Financial Institutions

4749 Words Dec 8th, 2010 19 Pages
International Technological University
FINN 918 Financial Institutions
Final Exam: Answers Textbook: Foundations of Financial Markets and Institutions, 4th Edition, Fabozzi, Modigliani, and Jones, Prentice Hall, 2010, | ISBN –13: 978-0-13613531-9 | ISBN –10: 0-13-613531-5 |

1. Indicate whether each of the following instruments trades in the money market or the capital market: a. General Motors Acceptance Corporation issues a financial instrument with four months to maturity. b. The U.S. Treasury issues a security with 10 years to maturity. c. Microsoft Corporation issues common stock. d. The State of Alaska issues a financial instrument with eight months to maturity. e. GMAC issue trades in the money
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It also prohibited banks from engaging in insurance activities.

Chapter 4
1. What is the role of a central bank? The role of a central bank has several functions: risk assessment, risk reduction, oversight of payment systems, and crisis management. It can do this through monetary policies, and through the implementation of regulations. 2. Why is it argued that a central bank should be independent of the government?

Central banks should be independent of the short-term political interests and political influences generally in setting economic policies. 3. What is the discount rate, and to what type of action by a bank does it apply?

The discount rate is the rate a bank pays to borrow at the “discount window” of the Fed. Such borrowings are often undertaken to meet temporary liquidity needs. Bank needs are monitored and the Fed likes to state that borrowing from it is a “privilege and not a right.” 4. a. What is an open market purchase by the Fed? b. Which unit of the Fed decides on open market policy, and what unit implements that policy? c. What is the immediate consequence of an open market purchase?

a. An open market purchase by the Fed consists of the purchase of U.S. Treasury securities. b. The FOMC decides on open market policy and directs the Federal Reserve Bank of New York to implement it through sales and purchases of these
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