1. Discuss the purpose of the primary and secondary markets, and how each functions. Explain how the secondary market supports the function of the primary market, and how financial market turmoil (e.g. 2008-09) impedes this.
2. Discuss the differences between the Money and Capital Markets, and the types of securities trade in those markets. Give examples.
3. Discuss what market whether you would go to the Money or Capital Markets to raise funds for construction of a factory. Explain why. Discuss which market and the sort of instruments you should use to manage corporate treasury funds.
4. Explain in words why a dollar has different values dependent on point in time received, and how “present valuing” or “future valuing” cash-flows corrects for these differences. Also, look at the mathematics of the “annuity” versus the “annuity due”, and explain why the annuity is 1+r more valuable. Finally, create an amortization table using your calculator (like in the notes) and explain why the amount of interest paid is decreasing, and the principle paid is increasing.
5. Explain what makes bonds more sensitive to discount rate changes, and how Duration measures bond sensitivity. Why does higher Duration mean greater sensitivity, and lower Duration less (explain by using the equation, in terms of the present value of the coupon and principle payments)?
6. Explain why the current yield does not correctly reflect the true yield (yield to maturity) of a bond. Also discuss the effect of maturity on the error.
7. Discuss in words and graphs what will happen to bond prices, interest rates, and the dollar volume of bonds issued, due to factors such as: rising inflationary expectation, increased indebtedness, changes in taxation policies, etc. Think in terms of both supply and demand.
8. Explain graphically, how increased government bond issuance can result in a decrease of corporate bond issuance, and lower corporate bond prices.
9. Show how increased government spending crowds out investment using both investment and money supply/demand curves. Also explain why investment may not be crowed out during recession, and the long-run drawbacks to government fiscal stimulus (spending) during a recession.
10. Explain graphically why monetary stimulus is transitory (temporary), and leads only to higher prices (inflation) over the long run.
11. Explain the difference between the “expected inflation” and “income” effect.
12. Describe the difference between “default risk” and “liquidity risk”, and between default and liquidity premia. Explain why it is hard to differentiate between types of premia.
13. Explain how bonds get rated, and the difference between investment grade and non-investment grade ratings.
14. Discuss the three theories explaining the shape of the yield curve (Expectations, Segmented Markets, and Preferred Habitat). How is this indicated in the equations?
15. Explain the difference between Rational Expectations and EMH (begin by defining each). Explain the crucial assumptions of these theories, without which they fail.
16. Discuss the theoretical implications of Rational Expectations and EMH (e.g. what information is relevant, how investors should value securities, and how markets should behave when prices are incorrect). Discuss the practical implications regarding ability to forecast future prices and ability to beat the market or earn excessive profits.
17. Discuss evidence from the current market that Rational Expectations and EMH does not hold. Explain why the fundamental breakdown in these theories has occurred (hint: identify the absent or incorrect assumptions).
18. Explain specific regulations you might use to correct these market problems, and what specific problem these regulations would address.
19. Discuss the difference between moral hazard and adverse selection. Discuss examples from...
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