12 May DISTINGUISH BETWEEN A LINE OF CREDIT AND A LETTER OF CREDIT.
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?
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?
7. What is the purpose of bank examinations? How do they differ from that of a CPA audit?
Discussion Question # 2
1. Explain why the FOMC is the key policy group within the Fed.
2. A bank has $3,000 in reserves, $9,000 in bank loans, and $12,000 of deposits. If the reserve requirement is 20% what is the bank’s reserve position? What is the maximum dollar amount of loans the bank could make? What would happen to the nation’s money supply if the Fed lowered the reserve requirement to 10 percent? Demonstrate your results with numerical examples and T-accounts.
Assuming reserve requirements apply to all the bank’s deposits, its $3,000 of reserves comprise required reserves of $2,400 (20% of total deposits of $12,000) and excess reserves of $600 (total reserves of $3,000 less required reserves of $2,400):
3. Explain how the Fed changes the money supply with an open market purchase of Treasury securities.
4. What are some of the potential conflicts between goals of monetary policy? Explain.
5. Bank regulation is considered to be in the public interest. Thus, the more regulation the better. Explain why you agree or disagree with this statement.
6. How do failing bank resolution policies differ between large and small banks? Why the difference?
7. How can an effective lender of last resort prevent financial panics from developing? Why was the Fed unable to prevent the great depression of the 1930’s?
WEEK 3
Discussion Question # 1
1. What are the major business activities of investment banks?
2. Why do commercial banks want to get into investment banking?
3. Explain why underwriting new securities issues can be a risky business.
4. What is a private placement? How does it differ from a deal underwritten by an investment bank?
5. In what ways do some security dealers and stockbrokers serve as financial intermediaries?
6. What is venture capital? What types of companies seek venture capital?
7. What are the differences between M1, M2, and MZM? Why are there different measures of money?
Discussion Question # 2
1. What is the essential difference between the Keynesian and the Monetarist view of how money affects the economy?
2. What are technical factors? How do they affect the implementation of monetary policy?
3. According to the law of large numbers, as the number of insureds increases, risk is reduced. However, as an insurance company writes more policies, it exposes itself to the potential for greater insured losses, which is riskier. Explain this apparent contradiction.
4. To what extent do (1) the risk of unemployment and (2) the risk of war satisfy the requirements of private insurance risks?
5. What are the primary sources of insurance regulation? What are the areas that are regulated?
6. Why are annuities and life insurance often described as opposites? If they are opposites, why do insurance companies marketing life insurance also commonly market life annuities?
7. Differentiate between defined benefit and defined contribution pension plans. Who bears the investment risk under each of these alternatives? Which type of plan is easier to fund and manage?
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