Answers to End of Chapter Questions
1.
a. An insurance company offers a wide variety of insurance products including
life, health, disability, long-term care, and medical supplements insurance.
b. A tradi”onal investment bank major areas of ac”vity include securi”es
c. An automobile manufacturer produces and sells automobiles. BMW Bank
2. The four types of businesses that investment banks tradi”onally engage in are:
a. Securi”es underwri”ng: A firm may contract with an investment bank to
discuss raising funds through the issuance of bonds or stocks. The
underwri”ng process consists of helping the organiza”on design the security
b. Advisory services: Investment banks offer numerous fee-based services
to businesses and governments that assist them in managing risks and
reviewing possible business combina”ons. For firms, the primary services
c. Market making: Investment banks may make a market in certain securi”es.
Consequently, they stand willing to buy securi”es from par”cipants who
want to sell and to sell securi”es to par”cipants who want to buy. They
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d. Propriety trading & inves”ng: An investment bank may commit its own
funds to take a risk posi”on in an underlying security, commodity, or asset.
The investment bank hopes to profit by later reversing the trade at an
3. Level 1 assets have the most precise values because valua”ons are based on actual
price quotes in ac”ve markets for the same or virtually iden”cal asset. The values
are less precise for Level 2 assets because they are based on matrix pricing. In this
4. Historically, investment banks have operated with very high levels of financial
leverage. Financial leverage magni4es a firm’s return on assets . When ROA is
posi”ve, high financial leverage leads to even higher returns on equity. However,
5. Mutual of Omaha Bank benefit from the strong capital base and low-risk profile of
its parent, Mutual of Omaha. Were Mutual of Omaha Bank to need a capital
injec”on, it can rely on Mutual of Omaha to provide addi”onal equity. Mutual of
6. Many community banks are against gran”ng Wal-Mart a charter because they are
concerned that Wal-Mart will offer tradi”onal banking services in all stores and
poten”ally drive them out of business. Many argue that there should be a
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accessible website, in whole or in part.
soundness problems.
7. Having BMW Bank aligned with BMW North America helps facilitate the sale of
vehicles at BMW dealers across North America. BMW caters to rela”vely aHuent
8.
a. Interest income is a much smaller percentage of total revenue for Goldman
Sachs versus PNC. Personnel expense is also much higher, as a percentage of
b. At Mutual of Omaha Bank, much like Community Bank, interest-bearing deposits
and demand deposits represent the dominant funding source. In terms of its
c. BMW Bank has no demand deposit accounts and very few li0le in NOW & ATS
accounts rela”ve to Community Bank. Loans (as a percentage of assets) are on
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© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.