12 May EXPLAIN WHY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM IS CONSIDERED SO POWERFUL.
Discussion Question # 1
1. What is the primary goal of a commercial bank? Why may this goal be translated into maximizing the firm’s stock share price?
2. Why are demand deposits a more important source of funds for small banks than for large banks? Why are demand deposits considered to be a more stable source of funds for small banks than for large banks?
3. What are borrowed funds? Give some specific examples. Have borrowed funds become more or less important as a source of funds for banks?
4. Explain why banks buy and sell federal funds. Also explain the role of the Federal Reserve System in the fed funds market. Show the T-accounts for a federal funds transaction.
5. Throughout this chapter, the role of insurance companies and pension funds as financial intermediaries was stressed. Discuss the financial intermediation process as it applies to insurance companies and pension funds.
6. What is the difference between pure risk and speculative risk? Provide an example of each of these types of risk.
7. Explain how investment banks and large money-center banks are similar and how they are different.
Discussion Question # 2
1. What are the major uses of funds for a bank? What are the differences between large and small banks? Explain.
2. What are the important differences between investments and loans in a bank portfolio of assets?
3. Distinguish between a line of credit and a letter of credit.
4. Define correspondent banking. Why do banks enter into correspondent relationships?
5. Term insurance becomes cost prohibitive for elder individuals. However, the same insurance companies that do not offer term policies at advanced ages sell whole life insurance. How are these insurers able to offer life insurance for all of life under whole life insurance but not under term insurance?
6. How are Social Security old-age benefits funded? What is the age for full retirement benefits for those retiring under Social Security today? What is the age under current law for full retirement benefits when someone who is 20 years old today retires?
7. Assume a venture capitalist requires a 40 percent rate of return per year. If the venture capitalist thinks that a company will be worth $50 million in 5 years, what percentage of ownership in the company will the venture capitalist require today in exchange for a $3 million investment?
Assignment (Individual) – Individual Reflections Paper
WEEK 2
Discussion Question # 1
1. Explain why the banking system was so unstable prior to establishment of the Fed in 1914.
2. What is a “call loan” and how did call loans contribute to economic recessions?
3. Explain why the Board of Governors of the Federal Reserve System is considered so powerful. What are its major powers and which is the most important?
4. Explain the concepts of frictional unemployment, structural unemployment, and the natural rate of unemployment. How do these affect what is considered full employment?
5. Why are bank failures considered to have a greater impact upon the economy than other types of business failures? Do you agree with this conclusion?
6. What are the major lessons that have been learned from past bank failures? Do you think that history can or will repeat itself?
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