1) in a best efforts offering, the investment banker acts as an agent for the issuer rather
than as a principal.
2) an improvement in economic conditions would likely shift the supply curve down
and to the right and shift the demand curve for funds up and to the right.
3) a bond’s price changes 2% when interest rates drop. the duration model would predict
a price increase of more than 2%.
4) composite rating 5 is the rating for the soundest financial institutions.
5) if a bank has a negative repricing gap, falling interest rates increase profitability.
6) diversified full-line investment banks act as both broker dealers and securities
underwriters.
7) an example of a national full-line investment banker that specializes in corporate
finance is goldman sachs.
8) a rising sales to working capital ratio may indicate a potential borrower is using its
net current assets more efficiently.
9) a 10-year annual payment corporate bond has a market price of $1,050. it pays
annual interest of $100 and its required rate of return is 9%. by how much is the bond
mispriced?
a.$0.00
b.overpriced by $14.18
c.underpriced by $14.18
d.overpriced by $9.32
e.underpriced by $9.32
10) in analyzing credit risk for a loan to a major diversified corporation, the bank
typically has which of the following advantages?
i. market-based models to analyze credit risk
ii. greater negotiating power due to the size of the loan required
iii. ratings agency measures of default risk
a.i only
b.i and ii only
c.ii and iii only
d.i and iii only
e.i, ii, and iii
11) you obtain a $265,000, 15-year fixed-rate mortgage. the annual interest rate is
6.25%. in addition to the principle and interest paid, you must pay $275 a month into an
escrow account for insurance and taxes. what is the total monthly payment (to the
nearest dollar)?
a.$2,272
b.$1,632
c.$2,547
d.$1,907
e.$2,311
12) a financial intermediary has two assets in its investment portfolio. it has 35% of its
security portfolio invested in one-month treasury bills and 65% in real estate loans. if it
liquidated the bills today, the bank would receive $98 per hundred of face value. if the
real estate loans were sold today, they would be worth $85 per 100 of face value. in one
month, the real estate loans could be liquidated at $94 per 100 of face value. what is the
intermediary’s one-month liquidity index?
a.0.93
b.0.92
c.0.91
d.0.90
e.0.89
13) deposits at savings banks are backed by the _______________ and deposits at
savings institutions are backed by the ______________.
a.bif; bif
b.bif; saif
c.saif; bif
d.saif; saif
e.dif; dif
14) if you believe that taxes are going to go up and you will likely have to pay a high
tax rate when you retire, you will probably be better off with a roth ira than with a
traditional ira.
15) a 15 payment annual annuity has its first payment in 9 years. if the payment amount
is $1400 and the interest rate is 7%, what is the most you should be willing to pay today
for this investment?
a.$5,825.11
b.$12,751.08
c.$6,416.67
d.$7,421.24
e.$6,935.74
16) an 8-year annual payment 7% coupon treasury bond has a price of $1,075. the
bond’s annual err must be
a.13.49%
b.5.80%
c.7.00%
d.1.69%
e.4.25%
17) a short-term unsecured promissory note issued by a company is
a.commercial paper
b.t-bills
c.repurchase agreement
d.negotiable cd
e.banker’s acceptance
18) fdic deposit insurance is generally limited to ________________ per depositor per
bank.
a.$50,000
b.$100,000
c.$150,000
d.$200,000
e.$250,000
19) in july 2002, the u.s. congress passed the sarbanes-oxley bill. among other things,
this bill
i. created an independent auditing oversight board run by the sec.
ii. increased penalties for corporate wrongdoers.
iii. eliminated the use of stock options for executive compensation.
a.i only
b.i and ii only
c.i and iii only
d.ii and iii only
e.i, ii, and iii
20) the amount that a policyholder receives when they cash in an insurance policy is
called the
a.cash value
b.surrender value
c.face value
d.policy value
e.fair market value
21) as a percentage of total assets, credit unions invest _______________ in securities
than banks and ______________ in consumer loans than banks.
a.more; more
b.less; less
c.more; less
d.less; more
e.less; about the same
22) how do public pension plans differ in other countries? has privatization worked
overseas?
23) how do insurance guarantee funds differ from bank deposit insurance funds?
24) a $40,000 one-year loan with a 1% origination fee and a 7.50% interest rate is
funded with money on which the bank owes 3%. what is the expected pretax dollar
spread on the loan? if the bank needs to net at least 3.5% on the funds lent to make its
roe, how many dollars can the bank spend on credit investigation, loan servicing, etc.?
would the bank be able to spend more if the loan amount was greater? what does this
example suggest about credit analysis?
25) at the start of the quarter a bank has $55 million (gross) in its loan portfolio, and has
$1 million in its allowance for loan loss account. during the quarter, loan audits indicate
that an additional $300,000 of loans will not be paid as promised. these loans have not
yet been written off as uncollectible however. what are the starting and ending gross
and net loan amounts, the provision for loan loss account, and what is the effect on the
bank’s quarterly earnings?
26) what is the difference between a loan commitment and a letter of credit?
27) what are the major differences in the traditional and hlt segments of the loan sale
market with respect to the types of loans sold?
28) figure 23-2
a u.s. bank has deposit liabilities denominated in euros that must be repaid in 2 years.
the deposits pay a fixed interest rate of 4%. the bank took the money raised and
converted it to dollars, whereupon it lent the dollars to a corporate customer who will
repay the bank over the next two years in dollars at a variable rate of interest equal to
libor +3%. the interest rate earned may change every six months.
other than credit risk, what are the risks to the bank?
29) explain why low interest rates and strong mortgage markets help keep profitability
high at savings institutions.