2053

Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.

true

Money center banks rely more heavily on wholesale and borrowed funds as sources of liability funding than do community banks.

true

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

true

EBIT

earnings before interest and taxes, is a measure of how much money a company makes, but is not necessarily the same as operating income

Carrying Value

Also known as book value; the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset.

If a portfolio regularly rises when a benchmark index rises, but it rises less than the benchmark does, the portfolio's beta coefficient could be

0.5. Beta is lower than 1 if the portfolio moves with the market, but not the same degree of volatility.

cons of the repricing model model

(1) it ignores market value effects of interest rate changes, (2) it is overaggregative, (3) it fails to deal with the problem of rate-insensitive asset and liability runoffs and prepayments, and (4) it ignores cash flows from off-balance-sheet activities.

When an investor purchases stock, they are purchasing company

equity; Common stockholders are equity owners of the company.

how is revenue typically organized on an income statement

1.Sales 2.Cost of goods sold 3.Other revenue

In what year did housing prices begin to deteriorate leading to a jump in defaults in the subprime mortgage markets and the onset of the recent financial crisis?

2006

By late 2015, the number of branches of existing commercial banks in the U.S. approximated ________, which was a(an) _________ from 1985.

82,500; increase

Sole Proprietorship

A business owned by one person with no reduction in risk

Which of the following is an example of a financial risk for a company that manufactures automobiles?

A car rental agency defaulting on a contract to buy a large volume of automobiles

direct financing

A company wants to have enough money to pay its bills, but also wants to invest so that it can grow in the future. The finance department is devoted to the task of figuring out how to allocate assets to do so, for the overarching goal of maximizing shareholder value.

perpetuity

A perpetuity is an annuity that will continue to pay for a number of infinite periods.

Entrepreneur

A person who organizes and operates a business venture and assumes much of the associated risk.

Who is responsible for holding the legal contract for a bond, or bond indenture?

A trustee, like a financial institution

Theoretically, a company would cancel plans for a long-term project whose net present value

falls below zero. A project who's NPV is less than zero is generating no return.

The pro forma balance sheet shows how the __________ resulting from a strategic plan will be financed.

AFN. A completed pro forma balance sheet will indicate what financial resources will be required.

Agency and Conflicts of Interest

Agency conflicts occur when managers pursue actions that are potentially harmful to the interests of principals.

The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is

All of the options. because diversification allows an FI to predict more accurately the expected returns on its asset portfolio. because individual savers cannot benefit from risk diversification. because FIs have a cost advantage in monitoring their portfolios. significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive.

Partnership

An association of two or more people to conduct a business.

underwriter

An entity which markets newly issued securities

preferred stock

An equity security that has the properties of both an equity and debt instrument and is higher ranking than common stock.

liability

An obligation, debt or responsibility owed to someone.

Under GAAP, how would dividends paid to company stockholders be accounted for on the statement of cash flows?

As a decrease in cash flow from financing

Under GAAP, how would employee salaries be accounted for on the statement of cash flows?

As a decrease in cash flow from operations

Fixed Assets

Assets and property that cannot easily be converted into cash

How are interest rate risk and reinvestment risk related to one another?

Because they are inversely related, one can be eliminated or diminished, but not both.

In an attempt to enhance the net social welfare benefits of the services provided by financial intermediaries, safety and soundness regulation requires a DI to hold a minimum level of cash reserves against deposits.

false

Which of the following identifies the primary function of the Office of the Comptroller of the Currency?

Charter national banks and approve their merger activity.

What is the defining characteristic of the dual banking system?

Coexistence of both nationally chartered and state chartered banks.

common stock

Common stock, is a security that represents ownership, or equity, in a corporation. In other parts of the world, the terms "voting share" or "ordinary share" are used to represent this same concept.

corporate finance

Corporate finance focuses primarily on decisions related to investment and financing

Which statement best characterizes the impact of regulatory changes on corporate governance since the 1990s?

Corporate transparency and accountability have increased through revised reporting and oversight requirements and stiffer penalties for fraud.

What happens after a company files for Chapter 7 bankruptcy?

Creditors are paid through the sale of assets. Assets are liquidated with the proceeds going to the creditors.

Select the option that reflects how assets are typically organized on a balance sheet.

Current assets Long-term assets Other assets This is from most liquid to least liquid.

EBIT equation

EBIT = Revenue - Operating expenses + Non-operating income Operating income = Revenue - Operating expenses

Basic Earning Power (BEP) Ratio

EBIT/Total Assets

If a sales increase is forecasted, how will it affect expenses on the pro forma income statement if market conditions are expected to remain stable?

Expenses will increase. In a stable environment, an increase in forecasted sales will reflect an increase in expenses; expenses are usually forecast as a percent of sales forecasted.

Which inventory technique assumes that the inventory that was purchased earliest is sold first?

FIFO

Currently (2015) J. P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.

False

The Riegle-Neal Act of 1994 removed many of the restriction on interstate banking that were originally imposed by the 1933 Glass Steagall Act.

False

What is the amount of debt that a company utilizes to finance its operations, as compared with the amount of equity that the company utilizes?

Financial leverage. this is directly related to the amount of debt used to fund the company.

Nathan tells a potential investor what his "bottom" line was in the previous quarter.

His net income

Under which circumstance would a company want to reexamine its level of working capital?

If a company has excessive capital invested in the short term. This is an opportunity to improve working capital management.

Do common stockholders or preferred stockholders get paid dividends first?

If a company issues dividends, preferred stockholders are prioritized over common stockholders.

Bond Valuation

If the coupon rate is less than the YTM, the bond is selling at a discount. If the coupon rate is equal to the YTM, the bond is selling at par. If the coupon rate is greater than the YTM, the bond is selling at a premium.

Why might investors prefer cash dividends over stock dividends?

If they want regular payments that can be used to reinvest in the company

disadvantages of IRR

It can overstate the rate of return for a project that assumes cash flows are not reinvested at a rate lower than the calculated internal rate of return. This reflects a reinvestment rate risk. It does not consider the cost of capital; therefore, it should not be used to compare projects of different durations. It may have multiple values in the case of positive cash flows, followed by negative cash flows, and then again by positive cash flows.

why is cash flow forecasting is important to a company's success

It is central to a company's liquidity.

When managing collections, a company can make use of lockbox banking to

Lockbox processing can speed up receipt and processing of accounts receivable.

market risk

Market risk is reflected on the impact in the market of any negative economic news.

capacity

Maximum level of output that can be produced by the firm.

capital

Money and wealth; the means to acquire goods and services, especially in a non-barter system.

npv disadvantages

NPV is only as accurate as the inputted information, , the NPV is only useful for comparing projects at the same time; it does not fully build in opportunity cost., Another issue with relying on NPV is that it does not provide an overall picture of the gain or loss of executing a certain project.

Net Working Capital

Net working capital is calculated as current assets minus current liabilities.

Conflicts of Interest

Occurs when organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.

runoff

Periodic cash flow of interest and principal amortization payments on long-term assets, such as conventional mortgages, that can be reinvested at market rates.

Over the last six years, prices and investing activity in the bond market rose for two years and then fell consistently for the next four years. How is this market classified?

Primary bear market

Prices and investing activity in the bond market have trended downward for the last four years, but in the past six months, the direction of the market has reversed and prices are increasing consistently month after month.

Primary bull market

Georgia is interested in selling her company. Before seeking a buyer, she wants her income statements to show a trend of increasing gross profits. How can she achieve her goal?

Reduce cost of goods sold

For the following problems, choose among the following major banking laws. This legislation introduced prompt corrective action requiring mandatory intervention by regulators when a bank's capital falls below certain levels.

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991

Which of the following impacts a bond's interest rate (coupon rate)?

The bond's time to maturity

repricing gap

The difference between assets whose interest rates will be repriced or changed over some future period (rate-sensitive assets) and liabilities whose interest rates will be repriced or changed over some future period (rate-sensitive liabilities).

discounting

The procedure of finding what a future sum of money is worth today.

Corporate Governance

The roles and relationships between a company's management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed.

Bob wants to expand his retirement portfolio, so he purchases some shares of stock in a software company that have consistently performed well over the last 10 years.What type of market transaction is taking place?

The secondary market is where individuals execute trades.

Where people buy stocks and bonds to invest after company's go public

The secondary market is where the transactions of individuals such as Paul are executed.

Statement of Cash Flow

The statement of cash flows is a financial statement that reports cash receipts and cash payments for a specific period, providing information about the business and cash

Which of the following describes derivatives, rather than debt securities or equity securities?

Their value tracks with the performance of an underlying entity.

Systemic risk

This is essentially the risk that the markets will experience in a downturn and all investments within that market will be negatively affected. It is difficult to reduce with diversification.

Specific risk

This is the risk associated with one individual security. It can be diversified away.

Preferred stock: May have a claim equal to its par value in the case of company liquidation.

This is true

The "Bond Yield Plus Risk Premium" Approach

This risk premium can be added to the cost of long-term debt to determine the price of equity.

incorporate

To form into a legal company.

Which of the following is a goal of working capital management?

To meet day to day expenses while minimizing the cost of holding cash. Daily expenses must be covered, but excess cash being held must be minimized.

Why do households prefer to use FIs as intermediaries to invest their surplus funds?

Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information. The FI can provide insurance at relatively low cost that will protect funds under management. The FI has can benefit from combining funds and negotiating lower asset prices and transactions costs. To receive the benefits of diversification that households may not be able to achieve on their own.

Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.

True

Savings associations and savings banks both are insured by insurance funds that are managed by the FDIC.

True

mergers and acquisitions

Two companies with distinct cultures are merged to form a new culture.

What is a question that should be asked about accounts receivable when forecasting?

What percentage of sales will likely be made with cash?

Under what circumstance would agency conflict be most likely to increase?

When owners are separated from the business. When the owners are separated from the business, it is much more likely for conflict to occur because management can make decisions without close oversight.

when do prepaid assets become expenses?

When these assets are used, those advance payments become expenses.

By appropriately preparing a forecast budget, a company can avoid

Without a budget, a company is incurring a very high level of risk that it will be solvent or even bankrupt.

External Auditor

a person that is independent of the entity being audited.

Which method of depreciation calculation gives a company a variable tax benefit from year to year that is based on an asset's actual use?

activity based

Proprietor

an owner

Peter is a financial analyst whose boss assigned him the task of examining a company in the travel industry. Peter compares several of the company's financial ratios to those of the leading company in the industry. What type of analysis is he performing?

benchmarking

when are common stock holders compensated after bankruptcy?

common stockholders are generally last in line among other creditors to receive assets

cogs

cost of goods sold

All of the following are examples of participants in the shadow banking system EXCEPT

credit unions

The most numerous of the institutions that define the depository institutions segment of the FI industry in the U.S. is(are)

credit unions

Net working capital

current assets - current liabilities

the 2 types of assets

current assets and noncurrent assets

If interest rates for all borrowing periods are similar, how would the yield curve be described?

flat

The recent trend of making investment decisions based on a mix of financial, social, and environmental considerations is known as

impact investing

when is the the company's estimate on how it plans to convert its revenue into net income written

in advance of a planned transaction, merger, acquisition, or new capital investment.

Gregor needs to know exactly how much revenue his company generated in the first quarter of the year.What type of financial statement should he look at?

income statement. The top part of the income statement is where revenue figures can be found.

What principle of corporate governance requires companies to operate in ways that respect the social and legal relationships they have with employees and creditors, among others?

interests of other stakeholders

leverage

it is the use of fixed costs over variable costs in production

Why is Duration a more complete measure of an asset or liability's interest rate sensitivity maturity?

it takes into account the time of arrival (or payment) of all cash flows as well as the asset's (or liability's) maturity.

Customer deposits are classified on a DI's balance sheet as

liabilities, because the DI uses deposits as a source of funds.

The price at which an asset would trade in a competitive setting is its

market value

Economic collapse during the 1930s, the banking system in the U.S. performed directly or indirectly all financial services. Those functions included all of the following EXCEPT

money market funds.

Business managers who behave in accordance with their personal ethical beliefs, even in the face of difficulty, have strong

moral character

A consumer lending function is performed by each of the following FIs EXCEPT

mutual funds.

return on asets

net income/total assets

return on equity

net profit/equity

Which organization type calls for owners to determine how much tax each will pay on distributions?

partnership

An investment fund whose goal is to provide income for workers who have ceased working is a

pension fund

what is the best ratio to measure expense rate

profitability ratios

__________, like research and development, that already occurred should not be part of cash flow analysis in the capital budgeting process

sunk costs

pro forma income statement

the company's estimate on how it plans to convert its revenue into net income

Opportunity Cost:

the cost of not having the cash on hand at a certain point of time.

discount rate

the cost of not having the money today

Safety and soundness regulations include all of the following layers of protection EXCEPT

the creation of money for those FIs in financial trouble.

what is the interest rate also called

the discount rate

Par Value

the face value of a bond. the amount of money a holder will get back once a bond matures.

Amortization

the reduction of a loan balance through payments made over a period of time

WACC

the weighted average cost of capital (WACC) normalizes the cost of capital by combining the interest rates being incurred from both debt and equity. A calculation of the various required returns on a project, which ultimately determines the profitability required to break even.

duration

the weighted-average time to maturity on the loan using the relative present values of the cash flows as weights.

Limitations of the Balance Sheet

they are recorded at historical cost, the use of estimates, and the omission of valuable things, such as intelligence.

Why is it a good idea to diversify an investment portfolio?

to reduce specific risk

The process of predicting what the market would pay for a company's investments and bonds is

valuation. Valuation is concerned with predicting what investors in the market would pay for its financial instruments.

Audits

verifications of financial/operational systems

to find the PV of a payment

you need to know the future value (FV), the number of time periods in question, and the interest rate.

Sylvia wants a bond that she can buy at a discount so that she will make money when the bond matures. If she is less concerned about receiving regular payments, what kind of bond should she buy?

zero coupon bond. This type of bond pays no coupon payment and does pay face value at maturity.