As an industry, finance companies have escaped the merger and consolidation activity
that has affected nearly every other sector of the financial services industry.
Answer:
Historically, correspondent banking relationships have been important in the sale of
bank loans.
Answer:
The USA Patriot Act of 2001 prohibits U.S. banks from providing banking services to
foreign banks.
Answer:
Routine hedging will allow the FI to achieve greater return from the assets and
liabilities on the balance sheet.
Answer:
When an FI sells a loan without recourse, the credit risk of the loan is completely
eliminated from the FIs balance sheet.
Answer:
A good news effect of increased mortgage prepayments on a mortgage pool caused by
decreasing market interest rates includes the receipt of fewer scheduled interest
payments.
Answer:
Derivative products used in managing contingent credit risk can only be acquired as
over-the-counter arrangements.
Answer:
Early prepayments on mortgages backing a CMO are normally allocated to the earliest
existing tranche maturity.
Answer:
Finance companies differ from banks in that they do not accept deposits.
Answer:
In the life insurance model, the ratio of total surplus and capital to the risk-based capital
calculation must be greater than or equal to 0 for the insurance company to be
satisfactorily capitalized.
Answer:
The establishment of a presence in local markets by insurance companies is reasonably
inexpensive because of low capital requirements established by state regulators.
Answer:
The Financial Services Modernization Act of 1999 allowed investment banks and
securities firms to offer deposit accounts to individuals.
Answer:
Even though an FI has off-balance-sheet activities, the TRUE net worth is equal to
on-balance sheet assets minus on-balance sheet liabilities.
Answer:
The market in which foreign currency is traded for future delivery is the forward
foreign exchange market.
Answer:
When an FI sells a loan with recourse, a liability is created on the balance sheet.
Answer:
The back simulation approach to estimating market risk exposure requires the use of
daily prices or returns for some period of immediately recent history.
Answer:
Traditionally, motor vehicle loans and leases are the largest category of consumer loans
for finance companies.
Answer:
Most bond options trade on the over the counter markets as opposed to organized
exchanges such as the Chicago Board Options Exchange.
Answer:
In recent years, the fastest growing type of swap agreement has been a fixed-fixed
currency swap.
Answer:
Which of the following is TRUE of an ‘adverse material change in conditions clause’
used in a loan commitment?A. It allows the FI to cancel or reprice a loan commitment.
B. It protects the lender against takedown risk.
C. It protects the lender against basis risk.
D. Exercise of the clause helps defaulted borrowers.
E. It is exercised frequently by most FIs.
Answer:
Federal regulations in the U.S. allow derivatives to be used only by the 25 largest
banks.
Answer:
Which of the following observations concerning the intermediation approach to
measure the cost function of FIs is TRUE?A. It views FIs’ outputs of services as having
two underlying inputs.
B. Labor and capital are the only inputs.
C. It views the output as being produced by labor, capital and the funds used to
produce intermediated services.
D. Premiums or reserves are viewed as an input in the banking and thrift industries.
E. None of the above.
Answer:
Futures options on bonds have interest rate futures contracts as the underlying asset.
Answer:
The gain to the writer of a bond option is unlimited.
Answer:
It is impossible for an individual to be approved for a finance company loan with a
bankruptcy on their record.
Answer:
If an FI were closed by regulators before its economic net worth became zero, neither
liability holders nor those regulators guaranteeing the claims of liability holders would
stand to lose.
Answer:
Selling loans without recourse is a way for FIs to remove loans from their balance sheet
for the purpose of reducing the cost associated with reserve requirements.
Answer:
The policyholder can vary the premium payments on an endowment life policy.
Answer:
Retail nontransaction savings and time deposits comprise the largest portion of deposits
for commercial banks.
Answer:
Options become more valuable as the variability of interest rates decreases.
Answer:
A borrower’s reputation is an example of a market-specific factor in the credit decision.
Answer:
The Financial Services Modernization Act of 1999 allows commercial banking
activities and securities underwriting to operate simultaneously under the same
ownership structure.
Answer:
Investment banks are the predominant buyers of HLT loans because they are more
informed agents in this market than other investors.
Answer:
General Electric Capital Corporation is considered a captive finance company.
Answer:
Credit risk is more likely to lead to failure of an FI than either interest rate or
foreign-exchange risk.
Answer:
Systematic credit risk can be reduced significantly by diversification.
Answer:
In the U.S., electronic methods of payment account for a larger number of transactions,
but a lower aggregate dollar value than non-electronic methods of payment.
Answer:
Off-balance-sheet risk occurs because of activities that do not appear on the balance
sheet.
Answer:
Which of the following statements involving the promised return on a loan is
NOT TRUE?A. Credit risk may be the most important factor affecting the return on a
loan.
B. Compensating balances reduce the effective cost of loans for the borrower because
the deposit interest rate is typically greater than the loan rate.
C. Compensating balances represents the portion of the loan that must be kept on
deposit at the bank.
D. Compensating balance requirements provide an additional source of return for the
lending institution.
E. Increased collateral is a method of compensating for lending risk.
Answer:
If an FI’s repricing gap is less than zero, then A. it is deficient in its required reserves.
B. it is deficient in its capital ratio requirement.
C. its liability costs are more sensitive to changing market interest rates than are its
asset yields.
D. its liability costs are less sensitive to changing market interest rates than are its asset
yields.
E. the duration of the FI’s liabilities exceeds the duration of FI’s assets.
Answer:
The potential exercise of unanticipated contingencies can result in A. technology risk.
B. interest rate risk.
C. credit risk.
D. foreign exchange risk.
E. off-balance-sheet risk.
Answer:
What will be the size of the bank if a purchased liquidity management strategy is
adopted?A. $9 million.
B. $11 million.
C. $12 million.
D. $14 million.
E. $15 million.
Answer:
Fees investors are charged to cover administration and shareholder services are called
A. 12b-1 fees.
B. management fees.
C. sales loads.
D. preemptive taxes.
E. transaction fees.
Answer:
Which of the following is a disadvantage of international expansion? A. An FI can
lower its net regulatory burden and therefore increase its potential net profitability by
finding countries that have reduced activity restrictions and reserve requirements.
B. An FI can generate additional returns from new product innovations if it can sell
such services internationally rather than just domestically.
C. Monitoring and information collection cost often are higher in international markets.
D. International expansion allows an FI to search for cheaper and more available
sources of funds.
E. International activities enhance the opportunities to diversify the risk of earnings
flows.
Answer:
One hundred identical mortgages are pooled together into a pass-through security. Each
mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid
monthly), and is fully amortized over a term of 30 years.
If the entire mortgage pool is repaid after the second month, what is the second month’s
(liquidating) principal and interest payments? A. $99,933 interest and $14,989,935
principal.
B. $100,000 interest and $10,065 principal.
C. $100,000 interest and $15,000,000 principal.
D. $99,933 principal and $14,989,935 interest.
E. $12,000 interest and $138,000 principal.
Answer:
Calculating modified duration involvesA. dividing the value of duration by the change
in the market interest rate.
B. dividing the value of duration by 1 plus the interest rate.
C. dividing the value of duration by discounted change in interest rates.
D. multiplying the value of duration by discounted change in interest rates.
E. dividing the value of duration by the curvature effect.
Answer:
Which is the oldest mortgage-backed security sponsoring agency? A. GNMA.
B. FNMA.
C. FHA.
D. FMHA.
E. FHLMC.
Answer:
Suppose that the financial ratios of a potential borrowing firm took the following
values:
X1 = 0.30
X2 = 0
X3 = -0.30
X4 = 0.15
X5 = 2.1
Altman’s discriminant function takes the form:
Z = 1.2 X1+ 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5
The Z score for the firm would be A. 1.64.
B. 1.56.
C. 2.1.
D. 3.54.
E. 2.96.
Answer:
If 50 percent of the commitment is taken down, the back-end fee is A. $250,000.
B. $4,000,000.
C. $400,000.
D. $775,000.
E. $375,000.
Answer:
The federal government has traditionally extended safety nets to DIs consisting of A.
deposit insurance, discount window borrowing, and reserve requirements.
B. deposit insurance and discount window borrowing.
C. deposit insurance, unemployment insurance, and discount window borrowing.
D. deposit insurance, open market operations, and discount window borrowing.
E. deposit insurance protection.
Answer:
Concern about the improper transfer of inside information has been used to justify
product segmentation on the grounds of A. safety and soundness issues.
B. economy of scale and scope issues.
C. conflict of interest issues.
D. deposit insurance issues.
E. regulatory oversight issues.
Answer:
What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling
at 25 cents on the dollar? (choose the closest answer) A. 10 percent.
B. 40 percent.
C. 14 percent.
D. 25 percent.
E. Cannot be determined.
Answer:
Which of the following items is an advantage of international expansion for an FI?A.
An FI faces the political risk that a change in government may lead to the
nationalization of fixed assets.
B. A global FI must master the rules and regulations of each market in which it
operates.
C. The fixed costs of establishing overseas organizations may be very high in certain
markets.
D. International expansions allow an FI to maintain contact with and provide service to
the needs of domestic multinational corporations.
E. The absolute level of risk exposure in certain markets can be very high.
Answer:
Assume that the swap is for two years and that LIBOR is 5.25 percent in year one and
6.25 percent in year two. What will be the net swap cash flow each year if the notional
value of a swap is $100 million? A. The thrift pays $0.75 million to the bank in year
one and receives $0.25 million from the bank in year two.
B. The thrift receives $0.75 million from the bank in year one and pays $0.25 million
to the bank in year two.
C. The thrift pays $0.25 million to the bank in year one and receives $0.75 million
from the bank in year two.
D. The thrift receives $0.25 million from the bank in year one and pays $0.75 million
to the bank in year two.
E. None of the above.
Answer:
An investor purchases fund shares with a 3 percent front-end load and expects to hold
the shares for 10 years. The fund has a total fund expense ratio (including 12b-1 fees) of
1 percent per year. The annual total shareholder cost for this fund is _______ per year.
A. 3 percent
B. 30 percent
C. 0.3 percent
D. 1.3 percent
E. 1 percent
Answer:
Regulation limits FI investment in non-investment grade bonds (rated below Baa or
non-rated). What kind of risk is this designed to limit? A. Liquidity risk.
B. Interest rate risk.
C. Credit risk.
D. Foreign exchange rate risk.
E. Off-balance sheet risk.
Answer:
Which of the following is a measure of the sensitivity of loan losses in a particular
business sector relative to the losses in an FI’s loan portfolio? A. Loss rate.
B. Systematic loan loss risk.
C. Concentration limit.
D. Loss given default.
E. Expected default frequency.
Answer:
Which of the following two investment banks were acquired by financial services
holding companies during the most recent financial crisis? A. Merrill Lynch and Bear
Stearns.
B. Goldman Sachs and Morgan Stanley.
C. Bear Stearns and Lehman Brothers.
D. Merrill Lynch and Morgan Stanley.
E. Lehman Brothers and Goldman Sachs.
Answer:
A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest
paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent.
Calculate the percentage change in this bond’s price if interest rates on comparable risk
securities decline to 7 percent. Use the duration valuation equation.A. +8.58 percent
B. +12.76 percent
C. -12.75 percent
D. +11.80 percent
E. +11.52 percent
Answer:
Which function of an FI reduces transaction and information costs between a
corporation and individual which may encourage a higher rate of savings? A.
Brokerage services.
B. Asset transformation services.
C. Information production services.
D. Money supply management.
E. Administration of the payments mechanism.
Answer:
In comparison to a typical commercial bank, an investment bank is likely to have A.
lower levels of capital.
B. higher reliance on long-term debt.
C. lower levels of repurchase agreements.
D. higher levels of net interest margin.
E. higher levels of loans to customers.
Answer:
U.S. pension funds hold approximately _______ of their assets in foreign securities,
while British pension funds have traditionally invested approximately _______ of their
funds in foreign assets. A. 20 percent; 5 percent
B. 5 percent; 20 percent
C. 0 percent; 30 percent
D. 30 percent; 10 percent
E. 20 percent; 20 percent
Answer:
In making credit decisions, which of the following items is considered a market-specific
factor? A. Whether the reputation of the borrower enhances the credit application.
B. Whether the current debt-equity ratio is sufficiently low to not impact the
probability of repayment.
C. Whether the debt can be secured by specific property.
D. Whether the position of the economy in the business cycle phase would affect the
probability of borrower default.
E. Whether the volatility of earnings could present a period where the periodic
payment of interest and principal would be at risk.
Answer:
The concept of prompt corrective action refers to the requirement A. that bank
managers must address problems in the loan portfolio when they are first identified.
B. that regulators must take specific actions when bank capital levels fall outside the
well-capitalized category.
C. that a receiver must be appointed when a bank’s book value of capital to assets falls
below 2 percent.
D. that b and c above are correct.
E. that all of the above are correct.
Answer:
Which of the following is NOT an advantage of domestic geographic diversification?
A. Consumer convenience.
B. Risk diversification.
C. Efficiency of operations.
D. Exploitation of economies of scale.
E. Exploitation of monopoly power.
Answer:
Which of the following implies reduced unit costs as the range of products offered
increases inputs in producing multiple products?A. Diseconomies of scale.
B. Economies of scale.
C. Economies of scope.
D. Diseconomies of scope.
E. Constant returns to scale.
Answer:
Which of the following is pure life insurance with a savings element built inA. term
life.
B. universal life.
C. endowment life.
D. variable universal life.
E. variable life.
Answer:
A corporate venture capital firm A. has publicly-traded common stock.
B. provides equity funds to companies that already have publicly traded common
stock.
C. is a subsidiary of a nonfinancial corporation.
D. provides debt funding to only to established corporations.
E. is subject to more stringent disclosure requirements than other venture capital firms.
Answer:
Concern about the ability to analyze a more complex corporate structure has been used
to justify product segmentation on the grounds of A. safety and soundness issues.
B. economy of scale and scope issues.
C. conflict of interest issues.
D. deposit insurance issues.
E. regulatory oversight issues.
Answer:
What should be the spot rate in order for no arbitrage to take place, assuming the
one-year forward rate is $0.1975/€?A. $0.1944/€.
B. $0.1975/€.
C. $0.2000/€.
D. $0.2025/€.
E. $0.2031/€.
Answer:
This legislation defines a bank as any institution that accepts deposit insurance
coverage. A. The McCarran-Ferguson Act of 1945.
B. The Bank Holding Company Act of 1956.
C. The Garn-St. Germain Act of 1982.
D. The Competitive Equality Banking Act of 1987.
E. The International Banking Act of 1978.
Answer:
Which of the following measures the dollar value of futures contracts that should be
sold per dollar of cash position exposure? A. Hedge ratio.
B. Open position.
C. Implied volatility.
D. Payoff.
E. Risk ratio.
Answer: