Assignments # 5, week 5 Chapter 8 Question # 1, 2, 7, 8, and 9. 1. Bond Investment Decision Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain. 2. How Interest Rates Affect Bond Prices Explain the impact of a decline in interest rates on: a. An investor’s required rate of return. b. The present value of existing bonds. c. The prices of existing bonds. 7. Coupon Rates If a bond’s coupon rate were above its required rate of return, would its price be above or below its par value? Explain. 8. Bond Price Sensitivity Is the price of a longterm bond more or less sensitive to a change in interest rates than to the price of a short-term security? Why? 9. Required Return on Bonds Why does the required rate of return for a particular bond change over time? Assignment 6 Chapter 9 Question #s 2, 3, 4, 10, 11, 12, 16, 22. 2. Mortgage Rates and Risk What is the general relationship between mortgage rates and long-term government security rates? Explain how mortgage lenders can be affected by interest rate movements. Also explain how they can insulate against interest rate movements. 3. ARMs How does the initial rate on adjustable-rate mortgages (ARMs) differ from the rate on fixed-rate mortgages? Why? Explain how caps on ARMs can affect a financial institution’s exposure to interest rate risk. 4. Mortgage Maturities Why is the 15-year mortgage attractive to homeowners? Is the interest rate risk to the financial institution higher for a 15-year or a 30-year mortgage? Why? 10. Exposure to Interest Rate Movements Mortgage lenders with fixed-rate mortgages should benefit when interest rates decline, yet research has shown that this favorable impact is dampened. By what? 11. Mortgage Valuation Describe the factors that affect mortgage prices. 12. Selling Mortgages Explain why some financial institutions prefer to sell the mortgages they originate. 16. Mortgage-Backed Securities Describe how mortgage-backed securities (MBS) are used. 22. Subprime versus Prime Mortgage Problems How did the repayment of subprime mortgages compare to that of prime mortgages during the credit crisis? dq board is not up week 9 assingments Chapter 13 #1, 2, 3, 4, 7, 12, 14,16,17, and 19 1. Futures Contracts Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts? 2. Futures Pricing How does the price of a financial futures contract change as the market price of the security it represents changes? Why? 3. Hedging with Futures Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk. 4. Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain. 7. Hedging with Futures Assume a financial institution has more rate-sensitive assets than rate-sensitive liabilities. Would it be more likely to be adversely affected by an incr ...

1. Assignments # 5, week 5
Chapter 8 Question # 1, 2, 7, 8, and 9.
1. Bond Investment Decision Based on your forecast of interest
rates, would you recommend that investors purchase bonds
today? Explain.
2. How Interest Rates Affect Bond Prices Explain the impact of
a decline in interest rates on:
a. An investor’s required rate of return.
b. The present value of existing bonds.
c. The prices of existing bonds.
7. Coupon Rates If a bond’s coupon rate were above its required
rate of return, would its price be above or
below its par value? Explain.
8. Bond Price Sensitivity Is the price of a longterm bond more
or less sensitive to a change in interest
rates than to the price of a short-term security? Why?
9. Required Return on Bonds Why does the required rate of
return for a particular bond change
over time?
Assignment 6
Chapter 9 Question #s 2, 3, 4, 10, 11, 12, 16, 22.
2. Mortgage Rates and Risk What is the general relationship
between mortgage rates and long-term
government security rates? Explain how mortgage lenders can
be affected by interest rate movements.
Also explain how they can insulate against interest rate
movements.
3. ARMs How does the initial rate on adjustable-rate mortgages
(ARMs) differ from the rate on fixed-rate
mortgages? Why? Explain how caps on ARMs can affect a
financial institution’s exposure to interest
rate risk.
4. Mortgage Maturities Why is the 15-year mortgage attractive
to homeowners? Is the interest rate

2. risk to the financial institution higher for a 15-year or a 30-year
mortgage? Why?
10. Exposure to Interest Rate Movements Mortgage lenders with
fixed-rate mortgages should
benefit when interest rates decline, yet research has shown that
this favorable impact is dampened.
By what?
11. Mortgage Valuation Describe the factors that affect
mortgage prices.
12. Selling Mortgages Explain why some financial institutions
prefer to sell the mortgages they originate.
16. Mortgage-Backed Securities Describe how mortgage-backed
securities (MBS) are used.
22. Subprime versus Prime Mortgage Problems How did the
repayment of subprime mortgages
compare to that of prime mortgages during the credit crisis?
dq board is not up
week 9 assingments
Chapter 13 #1, 2, 3, 4, 7, 12, 14,16,17, and 19
1. Futures Contracts Describe the general characteristics of a
futures contract. How does a clearinghouse
facilitate the trading of financial futures contracts?
2. Futures Pricing How does the price of a financial futures
contract change as the market price
of the security it represents changes? Why?
3. Hedging with Futures Explain why some futures contracts
may be more suitable than others
for hedging exposure to interest rate risk.
4. Treasury Bond Futures Will speculators buy or sell Treasury
bond futures contracts if they expect
interest rates to increase? Explain.
7. Hedging with Futures Assume a financial institution has more
rate-sensitive assets than
rate-sensitive liabilities. Would it be more likely to be
adversely affected by an increase or a decrease in

3. interest rates? Should it purchase or sell interest rate futures
contracts in order to hedge its exposure?
12. Cross-Hedging Describe the act of cross-hedging.
What determines the effectiveness of a cross-hedge?
14. Stock Index Futures Describe stock index futures. How
could they be used by a financial institution that is anticipating
a jump in stock prices but does not yet have sufficient funds to
purchase large amounts of stock? Explain why stock index
futures may reflect investor expectations about the market more
quickly than stock prices.
16. Systemic Risk Explain systemic risk as it relates to the
futures market. Explain how the Financial Reform Act of 2010
attempts to monitor systemic risk in the futures market and
other markets.
17. Circuit Breakers Explain the use of circuit breakers.
19. Hedging Decision Blue Devil Savings and Loan Association
has a large number of 10-year fixed-rate
mortgages and obtains most of its funds from shortterm
deposits. It uses the yield curve to assess the market’s
anticipation of future interest rates. It believes that expectations
of future interest rates are the major force affecting the yield
curve. Assume that an upward-sloping yield curve with a steep
slope exists. Based on this information, should Blue Devil
consider using financial futures as a hedging technique?
Explain.
Chapter 14 #1, 2, 4, 5, 7, 8, 10, 11, 13, and 16
1. Options versus Futures Describe the general differences
between a call option and a futures contract.
2. Speculating with Call Options How are call options used by
speculators? Describe the conditions under which their strategy
would backfire. What is the maximum loss that could occur for
a purchaser of a call option?
3. Speculating with Put Options How are put options used by
speculators? Describe the conditions under which their strategy
would backfire. What is the maximum loss that could occur for
a purchaser of a

4. put option?
4. Selling Options Under what conditions would speculators sell
a call option? What is the risk to speculators who sell put
options?
5. Factors Affecting Call Option Premiums Identify the factors
affecting the premium paid on a
call option. Describe how each factor affects the size of the
premium.
7. Leverage of Options How can financial institutions with
stock portfolios use stock options when they expect stock prices
to rise substantially but do not yet have
8. Hedging with Put Options Why would a financial institution
holding the stock of Hinton Co. consider buying a put option on
that stock rather than simply selling it?
10. Put Options on Futures Describe a put option on interest
rate futures. How does it differ from selling
a futures contract?
11. Hedging Interest Rate Risk Assume a savings institution has
a large amount of fixed-rate mortgages
and obtains most of its funds from short-term deposits. How
could it use options on financial futures to hedge its exposure to
interest rate movements?
Would futures or options on futures be more appropriate if the
institution is concerned that interest rates will decline, causing
a large number of mortgage prepayments?
13. Change in Stock Option Premiums Explain how and why the
option premiums may change inresponse to a surprise
announcement that the Fed will increase interest rates, even if
stock prices are not affected.
16. Backdating Stock Options Explain what backdating stock
options entails. Is backdating consistent with rewarding
executives who help to maximize shareholder wealth?
ACCT504 Sample Case Study 3 on Cash Budgeting

5. Solution
It is recommended that you share this solution file in Doc
Sharing by the end of Week 5 with your students.
The Cambridge Company has budgeted sales revenues as
follows.
Jan Feb Mar
Credit sales$45,000$36,000$27,000
Cash sales 27,000 76,500 58,500
Total sales$72,000$112,500$85,500
Past experience indicates that 60% of the credit sales will be
collected in the month of sale and the remaining 40% will be
collected in the following month.
Purchases of inventory are all on credit and 40% is paid in the
month of purchase and 60% in the month following purchase.
Budgeted inventory purchases are $97,500 in January, $67,500
in February, and $31,500 in March.

6. Other budgeted cash receipts: (a) sale of plant assets for
$18,525 in February, and (b) sale of new common stock for
$25,275 in March. Other budgeted cash disbursements: (a)
operating expenses of $10,125 each month, (b) selling and
administrative expenses of $18,750 each month, (c) dividends of
$28,500 will be paid in February, and (d) purchase of equipment
for $9,000 cash in March.
The company has a cash balance of $15,000 at the beginning of
February and wishes to maintain a minimum cash balance of
$15,000 at the end of each month. An open line of credit is
available at the bank and carries an annual interest rate of 12%.
Assume that all borrowing is done on the first day of the month
in which financing is needed and that all repayments are made
on the last day of the month in which excess cash is available.
Also assume that there is no outstanding financing as of
February 1.
Requirements:
1. Use this information to prepare a cash budget for the months
of February and March using the template provided in Doc
Sharing.

7. ACCT 504 Sample Case Study 3 On Cash Budgeting