ECO 342 810 Banking & Financial Markets

ECO 342 810 Banking & Financial Markets Final Study guide Monday, May 10, 2-4

As indicated in the syllabus, requests for a makeup (If you have 2 other finals on the same day) must be made at least one week in advance of your scheduled exam.

Chapters covered: 4-14, 16, 18

Final Format

30 multiple choice (20 old material; 10 new material)

5 short answer (3 old; 2 new) no electronic devices!

Bring

pencil, calculator (not programmed)

Short answer question topics:

stock market efficiency risk structure of interest rates types of orders in stock market

types of pension funds risk aversion & its implications

4 Depository Financial Institutions

• what is maturity intermediation? how does it lead to interest rate risk?

• commercial banks

• McFadden Act, Glass-Steagall:

what did it do

what problems are associated with this regulation?

what is the status of this regulation today?

• S&Ls, thrifts

• What were the origins of the S&L crisis in the 1970s?

• How was S&L crisis of 1980s finally resolved? what steps were taken to strength the industry?

5 The Federal Reserve and Money Creation

• What is it about the structure and the financing of the Fed that makes it independent? Why is independence important?

• structure of the Fed—Who is the current chair of the Federal Reserve?

• tools of monetary policy

open market operations-- how do they work?--immediate impact, longer-run impacts

who decides OMO policy? who implements it?

what is the target of OMO policy?

6 Monetary Policy

• Recent Fed Monetary Policy

why did the Fed increase FF rate targets in 2000? Why did they reverse this?
• what is the current policy of FOMC towards interest rates? What is the current FF rate target?

7 Insurance Companies

• life insurance companies

• what is the difference between term, whole, universal life, and variable life?

• how does claim predictability compare between types of insurance? how does this affect investment choices?

• regulation: at what level?

• how do life insurance companies receive favorable tax treatment?

8 Investment Companies

• what are the advantages/disadvantages of indirect investment over direct investment?

• mutual fund fees: no load vs. front/back loads, 12b-1 fees

• equity fund objectives: growth, income, sector, value, global/international, small/med/large cap, index

• what is the difference between passive and active portfolio management?

9 Pension Funds

• what are defined benefit plans?

• what are the advantages/disadvantages of this type of plan? (from firm perspective? employee perspective?)

• what is vesting?

• what are defined contribution plans?

• what are the advantages/disadvantages of this type of plan?

• what is the tax treatment of pension contributions, earnings, and benefits in general?

• how does the Roth IRA differ ?

• federal regulation on defined benefit plans: 1974 ERISA:

• what are the provisions about: funding, vesting, insurance?

-- “pay-as-you-go” vs. fully funded; PBGC, minimum vesting

10 Properties and Pricing of Assets

• price of an asset = PV of all future cash flows

• terms: maturity, face value, coupon rate, yield to maturity

• coupon bonds--what are the cash flows?

• What is the relationship between bond price and bond yield?

• What is the relationship between yield and coupon rate, and bond price and face value?

• What is the relationship between bond price sensitivity and bond maturity? bond coupon rate? level of bond yields?

11 Level and Structure of Interest Rates

• risk structure of interest rates--different assets, same maturity

• what does it mean to be risk averse? what implications does this have for risk vs. yield?

• what affects the size of yield spreads?

• credit risk/ default risk (comparing bond ratings)-- how does default risk vary over the business cycle?

• tax treatment of municipals--calculating before tax vs. after tax yields, and the equivalent taxable yield

• how does tax policy impact the spread between the before-tax yields on municipals and corporate bonds?

• embedded options--what are the different types of options and how do they impact the yield spread?

• liquidity--what debt securities are most liquid? what are some general rules about liquidity?

12 Term Structure of Interest Rates

• what is the yield curve? what is the usual shape of the U.S. yield curve?

• Tbills, Tnotes, Tbonds--how do they differ in maturity and coupon?

• theories of the term structure

• expectations theory--what are the central assumptions of this theory? what is the central implication?

• under this theory, what does the shape of the yield curve tell you about expected future short-term rates?

• what is the main problem with this theory?

• what risks are associated with short-term bonds? with long-term bonds?

• liquidity theory--what is the central assumption? what is the central implication?

• why would a flat or upward sloping yield curve be subject to different interpretations under the expectations theory vs. the liquidity theory?

• why is this theory able to explain the usual shape of the U.S. yield curve?

13 Risk/Return and Asset Pricing

• what does it mean when investors are risk averse?

• what does the assumption of risk aversion tell us about the optimal portfolio?

• types of risk: systematic risk, unsystematic risk

• which type of risk can be eliminated through diversification?

• what is the interpretation of beta ? what does it mean when beta = 0 ? or = 1? or < 1? or >1?

• CAPM—

• what are the implications about the risk premium of a portfolio? about expected return?

• given the market risk premium and ? how would you find the risk premium of a that portfolio? how would you find expected return?

• APT -- how does this theory differ from the CAPM?

14 Primary Markets

• IPOs, underwriting, investment banks, primary vs. secondary markets, syndicates, lead underwriter, selling group, gross spread, underwriter discount, red herring

• role of investment banks

• what is the difference between underwriting and best effort?

• what determines the size of the underwriter’s discount?

• regulation--SEC

• what does it mean to register a security? what does it mean when registration is effective?

• what types of securities are exempt from registration?

16 Treasury & Agency Securities

• Primary market

• what is the difference between competitive bids and noncompetitive bids?

• how are the treasury securities awarded? what is the stop yield?

• how does a single price auction avoid the "winner's curse"?

• Inflation indexed Treasury securities

• what is the purpose? how do they work?

• Secondary market

• calculating the discount yield and yield to maturity for Tbills--what’s the difference?

• interpreting prices quotes for Treasury notes and bonds

18 Common Stock Markets

• what is the difference between an exchange and an over the counter market?

• basics about NYSE, AMEX, regional exchanges, Nasdaq

• what does it mean to buy a “seat” on an exchange? for a stock to be "listed" on an exchange?

• what is the role of the specialist on the exchange? how does a specialist differ from an OTC dealer as a market maker?

• types of orders: market, limit, stop, stop-limit, market if touched

• what are the advantages and problems with these orders?

• what are round vs. odd lots?

• fill or kill, good until cancelled

• short selling: what is it? how does it work?

• what price movement is beneficial to short-sellers?

• what restrictions do exchanges place on short-selling? why?

• what does it mean to buy stock on the margin?

• why are there margin requirements? what is the current requirement, and who sets it?

• what is the call money rate? what is a margin call, and when does it occur?

• program and block trades: what are they? how are they handled?

• what is frontrunning? why is frontrunning a problem? what can institutional investors do to prevent frontrunning?

• stock market indexes--what are they? how do they differ?

• what are some of the main indexes used and what do they measure?

• NYSE Composite, NASDAQ Composite, DJIA, S&P 500, Russell 2000, Wilshire 5000

• price efficiency

• what information do current prices contain under weak-form, semi-strong form, and strong form efficiency?

• what implications does each form of price efficiency have for “beating the market”

• what is technical analysis? fundamental analysis?

• under what efficiency conditions will technical and/or fundamental analysis beat or fail to beat the market?

• what is the evidence about efficiency in the United States stock market?

• what are the implications of price efficiency for an active vs. passive trading strategy?

I WILL EMAIL GRADES, WHEN COMPLETED, TO YOUR OSWEGO ACCOUNT. YOU MAY ACCESS THIS ACCOUNT AT http://www.oswego.edu/mail NO GRADES WILL BE GIVEN OR DISCUSSED OVER THE PHONE.

I GRADE ON THE BASIS OF TOTAL POINTS AS INDICATED IN THE SYLLABUS. GRADES ARE NOT BASED ON THE GRADE YOU WANT, THE GRADE YOU NEED, ON ANY SUBJECTIVE ASSESSMENT OF YOUR EFFORT, ON HOW MUCH I LIKE YOU, ON ATTENDANCE, etc. KEEP IN MIND THAT THE EVALUATION SYSTEM IN PLACE FOR THIS COURSE ALREADY HAS BUILT IN SUBSTANTIAL BENEFIT-OF-THE-DOUBT.

ANY DISPUTES ABOUT YOUR GRADE MUST BE MADE IN WRITING, BUT UNLESS THERE IS AN ERROR

MY GRADING DECISIONS ARE FINAL. ANY OBJECTIONS SHOULD BE TAKEN TO THE DEPT. CHAIR, JOHN KANE, 431 MAHAR.