1) preferred stockholders have a claim senior to common stock but junior to
bondholders.
2) the writer of an american-style bond call option has the right, but not the obligation,
to buy the bond at a preset price until the option expires.
3) nontransaction deposits at banks include now accounts and demand deposits.
4) a stock broker acts as a principal on behalf of the customer.
5) a bank holding company that only has one bank is termed a unit bank.
6) marking to market of futures contracts is the process of realizing gains and losses
each day as the futures contract changes in price.
7) the seven members of the board of governors of the federal reserve system serve
14-year nonrenewable terms. each board member is appointed by the president and
confirmed by the senate.
8) 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%.
if interest rates increase 100 basis points the predicted dollar change in equity value will
equal
a.$10,171,698
b.-$10,171,698
c.$12,724,528
d.-$12,724,528
e.$4,928,756
9) if you are married and you and your spouse make $160,000 total per year you are not
allowed to contribute to an ira.
10) state farm and other p&c insurers came into conflict with policyholders over claims
filed as a result of hurricane katrina that resulted in lawsuits. the conflict resulted from
a.insurer’s refusal to pay until reinsurance funds were collected
b.policyholder’s fraudulent claims
c.insurers’ insistence that the katrina storm surge resulted in flood damage which was
not covered
d.insurers overcharged for hurricane insurance
11) interest-bearing retail accounts with limited checking features designed to compete
with money market mutual fund investments are called ________________.
a.nows
b.retail cds
c.mmdas
d.special savings deposits
e.negotiable cds
12) investment firms that pool money from individuals and/or institutions and invest
equity funds in startup firms are called
a.top-tier bankers
b.section 20 affiliates
c.venture capital firms
d.ecns
e.discount brokerage houses
13) a bond portfolio manager has a $25 million market value bond portfolio with a
6-year duration. the manager believes interest rates may increase 50 basis points. which
of the following could be used to help limit his risk?
i. sell the bonds forward.
ii. buy bond futures contracts.
iii. buy call options on the bonds.
iv. buy put options on the bonds.
a.i only
b.ii only
c.i and iii only
d.i and iv only
e.ii and iii only
14) in selling loans, fis act as an asset _____ and in creating cmos, fis act as an asset
_____.
a.transformer; broker
b.transformer; transformer
c.broker; broker
d.broker; transformer
15) a negotiated otc agreement to exchange currencies at a fixed date in the future but at
an exchange rate specified today is a
a.currency swap agreement
b.forward foreign exchange transaction
c.currency futures contract
d.currency options contract
e.spot foreign exchange transaction
16) if a bank has more purchased funds than the average bank, you would not be
surprised to see a higher than average ____________________ ratio.
a.provision for loan loss
b.tax
c.noninterest expense
d.interest expense
e.none of the above
17) you buy a principal strip maturing in 5 years. the price quote per hundred of par for
the strip is 75.75%. using semiannual compounding what is the promised yield to
maturity on the strip?
a.5.632%
b.5.712%
c.2.816%
d.2.945%
e.4.566%
18) today stock a is worth $20 and has 1000 shares outstanding. stock b costs $30 and
has 500 shares outstanding. stock c is priced at $50 per share and has 1200 shares
outstanding. if tomorrow stock a is priced at $22, stock b at $35, and stock c is worth
$48, what would the value-weighted index amount equal? (the index has a base period
value of 100.)
a.35.00
b.105.00
c.108.44
d.101.45
e.102.21
19) a repo is in essence a collateralized
a.banker’s acceptance
b.certificate of deposit
c.fed funds loan
d.commercial paper loan
e.eurodollar deposit
20) common stocks typically have which of the following that bonds do not have?
i. voting rights
ii. fixed cash flows
iii. set maturity date
iv. tax deductibility of cash flows to investors
a.i only
b.i, ii, and iv only
c.ii, iii, and iv only
d.iv only
e.i, ii, iii, and iv
21) which one of the following is usually the better predictor of default?
a.standard & poor’s credit rating
b.moody’s credit rating
c.altman z-score
d.kmv’s edf
e.all of the above are equally effective at predicting default
22) a firm is using cumulative voting and four director spots are up for election. there
are 3.6 million shares outstanding. how many shares must a minority owner own or
control to ensure that he or she can gain control of one seat on the board of directors?
a.900,001
b.880,001
c.720,001
d.1,800,001
e.1,750,001
23) which one of the following statements about commercial paper is not true?
commercial paper issued in the united states
a.is an unsecured short-term promissory note
b.has a maximum maturity of 270 days
c.is virtually always rated by at least one ratings agency
d.has no secondary market
e.carries an interest rate above the prime rate
24) if the net proceeds are greater than the gross proceeds in an underwritten offering,
then
a.the investment banker made a profit on the spread
b.the issuing company underpriced its securities
c.the issue fails to occur
d.the sec rescinds the issue
e.none of the above
25) investment a pays 8% simple interest for 10 years. investment b pays 7.75%
compound interest for 10 years. both require an initial $10,000 investment. the future
value of a minus the future value of b is equal to ______________ (to the nearest
penny).
a.$2,500.00
b.-$2,500.00
c.$1,643.32
d.$3,094.67
e.-$3,094.67
26) the largest liability of broker dealers in 2010 was
a.bank loans payable
b.short positions in securities and commodities
c.subordinated debt
d.repurchase agreements
e.equity
27) figure 12-2
first national bank of beverly hills (millions $)
what must net noninterest income (net of noninterest expense) be in order for fnb to
have a 12% roe? based on your answer, must fnb be performing better or worse than the
industry average in this area? explain.
28) what new rules have resulted from the mutual fund trading abuses?
29) what factors can cause a bank’s book value of equity to differ from its market
value? what widely available ratio is typically used to measure the difference between
the two?
30) halliburton was allowed to bankrupt one of its subsidiaries in settlements of
lawsuits on asbestos cases. what are the pros and cons of allowing a firm to limit its
liability by shifting the liability to only one subsidiary rather than placing all of the
corporation’s assets at risk?
31) why do mortgage lenders prefer arms while many borrowers prefer fixed-rate
mortgages, ceteris paribus.
32) a three-class (class a, b, and c) sequential pay cmo starts with an $80 million
principle amount in each class. the mortgages in the pool have a 7% interest rate. the
cmo classes receive monthly payments. during the first month $1 million in interest is
received from mortgage holders and $1.5 million in principle. what principle amounts
are outstanding for each class during the second month? how will this affect the total
payment each class receives? explain.
33) explain how the credit crunch originating in the mortgage markets hurt financial
intermediaries’ attempts to use diversification and monitoring to limit the riskiness of
their loans and investments while offering more liquid claims to savers.
34) a bank has da = 2.5 years, dl= 0.80 years, and k = 92%. assets are equal to $1,200
million. according to the duration gap model, what size interest rate change would make
the institution insolvent if rates are currently 5%?
35) who are the major participants in money markets?