1) the allowance for loan and lease losses is bank management’s estimate of the amount
of gross loans and leases that will not be repaid to the bank.
2) assets in a bank’s trading book tend to be held for a longer time than assets held in
the banking book.
3) a firm’s cash account grew by $300 over the year when the firm had cash flow from
financing of -$150 and cash flow from investing of $100. the firm’s operating cash flow
must have been +$250.
4) if you buy 100 shares of ibm stock in anticipation that earnings will increase by more
than anticipated, you are engaging in what is termed a risky arbitrage.
5) secondary markets are markets used by corporations to raise cash by issuing
securities for a short time period.
6) advantages of brady bonds over ldc loans include improved liquidity and higher
coupon rates.
7) nationally chartered banks are required to become members of the federal reserve
system.
8) prior to 1986, regulation q limited the interest rate that depository institutions could
pay on deposits and allowed savings institutions to pay a slightly higher rate than banks.
9) bond ratings use a classification system to give investors an idea of the amount of
default rate risk associated with the bond issue.
10) about 40% of all u.s. banks are members of the federal reserve system.
11) the u.s. treasury switched from a discriminating price auction to a single price
auction because the latter lowered the average price paid by investors.
12) mondex spent $50 million to develop the smart card, but tests of prototypes in new
york and canadian cities revealed very little consumer interest. this is an example of
a.credit risk
b.liquidity risk
c.stupidity risk
d.technological risk
e.operational risk
13) you buy an investment today for $9,000. you sell the investment in 120 days for
$9,500. the effective annual rate on this investment is
a.13.76%
b.14.35%
c.15.56%
d.16.90%
e.17.87%
14) an investor is trying to decide between a muni paying 5.75% or an equivalent
taxable corporate paying 8.25%. what is the minimum marginal tax rate the investor
must have to consider buying the municipal bond?
a.80.00%
b.20.00%
c.25.00%
d.66.67%
e.30.00%
15) uniform principles, standards, and report forms for depository institutions are
prescribed by the
a.fdic
b.federal reserve
c.federal financial institutions examination council
d.office of comptroller of currency
16) blue ridge bank has a pm of 12%, an interest income to total assets ratio of 6.00%,
and a noninterest income to assets ratio of 1.50%. blue ridge also has $9 in assets per
dollar in equity capital. blue ridge’s roe is
a.7.50%
b.9.00%
c.8.10%
d.6.48%
e.5.75%
17) argentina has refused to pay loans made to it by foreign institutions three times. this
is an example of
a.operational risk
b.liquidity risk
c.foreign exchange risk
d.sovereign risk
e.insolvency risk
18) an investor requires a 3% increase in purchasing power in order to induce her to
lend. she expects inflation to be 2% next year. the nominal rate she much charge is
about
a.3%
b.2%
c.1%
d.5%
e.7%
19) in comparison to small banks, larger banks typically have
a.more equity capital
b.more core deposits
c.more off-balance-sheet activities
d.larger net interest margins
e.all of the above
20) a u.s. corporation is bidding on a revenue-generating contract in england. if the
corporation gets the bid, they will be paid in pounds. a) if the managers are risk averse,
can hedging increase the likelihood that the u.s. firm gets the bid? explain. b) in this
situation, should the corporation hedge with options, futures, or forwards? explain.
21) a holder of rainbow funds convertible bonds with a $1,000 par and a $1,100 price
can convert the bond to 25 shares of common stock. the stock is currently priced at $36
per share. by what percent does the stock price have to rise to make conversion
potentially attractive?
a.10.00%
b.14.73%
c.22.22%
d.23.64%
e.25.69%
22) investment securities plus ____________________ is equal to a bank’s earning
assets.
a.net loans and leases
b.gross loans and leases
c.property, plant, and equipment
d.securities held for trading
e.purchased accounts
23) a life insurer owes $550,000 in 8 years. to fund this outflow the insurer wishes to
buy strips that mature in 8 years. the strips have a $5,000 face value per strip and pay a
6% apr with semiannual compounding. how much must the insurer spend now to fully
fund the outflow (to the nearest dollar)?
a.$110,000
b.$342,742
c.$355,224
d.$362,355
e.$370,890
24) a u.s. firm has a european subsidiary that earns euros. the subsidiary has borrowed
dollars at a floating rate of interest. what kind of risk does the subsidiary have? what
kind of swap could be used to limit the subsidiary’s risk? be specific.
25) how sound is the pbgc? how much do firms pay for pension fund insurance?
describe president bush’s proposal to increase funding for pbgc.
26) is it reasonable to expect real rates of interest to be identical across countries?
explain. what does this imply about parity?
27) when might an option on a futures contract be preferable to an option on the
underlying instrument?
28) what determines the price of financial instruments? which are riskier, capital market
instruments or money market instruments? why?
29) how can brokers and dealers make money? which activity is riskier? why?
30) describe an agency transaction (brokerage) and a principal transaction (dealer) that
is involved in trading. what determines profits in each activity? which is riskier?
31) why have postal savings institutions flourished in many foreign countries? what
unique advantages do they have and what services do many offer?
32) explain how interest rate risk could change at banks, thrifts, and other institutions
that originate and sell fixed-rate mortgages but are funded with deposits if these
institutions lose the ability to securitize and sell mortgages. what could be the effect on
the economy?
33) what does the 2004 check 21 law allow? why was this law passed? does it benefit
the customer or banks? explain.