Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons. (Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough.
It includes options and warrants as well as debt and stock. "(2) Participation rights – contractual rights of security holders to receive dividends or returns from the security issuer’s profits, cash flows, or returns on investments. " "(3) Preferred Stock – a security that has preferential rights compare to capital stock. " (C) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue.
MULTIPLE CHOICE QUESTIONS 1. The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period.
It achieves this through a process known as the transmission mechanism, which occurs in a number of distinct stages: - Purchasing and sale of government bonds in the STMM to influence the cash rate - Changes in the cash rate influence other interest rates, particularly short term securities, such as bank bills. In this way, changes in monetary policy are usually translated into the rates that banks charge for lending. - These lending rates then influence the decisions of businesses and household to borrow and spend, as seen in Figure 1, providing a key channel for transmitting monetary policy to the real economy. 3. Explain the possible impacts of loose monetary policy on the value of the exchange rate and on economic growth in Australia The effect of an expansionary monetary policy is to lower the exchange rate, weaken the financial
τ = 34% can be used as a proxy for federal tax rate in the US). • The cost of debt RD should reﬂect the reality of the company. Each company knows its debt rate premium that they will have to pay for their debt, that is, it knows the spread over the treasury that lenders will require to lend
Financial Markets and Institutions, 8e (Mishkin) Chapter 2 Overview of the Financial System 2.1 Multiple Choice 1) Every financial market performs the following function: A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. Answer: D Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 2) Financial markets have the basic function of A) bringing together people with funds to lend and people who want to borrow funds.
Consider the differences between currency Futures and Forward contracts. When would Futures be used? When would forwards be used? A forward contract is tailor made for a client by his international bank. In contrast, a futures contract has standardized features and is exchange traded, that is, traded on organized exchanges rather than over the counter.
This is known as aggregate demand externalities. The staggering of prices Since prices are set by different people in the economy and at different times, adjusting of prices by firms in the economy is staggered. Staggering makes it difficult for firms to set prices since firms care about their prices relative to prices of other firms. If a firm sets a higher price relative to its competitors, it may lose some of its customers so the firms is forced to consider the competitor’s prices before it sets a new price. Staggering makes the overall level of prices to adjust slowly even when individual prices change frequently.
Marriott uses three inputs to determine the opportunity cost of capital: debt capacity, debt cost and equity cost consistent with the amount of debt. Calculating the WACC will be determined using the following four steps: 1) Calculate target levered beta, 2) Determine cost of debt, 3) Determine cost of equity and 4) Calculate WACC. The first step is to calculate the targeted levered beta, which is found by using the equity beta of Marriott from Exhibit 3 in the case. The tax rate was assumed to be 34% from our class discussion and the targeted debt-to-equity of 1.11 from Table A in the case. See “Appendix A” for calculations of targeted levered beta.