FIN 330 FINAL
Finance companies enjoy several advantages over banks. These include all but which one of the following?
Finance companies have lower funds costs than banks.
Credit unions are I. mutual associations. II. not open to the general public. III. for profit institutions
I and II only
Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following? I. Lower expense ratios at index funds II. Higher turnover ratios at index funds III. Differences in returns in sectors of the market and the overall market return
I and III only
Credit unions have several advantages over banks. These include the following: I. Credit unions are not taxed. II. Credit unions are better diversified than banks. III. Credit unions can collectively pool funds. IV. Due to regulations, credit unions have better economies of scale and scope than banks. V. Because of their ties to employers, credit unions have better personnel expertise than banks
I and III only
The P&C loss ratio on an insurance line contains I. payouts on claims. II. brokerage commissions incurred to market the claims. III. costs associated with settling claims. IV. dividend payouts to policyholders
I and III only
Which of the following trends in the number and industry assets of savings institutions is/are correct? I. The number of savings institutions has fallen over time. II. The number of savings institutions has increased over time. III. Total industry assets fell during the recession of the late 2000s. IV. Total industry assets are falling over time. V. Total industry assets are stable but the number of savings institutions has fallen
I and III only
Aggregate finance company profitability was poor in the late 2000s primarily due to which segment of the finance company industry?
Subprime lending
Banks have an average total debt ratio of about 90 percent.
TRUE
Because of the differences in the makeup of their major loan types, finance companies typically have shorter-term loans than banks
TRUE
Credit unions are not taxed and, as a result, well-run credit unions are often able to charge lower loan rates and pay slightly higher deposit rates than banks.
TRUE
Finance companies rely primarily on bank loans and commercial paper as source of funding.
TRUE
Floor plan loan is a type of short-term loan to finance high priced inventory in which the purchased inventory is placed as collateral for the loan
TRUE
Generally, consumer finance companies make loans to borrowers who have been refused loans at banks due to low income or poor credit
TRUE
Of all the depository institutions, as a percentage of assets, credit unions rely the most on deposit sources of funds.
TRUE
Off-balance-sheet activities consist of issuing financial instruments such as various types of guarantees and engaging in derivative trading to generate additional revenue.
TRUE
The following type(s) of life insurance policies do not have a savings feature:
Term life
The largest asset category of life insurers is _______________ and the largest liability category is ___________
bonds; policy reserves
Hybrid mutual funds normally invest significant amounts in
both common stock and long-term bonds.
A fund that has a fixed number of shares outstanding and is traded on an exchange is called a(n)
closed-end fund.
In 2016, credit union's biggest type of loans was __________.
consumer loans
For the finance company industry as a whole, the largest single loan type is
consumer loans.
The provision of banking services to other banks, such as check clearing, foreign exchange trading, and so forth, is an example of
correspondent banking.
By type of fund, there are more ______________ funds than any other.
equity
In 2016, credit union's largest portion of investment securities was __________.
federal agency securities
In 2016, _______________ had on average the greatest amount of equity as a percentage of assets and ______________ had the lowest
finance companies; credit unions
A loan agreement between Ford Motor Credit and a local Ford dealer is an example of
floor plan financing.
Hurricane damage in a given area is an example of a ____________________ for which it is difficult to predict loss exposure
high-severity, low-frequency event
ETFs are a direct competitor to ___________.
index funds
State Farm and other P&C insurers came into conflict with policyholders over claims filed as a result of Hurricane Katrina that resulted in lawsuits. The conflict resulted from
insurers' insistence that the Katrina storm surge resulted in flood damage that was not covered.
A captive finance company is one that
is owned by a retailer or manufacturer.
Finance companies obtain a significant portion of their short-term financing from
issuing commercial paper.
Commercial banks are the __________________ financial intermediary in the United States as measured by asset size.
largest
Bank assets tend to have _____________ maturities and _____________ liquidity than/as bank liabilities
longer; lower
The two major components of expense risk for P&C insurers are
loss adjustment expenses and variations in commission and other expenses.
For P&C insurers, if the combined ratio is more than 100 percent, that firm
may have been profitable if investment returns were high enough.
Most of the changes in size, structure, and composition of the banking industry in recent years are due to
mergers and acquisitions
As the economy weakens, one would expect investment in ____________ funds to increase and investment in _____________ funds to decrease, ceteris paribus.
money market mutual; equity
In comparison to small banks, larger banks typically have
more off-balance-sheet activities.
Property and casualty insurers hold _____________ short-term assets than life insurers because property and casualty loss rates are _____________ predictable than life insurance loss rates.
more; less
Historically, most savings institutions were established as
mutual organizations.
Loans past due 90 days or more and loans that are not accruing interest because of problems of the borrower are called
non-current loans
A contingent item that may eventually be placed on the right-hand side of the balance sheet or expensed on the income statement is a(n)
off balance sheet liability
A(n) ___________ fund must hold substantial cash reserves in order to meet fund redemptions from shareholders
open-end mutual
The U.S. Central Credit Union and the corporate credit union
provide investment and liquidity services to corporate credit unions.
An example of off balance sheet activity includes:
purchasing a futures contract.
Factoring is
purchasing corporate accounts receivables at a discount.
The largest single category of loans on the typical bank's balance sheet in 2016 was
real estate loans.
Money market mutual funds (MMMFs) have caused disintermediation at banks at times. This is because MMMFs
sometimes pay higher interest rates than bank deposits.
Sales finance companies
specialize in making loans to customers of a specific retailer or manufacturer.
The primary regulator of insurance firms is the
state insurance regulator.
A finance company that makes loans to high-risk customers is called a
subprime lender.
The operating ratio is calculated as
the combined ratio after dividends minus the investment yield.
The largest proportion of long-term mutual fund assets is held by ___________________
the household sector
The term "variable" in a variable life policy refers to the
variable growth rate of the cash value of the policy.
You have $15,000 to invest in a mutual fund. You choose a fund with a 3.5 percent front load, a 1.75 percent management fee, and a 0.5 percent 12b-1 fee. Assume, for simplicity, that the management and 12b-1 fees are charged on year-end assets. The gross annual return on the fund's shares was 12.50 percent. What was your net annual rate of return to the nearest basis point
{{[$15,000 × (1 − 0.035) × 1.125] × (1 − 0.0225)}/$15,000} − 1 = 6.12%
A policyholder wishes to annuitize the cash value of her insurance policy at retirement. She desires an annual payment of $95,000 per year and the cash value is expected to be $1,100,000 at retirement. Approximately how many payments can she expect to receive if annuity interest rates are 5.122 percent?
$1,100,000/$95,000 = PVIFA (5.122%, N yrs.); N = 18; log rule or financial calculator required = 18
Estimates of the cost of the September 11, 2001, terrorist attacks on the World Trade Center indicate that the cost to insurance companies was as high as
$40B
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 percent. How many fund shares will you receive
((1 − 0.045) × 17,445):26.03 = 640
A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be
(1.50% − 0.50%) × $30 million = 300,000
In terms of profitability, a well-run bank usually has an ROA of
.5-3%
Hedge funds charge expense fees and performance fees. The average performance fee on hedge funds is ____________.
20 percent
You have $16,000 to invest in a mutual fund with a NAV = $45. You choose a fund with a 4 percent front load, a 1 percent management fee, and a 0.25 percent 12b-1 fee. Assume that the management and 12b-1 fees are charged on year-end assets. The gross annual return on the fund's shares was 9 percent. What was your net annual rate of return to the nearest basis point?
3.33 percent {{[$16,000 × (1 − 0.04) × 1.09] × (1 − 0.0125)}/$16,000} − 1 = 3.33%
A bank is earning 6 percent on its $150 million in earning assets and is paying 4.75 percent on its liabilities. The bank's interest rate spread is
6% − 4.75% = 1.25%
An insurance line has a loss ratio of 72 percent and an expense ratio of 35 percent, and the firm pays 2 percent of premiums to policyholders as dividends. What level of investment yield is needed to make the P&C firm break even?
9 percent 72+35+2 = 109 - 9 = 100
Which one of the following statements concerning annuities offered by insurers is not true?
Annuity payments must cease upon the policyholder's death.
______ are the most diversified of depository institutions and ______________ are on average the largest depository institutions
Commercial banks; commercial banks
Banking may be subdivided into at least three categories of banks. Match the definitions with the appropriate name. I. A bank that specializes in retail or consumer banking in a local market II. A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services III. A bank that is located in a financial center and relies on nondeposit or borrowed sources of funds for a significant portion of its liabilities
Community bank; super-regional bank; money center bank
Savings institution deposits and bank deposits are backed by two different insurance funds.
FALSE
Since 1980, the number of banks in the United States has been increasing dramatically due to deregulation of the industry.
FALSE
The financial crisis of 2008, demonstrated that activities such as trading in financial futures and interest-rate swaps have low risk
FALSE
Which of the following is the primary regulator of bank holding company activities?
Fed Reserve
Which one of the following institutions is the least regulated?
Finance companies
Which one of the following utilizes the least amount of deposits as a source of funds?
Finance companies
Which of the following statements are true? I. Catastrophe bonds may be used as a form of reinsurance. II. Catastrophe bonds are structured so that if an insured event results in large losses for an insurer, the bond's required payments increase. III. Buyers of catastrophe bonds benefit if the adverse event occurs. IV. When issued, catastrophe bonds will have promised yields above the risk-free rate
I and IV only
ETFs have several advantages over index funds, including the ability to I. trade throughout the day at continuously updated prices. II. purchase ETF shares on margin. III. sell ETF shares short. IV. sell the shares back to the fund
I, II, and III only
Rank the following from greatest to smallest in terms of industry asset size in 2016. I. Banks II. Savings institutions III. Credit unions IV. Finance companies
I, IV, III, II
Reasons behind the drop in bank profitability in the second half of this decade include I. flattening of the yield curve. II. increase in competitive pressures on asset pricing. III. increases in foreclosures in the mortgage market. IV. increases in net interest margin.
I,II, and III only
SI profitability declined in the mid-2000s due to I. the yield curve becoming more positively sloped. II. decreases in the NIM ratio. III. increases in the NIM ratio. IV. the yield curve becoming flatter and even inverted
II and IV only
Rank the following in asset size from largest to smallest in 2016. I. Mutual funds II. Insurance companies III. Depository institutions
III, I, II
Which one of the following fund types is likely to have the lowest annual expense ratio
Index funds
Home equity loans are popular with finance companies. Which one of the following statements about home equity loans is not correct?
Interest payments on home equity loans are not tax deductible.
You have $10,000 to invest and you are considering investing in a fund. The fund charges a front-end load of 5.75 percent and an annual expense fee of 1.25 percent of the average asset value over the year. You believe the fund's gross rate of return will be 11 percent per year. If you make the investment, what should your investment be worth in one year?
Investment amount = $10,000 × (1 − 0.0575) = $9,425; FV1: $9,425 × 1.11 = $10,461.75; Average assets = ($10,461.75 + $9,425)/2 = 9,943.375; $9,943.375 × 0.0125 = $124.29; $10,461.75 − $124.29 = $10,337.46
You have $12,500 to invest and you are considering investing in Fund X. The fund charges a front-end load of 3 percent and an annual expense fee of 2.25 percent of the ending asset value over the year. You believe the fund's gross rate of return will be 8 percent per year. If you make the investment, what should your investment be worth in one year
Investment amount = $12,500 × (1 − 0.03) = $12,125; FV1: $12,125 × 1.08 = $13,095.00; After expenses: $13,095.00 × (1 − 0.0225) = $12,800.36
Which one of the following would provide an example of social inflation?
Large malpractice awards beyond the level of damages incurred
Advantages of going global for U.S. banks include all but which one of the following
Low fixed costs involved in international expansion
The market value of a mutual fund's assets divided by the number of fund shares outstanding is equal to the
NAV
Nationally chartered banks receive chartering and merger approval from the
Office of Comptroller of the Currency.
Open-end mutual funds guarantee
Open-end mutual funds guarantee
An insurance line has a loss ratio of 62 percent and an expense ratio of 35 percent; the firm pays 2 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 9 percent. The operating ratio for this line is
Operating ratio = 62 + 35 + 2 − 9 = 90
The primary regulator of mutual funds is the
SEC
Which one of the following has the highest concentration of mortgage-related assets on the balance sheet
Savings institutions
Suppose you deposit $100 in a bank, which of the following will occur?
The bank's assets will increase by $100.
A money market mutual fund's total assets increase from $100 to $105 when the fund has 100 shares outstanding. Which of the following will happen?
The fund will issue a total of five new shares.
An insurance line has a pure loss ratio of 65 percent, LAE of 16 percent and an expense ratio of 26 percent; the firm pays 3 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 6 percent. Which one of the following statements is true
The line is not profitable because the operating ratio is greater than 100.
A policyholder wishes to annuitize the cash value of her insurance policy at retirement. The cash value is $725,000. What payment (to the nearest dollar) can he expect if he wishes to receive 15 years of payments (starting next year) and interest rates are 5.25 percent?
With a financial calculator: Input PV = −725,000, N = 15, I = 5.25, FV = 0 and solve for PMT to get 71,033.43.
An open-end mutual fund owns 1,500 shares of Krispy Kreme priced at $12. The fund also owns 1,000 shares of Ben & Jerry's priced at $43, and 2,000 shares of Pepsi priced at $50. The fund itself has 3,500 of its own shares outstanding. What is the NAV of a fund's share?
[(1,500 × 12) + (1,000 × 43) + (2,000 × 50)]/3,500 fund shares = $46
A fund has a NAV of $30 per share but the shares are currently selling for $32. This fund must be
a closed-end fund.
Insurance companies face the problem of ________ when people with highest probability of getting the insurance payoffs are the ones who purchase insurance.
adverse selection
investors pay load charges to receive
advice on which fund to buy.