Financial Markets & Institutions

ECN 324

PHASE 1 REVIEW[Homework Questions]

TOPICS FOR CH 1Financial Market

OverviewA. WHAT IS THE DIFFERENCE BETWEEN [CAPITAL]

SURPLUS AND DEFICIT MARKETSB. WHAT IS THE DIFFERENCE BETWEEN PRIMARY

AND SECONDARY MARKETS?C. WHAT IS THE DIFFERENCE BETWEEN MONEY

AND CAPITAL MARKETS? D. WHAT ARE THE THREE MAIN FUNCTIONS OF

FINANCIAL MARKETS?

TOPICS FOR CH 2Interest Rates

A. WHOM DEMANDS AND SUPPLIES FUNDS IN THE LOANABLE FUNDS THEORY?

B. HOW DOES THE SUPPLY OF AND DEMAND FOR MONEY [CREDIT] IMPACT INTEREST RATES?

C. WHAT CAUSES CHANGES IN INTEREST RATES?D. WHAT IS THE FISHER EFFECT AND WHY IS IT

IMPORTANT?

TOPICS FOR CH 4Federal Reserve System

A. WHAT ARE THE PRINCIPAL OBJECTIVES OF THE FEDERAL RESERVE SYSTEM?

B. HOW IS THE FEDERAL RESERVE ORGANIZED?C. WHAT IS THE FUNCTION OF THE FEDERAL OPEN

MARKET COMMITTEE (FOMC)?D. WHAT ARE THE GOALS OF MONETARY POLICY?

FISCAL POLICY?E. HOW DO CHANGES IN MONETARY POLICY AFFECT

BUSINESS?F. HOW DOES THEY FED INCREASE (DECREASE) THE

MONETARY BASE?

TOPICS FOR CH 5Monetary Theory &

PolicyA. HOW DO KEYNESIANS TREAT THE SUPPLY OF

MONEY?B. HOW DO MONETARISTS TREAT THE SUPPLY OF

MONEY?C. WHY IS VELOCITY IMPORTANT?D. WHAT DOES THE THEORY OF RATIONAL

EXPECTATIONS SAY ABOUT THE EFFECTIVENESS OF GOVERNMENT POLICY INITIATIVES?

E. WHAT POLICY TOOLS CAN THE FEDERAL RESERVE USE TO CONTROL INFLATION?

TOPICS FOR CH 6Money Markets

A. WHAT ARE THE 4 MAIN TYPES OF MONEY MARKET INSTRUMENTS?

B. WHO ISSUES COMMERCIAL PAPER? WHY?C. HOW DOES THE REPURCHASE (REPO)

AGREEMENT WORK?D. WHY ARE FED FUNDS IMPORTANT TO FINANCIAL

INSTITUTIONS?E. WHAT ARE EURODOLLAR DEPOSITS AND WHY

ARE THEY IMPORTANT?

TOPICS FOR CH 7Bond Markets

A. HOW DOES THE FED USE ITS INVENTORY OF TREASURY SECURITIES?

B. WHO ISSUES MUNICIPALS? WHAT IS THEIR PRINCIPAL ATTRACTION TO AN INVESTOR?

C. WHAT ARE ZERO-COUPON BONDS? WHY MIGHT BORROWERS PREFER THEM?

D. WHAT ARE THE TWO PRINCIPAL SOURCES OF RISK IN A BOND INVESTMENT?

E. WHAT ARE THE TWO SOURCES OF RISK WHEN INVESTING IN FOREIGN BONDS?

TOPICS FOR CH 8Bond Valuation & Risk

A. WHAT CASH FLOWS ARE ASSOCIATED WITH BOND INVESTMENTS?

B. WHAT EFFECTS DO INTEREST RATE INCREASES (DECREASES) HAVE ON;

1. MARKET VALUES OF BONDS?2. CURRENT YIELDS?3. YIELDS TO MATURITY?

C. WHAT DOES IT MEAN WHEN A BOND SELLS; 1. AT PAR, 2. AT A DISCOUNT, 3. AT A PREMIUM?

D. HOW DO INCREASES IN EXPECTED INFLATION RATES AFFECT BOND YIELDS?