1) profitability at investment banking firms has been very stable each year since 2001 .
2) the repricing gap fails to consider how the value of fixed income accounts will
change when rates change.
3) the sale or transfer of assets at less than fair value that occurs at a time when the
seller is insolvent is termed fraudulent conveyance.
4) loans are the major item on a bank’s balance sheet, and they generate the largest
amount of revenue.
5) traditionally, most credit union members had a common employer, but increasingly
the required commonality is a common location of either residence or workplace.
6) the greater a security’s coupon, the lower the security’s price sensitivity to an interest
rate change, ceteris paribus.
7) we expect liquidity premiums to move inversely with interest rate volatility.
8) an example of a national full-line investment banker that specializes in corporate
finance is goldman sachs.
9) banks have an average total debt ratio of about 90%.
10) in july 2002, the u.s. congress passed the sarbanes-oxley bill. among other things,
this bill
i. created an independent auditing oversight board run by the sec.
ii. increased penalties for corporate wrongdoers.
iii. eliminated the use of stock options for executive compensation.
a.i only
b.i and ii only
c.i and iii only
d.ii and iii only
e.i, ii, and iii
11) regulator’s overall evaluation of the riskiness of a depository institution is measured
by the _______________.
a.basel accord
b.cra rating
c.camels rating
d.exposure scale
e.ffiec score
12) the provision of banking services to other banks, such as check clearing, foreign
exchange trading, etc., are examples of
a.correspondent banking
b.trust services
c.off-balance-sheet assets
d.economies of scope
e.credit derivatives
13) the au ratio measures the bank’s ability to __________ and the pm ratio measures
the bank’s ability to __________________.
a.control expenses; generate income from assets
b.generate income from assets; control expenses
c.maximize interest revenue; minimize interest expense
d.control leverage; minimize physical plant
e.none of the above
14) the agreement that ended the era of fixed exchange rates for the major economies
was called the
a.louvre accord
b.bretton woods agreement
c.smithsonian agreement i
d.smithsonian agreement ii
e.plaza accord
15) as a result of the alleged conflicts of interest between analysts and underwriting,
which of the following changes were implemented?
i. analysts cannot participate in, nor attend certain presentations to potential investors
conducted by investment bankers associated with underwriting an issue.
ii. analyst compensation can no longer be tied to the amount of underwriting business a
firm generates.
iii. securities firms must divest stock research divisions to ensure independence from
their investment banking business.
a.i only
b.i and ii only
c.i and iii only
d.ii and iii only
e.i, ii, and iii
16) a decrease in interest rates will
a.decrease the bond’s pv
b.increase the bond’s duration
c.lower the bond’s coupon rate
d.change the bond’s payment frequency
e.not affect the bond’s duration
17) a bank has a negative repricing gap and estimates that the spread between rsas and
rsls will move inversely with interest rates. if interest rates increase, nii will
a.rise
b.fall
c.be unchanged
d.rise or fall depending on the size of the spread effect relative to the size of the cgap
effect
18) liquidity risk at a financial intermediary (fi) is the risk
a.that promised cash flows from loans and securities held by fis may not be paid in full
b.incurred by an fi when the maturities of its assets and liabilities do not match
c.that a sudden surge in liability withdrawals may require an fi to liquidate assets
quickly at fire sale prices
d.incurred by an fi when its investments in technology do not result in cost savings or
revenue growth
e.risk that an fi may not have enough capital to offset a sudden decline in the value of
its assets
19) a corporate bond has a coupon rate of 10% and a required return of 10%. this bond’s
price is
a.$924.18
b.$1000.00
c.$879.68
d.$1124.83
e.not possible to determine from the information given
20) figure 12-1
the bank’s asset utilization ratio is
a.58.04%
b.6.12%
c.5.46%
d.4.29%
e.6.81%
21) figure 2-1
yield curve for zero coupon bonds rated aa
assume that there are no liquidity premiums.
to the nearest basis point, what is the expected interest rate on a four-year maturity aa
zero coupon bond purchased six years from today?
a.10.41%
b.10.05%
c.9.16%
d.10.56%
e.9.96%
22) the primary policy tool used by the fed to meet its monetary policy goals is:
a.changing the discount rate
b.changing reserve requirements
c.devaluing the currency
d.changing bank regulations
e.open market operations
23) a bond investor has a 99% chance of receiving all of her promised payments on a
particular bond issue in the first year of holding the bond, but only a 98% chance in the
second year, and a 97% chance in the third year and beyond. what is the cumulative
default probability over the first three years she holds the bond?
a.3.75%
b.4.24%
c.5.89%
d.6.85%
e.7.33%
24) the safest way to hedge a bond liability with options is to
a.purchase a call option on the bond
b.write a call option on the bond
c.purchase a put option on the bond
d.write a put option on the bond
25) a contract where the buyer agrees to pay a specified interest rate on a loan where the
loan will be originated at some future time is called a(n)
a.forward rate agreement
b.futures loan
c.option on a futures contract
d.interest rate swap contract
e.currency swap contract
26) on july 1, 2012 you purchase a $10,000 par t-note that matures in 5 years. the
coupon rate is 8% and the price quote is 98:6. the last coupon payment was may 1, 2012
and the next payment is november 1, 2012 (184 days total). the accrued interest is
a.$132.61
b.$101.00
c.$50.54
d.$40.65
e.$35.67
27) areas of commercial bank regulation designed to encourage banks to lend to
socially important sectors such as housing and farming are termed
______________________ regulations.
a.safety and soundness
b.consumer protection
c.investor protection
d.credit allocation
e.monetary policy
28) an increase in which of the following would increase the price of a call option on
common stock, ceteris paribus?
i. stock price
ii. stock price volatility
iii. interest rates
iv. exercise price
a.ii only
b.ii and iv only
c.i, ii, and iii only
d.i, iii, and iv only
e.i, ii, iii, and iv
29) commercial banks are the __________________ financial intermediary in the
united states as measured by asset size.
a.largest
b.second-largest
c.third-largest
d.fourth-largest
e.fifth-largest
30) when would preferred stock be a better investment choice than common stock or
bonds?
31) what are the major sources of funds for banks? provide a breakdown of all the
major sources of funds at a bank and briefly describe the different types of
deposits/non-deposit sources.
32) why did profitability of security firms drop precipitously in 2005 and rebound in
2006 only to fall again in 2007?
33) what are the major purposes of the foreign exchange markets?
34) what are the four main categories of mutual fund trading abuses mentioned in the
text? explain the problem with each.
35) a financial service holding company operates a nationally chartered bank, an
insurance firm, a securities firm, and a federal savings bank. who is the primary
regulator for this company? explain.
36) what are the major differences between the interbank foreign exchange market and
the foreign currency exchanges?
37) 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.
assuming a zero spread effect, if all interest rates decrease 50 basis points, what is the
change in nii for the thrift? for the credit union?
38) a foreign investor placing money in dollar denominated assets desires a 4% real rate
of return. global inflation is running about 3% and the dollar is expected to decline
against her home currency by 1.5% over the investment period. what is her minimum
required rate of return? explain
39) describe the major components of a liquidity plan.