1) an example of a pure arbitrage strategy is to simultaneously buy and sell the same
security in two different markets at different prices.
2) credit unions are not taxed, as a result well-run credit unions are often able to charge
lower loan rates and pay slightly higher deposit rates than banks.
3) property loss risk is generally easier to estimate than liability loss risk.
4) the ongoing accumulation of foreign currency reserves by foreign monetary
authorities contributed to the dollar’s drop in 2006 .
5) euro commercial paper is a short-term obligation of the european central bank.
6) a loan sold without recourse generates a contingent liability for the selling bank.
7) which of the following bond types pays interest that is exempt from federal taxation?
a.municipal bonds
b.corporate bonds
c.treasury bonds
d.convertible bonds
e.both a) and c)
8) a bond that pays interest annually has a 6% promised yield and a price of $1025.
annual interest rates are now projected to fall 50 basis points. the bond’s duration is 6
years. what is the predicted new bond price after the interest rate change? (watch your
rounding.)
a.$1042.33
b.$995.99
c.$1054.01
d.$987.44
e.none of the above
9) employee plus employer contributions to a 401(k) are $11,000 per year. equity funds
are earning 10%, bond funds 5%, and money market funds 3%. the employee will retire
in 30 years. how much money will he have if he earns the average return from putting
65% of his money in equities, 30% in bond funds, and the rest in money market funds?
a.$1,280,925
b.$1,838,526
c.$1,654,320
d.$1,978,565
e.$1,248,550
10) a loan that finances a merger or acquisition that results in a high-leverage ratio for
the borrower is called a
a.correspondent loan
b.cmo
c.hlt loan
d.low-recourse loan
e.distressed loan
11) a country where the link between public pension benefits and amounts paid in is
weak is
a.sweden
b.italy
c.great britain
d.chile
e.france
12) the preliminary version of a security offer that is circulated to potential buyers
before sec approval (registration) is obtained is called a
a.final prospectus
b.shelf registration statement
c.due diligence draft
d.waiting period offer
e.red herring prospectus
13) figure 7-1
a homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0% with
zero points or at a rate of 5.5% with 2.25 points.
how long must the owner stay in the house to make it worthwhile to pay the points if
the payment saving is not invested?
a.7.15 years
b.3.33 years
c.6.04 years
d.5.90 years
e.more than 30 years
14) which of the following are potentially subject to risk-based capital requirements?
a.swaps and futures
b.swaps and forwards
c.forwards and futures
d.purchased option positions and futures
e.purchased option positions and swaps
15) which of the following statements are true?
i. catastrophe bonds may be used as a form of reinsurance.
ii. catastrophe bonds are structured so that if an insured event results in large losses for
an insurer, the bond’s required payments increase.
iii. buyers of catastrophe bonds benefit if the adverse event occurs.
iv. when issued, catastrophe bonds will have promised yields above the risk-free rate.
a.i and ii only
b.i and iv only
c.ii and iii only
d.ii and iv only
e.iii and iv only
16) chips and ach are
a.potato products of frito lay
b.check clearing systems run by the federal reserve
c.retail payment systems used in europe
d.international bank regulators
e.wholesale electronic payment systems
17) in 2009, the u.s. imported goods and services worth about _____________ and
exported about _________ leading to a current account ____________.
a.$2.4 trillion; $2.2 trillion; deficit
b.$2.2 trillion; $2.4 trillion; surplus
c.$2.4 trillion; $2.2 trillion; surplus
d.$2.2 trillion; $2.4 trillion; deficit
e.$2.0 trillion; $2.0 trillion; balance
18) a bank manager lends a corporate client $1,000,000 for six months. the bank
charges a $1,000 fee to set up the loan. the corporate borrower repays $1,050,000 in six
months. what is the effective annual rate on the loan?
a.5%
b.5.1%
c.10.25%
d.10.47%
e.none of the above
19) a bank has an average asset duration of 2.25 years, the average duration of the
liabilities is 1.25 years, and the bank has total assets of $2 billion and $200 million in
equity. the bank has an roe of 9.00%. if all interest rates decrease 50 basis points, the
predicted change in the bank’s market value of equity is ___________.
a.-2.85%
b.-3.55%
c.3.55%
d.2.85%
e.5.16%
20) which of the following results in a net liquidity drain?
a.demand deposits increase $100; loans increase $50
b.demand deposits decrease $100; loan repayments are $150
c.repurchase agreements increase $100; demand deposits decrease $50
d.reverse repurchase agreements increase $50; demand deposits decrease $50
e.none of the above
21) which one of the following statements about venture capitalists is not correct?
a.venture capitalists contribute to equity financing rather than make loans
b.venture capitalists are passive investors
c.most private venture capitalists are organized as limited partnerships
d.the federal government licenses some private firms to provide lower cost funds to
entrepreneurs
e.angel venture capitalists are wealthy individuals who fund business startups
22) what are the four major functions of the federal reserve system?
23) you have the following data for a bank (million $):
calculate the net funding requirement for each period and the cumulative net funding
requirement over the month. what does the plan reveal?
24) how do the primary risks of credit unions differ from banks? from savings
institutions (sis)? from finance companies?
25) why do many mutual funds now offer three different classes of shares? what are the
differences and what should you consider in choosing the classes?
26)
suppose you borrow $15,000 and then repay the loan by making 12 monthly payments
of $1,297.92 each. what rate will you be quoted on the loan? what is the effective
annual rate you are paying?
27) look at the following simplified bank balance sheet. assume that the bank has no
off-balance-sheet commitments.
using the three capital adequacy ratios, determine if the bank is well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, or critically
undercapitalized.
28) explain how the kmv model predicts bankruptcy probability.
29) explain the market segmentation theory of the term structure.
30) an investor is holding a $1,000 par, 10-year 9% coupon convertible bond with a 9%
required bond yield. the bond is convertible into 40 shares of stock. each share is worth
$30. the bond has a current market value of $1,200. if interest rates don’t change what is
the maximum gain and loss on the bond?
31) the one-year spot rate is currently 4%; the one-year spot rate one year from now
will be 3%; and the one-year spot rate two years from now will be 6%. under the
unbiased expectations theory, what must today’s three-year spot rate be? suppose the
three-year spot rate is actually 3.75%, how could you take advantage of this? explain.