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Self-Test Problems

ST-1 Explain the process in which financial institutions channel funds from investors to firms.

ST-2 Annualized return You purchased a 180-day maturity, $100,000 par value Treasury bill for $96,800.

a. Calculate your annualized return if you hold it until it matures.

b. If you sell it for $98,100 after 90 days, what is your annualized return?

c. What should the price be in part b in order for your annualized return to be the same as in part a?

Problems

P-1 How is the role of the securities firms as intermediaries different from the roles of commercial banks and insurance companies?

P-2 Consolidation among financial institutions in recent years has changed the landscape of financial services offered to investors. How has consolidation affected the services offered?

P-3 Give three reasons why financial institutions have expanded globally in recent years.

P-4 Why are financial markets important to firms and investors?

P-5 Why are secondary markets important?

P-6 What are (a) initial public offerings and (b) secondary offerings?

P-7 Distinguish between public offering and private placement.

P-8 Describe the following money market securities: (a) Treasury bills, (b) commercial paper, and (c) negotiable certificates of deposit.

P-9 Money market securities, in general, provide lower returns than capital market securities. In the presence of the secondary market where capital securities are easily tradeable, why would anyone invest in money market securities instead of capital market securities?

P-10 Explain how foreign money market securities can be used for cash receipts or payments in the foreign currency.

P-11 Distinguish between a general obligation bond and a revenue bond.

P-12 What are the bid price and the ask price? Why are prices in the OTC market quoted in this way?

P-13 Exchange rate transactions Suppose Charlotte Co. expects to pay out 100,000 euros to a Dutch exporter in 3 months' time. The current spot rate and forward rate remain at $1.10 per euro.

a. If Charlotte Co. expects the euro to depreciate to $1.02, should Charlotte purchase euros forward?

b. If Charlotte Co. expects the euro to appreciate to $1.18, should Charlotte purchase euros forward? Explain.

 
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