1) the major asset of the federal reserve is currency outside banks and the major liability
is u.s. treasury securities.
2) simple interest calculations assume that interest earned is never reinvested.
3) diversified full-line investment banks act as both broker dealers and securities
underwriters.
4) in a treasury bond quote with a $1000 face value, you find the bid is equal to 100:24
and the ask is equal to 100:26 . you could buy this bond for $1008.125 .
5) a subprime mortgage is a mortgage made to a borrower who has a below normal
credit rating.
6) the glass-steagall act came about due to concerns about excessive risk taking at
banks and conflicts of interest between commercial and investment banking activities.
7) discount points are paid to reduce the down payment required.
8) earning a 5% interest rate with annual compounding is better than earning a 4.95%
interest rate with semiannual compounding.
9) with tips, the security’s coupon rate is changed every six months by the inflation rate
as measured by the cpi.
10) eurodollar cds would include
a.cds denominated in euros
b.dollar investments by european entities in the u.s
c.dollars deposited in caribbean banks
d.dollars deposited in europe
e.both c & d
11) a bank has tier 1 capital of $90 million and tier 2 capital of $70 million. the bank
has total assets of $2,522 million and risk-weighted assets of 2,017.6 million. this bank
is
a.critically undercapitalized
b.significantly undercapitalized
c.undercapitalized
d.adequately capitalized
e.well-capitalized
12) a bank has book value of $5 million in liquid assets and $95 million in nonliquid
assets. large depositors unexpectedly withdraw $9.5 million in deposits. to cover the
withdrawals the bank sells all of its liquid assets at book value. to raise the additional
funds needed the bank sells the necessary amount of nonliquid assets at 80 cents per
dollar of book value. as a result, the bank’s equity will _____________.
a.remain unchanged
b.fall $4.5 million
c.fall $3.6 million
d.fall $1.4 million
e.fall $5.0 million
13) you own a mortgage-backed security and you will receive fixed semiannual interest
payments and no principle payments as long as prepayments remain within a given
range. if prepayments move outside the range, you will receive prepayments. you must
be holding a ______________________.
a.class c or lower sequential pay cmo
b.pac cmo
c.po security
d.pass-through security
e.cdo
14) a 90-day t-bill is selling for $9,900. the par is $10,000. the effective annual return
on the t-bill is (watch your rounding)
a.4.00%
b.4.16%
c.4.10%
d.4.04%
e.4.21%
15) a bank has a positive repricing gap using a 6-month maturity bucket. which one of
the following statements is most correct?
a.if all interest rates are projected to increase, to limit a profit decline when this occurs,
the bank could encourage its retail loan customers to switch from 1-year adjustable rate
loans to fed funds loans
b.if all interest rates are projected to decrease, to limit a profit decline when this occurs,
the bank could encourage its retail loan customers to switch from 1-month reset floating
rate loans to 3-year fixed-rate loans at current rates
c.if all interest rates are projected to decrease, to limit a profit decline when this occurs,
the bank could encourage its retail loan customers to switch from fixed-rate mortgages
to adjustable rate mortgages
d.if all interest rates are projected to increase, to limit a profit decline when this occurs,
the bank could encourage its retail loan customers to switch from 3-year to 5-year auto
loans
e.if all interest rates are projected to decrease, to limit a profit decline when this occurs,
the bank could encourage its retail loan customers to switch from their bank to another
bank
16) figure 7-1
a homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0% with
zero points or at a rate of 5.5% with 2.25 points.
if you will keep the mortgage for 30 years, what is the net present value of paying the
points (to the nearest dollar)?
a.$9,475
b.$8,360
c.$7,564
d.$7,222
e.$6,578
17) day-to-day trading practices of securities firms currently may be regulated by which
of the following?
i. finra
ii. sec
iii. federal reserve
iv. sipc
a.i only
b.ii only
c.i and ii only
d.i and iii only
e.ii and iv only
18) a stock has a spot price of $55. its may options are about to expire. one of its puts is
worth $5 and one of its calls is worth $10. the exercise price of the put must be
______________ and the exercise price of the call must be ________________.
a.$50; $45
b.$55; $55
c.$60; $45
d.$60; $50
e.one cannot tell from the information given
19) a u.s. firm has borrowed £50 million from a british firm. the borrower will need to
convert dollars to pounds to repay the loan when it is due. the u.s. firm could hedge the
exchange rate risk by
a.buying pounds forward
b.selling pounds forward
c.borrowing pounds
d.both b and c would hedge the risk
e.both a and c would hedge the risk
20) the fha charges the homeowner __________________ to insure an fha mortgage.
a.nothing
b.0.5% of the loan amount
c.$500
d.1% of the loan amount
e.$1,500
21) suppose that $10 million face value commercial paper with a 270-day maturity is
selling for $9.55 million. what is the bey on the paper?
a.4.71%
b.6.42%
c.6.37%
d.6.28%
e.4.50%
22) after 1989, savings institutions have primarily been regulated by
a.federal home loan bank board
b.federal deposit insurance corporation
c.office of thrift supervision
d.national credit union administration
23) a banker’s acceptance is
a.a time draft drawn on the exporter’s bank
b.a method to help importers evaluate the creditworthiness of exporters
c.a liability of the importer and the importer’s bank
d.an add on instrument
e.for greater than 1 year maturity
24) recently oil prices have risen in the u.s, generating concerns that inflation may
increase. if the fed wishes to ensure that inflation does not get out of hand the fed could:
a.intervene in the currency markets to push the value of the dollar down
b.decrease the discount rate
c.lower the target fed funds rate
d.lower the target money supply growth rate
e.reduce reserve requirements at banks
25) a) a bank has risk-weighted assets of $175 and equity of $12.5. if regulators require
a minimum risk-weighted capital ratio of 5% given the current level of equity, how
many new assets with a 100% risk weight can the bank add? how many with a 50% risk
weight?
b) if the bank had 20% more equity, how many new assets with a 100% risk weight
could the bank add? how many with a 50% risk weight? how does having more equity
affect a bank’s ability to grow? how is this growth affected by the riskiness of the bank’s
assets?
26) an investor buys a $10,000 par, 4.25% annual coupon tips security with 3 years to
maturity. if inflation every six months over the investor’s holding period is 2.50%, what
is the final payment the tips investor will receive?
a.$10,213.00
b.$10,869.28
c.$11,822.25
d.$11,843.37
e.$12,201.11
27) you are considering purchasing 5-year corporate bonds as an investment. you have
a choice of terms available. which of the following terms would you find desirable,
ceteris paribus? how does each feature affect the bond’s required rate of return? explain.
a) call feature
b) convertible feature
c) warrants
d) sinking fund
e) debenture
28) how do closed-end investment companies differ from open-end mutual funds?
29) who are the major buyers of mortgages after they have been originated? what is the
difference between selling with recourse or without recourse? which is most common?
30) if his parents give him $20,000 for a down payment, what is the most he can pay on
a house with a 15-year mortgage if the interest rate is 5.50%?
31) the preferred stock of ace pays a constant $1.00 per share dividend. the common
stock of acme just paid a $1.00 dividend per share, but its dividend is expected to grow
at 4% per year forever. able common stock also just paid a dividend of $1.00 per share
but its dividend is expected to grow at 10% per year for 5 years and then grow at 4%
per year forever. all three stocks have a 12% required return. how much should you be
willing to pay for a share of each stock? which stock will give you the best return?
explain.
32) 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?