A one bank holding company is a parent bank holding company with only one
subsidiary involved in banking activities.
Answer:
During the late 2000’s financial crisis, global stock market return correlations decreased
relative to the decade before the crisis.
Answer:
Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to
hedge a cash position than are warranted by the initial analysis.
Answer:
Risk-based capital supports risk-based deposit insurance premiums by increasing the
cost risk taking for DI stockholders.
Answer:
FNMA supports only those pools of mortgages that comprise mortgage loans whose
default or credit risk is insured by one of three government agencies.
Answer:
Managing liabilities as a means of managing liquidity risk involves the tradeoff
between lower funding cost and higher risk of withdrawals.
Answer:
Because of the collateral feature, RPs typically have a higher interest rate than fed
funds.
Answer:
Currency swaps can be designed to reduce foreign exchange risk.
Answer:
One function of capital is to provide funding for real assets, such as branches and
technology that are necessary to provide financial services.
Answer:
Banks typically have faced few restrictions in expanding their businesses, while
securities firms and insurance companies have faced complex rules regarding
expansion.
Answer:
Abnormally large and unexpected deposit withdrawals can occur because of concerns
by depositors about a bank’s solvency relative to other banks.
Answer:
Hedge funds are not susceptible to liquidity risk or a liquidity crisis.
Answer:
By 2012, life insurance companies were managing approximately 40% of all private
pension plans.
Answer:
The DI can influence the withdrawal rates of NOW accounts through explicit interest
payments, implicit interest payments, or minimum balance requirements.
Answer:
A commercial bank that acts as a swap dealer must include swap risk exposure when
calculating risk-based capital requirements.
Answer:
Mutual funds often offer multiple share classes which differentiate between different
methods of paying the sales loads and management fees.
Answer:
The International Banking Act of 1978 attempted to provide a level playing field for
domestic and foreign banks in U.S. banking markets.
Answer:
Because they are secured by homes, residential mortgages have demonstrated very little
credit risk for FIs.
Answer:
The premium on a credit spread call option is the maximum loss attainable to the buyer
of the option in situations where the credit spread increases.
Answer:
Commercial real estate mortgages have been the fastest growing component of real
estate loans.
Answer:
Short-term CDs often are priced competitively with T-bills of similar maturity.
Answer:
The largest category of business loans of finance companies is securitized business
assets.
Answer:
Which of the following observations concerning the Fed’s discount window is TRUE?
A. The facility is provided to meet DIs’ permanent liquidity needs.
B. Four lending programs are offered through the Fed’s discount window.
C. Primary credit is available to sound depository institutions on a very short-term
basis.
D. Secondary credit is available only to depository institutions that are eligible for
primary credit.
E. Eligible institutions for seasonal credit are big banks located in urban areas.
Answer:
In pure arbitrage, a trader would sell an asset in one market at one price while buying
the same asset in another market at a higher price.
Answer:
Expansion on a de novo basis implies the establishment and construction of a new
office in a location where previously no office existed.
Answer:
Which of the following is TRUE of the delta of an option?A. It lies between 0 and 0.5.
B. It is always negative.
C. It lies between 0 and 1.
D. It is greater than 1.
E. It is always equal to 1.
Answer:
Which observation is TRUE of vulture funds?A. Their decisions based on developing
and maintaining long-term relationships.
B. Their sole agenda is to helping the distressed firm to survive.
C. Their investments are always passive.
D. They are relationship based, not transaction driven.
E. In a restructuring, they are looking for a return on capital invested.
Answer:
Insurance companies and pension funds are important buyers of long-maturity loans.
Answer:
The Wall Street Reform and Consumer Protection Act of 2010 established
comprehensive regulation of over-the-counter (OTC) derivatives including swaps.
Answer:
In recent years, the total assets of insurance companies in the U.S. have been
decreasing.
Answer:
Credit allocation regulations are typically designed to benefit customers as well as the
financial institution that must implement the guidelines.
Answer:
Assignments of fixed-rate loans typically do not have difficulties in the calculation and
transfer of accrued interest.
Answer:
Historically, commercial banks have been prohibited from acting as an underwriter of
insurance products.
Answer:
As the U.S. dollar appreciates against the Japanese yen, Japanese goods sold in the U.S.
become less expensive to the U.S. consumer.
Answer:
The condition of no arbitrage profits implies that profits cannot be made without taking
some risk.
Answer:
For a given maturity fixed-income asset, duration decreases as the market yield
increases.
Answer:
For an FI to exactly hedge the foreign investment risk, the foreign currency assets must
equal the foreign currency liabilities.
Answer:
Funds transferred on Fedwire are settled at the end of the day.
Answer:
The Financial Services Modernization Act of 1999 prohibits insurance companies from
opening commercial banks.
Answer:
Excessive amounts of liquid asset holdings can penalize the earnings of a DI.
Answer:
Compared to commercial banks, finance companies usually signal solvency and safety
concerns by A. holding higher leverage ratios.
B. holding lower capital-asset ratio.
C. holding less liquid long-term assets.
D. holding higher capital-asset ratio.
E. Answers A and B only.
Answer:
A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest
paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent.
If all interest rates decline 90 basis points (ΔR/(1 + R) = -90 basis points), what is the
change in the market value of equity?A. -$4.4300 million
B. +$3.9255 million
C. +$4.3875 million
D. +$2.5506 million
E. +$0.0227 million
Answer:
If a stock portfolio replicates the returns on a stock market index, the beta of the
portfolio will be A. less than 1.
B. greater than 1.
C. equal to 0.
D. equal to 1.
E. negative.
Answer:
What is the cost to the FDIC if the insured depositor transfer resolution method is used
by the regulators to resolve the bank failure? A. $0.
B. $20 million.
C. $30 million.
D. $40 million.
E. $60 million.
Answer:
The following question are based on material in Appendix 8B
Which theory of term structure posits that long-term rates are a geometric average of
current and expected short-term interest rates? A. The unbiased expectations theory.
B. The liquidity premium theory.
C. The loanable funds theory.
D. The market segmentation theory.
E. None of the above.
Answer:
The housing bubble that began building in 2001 was primarily the result of A. the
availability of low-cost affordable homes.
B. low interest rates and increased liquidity provided by the Federal Reserve.
C. a change in income tax policy that favored home ownership.
D. increased demand for U.S. real estate by international investors.
E. lack of available residential rental property.
Answer:
Match the following pieces of legislation with the function achieved by each regulation
as stated in question
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Advisers Act
D. Investment Company Act
E. Insider Trading and Securities Fraud Enforcement Act of 1988
F. Market Reform Act of 1990
G. National Securities Markets Improvement Act of 1996
Requires a mutual fund to set rules and procedures regarding the fund’s prospectus sent
to investors.
Answer:
What is the minimum total capital (Tier I + Tier II) required to be adequately
capitalized for the off-balance sheet derivative contracts (both interest rate swaps and
foreign exchange forwards) under Basel II?A. $0.24 million.
B. $0.36 million.
C. $0.72 million.
D. $0.60 million.
E. $0.48 million.
Answer:
A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest
paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent.
Calculate the duration of the assets to four decimal places.A. 2.5375 years.
B. 4.3750 years.
C. 1.7500 years.
D. 3.0888 years.
E. 2.5000 years.
Answer:
Which of the following rankings of liabilities is correct if they are ranked by funding
costs from lowest cost to highest cost? A. Retail certificates of deposit; repurchase
agreements; federal funds.
B. Federal funds; demand deposits; certificates of deposit.
C. Repurchase agreements; money market demand accounts; retail certificates of
deposit.
D. Certificates of deposit; federal funds; demand deposits.
E. Demand deposits; federal funds; passbook savings.
Answer:
During most of the twentieth century the banking industry was able to continue to
expand geographically byA. utilizing multi-bank holding companies.
B. utilizing one-bank holding companies.
C. successfully implementing reciprocal regional banking pacts.
D. All of the above.
E. Answers A and B only.
Answer:
What is the number of T-bond futures contracts necessary to hedge the balance sheet if
the duration of the deliverable bonds is 9 years and the current price of the futures
contract is $96 per $100 face value? A. 1,630 contracts.
B. 1,475 contracts.
C. 1,900 contracts.
D. 2,078 contracts.
E. 3,225 contracts.
Answer:
What is the impact of underpricing a securities issue? A. The underwriter loses while
the issuing firm gains.
B. Both the underwriter and the outside investor gains while the issuing firm loses.
C. The outside investor loses while the issuing firm gains.
D. Both the underwriter and the outside investor loses while the issuing firm gains.
E. All three parties lose when the securities are underpriced.
Answer:
Loan participations are typically sold to correspondent banks because A. they are
insiders and can be trusted.
B. they offer the best prices.
C. the ongoing relationship offers the greatest monitoring opportunities.
D. it is a regulatory requirement.
E. correspondent banks are captive customers.
Answer:
The hedge fund industry is built on the theory that A. a profit can always be made if
each investment has an off-setting position to cover any losses.
B. proper diversification can be attained with larger sums of money and fewer assets.
C. wealthy individuals should be expected to make more informed investment
decisions and can take on higher levels of risk.
D. strategies such as program trading and arbitrage are only successful if leverage
(borrowed funds) are used.
E. it takes money to make money.
Answer:
Why is the failure of a large bank more detrimental to the economy than the failure of a
large steel manufacturer? A. The bank failure usually leads to a government bailout.
B. There are fewer steel manufacturers than there are banks.
C. The large bank failure reduces credit availability throughout the economy.
D. Since the steel company’s assets are tangible, they are more easily reallocated than
the intangible bank assets.
E. Everyone needs money, but not everyone needs steel.
Answer:
Why has empirical evidence on economies of scale and scope been so contradictory?
A. Data on bank costs are unavailable.
B. Efficiency may be related to overall market conditions.
C. Efficiency may be related to non-quantifiable variables such as managerial ability.
D. Neither the intermediation nor the production approach conform to reality.
E. The methodology to detect economies of scale and scope are still very rudimentary.
Answer:
Property-casualty insurance involves A. insurance coverage related to the loss of real
and personal property.
B. insurance protection against legal liability exposure.
C. insurance protection against injuries in employment related work.
D. Answers A and B only.
E. Answers A and C only.
Answer:
Which of the following FIs does not currently provide a payment function for their
customers? A. Depository institutions.
B. Insurance companies.
C. Finance companies.
D. Pension funds.
E. Mutual funds.
Answer:
If the spot interest rate on a prime-rated one-month CD is 6 percent today and the
market rate on a two-month maturity prime-rated CD is 7 percent today, the implied
forward rate on a one-month CD to be delivered one month from today is A. 9 percent.
B. 11 percent.
C. 18 percent.
D. 10 percent.
E. 8 percent.
Answer:
Which of the following loan applicant characteristics is not relevant in the credit
approval decision? A. Leverage position of the borrower.
B. Borrower income.
C. Value of collateral.
D. Borrower reputation.
E. None of the above.
Answer:
Legislations restricting geographic expansion have been undermined in all of the
following ways EXCEPT A. regional banking pacts.
B. purchase of troubled banks.
C. opening of nonbank banks.
D. acquisition of subsidiaries.
E. acquisition of insurance companies out of state.
Answer:
The type of abusive activity that involves arrangements between mutual fund
companies and brokerage houses is A. market timing.
B. late trading.
C. directed brokerage.
D. improper fee assessment.
E. None of the above.
Answer:
The increased opportunity for a bank to securitize loans into liquid and tradable assets
is likely to affect which type of risk? A. Sovereign risk.
B. Market risk.
C. Insolvency risk.
D. Technological risk.
E. Interest rate risk.
Answer:
One hundred identical mortgages are pooled together into a pass-through security. Each
mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid
monthly), and is fully amortized over a term of 30 years.
For the first monthly payment, what portion is principal and what portion is interest? A.
$100,000 principal and $10,065 interest.
B. $12,000 interest and no principal.
C. $100,000 interest and no principal.
D. $100,000 interest and $10,065 principal.
E. $10,000 interest and $2,000 principal.
Answer:
Economic collapse during the 1930s, the banking system in the U.S. performed directly
or indirectly all financial services. Those functions included all of the following
EXCEPT A. commercial banking.
B. money market funds.
C. investment banking.
D. stock investing.
E. insurance services.
Answer:
The strong performance of commercial banks during the decade before 2007 was due to
A. the stability of interest rates during this period.
B. the ability of banks to shift credit risk from their balance sheets to financial markets.
C. the contraction of the number of banks and thrifts.
D. the growth in the number of thrifts and credit unions.
E. All of the above.
Answer:
Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in
its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of
Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar
closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300
shares of Microsoft. It has a total of 500 shares outstanding.
To what level should the price of Microsoft shares decline in order for the NAV of
Morningstar fund to remain constant if the price of P&G rises to $40? A. $60.
B. $55.
C. $50.
D. $45.
E. $40.
Answer:
The largest proportion of assets of money market mutual funds in 2012 was A. security
repos.
B. time and savings deposits.
C. checkable deposits and currency.
D. credit market instruments.
E. foreign deposits.
Answer:
Match the following pieces of legislation with the function achieved by each regulation
as stated in question
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Advisers Act
D. Investment Company Act
E. Insider Trading and Securities Fraud Enforcement Act of 1988
F. Market Reform Act of 1990
G. National Securities Markets Improvement Act of 1996
Requires mutual funds to develop mechanisms and procedures to avoid insider trading
abuses.
Answer:
Which of the following is a good strategy to adopt when interest rates are expected to
rise? A. Buying a call option on a bond.
B. Writing a call option on a bond.
C. Writing a put option on a bond.
D. Buying bond futures.
E. All of the above.
Answer:
The problem of adverse selection A. implies that many people who do not need
insurance coverage have it through group plans.
B. means that those people who apply for insurance are the least likely to need
insurance coverage.
C. causes insurance underwriters to alter the health statistics of the general population
when determining appropriate premiums.
D. creates a savings element along with the insurance component of the premium and
policy.
E. does not exist in the insurance industry.
Answer:
An investment banker agrees to underwrite an issue of 10 million shares of stock for
TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per
share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares
to the public for $11.20 per share.
How much money does TWResearch receive? A. $105,000,000.
B. $150,000,000.
C. $112,000,000.
D. $125,000,000.
E. $110,000,000.
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Answer:
Use the following two choices to identify whether each intermediary or entity is a net
buyer or net seller of credit derivative securities.
a. Net buyer (typically)
b. Net seller (typically)
Hedge funds
Answer:
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Answer:
Use the following two choices to identify whether each intermediary or entity is a net
buyer or net seller of credit derivative securities.
a. Net buyer (typically)
b. Net seller (typically)
Pension funds
Answer:
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