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Moralhazard:Theriskthatonepartytoatransactionwillengageinbehaviorthatisundesirablefromtheotherparty’spointofview.Yieldtomaturity:Theinlerestratethatequatesthepresentvalueofpaymentsreceivedfromacreditmarketinstrumentwithitsvaluetoday.Optioncontracts:Contractsthatgivethepurchasertheoptiontobuyorselltheunderlyingfinancialinstrumentataspecifiedprice,calledtheexercisepriceorstrikeprice,withinaspecificperiodoftime.Capitalmarket:Afinancialmarketinwhichlonger-termdebt(maturityofgreaterthanoneyear)andequityinstrumentsaretraded.Ifthereisadcclincininterestrates,whichwouldyouratherbeholding,long-termbondsorshort-termbonds?Why?Whichtypeofbondhasthegreaterintcrest-ratcrisk?Youwouldratherbeholdinglong-termbondsbecausetheirpricewouldincreasemorethanthepriceoftheshorl-termbonds,givingthemahigherreturn.Whateffectwillasuddenincreaseinthevolatilityofgoldpriceshaveoninterestrates?Inlerestrateswouldrise.Asuddenincreaseinpeople’sexpectationsoffuturerealestatepricesraisestheexpectedreturnonrealestaterelativetobonds,sothedemandforbondsfalls.ThedemandcurveBdshiftstotheleft,andtheequilibriuminterestraterises.Whatcharacteristicsdefinethemoneymarkets?Themoneymarketscanbecharacterizedashavingsecuritiesthattradeinoneyearorless,areoflargedenomination,andareveryliquid.1.Whyarefinancemarketsimportanttothehealthoftheeconomy?Becausetheychannelfundsfromthosewhodonothaveaproductiveuseforthemtothosewhodo,therebyresultinginhighereconomicefficiency.2.Wheninterestraterise,howmightbusinessesandconsumerschangetheireconomicbehavior?Businesseswouldcutinvestmentspendingbecausethecostoffinancingthisspendingisnowhigher,andconsumerswouldbelesslikelytopurchaseahouseoracarbecausethecostoffinancingtheirpurchaseishigher.3.Howcanachangeininterestratesaffecttheprofitabilityoffinancialinstitutions?Achangeininterestratesaffectsthecostofacquiringfundsforfinancialinstitutionsaswellaschangestheincomeonassetssuchasloans,bothofwhichaffectprofits.Inaddition,changesininterestratesaffectthepriceofassetssuchasstockandbondsthatthefinancialinstitutionownswhichcanleadtoprofitsorlosses.4.Iseverybodyworseoffwheninterestratesrise?No.Peoplewhoborrowtopurchaseahouseoracarareworseoffbecauseitcoststhemmoretofinancetheirpurchase;however,saversbenefitbecausetheycanearnhigherinterestratesontheirsavings.5.Whateffectmightafallinstockpriceshaveonbusinessinvestment?Thelowerpriceforafirm’ssharesmeansthatitcanraiseasmalleramountoffunds,andsoinvestmentinplantandequipmentwillfall.6.Whateffectmightariseinstockpriceshaveonconsumers’decisionstospend?Higherstockpricesmeanthatconsumers’wealthishigherandsotheywillbemorelikelytoincreasetheirspending.7.HowdoesadeclineinthevalueofthepoundsterlingaffectBritishconsumers?ItmakesforeigngoodsmoreexpensiveandsoBritishconsumerswillbuylessforeigngoodsandmoredomestic8.HowdoesadeclineinthevalueofthepoundsterlingaffectAmericanbusinesses?ItmakesBritishgoodsmoreexpensiverelativetoAmericangoods.AmericabusinesseswillfinditeasiertoselltheirgoodsintheUnitedStatesandabroad,andthedemandfortheirproductswillrise.9.Howcanchangesinforeignexchangeratesaffecttheprofitabilityoffinancialinstitutions?Changesinforeignexchangerateschangethevalueofassetsheldbyfinancialandthusleadtogainsandlossesontheseassets.Alsochangesinforeignexchangeratesaffecttheprofitsmadebytradersinforeignexchangewhoworkforfinancialinstitutions.10.LookingatFigure3.inwhatyearswouldyouhavechoscntovisittheGrandCanyoninArizonaratherthantheTowerofLondon?Inthemid-tolate1970sandthelate1980sandearly1990s,thevalueofthedollarwaslow,makingtravelabroadrelativelymoreexpensive;thatwouldhavebeenagoodlimetovacationintheUnitedStatesandseetheGrandCanyon.AsthedolUu.，svalueroseintheearly1980s,travelabroadbecamerelativelycheaper,makingitagoodtimetovisittheTowerofLondon.11.Whatisthebasicactivityofbanks?Banksacceptdepositsandthenusetheresultingfundstomakeloans.12.Whataretheotherimportantfinancialintermediariesintheeconomybesidesbanks?Savingsandloanassociations,mutualsavingsbanks,creditunions,insurancecompanies,mutualfunds,pensionfunds，andfinancecompanies.13.Canyouthinkofanyfinancialinnovationinthepasttenyearsthatliasaffectedyoupersonally?Hasitmadeyoubetterorworseoff?Inwhatway?Answerswillvary.14.Whattypesofrisksdofinancialinstitutionsfacc?Theprofitabilityoffinancialinstitutionsisaffectedbychangesininterestrates,stockprices,andforeignexchangerates;fluctuationsinthesevariablesexposetheseinstitutionstorisk.15.WhydomanagersoffinancialinstitutionscaresomuchabouttheactivitiesoftheFederalReserveSystem?BecausetheFederalReserveaffectsinterestrates,inflation,andbusinesscycles,allofwhichhaveanimporlantimpactontheprofitabilityoffinancialinstitutions.1.WhyisashareofIBMcommonstockanassetforitsownerandaliabilityforIBM?TheshareofIBMstockisanassetforitsownerbecauseitentitlestheownertoashareoftheearningsandassetsofIBM.TheshareisaliabilityforIBMbccauscitisaclaimonitsearningsandassetsbytheowneroftheshare.2.IFIcanbuyacartodayfor$5000anditisworth$10000nextyearinextraincomctomebccauscitenablesmetogetajobasatravelinganvilseller,shouldItakeoutaloanfromLarryt