if the discount rate is relatively high, this may not have much of an impact on the money supply, because many commercial banks do not use the discount window to obtain funds anyway. If the Fed wants to affect interest rates, it will likely use open market operations, regardless of whether it raises the discount rate.d.Assume that the Fed has just learned that the Treasury will need to borrow a larger amount of funds than originally expected. Explain how this information may affect the degree to which the Fed changes the monetary policy.The increased borrowing by the Treasury may place upward pressure on interest rates. Therefore, the Fed may not have to restrict money supply growth as much because the Treasurys actions will help push interest rates higher. In this case, the Fed may still decide to cut back on money supply growth but the cut may be smaller as a result of the expected actions of the Treasury.第六章Managing in Financial MarketsAs a treasurer of a corporation, one of your jobs is to maintain investment in liquid securities such as Treasury securities and commercial paper. Your goal is to earn as high a return as possible, but without taking much of a risk.a.The yield curve is currently upward sloping, such that 10-year Treasury bonds have an annualized yield 3 percentage points above the annualized yield of three-month T-bills. Should you consider using some of your funds to invest in 10-year Treasury securities?No, unless you are willing to bear the risk. Ten-year Treasury bonds are subject to a high degree of interest rate risk. If interest rates rise, the value of the bonds will decline. If you have to liquidate the Treasury securities after their value has declined, you may have to take a loss on your investment. Even though these securities are free from default risk, they can still generate significant losses, especially when a Treasurer may need to liquidate them on short notice.b.Assume that you have substantially more cash than you would possibly need for any liquidity problems. Your boss suggests that you consider investing the excess funds in some money market securities that have a higher return than short-term Treasury securities, such as negotiable certificates of deposit (NCDs). Even though NCDs are less liquid, this would not cause a problem if you have more funds than you need. Given the situation, what use of the excess funds would benefit the firm the most?The excess funds should not be invested in money market securities. If these funds are not needed for liquidity purposes, they should be used to support the firms operations (and therefore reduce the amount of funds that have to be borrowed).c.Assume that commercial paper is presently offering an annualized yield of 7.5 percent, while Treasury securities are offering an annualized yield of 7 percent. Economic conditions have been stable, and you expect conditions to be very favorable