Capital Market

FINC 3321: Capital Markets
Case :2 – Managerial Report (due 11/7/21)
Instructor: Dr. Nazif Durmaz
Case Study Instructions :
Use 12-point Times New Roman font. Do not exceed 4 pages in length. The bulk of your grade will be based on
your ability to perform the requested analyses and provide an accurate interpretation.
You should attempt to provide a balanced approach to the issue by considering alternative views. Accepted economic
principles, theory and facts, not opinion, should be the basis for your arguments. Remember, in thinking about economic
questions, we must distinguish questions of fact from questions of fairness. Questions involving ethical precepts and
norms of fairness can only be resolved thorough political debate. I want positive economic arguments that come
from analysis and empirical evidence, not normative economic arguments based on ethics or societal norms. Society
determines the optimal mix – not economists.
Questions
1. Can you think of a reason why people in general do not lend money to one another to buy a house or a car ?
How would your answer explain the existence of banks ?
2. Some economists suspect that one of the reasons economies in developing countries grow so slowly is that they
do not have well-developed financial markets. Does this argument make sense ?
3. Financial regulation is similar, but not exactly the same, in industrialized countries. Discuss why it might be
desirable—or undesirable—to have the same financial regulation across industrialized countries.
4. If mortgage rates rise from 5% to 10%, but the expected rate of increase in housing prices rises from 2% to 9%,
are people more or less likely to buy houses ?
5. An important way in which the Federal Reserve decreases the money supply is by selling bonds to the public.
Using a supply and demand analysis for bonds, show what effect this action has on interest rates. Is your answer
consistent with what you would expect to find with the liquidity preference framework ?
6. Go to the St. Louis Federal Reserve FRED database and find data on net corporate dividend payments
(B056RC1A027NBEA). Adjust the units setting to “Percent Change from Year Ago,” and download the data
into a spreadsheet.
a. Calculate the average annual growth rate of dividends from 1960 to the most recent year of data available.
b. Find data on the Dow Jones Industrial Average (DJIA) for the most recent day of data available. Suppose
that a $100 dividend is paid out at the end of next year. Use the Gordon growth model and your answer to part
(a) to calculate the rate of return that would be required for equity investment over the next year, assuming
you could buy a share of DJIA.
7. Which relationship would you expect to exist between measures of corruption and living standards at the
country level ? Explain by which channel corruption might affect living standards.
8. Would you recommend the adoption of a system of deposit insurance, like the FDIC in the United States, in a
country with weak institutions, prevalent corruption, and ineffective regulation of the financial sector ?
9. Why have banks been losing cost advantages in acquiring funds in recent years ?
10. Define “financial frictions” in your own terms and explain why an increase in financial frictions is a key element
in financial crises.
11. If the British central bank lowers interest rates to reduce unemployment, what will happen to the value of the
pound in the short run and in the long run ?
12. Under the gold standard, if Britain became more productive relative to the United States, what would happen
to the money supply in the two countries ? Why would the changes in the money supply help preserve a fixed
exchange rate between the United States and Britain ?
1