1) risk arising from unhedged positions in securities, currencies, and derivatives is
called market risk.
2) the policy employed in the 1980s of not closing economically insolvent savings
institutions was called regulatory forbearance.
3) an unsecured bond that has no specific collateral other than the general
creditworthiness of the issuing firm is called a debenture.
4) the cra of 1977 and the hmda of 1975 are examples of consumer protection
regulations.
5) a country with lower interest rates than another country is likely to see its currency
appreciate if parity holds.
6) insolvency occurs when an institution’s duration gap becomes negative.
7) the dollar’s value increased when the fed cut interest rates in late 2007 .
8) everything else equal, an effective annual rate will be greater than the bond
equivalent yield on the same security.
9) the term structure of interest rates is the relationship between interest rates on bonds
similar in terms except for maturity.
10) program trading is the simultaneous buying and selling of at least 15 stocks worth a
total of $1 million or more.
11) iras are
a.self-directed investment vehicles designed to provide supplemental retirement income
b.corporate retirement plans for self-employed individuals and small businesses
c.specific classes of investments such as equities or bonds issued by certain
corporations
d.investment vehicles created by erisa
e.special types of life insurance policies
12) firms in the securities industry are required to maintain a minimum capital to asset
ratio of ______________.
a.2%
b.4%
c.6%
d.8%
e.10%
13) the following type(s) of life insurance policies do not have a savings feature:
a.term life
b.whole life
c.variable life
d.universal life
e.both c and d do not
14) core deposits typically include all except which one of the following?
a.demand deposits
b.now accounts
c.mmdas
d.eurodollar deposits
e.passbook savings accounts
15) the law that largely repealed the depression era banking laws was the
a.depository institution deregulation and monetary control act of 1980
b.financial services modernization act
c.firre act
d.international banking act
e.none of the above
16) if an n year security recovered the same percentage of its cost in pv terms each year
the duration would be
a.n
b.0
c.sum of the years/n
d.n!/n2
e.none of the above
17) an interest rate floor is designed to protect an institution from
i. falling interest rates.
ii. falling bond prices.
iii. increased credit risk on loans.
iv. swap counterparty credit risk.
a.i and iv
b.ii and iii
c.i and iii
d.ii and iv
e.i only
18) the _____________ is a network linking over 9,000 banks with the federal reserve
that is used to transfer deposits and make loan payments between participants.
a.fedwire
b.ach
c.chips
d.nasdaq
e.swift
19) the largest single type of holder of common stock ($) is
a.pension funds
b.households
c.mutual funds
d.brokers and dealers
e.life insurance firms
20) in 2009, the greatest dollar volume of u.s. corporate underwriting occurred for
which type of security?
a.straight corporate debt
b.asset-backed debt
c.common stock
d.preferred stock
e.convertible debt
21) a bank that has an equity to asset ratio equal to 12% can normally lend no more
than _________________ of its assets to any one borrower.
a.1.20%
b.1.50%
c.1.80%
d.12.00%
e.15.00%
22) a bank has a negative repricing gap using a 6-month maturity bucket. which one of
the following statements is most correct if mmdas are rate-sensitive liabilities?
a.if all interest rates are projected to increase, to limit a profit decline when this occurs,
the bank could encourage its retail deposit customers to switch from 2-year cds at
current rates to 3-month cds
b.if all interest rates are projected to decrease, to limit a profit decline when this occurs,
the bank could encourage its retail deposit customers to switch from mmdas to 2-year
cds 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 deposit customers to switch from 3-month cds to
2-year cds at current rates
d.if all interest rates are projected to increase, to limit a profit decline when this occurs,
the bank could encourage its retail deposit customers to switch from 2-year cds at
current rates to mmdas
e.if all interest rates are projected to increase, to limit a profit decline when this occurs,
the bank could encourage its retail deposit customers to switch from mmdas to 2-year
cds at current rates
23) credit unions have several advantages over banks. these include
i. credit unions are not taxed.
ii. credit unions are better diversified than banks.
iii. credit unions can collectively pool funds.
iv. due to regulations, credit unions have better economies of scale and scope than
banks.
v. because of their ties to employers credit unions have better personnel expertise than
banks.
a.i and ii only
b.i and iii only
c.iii and iv only
d.iii, iv, and v only
e.i, iii, and v only
24) the operating ratio is calculated as
a.the loss ratio minus the underwriting cycle lag
b.the loss ratio plus the loss adjustment expense ratio plus the commission to premium
ratio
c.the combined ratio after dividends minus the investment yield
d.the combined ratio minus the loss ratio
e.none of the above
25) a 10-year maturity coupon bond has a 6-year duration. an equivalent 20-year bond
with the same coupon has a duration
a.equal to 12 years
b.less than 6 years
c.less than 12 years
d.equal to 6 years
e.greater than 20 years
26) the fed increases bank reserves in the system by $75 million. if there are no drains
the expected change in bank deposits is
a.$82.5 million
b.$945 million
c.$750 million
d.$1,500 million
e.$655 million
27) a money market mutual fund’s total assets increase from $100 to $105 when the
fund has 100 shares outstanding. which of the following will happen?
a.the fund’s nav will rise from $100 to $105
b.the fund’s nav per share will rise from $1 to $1.05
c.the fund will issue a total of 5 new shares
d.the fund’s nav will fall 5%
e.the fund will close to new investors
28) a bank has made a risky loan to a midsize consumer goods manufacturer. with the
weaker economy, the borrower is expected to have trouble repaying the loan. the bank
decides to purchase a digital default option. which one of the following payout patterns
does a digital option provide?
a.the option seller pays a stated amount to the option buyer, usually the par on the loan
or bond, in the event of a default on the underlying credit
b.the option seller pays the buyer if the default risk premium or yield spread on a
specified benchmark bond of the borrower increases above some exercise spread
c.if the option buyer makes fixed periodic payments to the option seller, the seller will
pay the option buyer if a credit event occurs
d.if the option buyer makes periodic payments to the seller and delivers the underlying
bond or loan, the seller pays the par value of the security
e.if interest rates change, the option seller will begin making fixed-rate payments to the
option buyer
29) an fi has da = 2.45 years and kdl = 0.97 years. the fi has total assets equal to $375
million. the fi wishes to effectively reduce the duration gap to one year by hedging with
t-bond futures that have a market value of $115,000 and a dfut = 8 years. how many
contracts are needed and should the fi buy or sell them? (d = duration)
30) what is the purpose of index funds? how does this differ from other equity mutual
funds? why are index funds growing in popularity?
31) a 55-year-old has just changed jobs and has a choice between a defined benefit plan
[final pay] and a defined contribution plan. he will work for 10 more years. what should
he consider in making his decision?
32) hedge funds may be classified into three types based on their investment strategies
and risk level. what are the three types and their broad risk levels? many different
strategies exist in each type. list one example strategy in each type.
33) how can a depository intermediary afford to purchase long-term risky direct claims
from fund’s demanders and finance these purchases with safe, liquid, short-term, low
denomination deposits? what can go wrong in this process?
34) why are banks different from other depository institutions?