1) mmdas are a type of savings account that has some limited checking features. these
accounts were designed to help banks compete with mmmfs.
2) there are three types of major financial markets today: primary, secondary, and
derivatives markets. the nyse and nasdaq are both examples of derivatives markets.
3) according to the market segmentation theory short-term investors will not normally
switch to intermediate- or long-term investments.
4) most loan sales are now accomplished in about 10 days.
5) gains and losses on a futures contract must be recognized daily.
6) rising interest rates decrease the value of fixed-income assets and increase the value
of fixed-income liabilities.
7) a bond with an 11% coupon and a 9% required return will sell at a premium to par.
8) a market maker buys ibm at $185 for his own account and sells the stock later in the
day at $187. he is acting as a broker in this transaction.
9) during much of the 1800s, developed nations employed what came to be known as
the bretton woods international monetary system to manage exchange rates.
10) life insurers write over 50% of all health insurance premiums.
11) unit banking states are states that do not allow interstate branch banking, but allow
the creation of intrastate branch banks.
12) si profitability declined in the mid-2000s due to
i. the yield curve becoming more positively sloped.
ii. decreases in the nim ratio.
iii. increases in the nim ratio.
iv. the yield curve becoming flatter and even inverted.
a.i and ii only
b.ii and iii only
c.ii and iv only
d.iii and iv only
e.i and iii only
13) a(n) __________________ is a contra asset account.
a.loan commitment
b.provision for loan and lease losses
c.allowance for loan and lease losses
d.net charge-off
14) having longer maturity assets than liabilities causes banks to bear which of the
following risks?
i. interest rate risk
ii. liquidity risk
iii. credit risk
a.i only
b.i and ii only
c.i and iii only
d.ii and iii only
e.i, ii, and iii
15) firms in the securities industry are required to maintain a minimum capital to asset
ratio of ______________.
a.2%
b.4%
c.6%
d.8%
e.10%
16) banks differ from other types of depository institutions in that
i. banks have more diversified asset portfolios.
ii. banks obtain funds from more different types sources.
iii. the average size bank is larger than other depository institutions.
a.i only
b.i and ii only
c.i and iii only
d.ii and iii only
e.i, ii, and iii
17) to be classified as an adequately capitalized bank, the bank must have a leverage
ratio of at least ____________%, tier i capital to risk-adjusted asset ratio of at least
______________ % and a total risk-based capital ratio of at least __________%, and
does not meet the definition of a well-capitalized bank.
a.4; 4; 8
b.5; 6; 10
c.3; 3; 8
d.4; 8; 4
e.4; 6; 10
18) if a mortgage pass-through experiences smaller prepayments than expected early on
in the life of the security, the result will be that pass-through holders will receive
_______ than expected cash flows early on and _______ than expected cash flows later
on.
a.greater; less
b.greater; greater
c.less; greater
d.less; less
e.less; no different
19) in 2007 the nyse merged with _________________.
a.nasdaq
b.euronext
c.american exchange
d.chicago mercantile exchange
e.london stock exchange
20) a(n) ___________________ is used to help retired people receive monthly income
in exchange for the equity in their home.
a.sam
b.equity participation mortgage
c.ram
d.plam
e.gem
21) a 4-year maturity 0% coupon corporate bond with a required rate of return of 12%
has an annual duration of _______________ years.
a.3.05
b.2.97
c.3.22
d.3.71
e.4.00
22) the least used form of mortgage securitization is the ______________________.
a.second mortgage
b.mortgage-backed bond
c.mortgage pass-through
d.cmo
e.home equity loan
23) the best underwriting performance since 1936 in terms of the combined ratio
occurred during ____________ for property and casualty insurers.
a.1999 and 2000
b.2001 and 2002
c.2002 and 2003
d.2004 and 2005
e.2006 and 2007
24) the major monetary policy making arm of the federal reserve is the
a.board of governors
b.council of federal reserve bank presidents
c.office of the comptroller of the currency
d.federal reserve bank of new york
e.none of the above
25) second bank now offers web banking services. last week a computer glitch posted
all web deposit transfers to the wrong accounts. this is an example of
a.credit risk
b.liquidity risk
c.stupidity risk
d.technological risk
e.operational risk
26) classify each of the following in terms of their effect on interest rates (increase or
decrease):
i. covenants on borrowing become more restrictive
ii. the federal reserve increases the money supply
iii. total household wealth increases
a.i increases; ii increases; iii increases
b.i increases; ii decreases; iii decreases
c.i decreases; ii increases; iii increases
d.i decreases; ii decreases; iii decreases
e.none of the above
27) an interest rate collar is
a.writing a floor and writing a cap
b.buying a cap and writing a floor
c.an option on a futures contract
d.buying a cap and buying a floor
e.none of the above
28) if all preferred dividend payments that have been missed must be paid before any
common stock dividend can be paid the preferred stock is called _____________
preferred stock.
a.cumulative
b.participating
c.nonparticipating
d.voting
e.dual class
29) an investor is in the 28% federal tax bracket, pays a 9% state tax rate and 4% in
local income taxes. for this investor a municipal bond paying 6% interest is equivalent
to a corporate bond paying _____ interest.
a.11.79%
b.10.17%
c.9.08%
d.9.68%
e.8.47%
30) which one of the following institutions is the least regulated?
a.banks
b.credit unions
c.finance companies
d.savings associations
e.savings banks
31) in a bear market, which option positions make money?
i. buying a call
ii. writing a call
iii. buying a put
iv. writing a put
a.i and ii
b.i and iii
c.ii and iv
d.ii and iii
e.i and iv
32) what are soft dollar fees or commissions? how can these lead to conflicts of interest
for investment bankers?
33) classify the following trading activities as either a position trade, a pure arbitrage
trade, or a risk arbitrage trade.
34) a 15-year, 7% coupon annual payment corporate bond has a pv of $1055.62.
however, you pay $1024.32 for the bond. by how many basis points is your err different
from your rrr?
35) what is the difference between a discriminating auction and a single-price auction?
how is the final price determined in a single-price auction? why did the treasury switch
to a single-price auction?
36) what are the differences between purchased funds and core deposits?
37) what are the main lines of p&c insurance?
38) in general terms explain why certain types of derivatives such as options, futures,
swaps, and other exotic contracts can generate such catastrophically large losses and
even insolvency for users at times. does this mean that corporate or institutional use of
derivatives should be limited or otherwise regulated? explain.
39) what are arguments for and against requiring banks to mark all assets and liabilities
to market continuously? relate your arguments to managing credit risk and interest rate
risk.