FBE 525



FBE 524 - Final Examination – Due December 8, 2003

J. K. Dietrich

Write your name in a bluebook or on lined 8.5x11” paper stapled together and answer the following questions. You may type your answers but limit their length to approximately two-thirds to one page of double-spaced type (with normal margins and font size). Answer all five questions: they are equally weighted (20 points each) and cover the material discussed in class throughout the semester. While there is no way to enforce a time limit, the examination is intended to be a two-hour examination. I will not reward longer answers and value good organization and clear writing much more than many pages of words. Think about the question before answering and address each of the points raised using the analytical structure and concepts covered in class. The exam is due on December 8, 2003, at the FBE office (7th floor of Hoffman Hall) or emailed to me at kdietrich@marshall.usc.edu. Please append a cover sheet with your statement that you did not collaborate with anyone and provide the approximate amount of time you spent on the examination (in minutes).

1. The following quotations are for U.S. Treasuries on December 1, 2003 (from the Wall Street Journal):

Maturity Ask

Rate Mo/Yr Bid Asked Chg Yield

4.250 Aug 13n 99:00 99:01 –16 4.37

12.00 Aug 13 137:12 137:13 –15 3.34

a. What are the durations for these two bonds (assume maturity equals 10 years)? Provide all calculations. Which is riskier and in what sense is it riskier?

b. How do you explain the differences in these two durations since the bonds mature on the same date?

c. What could explain the differences in these bonds yields to maturity? (Be explicit)

2. Monetary policy is set by the Federal Open Market Committee (FOMC). Recently there has been a great deal of discussion on how much information the FOMC should reveal to market participants about its deliberations (see, for example, “Rating a Mention: Fed’s Big Questions: Not What to Do, But What to Say”, Wall Street Journal¸ October 27, 2003, p.A1). Why are Fed officials worried about its communications to the market? How and when does the FOMC reveal details on its monetary-policy deliberations to the public? In the light of FOMC’s past policies, assess the significance of the FOMC’s inclusion of the phrase “considerable period” in its August press release. What range of opinions exists concerning the FOMC’s disclosure policies?

3. The unsecured consumer debt market has grown in recent years. In what form has this debt grown, how is it financed, and how are these developments similar or different from those in the home mortgage market? What is the economic significance of the development an unsecured consumer debt market and is this economically good or bad? What are the links between the institutional investor market and the consumer debt market (be explicit)?

4. Since the beginning of this course (August 22, 2003) until last Friday (November 28, 2002), 20-year U.S. Treasury bond yields fallen from 5.37% to 5.20%, Aaa corporate bond yields from 5.85% to 5.64% and Baa corporate bond yields from 6.97% to 6.67% (Federal Reserve selected H15 releases). Relate these changes to default risk expectations in terms of the various components of expected losses from corporate defaults. Relate these changes to perceptions concerning economic conditions important for business.

5. Equity markets and shareholder activism are highly developed in the United States and a few other countries (like England) but less so in European markets. What are the major differences between Anglo-Saxon capitalism and the Continental financial system? What are the advantages and disadvantages of each system? Does there appear to be an economically better and/or more efficient system and, if so, what makes it better and/or more efficient?

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