1) for securities firms, income from investment management is more stable than income
from underwriting or trading activities.
2) buying large blocks of securities and holding them until the price rises sufficiently to
warrant a sale is an example of pure arbitrage.
3) because of the differences in the makeup of their major loan types, finance
companies typically have shorter-term loans than banks.
4) the mcfadden act grants states the primary right to regulate insurance companies.
5) in a futures contract, if funds in the margin account fall below the maintenance
margin requirement, a margin call is issued.
6) if the stock markets are semi-strong efficient, stock prices reflect all historic and
current public information about a firm but prices do not reflect inside information.
7) a ten-year maturity zero coupon bond will have lower price volatility than a ten-year
bond with a 10% coupon.
8) closed-end mutual funds have less need to maintain liquid asset holdings than
open-end mutual funds.
9) on a fixed-rate mortgage the dollars of interest the homeowner pays falls each year
the mortgage is outstanding.
10) if a foreign currency appreciates, that country’s goods and services become
relatively more expensive for u.s. buyers.
11) if you are terminated before you are fully vested in an employer-sponsored plan you
may not get to keep previous contributions to your pension made by your employer.
12) you would expect the price quote for a put option to be at least $10 if the put had an
exercise price of $40 and the underlying stock was selling for $50.
13) rate sensitive funding sources at a bank are termed core deposits.
14) an investor has unrealized gains in 100 shares of amazin stock upon which they do
not wish to pay taxes. however, they are now bearish upon the stock for the short term.
the stock is at $76 and he buys a put with a strike of $75 for $300. at expiration the
stock is at $68. what is the net gain or loss on the entire stock/option portfolio?
a.$700
b.-$800
c.-$400
d.-$200
e.-$100
15) equity capital at commercial banks in 2010 comprised about ____________ of
liabilities and equity.
a.25%
b.21%
c.55%
d.11%
e.5%
16) a bank has a negative duration gap. interest rates decline. which one of the
following best describes the effects of the interest rate change?
a.the bank’s market value of equity is unchanged since the market value of its assets and
liabilities move in the same direction
b.the bank’s market value of equity goes up because the market value of its assets goes
up by more than the market value of its liabilities goes down
c.the bank’s market value of equity goes down because the market value of its assets
goes up by more than the market value of its liabilities goes down
d.the bank’s market value of equity goes down because the market value of its assets
goes down by more than the market value of its liabilities goes down
e.the bank’s market value of equity goes down because the market value of its liabilities
increases by more than the market value of its assets increases
17) advantages of loan sales and securitization typically include all but which one of the
following?
a.reduction in credit risk
b.reduction in interest rate risk
c.increase in liquidity of the balance sheet
d.reduction in regulatory tax burden
e.increase in net interest income
18) a nave hedge is one
a.where the hedger is not fully informed
b.where the hedger attempts to eliminate all of the risk of the underlying spot position
c.where the hedger uses microhedges rather than macrohedges to limit risk
d.where the hedger unwittingly increases the risk of the fi’s position
e.that does not have to be reported on the fi’s financial statements
19) figure 20-1
gds cutoff: 30%
tds cutoff: 35%
using only the gds criteria, which one of the following statements is true?
a.joe gets the loan but not bill
b.bill gets the loan but not joe
c.both get the loan
d.neither gets the loan
20) an individual is considering contributing $4,000 per year to either a traditional or a
roth ira. payments would begin in one year. if she uses the traditional ira, her
contributions would be fully deductible. she is 40 years old and is in a 28% tax bracket.
on either ira she can earn 7%. when she retires at age 65 she believes she will be in a
15% tax bracket. which type of ira should she choose if she invests not only the $4,000
per year, but any tax savings due to the deductibility of her contributions in a taxable
investment earning a pretax rate of 7%? she will withdraw all her money upon
retirement and may owe taxes then, depending on the type of ira chosen.
21) _____________ are the most diversified of depository institutions and
______________ are on average the largest depository institutions.
a.banks; savings institutions
b.credit unions; banks
c.credit unions; credit unions
d.banks; banks
e.savings institutions; banks
22) a bank has a positive repricing gap and estimates that the spread between rsas and
rsls will move directly with interest rates. if interest rates fall, the bank’s overall nii will
a.rise
b.fall
c.be unchanged
d.rise or fall depending on the size of the spread effect relative to the size of the cgap
effect
23) a current account deficit implies that
a.more goods and services are exported than are imported
b.the country borrowed from abroad more than it loaned, and/or sold off some of its
assets
c.there is excessive consumption of foreign financial assets
d.the value of the dollar will rise
e.the country is going bankrupt
24) a bank has an interest rate spread of 150 basis points on $30 million in earning
assets funded by interest bearing liabilities. however, the interest rate on its assets is
fixed and the interest rate on its liabilities is variable. if all interest rates go up 50 basis
points, the bank’s new pre-tax net interest income will be __________.
a.$600,000
b.$450,000
c.$300,000
d.$250,000
e.$175,000
25) a treasury security in which periodic coupon interest payments can be separated
from each other and from the principal payment is called a
a.strip
b.t-note
c.t-bond
d.g.o. bond
e.revenue bond
26) a homeowner could take out a 15-year mortgage at a 5.5% annual rate on a
$195,000 mortgage amount, or she could finance the purchase with a 30-year mortgage
at a 6.1% annual rate. how much total interest over the entire mortgage period could she
save by financing her home with the 15-year mortgage (to the nearest dollar)?
a.$230,408
b.$190,105
c.$155,612
d.$144,325
e.$138,612
27) the major result of the nsmia was to
a.reduce state regulatory powers over securities firms
b.establish the sipc
c.create the nasd
d.all of the above
e.none of the above
28) figure 24-1
a bank originates $150,000,000 worth of 30-year single-family mortgages funded by
demand deposits and the required amount of capital. reserve requirements are 10% and
the bank pays 32 basis points in deposit insurance premiums. the bank is earning a
6.25% coupon on the mortgages. the mortgages are priced at par and total monthly
payments on the mortgages are $923,576.
if the mortgages are securitized and deposits are reduced, how much will the bank save
in the first year’s reserve requirements and deposit insurance premiums in total?
a.$144,460,800
b.$160,512,000
c.$165,476,200
d.$178,332,500
e.$181,249,300
29) an fi has long-term, fixed-rate assets funded by short-term, variable-rate liabilities.
to protect the equity value, the fi may engage in a swap to pay a _____ rate and receive
a _____ interest.
a.fixed; variable
b.variable; variable
c.variable; fixed
d.fixed; fixed
30) why did bank profitability decline beginning in late 2006 and through 2008?
31) a u.s. bank has made £50 million in britain and has £40 in deposits. the bank’s
currency trading desk has also contracted to buy £20 million and has short positions of
£15 million. what is the bank’s net exposure? how could they use forward contracts to
hedge the exposure? if the bank has exposures in euros and yen, would you recommend
they use the forward hedge? why or why not?
32) most non-financial firms would never hold as much of their assets in safe liquid
securities as banks do. why do banks maintain such a high percentage of investment in
securities?
33) explain the purpose/benefits in adding a credit-scoring model to evaluate a loan
application.
34) how can using indirect finance rather than direct finance reduce agency costs
associated with monitoring funds’ demanders?
35) explain what each ratio in the altman credit model measures and explain why higher
values of each of the variables predicts lower default probability.
36) what are the major disadvantages that credit unions face versus banks?
37) is the realized rate of return related to the expected return? the required return?
explain.
38) how does an increase in interest rates affect a security’s duration?
39) before allowing the lender to actually acquire the funds for a mid-market
collateralized loan, what must the lender ensure? what type of monitoring occurs by the
lender after the loan is granted?