FIN 3080 Final Exam

According to Huszar, quantitative easing is controversial because

"Main Street" firms didn't experience a greater ability to access credit as a result of QE

What is Ed Liddy's salary at AIG?

$1 per year

A mutual fund owns 1,000 shares of Disney and 100 IBM bonds. The fund has 8,000 shares outstanding. At the end of the day, the Disney shares are worth $60 per share and the bonds are worth $550 each. Calculate the funds NAV (Net Asset Value), rounded to the nearest penny.

$14.38

How much has AIG been given/promised in bailout money?

$180 billon

A Treasury Inflation Protected Security is issued with an original principal of $100,000 and a 5 percent coupon (paid semi-annually). If inflation for the first six months is 0.7% and for the second six months is 0.9%, what is the coupon paid after one year?

$2,540.16

Maverick's Motorcycles conducts an initial public offering (IPO) and sells 150 million shares. Of those shares, 100 million are primary shares and 50 million are secondary shares. The offer price is $24 per share and the firm pays its investment banker a 7% fee. How much cash will go Maverick's Motorcycles (the firm itself) as a result of the IPO?

$2.232 billion

A commercial bank reports the following financials: Net Income= $2M Common Equity=$66.67M Equity Multiplier=6. Calculate ROA for the bank (expressed in percent, round to two decimals, such as 0.67% or 1.25%).

0.50%

Equity Multiplier

1/(1-debt ratio)

credit risk

1/p = 1 + r

A T-Bill trades for $995.02, has 47 days to maturity, and has a face value of $1,000. Calculate the bond equivalent yield on this security.

3.8868%

Before an initial public offering (IPO), a company typically conducts a roadshow. What happens during a roadshow?

A company makes a presentation to investors to gauge their interest

Operating Ratio

Combined Ratio after Dividends - Investment Yield

Which type of banks specialize in retail or consumer banking?

Community banks

Suppose that the Federal Reserve announces that it will sell a large amount of T-bills. This action will have ripple effects through the economy. What is the likely impact on the stock market? Decrease in the value of stocks

Decrease in the value of stocks

effective annual returns

EAR = (1 + (ibe / (365 / n))^(365/n) -1 EAR>=ibe

Suppose that, if car insurance did not exist, the likelihood of an accident would be 3% in a given year. What is the likelihood of an accident within a car insurance company's pool of policyholders?

Greater than 3% due to moral hazard

Which of the following could result from the belief that housing prices would always increase? I. Homeowners borrow a lot, sometimes more than the purchase price of the house II. Bond rating agencies underestimate the default risk of mortgage backed securities III. MBS bond traders decrease their exposure to housing by selling (or not buying) second homes

I. and II. only

Which of the following mutual fund fees/expenses are assessed annually? I. operating expenses (expense ratio) II. 12b-1 fees III. front-end load IV. back-end load

I. and II. only

Open market operations are a powerful tool for influencing the money supply. However, there are limits to the effectiveness of this action. What doesn't the Federal Reserve have control over? I. Bank lending decisions II. Cash holdings/demands of consumers III. The level of deposits in banks IV. Decisions by businesses to invest

I., II., III., and IV

Which of the following industries saw large economic losses due to the pandemic? I. Airlines II. Hotels III. Tech IV. Cruise Lines

I., II., and IV.

Which of the following is not a benefit provided by a mutual fund?

Maturity intermediation

What did Goldman employees in Europe refer to clients as?

Muppets

When corporate bonds trade over-the-counter and Treasury Bonds trade between primary government securities dealers, these bonds are trading in:

Secondary markets

During an initial public offering (IPO), firms often sell both "primary" and "secondary" shares. Select the correct statement regarding secondary shares.

Secondary shares allow the firms early investors' (e.g., venture capitalists) and employees to liquidate their investments.

A mutual fund owns 500 shares of Coca Cola and 2,000 shares of Home Depot. The fund has 10,000 shares outstanding. Stock prices for Day 1 and Day 2 are given below. At the end of Day 1, the fund issues 2,000 new shares to investors at the NAV. The fund manager invests the additional capital into only Coca Cola Stock. Given the stock prices below, what can you conclude about the fund's NAV at Day 2? Prices Day 1 Day 2Coca Cola $100 $105Home Depot $25 $20

The NAV will decrease from Day 1 to Day 2

What were the two plausible explanations that Mr. Markopolos considered?

Using insider information, or running a giant Ponzi scheme

When the Fed supervises and regulate depository institutions, it is

attempting to prevent crises in the economy

According to the academic study "Wall Street and the Housing Bubble", by Ing-Haw Cheng, Sahil Raina, and Wei Xiong, midlevel managers in securitized finance...

did not time the housing market

The Federal Reserve's decisions...

do not have to be ratified by the president, but it is subject to oversight by the U.S. Congress.

When giving a speech, Harry Markopolos calls himself a "$50 billion ______".

failure

Which is not a characteristic of money market securities?

high yields

Most secondary market corporate bond trading takes place...

in the over-the-counter market.

Gross Proceeds Based on Initial Price Range

initial share price x number of total shares

The Feds current policy is to target ___________, thus allowing the____________ to fluctuate

interest rates; quantity of funds

Suppose that the Fed is targeting the quantity of funds. If the demand curve shifts outward what should the Fed do to the supply curve?

leave the supply curve unchanged

In 2008, the category "Misc assets" on Fed's balance sheet represented 47% of total assets. What Federal Reserve action is represented by this item?

lender of last resort bailouts

Combined Ratio after Dividends

loss ratio + LAE ratio + Expense Ratio + Dividend Ratio

One of the roles of the Fed is to act as lender of last resort. Acting as such in a crisis is an example of which of the 4 main functions?

maintain stability of financial system

Competition from ________ has left commercial banks with fewer deposits.

money market mutual funds

A firm issues a new security called an B2AG. This security will be issued to a limited number of investors with the help of investment bankers and then trade in OTC markets. This security has a maturity of 9 months and pays interest once. This security will be classified as

money market security

What is the major difference between securities firms/investment banks and other financial institutions?

securities firms/investment banks do not transform securities, rather they serve as middlemen

Mutual funds use economies of scale to lower trading costs and reduce admin expenses. In doing so, they are providing which type of benefit?

transaction cost services

Tiger Bank has $250M in deposits. The current reserve ratio is 10% of deposits. Tiger Bank has exactly enough reserves to meet the reserve ratio requirement and it has 0 excess reserves. Suppose the Fed decreases the reserve ratio to 8% of deposits. Tiger Bank then loans out all excess reserves. After the loans are made, all the funds are deposited back into the bank. How much does the bank need to hold in required reserves after this first cycle of loans is made. How much does the bank need to hold in required reserves after the full effect of the decrease in reserve ratio?

$20.4M; $25M

Viper Ltd. is a boutique investment bank located in California. The bank advises on initial public offerings (IPOs) and charges a 7% fee. The most recent client issued 40 million shares at $8 per share. How much did Viper make off this transaction?

$22.4 million

An auto insurance company provides the following financial information. Calculate the amount paid in dividends. Premiums written: $80M Losses: $60M Loss Adjustment Expenses: $12M Operating Expenses: $16M Dividends Paid: $???? Investment Profit/Loss: −$10M Operating Ratio: 125

$2M

A mutual fund owns 800 shares of Walmart and 900 shares of Target. The fund has 4,375 shares outstanding. Stock prices for Day 1 and Day 2 are given below. At the end of Day 1, investors sell 1,000 shares back to the mutual fund. The fund manager must give these investors cash equal to the NAV times the number of shares owned. In order to pay investors, the fund manager chooses to sell shares of Walmart at the Day 1 price. Given this transaction and the Day 2 stock prices, calculate NAV at the end of Day 2. Stock Day 1 Day 2 Walmart $82 $85 Target $75 $74

$30.54

A mutual fund charges an expense ratio of 2.52%, calculated as an average of the beginning and ending values of the investment in the fund. Suppose that you invest $5,000 into the fund and the fund has a gross return of 6% during the first year. During the second year, the return is negative 4%. Calculate the value of your investment at the end of the second year.

$4,835.73

How much money did Joe Cassano (head of AIG FP) make in 2006 and 2007? What was his total income over 8 years?

$43M in 2006, $24M in 2007, $280M over 8 years.

Which of the following expenses are included in the numerator of the Loss Ratio?

$810 paid to an automobile policy holder to repair a damaged fender.

The table below gives quotes on T-bills in the secondary market. Use the Asked Yield of 0.170% (bond equivalent yield) to calculate the price of a bond with face value of $10,000. Maturity Bid Asked Chg Asked Yield 133 days 0.175% 0.168% -0.000 0.170%

$9,993.80

NAV

(Market Value of Assets - Liabilities) / Shares Outstanding

In November 2015, the Wall Street Journal reported that nineteen people in Washington became sick after eating at Chipotle, along with another four people in Oregon. The return to Chipotle's stock on the day of this announcement was -1.3%. Suppose the Beta of Chipotle's stock is 0.72, the Alpha is 0.5%, and the return to the S&P500 on the day of the announcement was 1.5%. Calculate the abnormal return to Chipotle's stock from the announcement of this news.

-2.88%

After 1993, how many trades did Madoff's fund make?

0

You want to buy a term life insurance product that pays $400,000 if you die within one year. Assume that the probability of death over the next year is "p" and that the insurance company's goal is to break even. That is, the insurance company needs to charge a premium equal to the expected payout. Calculate the probability of death over the next year if the insurance company charges an annual premium of $600.

0.15%

After the FDIC takes over the bank, what are its options for the bank going forward?

1. close the bank and pay depositors, 2. run the bank itself, 3. find a buyer (most common)

You observe the following quote in the Wall Street Journal for a T-Bill. A dealer will sell you a $10,000 face value T-Bill at the price which gives the "Ask" discount yield (1.74%). Calculate the "Asked Yield", which is a bond equivalent yield. (The yields are shown in percent, not decimals.) Maturity Bid Ask Chg Asked Yield 58 days 1.93% 1.74% -0.001% ???%

1.77%

You are watching CNBC when new information is released about Coca-Cola. The information is unambiguously negative. Based on the study of CNBC and stock markets by Jeff Busse and Clifton Green, how long will it take for this new information to be incorporated into the stock price?

10 to 15 minutes

How long had he been at the firm?

12 years

At Heritage Community Bank, how many accounts were there? What was the total amount in those accounts?

12,000 deposits, totaling > $200 million

Suppose that the government of Australia offers a one year risk free bond that pays 8% interest in Australian dollars (A$). You have $4,200 (U.S. dollars) to invest in the Australian bond. The current exchange rate is $0.84 / A$1. Thus, you can purchase A$5,000 worth of bonds initially with your $4,200. You invest in the bonds now and then convert your Australian dollars back to U.S. dollars after the interest payment is made. What is the percent return on your investment after one year if the exchange rate changes to $0.96 / A$1?

13.9%

A T-bill has face value of $1M and sells at 96.8% of its face value. It matures in 81 days. Calculate the discount yield.

14.22%

Suppose a T-Bill matures in 32 days, has a face value of $10,000, and sells for $9,875. Calculate the effective annual rate.

15.43%

How many pages is Madoff's customer list?

162 pages

In 2020, a major concert was cancelled due to the pandemic. Fortunately, the event organizer had pandemic related cancellation insurance. It paid $7M in premiums to an insurance company, and received a payout of $311M. Calculate the probability of loss.

2.25%

According to Ed Liddy, how many employees brought down AIG?

20 to 30 employees

You calculate that the fair interest rate on a bond issued by PLB is 7.35%. Your analysis shows the following; inflation risk premium is 0.25%, the real risk-free rate is 0.15%, the bond's liquidity premium is 1.75%, the bond's default risk premium is 2%. PLBs bonds have no special covenants. Calculate the bond's maturity premium.

3.2

How many separate submissions to Mr. Markopolos make?

5

How long did it take Mr. Markopolos to know it was a fraud? How long did it take to prove it was a fraud?

5 minutes. 4 hours.

You can buy commercial paper of a major U.S. manufacturing firm for $595,000. The face value of the paper is $600,000 and it matures in 59 days. Calculate the discount yield on this security.

5.0847%

During the Financial Crisis, the Dow Jones Industrial Average fell _____ in value from late 2007 to early 2009 while the S&P 500 Index erased its gains from the previous _____ years.

53.8%; ten

A commercial bank reports the following financials: Net Income= $6M Total Assets=$770M Common Equity=$123M Calculate the bank's Equity Multiplier.

6.26

How large of an equity stake do US taxpayers have in AIG?

79% equity stake

Pickens County Schools issues a municipal bond with a 6.4% annual return. A firm wishes to offer investors the same after-tax rate of return on their corporate bond of similar risk. Suppose that potential investors have a 28% marginal tax rate. What before-tax rate of return must the corporate bond offer?

8.9%

What is the typical debt ratio (total liabilities/total assets) of a commercial bank?

89%

An insurance company writes premiums of $50 million, has losses of $30 million, loss adjustment expenses of $2 million, and commissions/operating expenses of $13 million. Calculate the combined ratio.

90%

A commercial bank loans funds to a business to finance a project and charges an interest rate of 9.9%. The funds will be returned in one year, with interest, if the project is successful. If the project is not successful, the bank gets nothing. Assume that the bank's goal is to breakeven. From this information, what is the chance of success of the project?

90.99%

How many employees were at AIG Financial Products (AIG FP)?

< 500 employees

Which of the following statements describes the mutual fund industry during the late 1990s?

A rising stock market increased the demand for equity mutual funds

Which is an example of maturity intermediation?

A thrift makes long-term mortgage loans and short-term auto loans

How much of the bailout does Ed Liddy want to repay the federal government? All of it, some of it, or none of it?

All of it

Suppose the U.S. Treasury auctions off $13B (thirteen billion dollars) of T-Bills. The following four bids were submitted. What price will the winning bidders pay for the T-Bills? Bid Number 1: Quantity= $5B, Price= 99.9%, competitive bid Bid Number 2: Quantity= $4B, Price= 99.7 %, competitive bid Bid Number 3: Quantity= $6B, Price= N/A, non-competitive bid Bid Number 4: Quantity= $2B, Price= 99.8 %, competitive bid

All winning bidders will pay 99.9% of the face value of the securities

Politicians and regulators have proposed solutions to shrink the size of large financial institutions. Which is not one of the commonly discussed ways to shrink banks?

Allow US banks to be purchased by foreign financial institutions

What does the balance sheet of an insurance company look like?

Assets consist largely of bonds while liabilities consist largely of net policy reserves

A client once told Greg Smith that they do not trust them at all, but would still do business with them. What was the reason they kept doing business with them?

Because they have to (Goldman is too big)

Google issues convertible bonds with a $1,000 face value and the right to convert each bond into 37.45 shares of stock. Under which scenario would an owner of the bond likely choose to convert the bond to equity?

Bond price=$1,403 and stock price=$38

In class, we discussed Table 5-6, which shows the participants in money markets. This table shows that ___________ appear as an issuer and investor for almost every instrument.

Commercial Banks

Which of the following statements describes the risks faced by banks due to the characteristics of assets compared to liabilities?

Commercial banks face interest rate risk because liabilities have shorter maturities than assets

What is a major reason that returns to common stock are more volatile than returns to bonds?

Common stock holders are residual claimants while bond holders have a higher priority on the firm's cash flows

Why do commercial banks hold equity close to the minimum required by regulators?

Due to the low cost of obtaining deposits

At what point in the life cycle of a firm would a venture capitalist enter in?

Early in the life of a firm

How do life insurance companies solve the adverse selection problem?

Establish different pools of the population based on health characteristics

Which Nobel prize-winning academic(s) is most likely to support the efficient market hypothesis?

Eugene Fama

What happened during Facebook's IPO?

Facebook raised the offer price before the offering and the stock performed very poorly during the first day of trading

When a money market mutual fund "breaks the buck", this means that its NAV....

Falls below $1.00

Of the following money market securities, which typically has the shortest original maturity?

Federal Funds

New currency issue, check clearing, consumer protection and community affairs, and wire transfer services are functions of which component of the Federal Reserve System?

Federal Reserve Banks

The __________ funds acted like "steroids" and made Madoff's scheme an international Ponzi scheme, according to attorney David Boies who is representing Fairfield Greenwich Investors.

Feeder

Which group holds the most municipal bonds?

Financial institutions

On which day of the week do bank closures typically occur?

Friday, after close of business (over the weekend)

What happened to Goldman Sachs, Bear Stearns, and Morgan Stanley as a result of the 2008 Financial Crisis?

Goldman Sachs and Morgan Stanley were converted into commercial bank holding companies while Bear Stearns was acquired by JP Morgan.

Which of the following accurately describes a difference between hedge funds and mutual funds?

Hedge fund managers have stronger performance incentives than mutual fund managers

What are the key things that venture capitalists look for when investing in a firm?

High returns and an easy exit

Professor Greene holds a convertible bond issued by IBM. The bond has a $1,000 face value and can be converted into 27 shares of stock. Suppose the bond is trading at $845.00. If the share price of IBM is $31.18, what should Professor Greene do?

Hold the bond and do not convert to shares

Which of the following transactions take place in primary markets, rather than secondary markets? I. Microsoft issues $300M of new common stock to investors II. Vanguard mutual fund sells $100M of Wal-mart stock III. 3M issues new 2.75% coupon rate bonds to investors IV. wealthy investor buys Starbs bonds from a commercial bank. The Starbs bonds were originally issued w/ 10 yrs to maturity, but now 3

I and III take place in primary markets

Funds would not flow as freely in a world with no financial institutions as they would in a world with financial institutions. What are three reasons for this? I. The need to monitor II. The need for liquidity III. Credit allocation IV. Intergenerational wealth transfer V. Price risk

I, II, V

Which of the following findings provides evidence against the efficient market hypothesis? I. stock prices are much more volatile than the underlying dividend stream II. small firm stocks tend to outperform large firms stocks even after adjusting for risk III. stock prices tend to rise quickly following a takeover announcement (e.g. AirTran) IV. stock returns tend to be predictably higher in January than other months.

I, II, and IV

A nationally chartered bank headquartered in South Carolina is regulated by which entity/entities? I. Federal Deposit Insurance Corporation II. Office of the Comptroller of the Currency III. Federal Reserve System IV. Office of the Commissioner of Banking in South Carolina (state authority)

I., II., and III. only

Suppose that Fed decides to sell $600M worth of securities to a dealer in open market operations. Given the balance sheets below, which of the following changes will occur? I. Federal Reserve account "Securities" increases $600M II. Dealer account "Securities" increases $600M III. Fed account "Deposits of Bank" decreases $600M VI. Commercial bank account "Dealers deposits" decreases $600M

II, III, VI

Select the incorrect statement regarding IOER

IOER is a new tool that the Fed began using after the financial crisis

In 2002, Martha Stewart was accused of trading ImClone stock based on private (inside) information. The private information motivated her to sell the stock before it was publicly revealed that ImClone's drug had failed to receive FDA approval. Other insider trading cases document that individuals can earn large profits from trading on insider information. What can we conclude from this evidence?

If individuals can earn large profits from trading on private information then the strong form of the efficient market hypothesis does not hold

General Electric issues two classes of bonds, Class G and Class E. Home Depot issues two classes of bonds, Class H and Class D. Given the relevant information for each bond in the table below, select the incorrect statement regarding the interest rate of the bonds. Bond Maturity Special Provisions Liquidity Default General Electric, Class G 7 years Callable by issuer Highly Liquid General Electric, Class E 12 years Callable by issuer Highly Liquid Home Depot, Class H 7 years Convertible to stock Highly Liquid Home Depot, Class D 12 years Convertible to stock Illiquid

If the default risk of General Electric's bonds is strictly greater than the default risk of Home Depot's bonds, then the interest rate for Class E bonds is strictly greater than the interest rate for Class D bonds

Select the correct statement regarding worldwide stock market capitalization.

In both 1990 and 2013, the U.S. had the largest share of worldwide stock market capitalization.

Select the incorrect statement regarding municipal bonds (munis).

In the primary market, the most common way to issue munis is through a private placement.

Select the correct statement regarding the regulation of commercial banks and insurance companies.

Insurance companies are regulated at the state level while commercial banks are regulated at either the state or federal level.

A financial institution's balance sheet shows that bonds are over 40% of total assets. Which type of financial institution is this?

Insurance company

A mutual fund owns 2,000 shares of 3M Co. and 2,500 shares of PepsiCo, Inc. The fund has 14,000 shares outstanding. Stock prices for Day 1 and Day 2 are given below. At the end of Day 1, investors buy 622 shares of the fund at the NAV. Which of the following options will give the fund manager the highest NAV at Day 2? (Reminder: The shares of 3M and Pepsi are bought at the Day 1 price). Stock Day 1 Day 2 3M $126 $130 Pepsi $13 $20

Invest all the proceeds into Pepsi stock

Which type of financial institution is associated with very high pay for employees, but also very long hours and a high level of stress?

Investment Banks

Which of the following is an implication of the efficient market hypothesis?

Investors earn a fair return based on the risk that they bear

On the first day of trading, Facebook's stock had a return of 0.6%. How does this compare to the average first day return of firms that go public?

It is much lower than the average of 18%

What ultimately happened to Heritage Community Bank?

It was sold in an auction to MB Financial

The Behavioral Critique can itself be critiqued. Which is not one of the critiques of the Behavioral Critique?

Lab experiments tend to carry over to real life.

Rank the categories of commercial bank assets from largest to smallest.

Loans (largest), investment securities, cash

Which component of the combined ratio is drives most of the variability over time?

Loss Ratio

An outbreak of a deadly virus (e.g., Ebola) in the United States would have the largest effect on which of the following for a life insurance company?

Loss ratio

An insurance company begins a program to work with its policyholders to prevent losses. In the program, the insurance company installs "forward collision warning" devices into cars in order to reduce the chances of car accidents. If this program is successful, which of the following is likely to occur as a direct result?

Loss ratio decreases and Loss Adjustment Expense ratio decreases

Which of the following best describes the stock market reaction to the early days of the pandemic (i.e., around March 2020)?

Lots of volatility, many consecutive days of large price movements

When was the first time that Mr. Markopolos sent material to the SEC?

May 2000

Select the incorrect statement regarding Michael Milken.

Michael Milken was a debt analyst who mistakenly rated bonds as AAA that later proved to be low quality bonds.

Which of the following describes modern financial institutions (e.g., USAA)

Modern FIs typically have operations across multiple types of institutions

Which types of commercial banks rely heavily on nondeposit or borrowed sources of funds?

Money center banks

Deductible provisions in car insurance policies and suicide exclusions in life insurance policies are designed to combat which phenomenon?

Moral hazard

Morgan Stanley was the lead underwriter for Facebook's initial public offering (IPO). Which of the following events was a negative for Morgan Stanley and represents a risk of underwriting an IPO?

Morgan Stanley provided price support by buying shares on the first day of trading

Select the correct statement.

Mutual funds are a more liquid investment than hedge funds are.

ROA

Net Income/Total Assets

ROE

Net Income/Total Equity

Before he wrote the op-ed, did Greg Smith tell anyone at Goldman that he was quitting?

No

Has any depositor every lost money on an insured deposit?

No

One way for a mutual fund manager to "beat the market", is to correctly predict whether the market will rise or fall over the next month and adjust his/her portfolio accordingly. Suppose that predicting future stock market returns is nearly impossible and therefore is analogous to flipping a coin and guessing whether it lands on heads or tails. Given this framework, select the incorrect statement.

No mutual fund manager can "beat the market" over a short period of time (e.g., 5 years)

Did the FDIC have to pay any depositors of Heritage Community Bank?

No, because it was bought by MB Financial (even depositors over the limit were safe)

When the FDIC pays depositors and/or pays the salaries of bank employees, does it use tax payer money?

No. The funds come from FDIC reserves, which are collected from banks paying insurance premiums. The FDIC can use US Treasury money if needed, it is backed by the full faith and credit of the US government.

Which is not one of ways that we can summarize changes to commercial banking following the Financial Crisis (Tip: Wall Paper)?

One major change: limits on size through mergers

__________________ was Chair of the Federal Reserve during the late 1970s and early 1980s, a time during which interest rates were pushed up in order to fight inflation?

Paul Volcker

One hedge fund generated a 36% return during the early days of the pandemic. What trading strategy did it use?

Placed bets against the overall economy as well as firms in the travel industry

A Treasury Bill auction, a private placement of munis, and a public offering of corporate bonds are all examples of which type of transaction?

Primary market transaction

For your summer internship, you work for a stock trader. You find out that you can very accurately forecast stock returns by simply analyzing historical trading data on Yahoo! Finance. Which forms of the efficient market hypothesis does this finding support or provide evidence against?

Provides support for the semi-strong, weak, and strong forms.

Orange Bank has $130M in deposits, $13M in required reserves, $7M in excess reserves, and $110M in loans. Purple Bank has $160M in deposits, $16M in required reserves, $0M in excess reserves, and $144M in loans. Assume that both banks make loans exclusively to non-financial companies and that they do not borrow from each other. If the Federal Reserve lowers the reserve ratio from 10% to 8%, what are Orange Bank and Purple Bank likely to do?

Purple Bank is likely to make additional loans while Orange Bank is not.

ROE

ROA x (1/ (1 - debt ratio))

ROE

ROA x (Total Assets/ (Total Assets - Total Liabilities))

ROE

ROA x (Total Assets/Total Equity)

ROE

ROA x Equity Multiplier

Equity Multiplier

ROE/ROA

Loans by commercial banks fall into four categories. Which category represents the largest portion of loans on commercial bank balance sheets?

Real estate loans

rank 5 money market securities by denomination

Repos (largest), T-bills, CDs, CP (smallest)

What is one of the principles that Greg Smith said he liked about Goldman, in a training video?

Reputation and integrity

A mutual fund owns 700 shares of Facebook and 600 shares of LinkedIn. The fund has 5,000 shares outstanding. Stock prices for Day 1 and Day 2 are given below. At the end of Day 1, investors sell 1,000 shares back to the mutual fund. The fund manager must give these investors cash equal to the NAV times the number of shares owned. In order to pay investors, the fund manager must sell shares of Facebook and/or LinkedIn at the Day 1 price. If the fund manager could perfectly predict the Day 2 stock prices, what would be the best trading strategy? Prices Day 1 Day 2 Facebook $60 $52 LinkedIn $50 $52

Sell shares of only Facebook because the price will decline while the price of LinkedIn will rise in Day 2

Which of the following steps in the IPO process occurs first?

Set initial price range and shares to be issued

Where was Greg Smith born?

South Africa

Which of the following is not a similarity between the coronavirus pandemic and the financial crisis?

Speed of economic downturn

Which statement is accurate under the efficient market hypothesis?

Stock price changes are random

Four months prior to closure, what was Heritage ordered to do? Who ordered Heritage to do this?

Stop risky lending, raise cash. FDIC and State of Illinois

Select the correct ranking of money market securities by maturity (use most common, not full range).

T-Bills (longest maturity), Commercial Paper, Repos (shortest maturity)

Which of the following statements is not accurate when comparing and contrasting T-Bills and T-Notes?

T-Bills are default risk free while T-Notes are not default risk free

rank 5 money market securities by secondary market liquidity

T-bills, CDs (no secondary market: CP, Repos, Fed)

rank 5 money market securities by maturity

T-bills, CDs, CP, Repos, Fed

Which piece of legislation provided immediate help for firms during the Financial Crisis?

TARP (Troubled Asset Relief Program)

A mutual fund owns 1,000 shares of Apple and 500 shares of GE. The fund has 5,000 shares outstanding. Below are the Day 1 and Day 2 stock prices for each firm. Calculate the NAV at the end of Day 1. At the end of Day 1, the fund issues 1,000 new shares to investors at the NAV. The proceeds from selling these shares are invested in GE at the Day 1 price. Calculate the NAV at the end of Day 2. Prices Day 1 Day 2 Apple $75 $70 GE $50 $45

The NAV is $20.00 at the end of Day 1 and $18.42 at the end of Day 2

A firm wants to borrow $30,000 from a bank. The funds will be returned in one year, with interest, if the project is successful. If the project is not successful, the bank gets nothing. Assume that the bank's goal is to breakeven. That is, the bank needs to earn $30,000 in expectation from issuing the loan. Calculate the dollars of interest and the interest rate the bank should charge the firm if there is a 92% chance of success.

The bank should charge interest of $2,608.70, for an interest rate of 8.7%

According to an influential study in the late 1990s, what does the data say about mutual fund performance?

The best performing funds in a given year typically do not maintain this strong performance in the following 5 years

Mortgage backed securities are often created with different tranches such as AAA, A, BBB. Which of the following statements is incorrect regarding the differences between these tranches?

The different tranches are backed by different pools of mortgages

The Hartford Steam Boiler Insurance Company is a property insurer that specializes in boiler insurance. The company's strategy is to hire highly-skilled employees with very strong engineering backgrounds to work with policyholders in preventing losses. Compared to property industry averages, what do you expect to be true of Hartford Steam Boiler's expense ratio and loss ratio?

The expense ratio will be higher and the loss ratio will be lower

Which feature of commercial bank balance sheets leads to interest rate risk?

The fact that liabilities have shorter maturities than assets

Select the incorrect statement regarding LIBOR.

The federal funds rate and LIBOR are not highly correlated.

Among potential causes of the crisis, which one was considered the "trigger"?

The housing market / price declines

Which is not a reason that stock market returns are disconnected from the overall economy?

The stock market is a lagging indicator

Towards the end of 2020, the economy began to recover. Which statement accurately describes the recovery in the stock market compared to the labor market?

The stock market recovered all the gains it lost, while the labor market had not yet fully recovered.

During the coronavirus pandemic, the stock market and labor market both deteriorated during March and April 2020. Select the correct statement regarding the recovery of these markets.

The stock market recovered before the labor market, providing evidence that the stock market is not a good reflection of the economy as a whole.

Select the correct statement regarding Treasury Bill secondary money markets.

There are roughly 500 smaller dealers who trade Treasury Bills

The evidence against the efficient market hypothesis (EMH) includes Robert Shiller's conclusion that stock prices appear to be too volatile, as well as findings that can be categorized as anomalies (size, momentum, etc.), sentiment (sports, sunshine), and economic linkages. Overall, how can this evidence be summarized?

There is strong evidence against the EMH.

Why were commercial banks chosen to manage the flow of funds from the Paycheck Protection Program?

They are important to the functioning of our economy, and borrowers were encouraged to work with their local lenders

Which is not a defining characteristic of money market securities?

Trade in centralized secondary markets

Select the correct statement regarding primary market offerings of bonds.

Treasury Notes are auctioned off in primary markets.

A mutual fund charges an expense ratio of 0.50%, calculated as an average of the beginning and ending values of the investment in the fund. Suppose that you invest $3,000 into the fund and the fund has a gross return of 8% during the year. What is the value of your investment at the end of the year? Suppose that the fund charges a 3% front end load. Now, what is the value of your investment at the end of the year?

With no load, the ending value is $3,224.40. With a load, the ending value is $3,127.67.

A mutual fund charges an expense ratio of 0.75%, calculated as an average of the beginning and ending values of the investment in the fund. Suppose that you invest $10,000 into the fund and the fund has a gross return of 8% during the year. What is the value of your investment at the end of the year? Suppose that the fund charges a 3% front end load. Now, what is the value of your investment at the end of the year?

With no load, the investment is worth $10,722.00, with the load, it is worth $10,400.34.

Which of the following does not contradict the economic assumption that people are "rational, selfish, and have tastes that do not change"?

You find $100 lying on the ground and keep it all for yourself

Which of the following events will result in a decrease in the equilibrium quantity of funds available and an increase in equilibrium interest rates?

a deteriorating economy shifts only the supply curve

In 2008 (prior to the financial crisis), Warren Buffett made a bet with a hedge fund manager that _______________________.

a low-cost passive mutual fund that tracked the S&P 500 index would outperform a hand-picked portfolio of hedge funds.

What was Greg Smith's approximate salary when he left Goldman Sachs?

about $500,000 per year

Under the weak form of the efficient market hypothesis, stock prices reflect...

all past trading information

Under the semi-strong form of the efficient market hypothesis, stock prices reflect...

all publicly available information

Snap Incs IPO in March 2017 can be classified as

both a primary market and a capital market transaction

Which of the following tools would increase the size of the Feds balance sheet?

buying securities in OMOs

Since the 1950s, the long-term trend in the US financial sector has been a shift in assets away from _________ to __________.

commercial banks; investment companies

Which of the following money market securities is typically not traded in a secondary market?

commercial paper (CP)

expected probability of loss

cost = q * payout

Charles Schwab's Core Equity Fund costs less than $25 per share and gives investors exposure to over 150 stocks. Replicating this fund by purchasing the same stocks on your own would cost thousands of dollars. This is an example of a financial institution providing

denomination intermediation

According to the National Vital Statistics Report, the likelihood that a 20-year old person dies within the next year is 0.13%. A life insurance company anticipates that the likelihood that a 20-year old policyholder dies is __________________ .

higher than 0.13% due to adverse selection

bond equivalent yield

ibe = (Pf - P0) / P0 * (365 / n)

discount yield

id = (Pf - P0) / Pf * (360 / n) Pf = face value of sec P0 = purchase price of sec

An investment bank earns its fees on an activity by charging a percentage of assets under management. This activity can be classified as ________________.

investing

In primary markets fund flow from __________ to ____________.

investors; companies

RAD inc bonds mature in 5 yrs and trade in decentralized secondary markets. Suppose that a new govt regulation restricts the trading of all money market securities to Monday, Wednesday, and Friday only, while all capital market securities trading is not affected. What effect will this have on the interest rate of the bonds?

no effect on the interest rate

Cash to Firm

offer price x number of primary shares x (1 - fee%)

Cash to Employees

offer price x number of secondary shares x (1 - fee%)

Gross Proceeds Based on Offer Price

offer price x number of total shares

Fees to Investment Bankers

offer price x number of total shares x fee %

In 2008, the category "Loans to Domestic Banks" on the Feds balance sheet represented 25% of total assets. What Fed action is represented by this item?

opening discount window to all

3 basic characteristics of money markets

original maturity of one year or less, low default risk, and large denominations

What was the unemployment rate in October 2009?

over 10%

Most employers offer direct deposit services. Which benefit are commercial banks providing?

payment services

Which distinguishing characteristic of common stock makes the common stock of a company riskier than bonds of the same company?

residual claim status

Select the correct statement regarding stock market indices

the Dow Jones Industrial Average is calculated using price-weighted averages while the S&P 500 is calculated using value-weighted averages

The FOMC closely monitors the labor market in the US. Which of the following statements doesn't describe the FOMC's considerations?

the FOMC considers a strong labor market to have an unemployment rate of 0%

In a 1998 study, Strahan and Weston found that consolidation among small banks seemed to increase lending to small businesses. This finding suggests that...

the diversification benefits of consolidation outweigh costs such as moving decision making authority to a central location.

Suppose that an improving economy shifts both the supply and demand curve. What can you say about the new equilibrium interest rate and quantity of funds?

the equilibrium quantity increases and interest rate can either increase or decrease

Suppose that a monetary policy expansion shifts only the supply curve. What can you say about the new equilibrium interest rate and quantity of funds?

the equilibrium quantity increases and interest rate decreases

Suppose that a firm promises to pay stockholders an annual dividend of $4, continuing forever. The current interest rate is 6%. Calculate the price of the stock. Now, suppose that the Fed announces a decrease in the reserve ratio. The predicted effect is a change in all interest rates by 2%. What will happen to the price of this stock?

the original price was $66.67 and the new price is $100

Select the incorrect statement regarding FRBs.

they operate as for-profit institutions

Which of the following are not benefits of secondary markets?

they provide a transfer of funds from investor to the firm

Assume a stock trading for $66.67 and promises an annual dividend of $4 in perpetuity. Calculate the interest rate? Now assume that the Fed conducts monetary policy that affect the price of the stock. The price rises to $80, without a change in the annual dividend. What actions did the Fed take?

they took expansionary monetary policy actions which lowered interest rates by 1%

Which of the following types of institutions accepts deposits?

thrifts

Which type of financial institution takes deposits and makes loans, but tends to concentrate their loans in one segment?

thrifts

"Traditional" Investment Banking activities consist of ...

underwriting and distributing new issues of securities

Of the 5 largest banks in the world, ranked by total assets, how many are headquartered in the US?

zero