1) buying large blocks of securities and holding them until the price rises sufficiently to
warrant a sale is an example of pure arbitrage.
2) in a mutual organization, the depositors are owners of the institution.
3) if you invest $10,000 in a mutual fund with a nav of $50 per share and a 5%
back-end load, you will receive less than 200 shares in the fund.
4) all else equal, the holder of a fairly priced premium bond must expect a capital loss
over the holding period.
5) treasury notes and bonds and municipal bonds are default risk free.
6) private mortgage insurance (and hence, that part of the homeowner’s monthly
payment) is automatically removed from a mortgage when the loan-to-value ratio on
the mortgage falls below 80%.
7) the layers of regulation imposed on banks to protect depositors against bank failure
are termed credit allocation regulations.
8) european-style options are options that may only be exercised at maturity.
9) an increase in treasury securities held by the fed leads to a decrease in the money
supply.
10) the financial services modernization act allowed bank holding companies to open
insurance underwriting affiliates and allowed insurance companies to open banks.
11) individuals with higher levels of income must have higher gds and tds ratios to
qualify for a loan.
12) dual class stock refers to firms with both common and preferred stock outstanding.
13) if a security’s realized return is negative, it must have been true that the expected
return was greater than the required return.
14) when a vulture fund acquires a distressed loan, the fund usually assists the
distressed firm’s managers in formulating a long-term plan for restoring profitability.
15) noninsured pension plans generally invest in riskier assets than insured pension
plans.
16) the anti-money laundering provisions of the u.s.a. patriot act requires securities
firms to
i. verify the identity of any person seeking to open an account with their firm.
ii. keep separate records of accounts originating from foreign countries.
iii. determine whether the client appears on any lists of known or suspected terrorists or
terrorist organizations.
a.i only
b.iii only
c.i and ii only
d.ii and iii only
e.i, ii, and iii
17) the duration of a 180-day t-bill is (in years)
a.0.493
b.0.246
c.1
d.0
e.indeterminate
18) in 2010, the top five underwriters engaged in about _____________ of total u.s.
underwriting volume.
a.15%
b.22%
c.34%
d.44%
e.56%
19) you wish to invest $17,445 in a mutual fund with a nav of $26.03. the fund charges
a front-end load of 4.50%. how many fund shares will you receive?
a.595
b.640
c.616
d.668
e.628
20) a fund has a nav of $30 per share but the shares are currently selling for $32. this
fund must be
a.an open-ended fund
b.a closed-end fund
c.a balanced fund
d.an aggressive growth fund
e.a money market mutual fund
21) an agreement between two parties to exchange a series of specified periodic cash
flows in the future based on some underlying instrument or price is a(n)
a.forward agreement
b.futures contract
c.interest rate collar
d.option contract
e.swap contract
22) you are considering purchasing shares in a typical mutual fund that has three classes
of shares outstanding: class a, class b, and class c. if you purchase class c shares you
will pay
a.a back-end load and no 12b-1 fees
b.a front-end load and a small 12b-1 fee, but eventually your shares will be converted to
class a shares
c.no front-end load but a back-end load
d.a back-end load and full 12b-1 fees
e.a front-end load and full 12b-1 fees
23) 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
24) an mbb differs from a cmo or a pass-through in that
i. the mbb does not result in the removal of mortgages from the balance sheet.
ii. a mbb holder has no prepayment risk.
iii. cash flows on a mbb are not directly passed through from mortgages.
a.i, ii, and iii
b.i and ii only
c.ii and iii only
d.i and iii only
e.i only
25) congratulations, you have just been employed! you now have a choice between a
flat benefit at retirement equal to $4,000 times your years of service, or a career average
formula of 3.50% of your average salary times your years of service. you expect to
work 40 years. at what average salary would you be indifferent between the two
alternatives?
a.$160,000
b.$145,444
c.$114,286
d.$101,104
e.$98,976
26) present value uncertainty is the risk that
a.the market value of equity will decline if interest rates change
b.interest income will rise by more than interest expense when rates increase
c.assets will be insufficient to cover loan losses
d.bank capital will be insufficient to cover loan losses
e.real interest rates will exceed nominal rates
27) a bank can charge a corporate borrower 6.25% on a loan. the borrower is asking for
a $600,000 loan. the extreme loss rate on this loan type is 4.0% and when default
occurs, about 15% of the loan amount is recovered. the interest and noninterest cost of
the loan is 5.85%. what is the raroc of the loan? under what circumstances should the
bank make the loan?
28) why did profitability of security firms drop precipitously in 2005 and rebound in
2006 only to fall again in 2007?
29) a bank has $150 million in 1-year loans earning a fixed rate equal to 4.75%. the
assets are funded by $150 million in liabilities that have a cost of 4.25% and a maturity
of 3 years. if all interest rates are projected to fall 100 basis points by next year, by how
much will the bank’s profits and loan nim change in year two? does this bank face
refinancing risk or reinvestment risk? explain.
30) how do sales finance companies differ from personal credit and business credit
institutions? list an example of each.
31) why were cmos created?
32) according to current projections, social security and other entitlement programs will
soon be severely underfunded. if the government decides to cut social security benefits
to future retirees and raise social security taxes on all workers, what will probably
happen to the supply of funds available to the capital markets? what will be the effect
on interest rates?
33) describe an agency transaction (brokerage) and a principal transaction (dealer) that
is involved in trading. what determines profits in each activity? which is riskier?
34) in each of the following cases indicate whether the change in profits due to the
spread effect was i) greater than ii) less than, or iii) equal to the change in profitability
due to the repricing gap. in some cases you may not be able to tell; indicate which ones.
35) a bank has a base loan rate of 4.75% and for the loan under consideration it would
apply a 2% risk premium. the bank also requires compensating balances
(non-interest-bearing) equal to 5% of the loan amount. the bank’s reserve requirements
are 10%. the bank charges 1% of the loan amount as an origination fee. the borrower is
asking for a $500,000 loan. calculate the roa on the loan.