1) most states maintain a permanent reserve fund to resolve insurance company failures.
2) a 12b-1 fee is an implicit load charge.
3) a seasoned equity offering occurs when an issuer that already has equity publicly
trading issues new shares to the public.
4) if the euro per yen ratio falls, the value of the yen has risen.
5) at year-end a firm has assets of $100 and debts due of $120. in this situation, the
stockholders must pay an additional $20 out of their own pocket.
6) which of the following is the primary regulator of bank holding company activities?
a.federal bank holding company board
b.fdic
c.federal reserve
d.state regulatory agency in the chartering states
e.u.s. treasury
7) a best efforts offering is one where
a.the underwriter bears the risk of an unsuccessful offering
b.the bid-ask spread is exceptionally high, but the investment banker does their best to
sell the issue anyway
c.the investment banker acts as a principal for the issuer
d.the investment banker acts only as a distribution agent
e.the issue can only be privately placed
8) in 2010 the average combined ratio after dividends for the p&c industry was
___________.
a.102.3
b.105.6
c.107.2
d.97.6
e.93.5
9) mid-market commercial lending may be typically defined as borrowers
i. with sales revenue between $5 and $100 million.
ii. with a recognizable corporate structure.
iii. with ready access to deep and liquid capital markets.
a.i only
b.ii only
c.iii only
d.i and ii only
e.i, ii, and iii
10) a municipal bond is paying a 6% annual yield. an equivalent risk corporate bond is
paying 7%. investors with a tax rate of _______________ or higher would prefer the
municipal bond.
a.65.13%
b.14.28%
c.25.00%
d.80.75%
e.25.75%
11) reasons behind the drop in bank profitability in the second half of this decade
include
i. flattening of the yield curve.
ii. increase in competitive pressures on asset pricing.
iii. increases in foreclosures in the mortgage market.
iv. increases in net interest margin.
a.i only
b.ii and iii only
c.i, ii, and iii only
d.ii, iii, and iv only
e.iii and iv only
12) banking may be subdivided into at least three categories of banks. match up the
definitions with the appropriate name.
i. a bank that specializes in retail or consumer banking in a local market.
ii. a bank that engages in a complete array of wholesale commercial banking activities
and usually also provides retail banking services.
iii. a bank that is located in a financial center and relies on nondeposit or borrowed
sources of funds for a significant portion of its liabilities.
a.money center bank; community bank; super-regional bank
b.community bank; money center bank; super-regional bank
c.super-regional bank; money center bank; community bank
d.money center bank; super-regional bank; community bank
e.community bank; super-regional bank; money center bank
13) in the absence of deposit insurance, a deposit is a _______________ to the bank’s
assets.
a.pro rata claim
b.first come/first serve claim
c.full pay or no pay claim
d.both a and b
e.both b and c
14) the predominant liabilities for savings institutions are
a.commercial deposits and fhlb borrowings
b.wholesale money market notes and reserves at the fed
c.small time and savings deposits and fhlb borrowings
d.checking accounts and money market mutual funds
15) your firm has sold long-term government bonds short on a when-issued basis; your
firm must purchase the bonds and deliver them when they are issued in 6 months. to
hedge this risk, you could
i. buy at-the-money put options on bonds.
ii. sell bond futures contracts.
iii. write at-the-money call options on bonds.
a.i only
b.ii only
c.i and iii only
d.ii and iii only
e.none of these would hedge the risk
16) an insurance line has a loss ratio of 72%, an expense ratio of 35%, and the firm
pays 2% of premiums to policyholders as dividends. what level of investment yield is
needed to make the p&c firm break-even?
a.5%
b.7%
c.9%
d.11%
e.18%
17) a t-bond with a $10,000 par is quoted at a bid of 92:11 and an ask of 92:17 . if you
bought the bond and then immediately sold it at the same quotes, how much money
would you gain or lose (ignore commissions)?
a.$12.50
b.-$12.50
c.-$18.75
d.$18.75
e.$0.00
18) when calculating the liquidity index, the larger the discount from fair value, the
______________ the liquidity index and the _________________ the liquidity risk the
fi faces.
a.larger; greater
b.smaller; greater
c.larger; lower
d.smaller; lower
19) which would have a longer duration: a) a 5-year fully amortized installment loan
with semiannual payments or b) a 5-year semiannual payment bond, ceteris paribus.
why?
20) an increasingly positive financing gap can indicate ________________ liquidity
risk because it may indicate _______________ deposits and/or rising loan
commitments.
a.increasing; increasing
b.decreasing; decreasing
c.increasing; decreasing
d.decreasing; increasing
21) discount window borrowing is available to
i. banks.
ii. thrifts.
iii. investment banks.
iv. nonfinancial corporations.
a.i and ii only
b.i and iii only
c.i, ii, and iii only
d.ii, iii, and iv only
e.i, ii, iii, and iv
22) if m > 1 and you solve the following equation to find i: pv * (1 + (i/m))m*n= fv, the
i you get will be
a.the bond equivalent yield
b.the ear
c.the toe
d.the eye
e.the rate per compounding period
23) tier i (core) capital includes at least some part of which of the following?
i. common stockholders’ equity
ii. retained earnings
iii. subordinated debt
iv. allowance for loan and lease losses
a.i only
b.i and ii only
c.i and iv only
d.ii and iii only
e.i, ii, iii, and iv
24) an investor is committed to purchasing 100 shares of world port management stock
in six months. she is worried the stock price will rise significantly over the next 6
months. the stock is at $45 and she buys a 6-month call with a strike of $50 for $250. at
expiration the stock is at $54. what is the net economic gain or loss on the entire
stock/option portfolio?
a.-$500
b.-$750
c.-$900
d.$400
e.$500
25) the fed wishes to expand the money supply. what three things can they do? which
has the most predictable effects? be specific.
26) what are the advantages finance companies (fcs) have over banks in the area of
business lending? what disadvantages do they have?
27) what loans, other than mortgages, are currently being securitized?
28) what is convexity? how does convexity affect duration-based predicted price
changes for interest rates changes?
29) a 65-year-old wishes to convert the cash value of his insurance policy into an
annuity. he can select an annuity that will last 15 years or one that lasts 20 years. if the
cash value is $450,000 and interest rates are 5.25%, how much less per year will he
receive if he chooses the 20-year annuity?
30) a bank has committed to deliver yen in 6 months to a corporate customer. the spot
rate is 110 yen to the dollar and the 6-month forward rate is 105 yen per dollar. are there
costs to hedging this exposure with the forward market? explain.
31) does a positive or a negative financing gap indicate greater liquidity risk? explain.
32) what supervisory and regulatory authority does the fed have under current law?
33) why do most money market securities have large denominations?