1) a defined benefit pension plan expects to pay out $25 million per year over the next
10 years to pensioners. the fund currently has $155 million in pension assets that are
earning 10% per year. this plan is underfunded.
2) “on the run” treasury notes and bonds are newly issued securities and “off the run”
treasuries are securities that have been previously issued.
3) pension plans administered by the federal government are called insured pension
plans.
4) the fdic insures bank deposits and the ots insures thrift deposits.
5) banks generally pay higher interest rates on now accounts than on mmdas.
6) an investor earned a 5% nominal rate of return over the year. however, over the year,
prices increased by 2%. the investor’s real rate of return was less than his nominal rate
of return.
7) the buyer of a call option on stock benefits if the underlying stock price rises or if the
volatility of the stock’s price increases.
8) an order to buy shares of stock at a specified price or better is called a limit order.
9) the market in which firms sell new securities to raise cash is called the secondary
market.
10) the main advantage of a profit sharing keogh plan over a money-sharing keogh plan
is that profit sharing plans
a.are eligible for pbgc insurance and money sharing plans are not
b.have higher maximum contributions than money sharing plans
c.can have contributions that vary from year to year with profits, while money-sharing
plan contributions are fixed
d.both a and b are advantages
e.none of the above
11) the pension protection act of 2006 requires companies to correct funding shortfalls
in their defined benefit plans within:
a.1 year
b.3 years
c.5 years
d.10 years
e.20 years
12) the fed offers three types of discount window loans. ______________ credit is
offered to small institutions with demonstrable patterns of financing needs,
_____________ credit is offered for short-term temporary funds outflows, and
_____________ credit may be offered at a higher rate to troubled institutions with more
severe liquidity problems.
a.seasonal; extended; adjustment
b.extended; adjustment; seasonal
c.adjustment; extended; seasonal
d.seasonal; primary; secondary
e.adjustment; seasonal; extended
13) in general terms, which one of the following plan types is the riskiest for an
employee on a year-to-year basis?
a.defined contribution plan invested in fixed income securities
b.defined contribution plan invested in equities
c.final pay defined benefit plan
d.career average defined benefit plan
e.overfunded defined benefit plan
14) the largest center for trading in foreign exchange is
a.new york
b.london
c.tokyo
d.hong kong
e.geneva
15) money market securities exhibit which of the following?
i. large denomination
ii. maturity greater than one year
iii. low default risk
iv. contractually determined cash flows
a.i, ii, and iii
b.i, iii, and iv
c.ii, iii, and iv
d.ii and iv
e.i, ii, iii, and iv
16) in terms of profitability, a well-run bank usually has an roa of
a.0.5-3%
b.3-5%
c.5-10%
d.10-15%
e.15-20%
17) the preemptive right is designed to
a.allow management to diffuse stock ownership any voting power
b.allow managers to preempt a stock offering if they do not like the terms of the deal
c.allow existing shareholders the right to sell their existing shares before the new offer
d.allow existing shareholders to buy shares of the new offering if they desire
e.none of the above
18) an insurance line has a pure loss ratio of 65%, lae of 16%, an expense ratio of 26%,
the firm pays 3% of premiums to policyholders as dividends, and has an investment
yield to premium ratio of 6%. which one of the following statements is true?
a.the line is profitable because the operating ratio is greater than 100
b.the line is profitable because the operating ratio is less than 100
c.the line is not profitable because the operating ratio is greater than 100
d.the line is profitable because the combined ratio after dividends is greater than 100
e.the line is profitable because the combined ratio after dividends is less than 100
19) open-end mutual funds guarantee
a.investors a minimum rate of return
b.investors a minimum nav
c.to redeem investor’s shares upon demand at current nav
d.to earn the rate promised in the prospectus
e.none of the above
20) the risk that an unanticipated increase in liability withdrawals may cause an fi to
have to sell assets at fire sale prices is an example of
a.credit risk
b.liquidity risk
c.interest rate risk
d.sovereign risk
e.technology risk
21) a bank invests $250 million to add the ability to provide online bill paying for its
customers. usage of the new service is at about 50% of expected usage. this is an
example of
a.technological risk
b.operational risk
c.market risk
d.credit risk
e.derivative risk
22) which of the following conditions may lead to a decline in the value of a country’s
currency?
i. low interest rates
ii. high inflation
iii. large current account deficit
a.i only
b.i and ii only
c.ii and iii only
d.ii only
e.iii only
23) in recent years defined contribution plans have grown faster than defined benefit
plans in which of the following areas?
i. fund assets
ii. number of funds
iii. number of plan participants
a.i only
b.i and ii only
c.ii and iii only
d.i, ii, and iii
e.ii only
24) the _________________ insures losses of funds deposited with securities firms in
the event of failure of a securities firm.
a.sec
b.nasd
c.sia
d.sipc
e.fdic
25) the effect of an interest rate change on the market value of an fi’s equity is a
function of three things. what are they and how do they affect the equity value change?
26) why might a bank face abnormal deposit drains?
27) what kind of interest rate swap could fnma use to limit their interest rate risk?
explain.
28) why are loans such a high percentage of total assets at the typical bank? what four
broad classes of loans do banks engage in?
29) when would an option hedge be better than a futures or forward hedge?