1) callable bonds have lower required yields than similar convertible bonds, ceteris
paribus.
2) most state and local pension funds are underfunded.
3) brokerage commission income and stock market valuations tend to move inversely in
most years, including in 2010 .
4) if a bank meets a net deposit drain by borrowing money in the fed funds market, it is
using purchased liquidity.
5) revenue bonds are backed by the full revenue of the municipality.
6) as interest rates fall, bond prices and call option potential profits increase.
7) an fi with da < kdl may choose to enter into a long-term swap where it pays a fixed
rate of interest and receives a variable rate in order to effectively reduce the duration
gap.
8) many intermediaries, such as banks, cannot be asset transformers and match
maturities of their assets and liabilities.
9) on average, bank liabilities tend to have shorter maturities and greater liquidity than
bank assets.
10) rank the following from greatest to smallest in terms of industry asset size in 2010 .
i. banks
ii. savings institutions
iii. credit unions
iv. finance companies
a.iv, i, ii, iii
b.i, iv, ii, iii
c.i, ii, iv, iii
d.i, ii, iii, iv
e.ii, iv, iii, i
11) the lower the interest expense ratio, the provision for loan loss ratio, the noninterest
expense ratio and the tax ratio the _______________ the _______________.
a.lower; pm
b.higher; pm
c.lower; au
d.higher; au
e.lower; em
12) which of the following can create liquidity risk for a life insurer?
i. unexpectedly high number of policy surrenders
ii. unexpectedly low number of new policies sold
iii. unexpectedly high insurance claims filed by policyholders
a.i only
b.ii only
c.i and ii only
d.ii and iii only
e.i, ii, and iii
13) characteristics of loan participations include:
i. the loan participant is not a primary creditor on the loan.
ii. the original lender can change some loan terms without the participant’s permission.
iii. participations are without recourse.
a.i only
b.ii only
c.ii and iii only
d.i and ii only
e.i, ii, and iii
14) a 12-year annual payment corporate bond has a market price of $925. it pays annual
interest of $60 and its required rate of return is 7%. by how much is the bond
mispriced?
a.$0.00
b.overpriced by $7.29
c.underpriced by $7.29
d.overpriced by $4.43
e.underpriced by $4.43
15) which one of the following would provide an example of social inflation?
a.large malpractice awards beyond the level of damages incurred
b.increase in costs on auto physical damage claims
c.increase in prescription drug cost claims
d.losses to repair damages caused by hurricanes in florida
e.rising cost of funeral expenses due to inflation
16) which act allowed the establishment of full-service financial institutions in the
united states?
a.riegle-neal act
b.financial services modernization act
c.usa patriot act
d.foreign bank supervision enhancement act
e.foreign banking activity powers enforcement act
17) the most diversified type of depository institutions are
a.credit unions
b.savings associations
c.commercial banks
d.finance companies
e.mutual funds
18) which one of the following 5 cs of credit is not correctly defined?
a.capacity – whether the borrower has enough other credit available to pay off the loan
in the event of cash flow problems
b.capital – the borrower’s equity
c.character – a measure of the borrower’s intention/willingness to repay the loan
d.conditions – assessing how economic conditions could affect the borrower’s ability to
repay the loan
e.collateral – an asset of the borrower that the lender may seize in the event of default
on the loan
19) a 15-year corporate bond pays $40 interest every six months. what is the bond’s
price if the bond’s promised ytm is 5.5%?
a.$1261.32
b.$1253.12
c.$1250.94
d.$1263.45
e.$1264.79
20) a bank has $770 million in checkable deposits. the bank has $85 million in reserves.
the bank’s required reserves are _____________ and its excess reserves are
_____________.
a.$85 million; $0
b.$770 million; $85 million
c.$89 million; $21 million
d.$685 million; $8.5 million
e.$77 million; $8 million
21) figure 22-2
a bank has da = 2.4 years and dl= 0.9 years. the bank has total equity of $82 million and
total assets of $850 million. interest rates are at 6%.
what is the bank’s duration gap in years?
a.1.5325
b.1.5868
c.1.2685
d.1.4563
e.1.6222
22) the largest proportion of long-term mutual fund assets is held by
___________________.
a.bank trusts and estates
b.the household sector
c.nonfinancial corporate business
d.private pension funds
e.life insurance firms
23) which one of the following fund types is likely to have the lowest annual expense
ratio?
a.index funds
b.equity funds
c.bond funds
d.balanced funds
e.hybrid funds
24) banks were willing to swap ldc loans for brady bonds because:
a.brady bonds carried higher interest rates than the loans
b.the bonds had variable interest rates
c.the bonds were marketable and the loans were not
d.the bonds were uncollateralized
e.none of the above
25) corporate bond a returns 5% of its cost in pv terms in each of the first five years and
75% of its value in the sixth year. corporate bond b returns 8% of its cost in pv terms in
each of the first five years and 60% of its cost in the sixth year. if a and b have the same
required return, which of the following is/are true?
i. bond a has a bigger coupon than bond b.
ii. bond a has a longer duration than bond b.
iii. bond a is less price-volatile than bond b.
iv. bond b has a higher fpv than bond a.
a.iii only
b.i, iii, and iv only
c.i, ii, and iv only
d.ii and iv only
e.i, ii, iii, and iv
26) a security has an expected return less than its required return. this security is
a.selling at a premium to par
b.selling at a discount to par
c.selling for more than its pv
d.selling for less than its pv
e.a zero coupon bond
27) individual credit scoring models typically include all of the following information
except
a.income
b.length of time in residence
c.credit history
d.age
e.ethnic background
28) conceptually, why does a bond’s price fall when required returns rise on an existing
fixed income security?
29) what are the three major objectives of technological investments at fis? what are the
major risks involved with these investments?
30) explain the effects of coupon and maturity on volatility.
31) what three major ways has the federal government assisted the mortgage markets?
explain.
32) why are mbbs the least used form of mortgage securitization?
33) if mortgage rates are 6.25% for a 30-year fixed-rate mortgage, how large can his
mortgage be?
34) figure 12-2
first national bank of beverly hills (millions $)
if the net noninterest income were to increase to -$16, what would the average loan rate
(alr) have to be to generate a 12% roe? compared to the industry, does this alr appear
feasible? if not, what options does fnb have?
35) a corporate loan applicant has had a growing cash account for the last 3 years but
cash flow from operations has been negative in every year. would this concern you if
you were the loan officer charged with approving the loan? if so, why? if not, why not?
36) how are money market mutual funds similar to and different from bank deposits?