1) tips are a treasury offering that protects investors from unexpected increases in
inflation.
2) a corporation informs the bank they will immediately draw down the maximum
amount on their credit line. this is an example of liability side risk.
3) of the different types of defined benefit plans, plans using the final pay method will
usually produce the biggest retirement benefit to employees.
4) the top ten property and casualty firms underwrite just under half of all the p&c
premiums written.
5) any security that returns a greater percentage of the price sooner is less price-volatile.
6) a wholesale bank is one that focuses its business activities on commercial banking
relationships.
7) in a typical variable life policy the policyholder may vary the premium payments and
the maturity date of the policy.
8) asset management ratios are used in credit analysis to help understand the borrower’s
ability to generate sales from the amount invested in some asset category.
9) open-end fund shares often trade at a discount or premium relative to nav.
10) 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.
11) in a universal life policy the cash value of the contract grows at a fixed-rate set by
the life insurer.
12) in october 2005, the bankruptcy reform act was signed into law. this law primarily
a.made it easier for many debtors to receive bankruptcy protection
b.made it more difficult for many debtors to receive bankruptcy protection
c.applied only to corporations
d.applied only to corporations and financial institutions
e.made it easier for foreign debtors to seek debt relief under u.s. law
13) you want to have $5 million when you retire in 40 years. you believe you can earn
9% per year on your investment. how much must you invest each year to achieve your
goal when you retire? (ignore all taxes)
a.$10,412
b.$11,619
c.$14,798
d.$15,295
e.none of the above
14) an annual payment bond with a $1,000 par has a 5% quoted coupon rate, a 6%
promised ytm, and 6 years to maturity. what is the bond’s duration?
a.5.31 years
b.5.25 years
c.4.76 years
d.4.16 years
e.3.19 years
15) a defined benefit pension plan has expected payouts of $15 million per year for 8
years and then $20 million over the following 15 years. actuaries have estimated that
the fund can be expected to earn an average of 5.25% on its assets. the fund currently
has reserves of $185,475,000. the plan is ___________ by about ___________ million.
a.underfunded; $100
b.underfunded; $59
c.overfunded; $30
d.overfunded; $24
e.underfunded; $46
16) about __________________ of federally insured banks are nationally chartered and
about __________________ of federally insured banks are members of the federal
reserve.
a.77%; 65%
b.65%; 77%
c.34%; 22%
d.22%; 34%
e.40%; 60%
17) the term “variable” in a variable life policy refers to the
a.policyholder’s ability to vary the premiums
b.insurer’s ability to vary the rate of return on the policy
c.variable growth rate of the cash value of the policy
d.insurer’s ability to vary the premiums
e.the policyholder’s ability to cancel the plan
18) with a gnma pass-through, the investor bears ________ of the prepayment risk, with
a noncallable mortgage-backed bond the investor bears _________ of the prepayment
risk, and with a cmo the investor bears ______________ of the prepayment risk.
a.some; all; none
b.all; some; none
c.all; none; some
d.none; some; all
e.none; some; none
19) a 50-day maturity money market security has a bond equivalent yield of 3.60%. the
security’s ear is
a.3.69%
b.3.61%
c.3.55%
d.3.87%
e.3.66%
20) in a treasury auction, preferential bidding status is granted to
a.competitive bidders
b.noncompetitive bidders
c.short sale committed bidders
d.commercial bank bidders
e.no group of bidders
21) households are increasingly likely to both directly purchase securities (perhaps via a
broker) and also place some money with a bank or thrift to meet different needs. match
up the given investor’s desire with the appropriate intermediary or direct security.
i. money likely to be needed within 6 months
ii. money to be set aside for college in 10 years
iii. money to provide supplemental retirement income
iv. money to be used to provide for children in the event of death
1> depository institutions
2> insurer
3> pension fund
4> stocks or bonds
a.2, 3, 4, 1
b.1, 4, 2, 3
c.3, 2, 1, 4
d.1, 4, 3, 2
e.4, 2, 1, 3
22) basel ii consists of three overlapping areas that are designed to bolster the safety
and soundness of the financial system. the three areas include
i. regulatory capital requirements for credit, market, and operational risk.
ii. eliminating complex risk-based capital requirements for on- and off-balance-sheet
accounts.
iii. ensuring that banks have sound internal control procedures in place to measure and
limit risk.
iv. requirements to disclose to market participants the institution’s capital structure, risk
exposure, and capital adequacy.
v. increasing deposit insurance premiums on all accounts.
a.i, ii, and iii
b.i, iii, and iv
c.ii, iii, and v
d.i, iv, and v
e.ii, iii, and iv
23) libor is generally _______________ the fed funds rate because foreign bank
deposits are generally ________________ than domestic bank deposits.
a.greater than; less risky
b.less than; more risky
c.the same as; equally risk
d.greater than; more risky
e.less than; less risky
24) an 18 year t-bond can be stripped into how many separate securities?
a.18
b.19
c.36
d.37
e.38
25) the conditions specified in a credit agreement that must be fulfilled before a
drawdown is allowed are called
a.collateral perfection
b.power of sale conditions
c.conditions precedent
d.foreclosure agreements
e.audit review terms
26) how is social security different from a private defined benefit plan? when and why
is social security projected to become insolvent?
27) how does foreign exchange risk arise for an fi?
28) a savings institution (si) has funded $12 million of 30-year fixed-rate mortgages
with an average interest rate of 5.75%. these assets are funded with time deposits with
an average maturity of six months. the deposits are currently paying 3.5%. in six
months’ time, however, the fed has raised interest rates twice and the depositors now
must be paid 4.25%. what will happen to the si’s roa and nim? how would your answer
change if the si normally sells the mortgages every 6 months and originates additional
new mortgage loans?
29) a u.s. fi has u.s. $200 million worth of one-year loans earning an average rate of
return of 6%. the fi also has one-year single payment canadian dollar loans of c$110
million earning 8%. the fi’s funding source is $300 million in u.s.$ one-year cds, on
which they are paying 4%. initially the exchange rate is c$1.10 per $1 u.s. the one-year
forward rate is c$1.14 per $1 u.s. what is the bank’s dollar % spread if they hedge fully
using forwards?
30) a bondholder purchased a 9% coupon, $1,000 par 3-year bond at a 9% yield.
interest rates then immediately fell to 7% and his bond was called at a price of $1,040.
he reinvested his money and earned 7% on the $1,040 for 3 years. did the call help or
hurt the bondholder? what was his 3-year rate of return on his original investment?
31) describe the credit analysis process for a mid-market corporate loan applicant.
32) what are the major sources of liquidity risk for a bank? for a life insurer?
33) why do insured pension plans invest in less risky assets than uninsured pension
plans?
34) data shows that only 11 of 27 recessions prior to 1990 were preceded by a decline in
stock prices. although stocks are a leading economic indicator, what are some reasons
why a stock price decline might not indicate an upcoming recession?