1) issuance of short-term debt would result in an increase in cash flow from operations
on the statement of cash flows.
2) a well-managed bank tries to keep the ratio of nonperforming loans to total loans at
about 8% to 10%.
3) a clearinghouse backs the buyer’s and seller’s position in a forward contract.
4) in 2010, the notional value of bank off-balance-sheet activities was greater than bank
industry assets.
5) a bank has a positive repricing gap and wishes to protect its profits from an
unfavorable interest rate move. purchasing a cap will help limit this bank’s interest rate
risk.
6) a spot contract is an immediate delivery versus payment contract.
7) a rate-sensitive asset is one that either matures within the maturity bucket or one that
will have a payment change within the maturity bucket if interest rates change.
8) credit analysis of a mid-market corporate borrower differs from the analysis of a
small business in that the analysis of the mid-market borrower is more focused on the
business itself and less on the business owners.
9) the securities exchange commission (sec) does not
a.decide whether a public issue is fairly priced
b.decide whether a firm making a public issue has provided enough information for
investors to decide whether the issue is fairly priced
c.require exchanges to monitor trading to prevent insider trading
d.attempt to reduce excessive price fluctuations
e.monitor the major securities exchanges
10) the two main reasons why runs on u.s. banks no longer occur are
a.reserve requirements and higher bank liquidity ratios
b.a required positive financing gap and bank use of purchased liquidity
c.the fdic and the discount window
d.insurance funds operated by individual states and tighter bank regulations
e.none of the above
11) darby minerals wants to hire an investment banker to sell 2 million shares of stock
to the public. darby is considering using either a firm commitment or a best efforts
offering.
a) if darby goes with a firm commitment, the offer price will be $15.00 per share and
the spread will be 25 cents a share and all 2 million shares will be sold. the actual sale
price to the public is $14.55.
b) suppose that darby uses a best efforts offering. the actual sale price to the public is
again $14.55 and the investment banker charges 4 cents per share sold as commission.
assume that in the best efforts offer only 1.85 million shares can be sold.
what are the proceeds to darby from the sale of stock in the firm commitment and the
best efforts and what is the investment banker’s gain or loss in each case? ignore any
other costs and expenses.
12) the largest asset on the typical securities firms’ balance sheet in 2010 was
a.receivable from other broker-dealers
b.long positions in securities and commodities
c.reverse repurchase agreements
d.repurchase agreements
e.cash
13) the reduction in deposit funds cost to an individual bank brought about by
government insurance is an example of the
a.social benefit of regulation
b.private cost of regulation to dis
c.private benefits of regulation to dis
d.net regulatory burden
e.none of the above
14) the discount rate is the rate that
a.banks charge for loans to corporate customers
b.banks charge to lend foreign exchange to customers
c.banks charge each other on loans of excess reserves
d.banks charge securities dealers to finance their inventory
e.the federal reserve charges on loans to commercial banks
15) a(n) ___________ fund must hold substantial cash reserves in order to meet fund
redemptions from shareholders.
a.closed-end
b.reit
c.open-end mutual
d.etf
e.unit trusts
16) finance companies obtain a significant portion of their short-term financing from
a.time and savings deposits
b.transaction accounts
c.long-term bonds
d.issuing commercial paper
e.equity
17) the nyse specialists are charged with
i. trading for their own account.
ii. ensuring public limit orders are executed.
iii. facilitating processing public market orders.
a.i only
b.i and ii only
c.ii and iii only
d.i and iii only
e.i, ii, and iii
18) the largest type of municipal bonds outstanding are _______________.
a.revenue bonds
b.industrial development bonds
c.treasury strips
d.convertible bonds
e.general obligation bonds
19) standard revenue bonds are
a.backed by the full taxing authority of the municipality
b.collateralized by the earnings from a specific project
c.bonds backed by mortgages
d.backed by the u.s. treasury
e.always offered with a best efforts offering
20) which one of the following statements concerning annuities offered by insurers is
not true?
a.interest on annuities is not taxed until the investor receives the payments
b.annuity payments may be fixed or variable
c.annuity contributions are not capped by the irs
d.annuities can be deferred or immediate
e.annuity payments must cease upon the policyholder’s death
21) the higher the exercise price, the ________________ the value of a put and the
_______________ the value of a call.
a.higher; higher
b.lower; lower
c.higher; lower
d.lower; higher
22) the trading activity involving purchases of large blocks of securities on the
expectation of a favorable price move over the next several weeks or months is called
a.program trading
b.pure arbitrage
c.day trading
d.position trading
e.hedging
23) you purchase a $255,000 house and you pay 20% down. you obtain a fixed-rate
mortgage where the annual interest rate is 5.85% and there are 360 monthly payments.
what is the monthly payment?
a.$1,215.27
b.$1,203.48
c.$1,194.45
d.$1,367.22
e.$1,504.35
24) which of the following bond option positions increase in value when interest rates
increase?
a.long call; written put
b.long put; written call
c.long put; long call
d.written put; written call
25) a bank’s balance sheet is characterized by long-term fixed-rate assets funded by
short-term, variable-rate liabilities. most likely the bank has a
a.positive repricing gap and a positive duration gap
b.positive repricing gap and a negative duration gap
c.negative repricing gap and a positive duration gap
d.negative repricing gap and a negative duration gap
26) the _______________________ introduced the prompt corrective action policy that
requires federal intervention when a bank’s capital falls below certain minimums.
a.federal deposit insurance corporation improvement act
b.financial services modernization act
c.usa patriot act
d.foreign bank supervision enhancement act
e.foreign banking activity powers enforcement act
27) an individual actually earned a 4% nominal return last year. prices went up by 3%
over the year. given that the investment income was subject to a federal tax rate of 28%
and a state and local tax rate of 6%, what was the investor’s actual real after-tax rate of
return?
a.-0.36%
b.0.66%
c.0.72%
d.1.45%
e.2.64%
28) which one of the following bonds is likely to have the highest required rate of
return, ceteris paribus?
a.aaa-rated noncallable corporate bond with a sinking fund
b.aa-rated callable corporate bond with a sinking fund
c.aaa-rated callable corporate bond with a sinking fund
d.high-quality municipal bond
e.aa-rated callable corporate bond without a sinking fund
29) a bank has $6 million in treasury bills, $3 million in excess reserves at the fed, $1
million in vault cash, and an $8 million line of credit on the repo market. the bank has
borrowed $6 million in fed funds and $12 million in short-term notes borrowed to
finance loans. what is the net liquidity position of the bank and what can you conclude
from it?
30) what is the loanable funds theory of interest rates?
31) the total sale proceeds from selling the stripped components of a treasury security
can sometimes be greater than the fair present value of the treasury security. why might
this happen?
32) figure 22-3
a thrift has an annual cgap of -$25 million. a credit union has an annual cgap of +$5
million. the thrift has total assets of $500 million and net income of $7.5 million and the
credit union has total assets of $40 million and net income of $0.7 million.
calculate each institution’s cgap as a percent of assets. based on the gap, which
institution’s nii is more sensitive to interest rates? explain.
33) when would a forward contract be better for hedging than a futures contract?