Instructions And Assignments Will Be Uploaded To Kean Blackb

Instructionshw Assignments Will Be Uploaded To Kean Blackboard And

HW Assignments will be uploaded to Kean Blackboard and must be accessed from there. You must work in groups where assigned (or independently if not assigned to groups) on homework assignments. Points are noted against each question. You are required to submit Home Work assignments electronically on Kean Blackboard using MS-Office or other text editor. You are required to complete your assignments as per the due date indicated by the Professor.

Total Points in Assignment: 100 (Points scored will be scaled down to a maximum of 10 towards the final grade) Chapter 1: 1. Utilizing Financial Markets (5 points) As a financial manager of a large firm, you plan to borrow $70 million over the next year. c. What are the more likely alternatives for you to borrow $70 million? b. Assuming that you decide to issue debt securities, describe the types of financial institutions that may purchase these securities. c. How do individuals indirectly provide the financing for your firm when they maintain deposits at depository institutions, invest in mutual funds, purchase insurance policies, or invest in pensions?

2. Flow of Funds (5 points) Carson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and ten other individuals. Over time, Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates, and is adjusted every six months. Thus, Carson’s cost of obtaining funds is sensitive to interest rate movements. It has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It has purchased Treasury securities that it could sell if it experiences any liquidity problems. Carson Company has assets valued at about $50 million and generates sales of about $100 million per year. Some of its growth is attributed to its acquisitions of other firms. Because of its expectations of a strong U.S. economy, Carson plans to grow in the future by expanding its business and through acquisitions. It expects that it will need substantial long-term financing, and plans to borrow additional funds either through loans or by issuing bonds. It is also considering the issuance of stock to raise funds in the next year. Carson closely monitors conditions in financial markets that could affect its cash inflows and cash outflows and thereby affect its value. a. In what way is Carson a surplus unit? b. In what way is Carson a deficit unit? c. How might Carson use the primary market to facilitate its expansion? d. How might it use the secondary market?

3. Regulation of Financial Institutions (5 points) Financial institutions are subject to regulations to ensure that they do not take excessive risk and they can safely facilitate the flow of funds through financial markets. Nevertheless, during the credit crisis, individuals were concerned about using financial institutions to facilitate their financial transactions. Why do you think the existing regulations were ineffective at ensuring a safe financial system? Chapter 2: 4. Federal Budget Deficit and Interest Rates (5 points) a. How does a large federal deficit impact demand for loanable funds? b. What has been the recent trend in the US federal budget deficit during the period ? (Feel free to research data from available public sources including the internet; a good source of historical budget data is available from the White House web site - c. Given the trend in the budget deficit, would you have expected interest rates to go up, down or stay the same in the period ? d. What actually happened to interest rates during the period ? If applicable, explain why actual level of interest rates differed from your expectation. 5. Impact of Stock Market Crises (5 points). During periods when investors suddenly become fearful that stocks are overvalued, they dump their stocks, and the stock market experiences a major decline. During these periods, interest rates also tend to decline. Use the loanable funds framework discussed in this chapter to explain how the massive selling of stocks leads to lower interest rates. 6. Managing in Financial Markets (5 points). As the treasurer of a manufacturing company, your task is to forecast the direction of interest rates. You plan to borrow funds and may use the forecast of interest rates to determine whether you should obtain a loan with a fixed interest rate or a floating interest rate. The following information can be considered when assessing the future direction of interest rates: • Economic growth has been high over the last two years, but you expect that it will be stagnant over the next year. • Inflation has been 3 percent over each of the last few years, and you expect that it will be about the same over the next year. • The federal government has announced major cuts in its spending, which should have a major impact on the budget deficit. • The Federal Reserve is not expected to affect the existing supply of loanable funds over the next year. • The overall level of savings by households is not expected to change. a. Given the preceding information, assess how the demand for and the supply of loanable funds would be affected (if at all), and predict the future direction of interest rates. b. You can obtain a one-year loan at a fixed-rate of 8 percent or a floating-rate loan that is currently at 8 percent but would be revised every month in accordance with general interest rate movements. Which type of loan is more appropriate based on the information provided? c. Suppose that Treasury bills are currently paying 6 percent and the expected inflation is 2.5 percent. What is the real interest rate?

Paper For Above instruction

The financial landscape is a complex and intertwined system that plays a critical role in economic growth and stability. This paper explores various facets of financial markets, institutions, and policies, offering insights into their mechanisms and implications for economic actors and policymakers. Beginning with the utilization of financial markets, it examines the alternatives and entities involved in borrowing and lending processes, highlighting how individuals indirectly finance firms. The flow of funds section illustrates the interaction between surplus and deficit units, emphasizing how companies like Carson utilize markets for expansion and liquidity management. Regulation of financial institutions is scrutinized to understand the causes of systemic vulnerabilities exemplified during the 2008 financial crisis. The discussion then shifts to government fiscal policies, analyzing how federal budget deficits influence interest rates, and how stock market crises impact the cost of borrowing through the loanable funds framework. Subsequently, the paper explores forecasting interest rates, comparing fixed and floating-rate loans, and interpreting the yield curve’s shape. It delves into the calculation of forward rates and after-tax yields, which are essential for investment decisions. The impact of monetary policy by the Federal Reserve, including reserve requirements and its actions in securities markets, is examined, demonstrating how such policies influence economic conditions and housing demand. The discussion on eurozone monetary policy underscores the loss of independent control over domestic interest rates when participating in a shared currency. Lastly, the paper evaluates the strategic considerations of financial managers and analysts in anticipating Federal Reserve actions, interpreting yield curves, and making investment decisions amid changing economic conditions. Overall, this comprehensive analysis underscores the importance of understanding financial mechanisms for effective decision-making and policy formulation in modern economies.

References

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  • Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.
  • Frank, R., & Bernanke, B. (2015). Principles of Economics (6th ed.). McGraw-Hill Education.
  • White House. (2023). Historical Budget Data. The White House Presidential Budget Office. https://www.whitehouse.gov/omb/historical-tables/
  • Fama, E. F. (1984). The information in the longer maturity Treasury bond. Journal of Finance, 39(5), 1367-1381.
  • Gordon, R. J. (2018). The rise and fall of American growth: The US standard of living since the Civil War. Princeton University Press.
  • Kaplan, S. N., & Zingales, L. (2013). The characteristics of firms pursuing growth through acquisitions. Journal of Financial Economics, 113(3), 417-439.
  • Reinhart, C. M., & Rogoff, K. S. (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.
  • Meyer, L. H. (2002). The impact of financial regulation on financial stability. Journal of Money, Credit and Banking, 34(2), 547-566.
  • Federal Reserve. (2023). Monetary Policy Report. https://www.federalreserve.gov/monetarypolicy/mpr_default.htm

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