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Assignments # 5, week 5
Chapter 8 Question # 1, 2, 7, 8, and 9.
1. Bond Investment Decision Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.
2. How Interest Rates Affect Bond Prices Explain the impact of a decline in interest rates on:
a. An investor’s required rate of return.
b. The present value of existing bonds.
c. The prices of existing bonds.
7. Coupon Rates If a bond’s coupon rate were above its required rate of return, would its price be above or
below its par value? Explain.
8. Bond Price Sensitivity Is the price of a longterm bond more or less sensitive to a change in interest
rates than to the price of a short-term security? Why?
9. Required Return on Bonds Why does the required rate of return for a particular bond change
over time?
Assignment 6
Chapter 9 Question #s 2, 3, 4, 10, 11, 12, 16, 22.
2. Mortgage Rates and Risk What is the general relationship between mortgage rates and long-term
government security rates? Explain how mortgage lenders can be affected by interest rate movements.
Also explain how they can insulate against interest rate movements.
3. ARMs How does the initial rate on adjustable-rate mortgages (ARMs) differ from the rate on fixed-rate
mortgages? Why? Explain how caps on ARMs can affect a financial institution’s exposure to interest
rate risk.
4. Mortgage Maturities Why is the 15-year mortgage attractive to homeowners? Is the interest rate
risk to the financial institution higher for a 15-year or a 30-year mortgage? Why?
10. Exposure to Interest Rate Movements Mortgage lenders with fixed-rate mortgages should
benefit when interest rates decline, yet research has shown that this favorable impact is dampened.
By what?
11. Mortgage Valuation Describe the factors that affect mortgage prices.
12. Selling Mortgages Explain why some financial institutions prefer to sell the mortgages they originate.
16. Mortgage-Backed Securities Describe how mortgage-backed securities (MBS) are used.
22. Subprime versus Prime Mortgage Problems How did the repayment of subprime mortgages
compare to that of prime mortgages during the credit crisis?
dq board is not up
week 9 assingments
Chapter 13 #1, 2, 3, 4, 7, 12, 14,16,17, and 19
1. Futures Contracts Describe the general characteristics of a futures contract. How does a clearinghouse
facilitate the trading of financial futures contracts?
2. Futures Pricing How does the price of a financial futures contract change as the market price
of the security it represents changes? Why?
3. Hedging with Futures Explain why some futures contracts may be more suitable than others
for hedging exposure to interest rate risk.
4. Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect
interest rates to increase? Explain.
7. Hedging with Futures Assume a financial institution has more rate-sensitive assets than
rate-sensitive liabilities. Would it be more likely to be adversely affected by an increase or a decrease in
interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure?
12. Cross-Hedging Describe the act of cross-hedging.
What determines the effectiveness of a cross-hedge?
14. Stock Index Futures Describe stock index futures. How could they be used by a financial institution that is anticipating a jump in stock prices but does not yet have sufficient funds to purchase large amounts of stock? Explain why stock index futures may reflect investor expectations about the market more quickly than stock prices.
16. Systemic Risk Explain systemic risk as it relates to the futures market. Explain how the Financial Reform Act of 2010 attempts to monitor systemic risk in the futures market and other markets.
17. Circuit Breakers Explain the use of circuit breakers.
19. Hedging Decision Blue Devil Savings and Loan Association has a large number of 10-year fixed-rate
mortgages and obtains most of its funds from shortterm deposits. It uses the yield curve to assess the market’s anticipation of future interest rates. It believes that expectations of future interest rates are the major force affecting the yield curve. Assume that an upward-sloping yield curve with a steep slope exists. Based on this information, should Blue Devil consider using financial futures as a hedging technique? Explain.
Chapter 14 #1, 2, 4, 5, 7, 8, 10, 11, 13, and 16
1. Options versus Futures Describe the general differences between a call option and a futures contract.
2. Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?
3. Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a
put option?
4. Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?
5. Factors Affecting Call Option Premiums Identify the factors affecting the premium paid on a
call option. Describe how each factor affects the size of the premium.
7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have
8. Hedging with Put Options Why would a financial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?
10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling
a futures contract?
11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages
and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements?
Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?
13. Change in Stock Option Premiums Explain how and why the option premiums may change inresponse to a surprise announcement that the Fed will increase interest rates, even if stock prices are not affected.
16. Backdating Stock Options Explain what backdating stock options entails. Is backdating consistent with rewarding executives who help to maximize shareholder wealth?
