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European Financial Markets and Institutions

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					European Financial Markets and Institutions
                                                             J. de Haan, S. Oosterloo and D. Schoenmaker


                                      Exercises for Chapter 3
                                    European Financial Markets


1. Explain the role of credit rating agencies in financial markets.


2. What is the difference between quote driven and order driven markets?


3. The most important money market segments are the unsecured deposit markets (with various
   maturity, ranging from overnight to 1 year), and the secured repo markets (often called repos) with
   maturities also ranging from overnight to 1 year. Explain the main differences between both segments
   in terms of risk and return.

4. On January 15, 2009, the European Central Bank issues the following press release: "At today’s
   meeting the Governing Council of the ECB took the following monetary policy decisions: The
   interest rate on the main refinancing operations of the Eurosystem will be decreased by 50 basis
   points to 2.00%, starting from the operation to be settled on 21 January 2009. The interest rate on the
   marginal lending facility will be set at 3.00%, with effect from 21 January 2009. The interest rate on
   the deposit facility will be set at 1.00%, with effect from 21 January 2009."
       a. What are main refinancing operations?
       b. What is the difference between the marginal lending facility and the deposit facility?
       c. Why are the rates on these facilities different?

5. Interest rates on bonds are affected by the term premium, credit risk, and liquidity risk. Explain how.

6. Explain why the following statement is wrong: When an investor buys stock in a company, he helps
   financing this company.
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