1) if you think that interest rates are likely to rise substantially over the next several
years, you might sell a t-bond futures contract or buy an interest rate cap to take
advantage of your expectations.
2) a man has what he believes is a mild heart attack but he doesn’t go to the hospital.
instead he calls his insurance agent and doubles the amount of his life insurance. this is
an example of the moral hazard problem in insurance.
3) financial intermediaries such as banks typically have assets that are riskier than their
liabilities.
4) gross debt service usually must be greater than 30% before a residential mortgage
will be approved.
5) more than 90% of loan sales are via assignments.
6) in a private placement, the issuer typically sells the entire issue to one, or only a few,
institutional buyers.
7) the “runoff” of fixed income contracts is itself rate-sensitive.
8) the risk that an fi may not have enough capital to offset a sudden decline in the value
of its assets is called operational risk.
9) the duration of a four-year maturity 10% coupon bond is less than four years.
10) because of their ability to hedge, the subprime mortgage crisis did not cause any
significant losses to hedge funds.
11) in 2008, loan sales primarily consisted of sales of distressed loans.
12) in a defined benefit plan, the retirement benefit will vary according to rates of
return on pension fund reserves.
13) a callable bond is one where the issuer is required to retire a certain amount of the
outstanding bonds each year to ensure that all the bond principle is paid by final
maturity.
14) at your new job you estimate that your average salary over your working years will
be $95,000 per year. how many more years would you have to work to receive as much
benefit from a flat benefit of $3,000 times years of service as you would receive from
3.75% of your average salary times years of service?
a.1.33 times as many years
b.0.75 times as many years
c.1.19 times as many years
d.2.40 times as many years
e.1.50 times as many years
15) the fed changes reserve requirements from 10% to 7%, thereby creating $900
million in excess reserves. the total change in deposits (with no drains) would be
a.$3,000 million
b.$15,625 million
c.$12,857 million
d.$3,795 million
e.none of the above
16) a bank lender is concerned about the creditworthiness of one of its major borrowers.
the bank is considering using a swap to reduce its credit exposure to this customer.
which type of swap would best meet this need?
a.interest rate swap
b.currency swap
c.equity linked swap
d.credit default swap
e.dif swap
17) the check 21 act effective in october 2004 does which of the following?
a.allows bank customers to better take advantage of bank float
b.requires banks to immediately clear all customer deposits
c.prohibits the fed from being involved in check clearing to prevent unfair competition
with private check clearing agencies
d.authorizes the use of an electronic image to facilitate paperless check clearing
e.eliminates all fees on checking
18) figure 12-1
the bank’s roe is
a.15.65%
b.13.21%
c.19.55%
d.11.17%
e.12.67%
19) if mortgage interest rates fall and prepayments occur, the holder of a gnma
pass-through selling at a _____ will have a _____.
i. discount; capital gain
ii. premium; capital loss
iii. discount; capital loss
iv. premium; capital gain
a.i only
b.i and iii only
c.i and ii only
d.ii and iv only
e.iii and iv only
20) which act led to interstate banking in the united states?
a.glass-steagall act
b.didmca
c.mcfadden act
d.riegle-neal act
e.financial services modernization act
21) suppose that over the last 10 to 15 years significantly large numbers of investors
have been able to earn abnormal returns from using the firm’s publicly available
financial information to forecast growth in earnings and dividends. this would be
evidence that the markets are not:
i. weak form efficient
ii. semi-strong form efficient
iii. strong form efficient
a.i only
b.i and ii only
c.iii only
d.ii and iii only
e.i, ii, and iii
22) the price of a bond rises from 98 to par. even if you do nothing, this would still
result in an immediately recognized loss on a _____________ on a bond, and a paper
gain on a bond ______________.
a.long forward contract; call option
b.short futures contract; call option
c.call option; put option
d.short futures contract; put option
e.short forward contract; call option
23) inflation causes the demand curve for loanable funds to shift to the _____ and
causes the supply curve to shift to the _____.
a.right; right
b.right; left
c.left; left
d.left; right
24) for a bond put option, the _____ the exercise price, the greater the cost of the put,
and for a bond call option, the _____ the exercise price, the higher the cost of the call
option.
a.higher; higher
b.lower; lower
c.higher; lower
d.lower; higher
25) an entrepreneur looking for financing to get her small, personally-owned business
up and running should probably consider
a.an ipo
b.a seasoned stock offering
c.a public debt offering
d.a venture capitalist
e.a syndicated loan
26) which one of the following intermediaries is likely to engage in more asset liability
maturity matching?
a.banks
b.savings associations
c.savings banks
d.life insurers
27) you purchase a $1000 face value convertible bond for $975. the bond can be
converted into 150 shares of stock. the stock is currently priced at $5.25. at what
minimum stock price would you be willing to convert?
a.$4.50
b.$5.26
c.$6.50
d.$7.10
e.$7.25
28) which one of the following entities is an actual government agency dealing with
mortgages?
a.gnma
b.fnma
c.fhlmc
d.pip
e.cmo
29) a bank has a positive duration gap. which one of the following statements is most
correct?
a.if all interest rates are projected to increase, to limit a net value decline before rates
rise, the bank should increase long-term loans and decrease short-term loans
b.if all interest rates are projected to decrease, to limit a net value decline before rates
fall, the bank should increase long-term loans and decrease short-term loans
c.if all interest rates are projected to increase, to limit a net value decline before rates
rise, the bank should increase short-term loans and decrease long-term loans
d.if all interest rates are projected to decrease, to limit a net value decline before rates
fall, the bank should increase long-term bonds issued by the bank and decrease
short-term bonds
30) hurricane damage in a given area is an example of a ____________________ for
which it is difficult to predict loss exposure.
a.low severity, low frequency event
b.high severity, high frequency event
c.low severity, high frequency event
d.high severity, low frequency event
31) an open-end mutual fund owns 1500 share of krispy kreme priced at $12. the fund
also owns 1,000 shares of ben & jerry’s priced at $43, and 2,000 shares of pepsi priced
at $50. the fund itself has 3,500 of its own shares outstanding. what is the nav of a
fund’s share?
a.$66
b.$56
c.$46
d.$36
e.$26
32) a corporation seeking to sell new equity securities to the public for the first time in
order to raise cash for capital investment would most likely
a.conduct an ipo with the assistance of an investment banker
b.engage in a secondary market sale of equity
c.conduct a private placement to a large number of potential buyers
d.place an ad in the wall street journal soliciting retail suppliers of funds
e.none of the above
33) convexity in bond prices is caused by the
a.coupon changes on a bond
b.change in default probability associated with a yield change
c.cgap effect
d.curvature around the bond price yield relationship
e.mismatch between the duration of the assets and liabilities
34) a bank wishes to reduce its duration gap from 1.2 years to zero by using put options.
the bank has $800 million in assets. the underlying bonds on the puts are valued at
$115,000 and have a duration of 4 years. the put options have a delta of 0.58 . how
many put options are needed? assume that there is no basis risk on the hedge.
35) why would an fi be willing to issue a letter of credit guarantee to a municipal bond
issuer?
36) we rarely see bank runs since the advent of federal deposit insurance, but runs on
life insurers and mutual funds do occur even though claimants have pro rata claims in
the event of default. why do these runs still occur?
37) why have fnma and freddie mac, considered government sponsored enterprises
(gses), been in the news lately? explain.
38) why is capital a more important measure of the size of a securities firm than the
amount of assets? what other measures would be useful given the diversity of this
industry?
39)
what are the major types of firms in the investment banking industry? briefly describe
each.
40) why have some states placed restrictions on intrastate and interstate branches? what
historical laws gave this right to states? what law changed these restrictions?