FIN4324 Midterm Review

A bank which starts with all of 1.48 million at the beginning of the year, charges off worthless loans of .94 million during the year, recovers point 12 million on loans previously charged off add charges current income for a 1.02 million provision for loan losses will have in all at the end of the year of a. $3.32 million b. The same amount as the beginning of the year. c. $1.68 million d. $0.66 million

$1.68 million

During the recovery phase, the FED has been purchasing treasury and mortgage bond for a monthly amount of: a. $100 billion b. $120 billion c. $80 billion D. $50 billion

$120 billion

According to the CNBC article, how much does Robinhood need to pay its customers in restitution for the outages and misleading them? a. $22 mill b. $31 mill c. $13 mill d. $7 mill

$13 million

Company ABC has reported the total interest income is $140, provision for loan losses is $5, income taxes is $4, Total noninterest income is $75, total interest expenses is $100, total noninterest expenses is $90. Calculate the Net Income after taxes.

$21 Pre-tax net income = (total interest income - total interest expense) + (total non interest income - total non interest expense) Pre-tax net income = (140 - 100) + (75 - 90) = $25Net Income after taxes = 25-4 = $21

Management of a local bank is considering opening a new branch in the downtown area. The projected cost of establishing the new branch office is $4.5 million. They expect to run this branch for 15 years with an acceptable return of 12%. What is the minimum cash inflow required annually to meet management's requirements, rounded to the nearest dollar?

$660,709

Article link: https://www.wsj.com/articles/robinhood-agrees-to-pay-70-million-to-settle-regulatory-investigation-11625063765?mod=hp_lead_pos1 (Links to an external site.) The trading app, Robinhood, recently reached a settlement with the United States for their actions in restricting certain trading with stocks such as AMC and GME. What was the total settlement amount? A. $10 million B. $70 million C. $200 million D. $2 million

$70 million

Suppose the officer is considering purchasing a $1,000 par-value Treasury note that promises an 8 percent coupon rate and is slated to mature in 5 years. What's the T-Notes current price if YTM is 10.74 percent.

$900

Suppose 10-year U.S. government bonds are selling today in the cash market for $96 per $100 bond while futures contracts on the same bonds calling for delivery in six months are trading today at a price of $84. The current basis must be

$96-$84= $12 per contract.

To illustrate how the YTM formula can be useful to an investment officer, suppose the officer is considering purchasing a $1,000 par-value Treasury note that promises an 8 percent coupon rate.

(1000 x 0.08) = $80.

Suppose a bank purchases a bank-qualified bond from a small city, county, or school district and the bond carries a nominal (published) gross rate of return of 7 percent. Assume also that the bank had to borrow the funds needed to make this purchase at an interest rate of 6.5 percent and is in the top (35 percent) income tax bracket. The net after tax return would be:

(7.0 - 6.50) + (0.35 x 0.80 x 6.50) = 2.32 percent

General Financial Services Corp has the following revenues and expenses for 2020. Revenues: Cash assets ($17,652,000), Security Investments ($13,456,000), Outstanding Loans ($974,200) Expenses: Nondeposit borrowings ($14,500,000), Miscellaneous Expenses ($18,632,000) What was the company's Net Income in 2020?

-$1,049,800 Formula: Net Income = Total Revenues - Total Expenses

Suppose a $100,000 par value treasury bond futures contract is traded at a price of $99,700 initially but then interest rates on T-bonds increase a full percentage point from 7 to 8%. If the T-bond has a duration of nine years, then the change in the value of one T-bond futures contract would be _____.

-9yrs * $99,700 * .01/1*(1+.07) = -$8.385.98 *

Banks with less than _____ in assets are generally called community banks. a. 750,000 b. 1 million c. 1 billion d. 500,000

1 Billion

Under the Riegal- Neal Act of 1994 no institution can hold more than ___ of nation's deposits and ___ of states deposit -10 % and 30 % -10% and 41% -30% and 10% -41% and 10%

10 % and 30 %

A bond purchased today at a price of $950 and promising an interest payment of $100 each year over the next 3 years: when it will be redeemed by the bond's issuer for $1,000, will have a promised interest rate of?

12.10% $950=$100/(1+YTM)^1+$100/(1+YTM)^2+$100/(1+YTM)^3+$1,000/(1+YTM)^3=12.10%

Article link: https://www.wsj.com/articles/u-s-wins-international-backing-for-global-minimum-tax-11625153698?mod=hp_lead_pos1 (Links to an external site.) According to the information provided in the Wall Street Journal, what is the global minimum tax rate agreed by 130 countries including the United States? A. 15% B. 7% C. 45% D. 24%

15%

Rainbow National Bank has reported its interest income is $2250, interest expense is $1500, noninterest income is $800, noninterest expense is $900, taxes paid is $16, total assets is $45000. Calculate the Net profit margin (NPM)

21% Net Income = (2250-1500) + (800-900) = $650Total operating revenues = 2250 + 800 = $3050Net Profit Margin = Net Income / Total Operating Revenue = 650/3050 = 21%

Under terms of the Bank Holding Company Act, control is assumed to exist if the holding company acquires at least _______ of the outstanding shares of a bank.

25%

According to the information stated in the CNBC article, how much did the average hourly earnings increase in June? a. 3.6% b. 2.1% c. 2.6% d. 4%

3.6%

A small company's total assets are 10,000. It's liabilities are 2,000. Net income is 40,000 And Retained earnings is 20,000. What is the company's ROA? Use the formula ROA = Net income / Total Assets to find your answer. A.30,000 B. 4 C. 10,000 D. 50,000

4

Robert spends $2,925,000 to fund the establishment of a new branch. How many years will he break even if his expected annual cash inflow is $450,000? A 5.5 years B. 8.2 years C. 6.5 years D. 7.8 years

6.5 years

https://www.wsj.com/articles/u-s-job-openings-held-at-record-level-headed-into-summer-11625674595 The Labor Department stated that job openings rose at the end of May and it had seen a new high of ___________ million jobs in records dating back to 2000 A.8.9 B.9.7 C.7.8 D.9.2

9.2

The Boyer Bank wants to add a new ATM machine in a busy mall. They know the new machine will cost $60,000 with another $30,000 to install it and the necessary security measures in the mall. They expect to save $.27 per transaction and generate 100,000 per year. They expect the new machine to last 8 years. If they need to earn a 12% return what is the NPV of this project? (Round your answer to the nearest $1000)

= {Px[1-(1+r)^-n]/r} - Initial cash outflows = {27,000 x [1 - (1 + 0.12) ^-8] / 0.12} - (60,000+30,000) = (27,000 x 4.9676398) - (90,000) = 134,126 - 90,000= $44,126

Define, Explain, and Give examples of a Bank Holding Company

A Bank Holding Company is simply a corporation chartered for the purpose of holding the stock of at least one bank, often along with other businesses.

Define, explain, and give examples of Collateralized Debt Obligations.

A Collateralized Debt Obligation is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. CDOs may contain pools of high-yield corporate bonds, stock, commercial mortgages, or other financial instruments contributed by businesses interested in strengthening their balance sheets and raising new funds.

Define, explain, and give an example of a Noninterest-bearing demand deposits account?

A Noninterest-bearing demand deposits account is a checking account that is design for customers to use their day-to-day activities. These checking accounts may come with a monthly fee that can be waived given certain conditions. For example, Bank of America carries a checking account that has a 12 dollar monthly fee that can be waived if you maintain a minimum balance of $1500 0r receive direct deposit of $250.

What is a bank?

A bank can be defined by what economic function it performs, what services it offers its customers, or the legal basis for its existence. Historically, banks have been offering a great range of financial services such as checking and debit accounts, credit cards, and savings plans. However, banks today are rapidly expanding their service offerings to include investment banking, insurance protection, financial planning, advisory service for merging companies, risk-management services, and numerous other innovative financial products.

What factors influence the stock price of a financial-service corporation?

A bank's stock price is affected by all the factors affecting its profitability and risk exposure, particularly its rate of return and risk to shareholder earnings. The stock prices of financial institutions are also sensitive to changes in market interest rates, currency exchange rates, and the strength or weakness of the economy.

Define, explain, and give an example of a collateralized mortgage obligation.

A collateralized mortgage obligation is a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment. They are separated into groups of mortgages, known as tranches, organized by their risk level.

Define what is a deposit and give three examples of major types of deposits.

A deposit is a financial claim held by a business, household, or government against a banking firm. Three examples are non-interest-bearing demand deposits, savings deposits, and money market deposit accounts (MMDAs).

Explain why a deposit is a liability and why a loan is an asset for a bank.

A deposit is a liability on its balance sheet whereas loans are assets because the bank pays depositors interest, but earns interest income from loans. In other words, when your local bank gives you a mortgage, you are paying the bank interest and principal for the life of the loan. Your payments are an income stream for the bank similar to a dividend you might earn for investing in a stock.

Define, explain, and give examples of a derivative.

A derivative is when a financial institution derives their value from the value of underlying instruments such as T-bills, bonds, and eurodollars. Derivatives help financial firms to deal with interest risk and other risks. Some examples of derivatives are futures, options, and derivative contracts.

What is a financial intermediary? What are its key characteristics? Is a bank a type of financial intermediary? What other financial-services companies are financial intermediaries? What important roles within the financial system do financial intermediaries play?

A financial intermediary is a business that interacts with deficit spending individuals and institutions and surplus spending individuals and institutions. For that reason, any financial service provider including banks is considered a financial intermediary. In their function as intermediaries, they act as a bridge between the deficit and surplus spending units by offering financial services to the surplus spending individuals and then allocating those funds to the deficit spending individuals. Financial intermediaries accelerate economic growth by expanding the available pool of savings, lowering the risk of investments through diversification, and increasing the productivity of savings and investments.

Define Mortgage-Backed Bonds and explain its difference to CMOs

A mortgage-backed security is a type of asset-backed security which is secured by a mortgage or collection of mortgages. Unlike pass- throughs and CMOs, where mortgage loans are removed from the balance sheet, mortgage- backed bonds (MBBs) and the mortgage loans backing them stay on the issuer's balance sheet

What is the definition of a servicer?

A servicer is an agency that collects payments on the securitized loans and passes those payments along to the trustee, who ultimately makes sure investors who hold loan-backed securities receive the proper payments on time.

Define and explain what a Standby Letter of Credit is.

A standby letter of credit is a contingent obligation of the letter's issuer. The issuing fim, in return for a fee, agrees to guarantee the credit of its customer or guarantee the fulfillment of a contract made by its customer with a third party.

A ______combines a computer terminal, record keeping system, and vault cash in one unit allowing customers to withdraw money, check deposit balances, and other limited services 24 hours a day. A. POS B. ATM machine C. Virtual Banks D. Branch Office

ATM Machine

Explain the benefits and disadvantages of ATMs for customers.

ATMs are Automated Teller Machines that provide more convenience for simple transitions, which allows tellers to offer better quality services/products inside the bank. ATMs can also have a larger network than physical branches. Some disadvantages of ATMs are the possible transaction fees and limited services it provides, which is depositing or withdrawing cash. Another drawback is the safety of the customer as they are using the ATM since they are usually outside and not guarded.

Explain agency theory and the relationships it analyzes.

Agency theory analyzes relationships between a firm's owners (stockholders) and its managers, who legally are agents for the owners. Agency theory explores whether mechanisms exist in a given situation to compel managers to maximize the welfare of their firm's owners.

Community banks are: A. Much smaller B. Serve local communities and towns C. Offer a narrower, but often more personalized, menu of financial services D. All are correct

All are correct

Why are banks closely regulated? A. Banks are among the leading repositories of the public's savings B. Banks are closely watched because of their power to create money in the form of readily spendable deposits by making loans and investments C. Banks have a long history of involvement with federal, state, and local governments D. All are correct

All are correct

Banks are regulated for which of the reasons listed below? a. Banks are leading repositories of the public's savings. b. Banks have the power to create money. c. Banks provide businesses and individuals with loans that support consumption and investment spending. d. Banks assist governments in conducting economic policy, collecting taxes and dispensing government payments. e. All of statements mentioned.

All of statements mentioned.

What type of assets fall under "miscellaneous assets"? A. Bank premises and fixed assets B. Other real estate owned (OREO) C. Goodwill and other tangibles D. All of the options

All of the options

Which of the following is one of the risks the OCC requires banks to measure and set limits on? A. Strategic risk B. Reputation risk C. Price risk D. Liquidity risk E. All of the options

All of the options

An example of a money market investment instrument is/are: a. Certificates of deposit. b. Treasury bill. c. Banker's acceptance. d. All of the statements mentioned.

All of the statements

Principal roles that a financial institution's investment portfolio play includes which of the following? a. Income stability b. Geographic diversification c. Hedging interest rate risk d. Backup liquidity e. All of the statements above

All of the statements

Under the Gramm-Leach-Bliley (GLB) Act, a financial holding company may offer financial service(s) such as: A. Dealing securities B. Selling insurance C. Underwriting securities and insurance D. All of the statements mentioned

All of the statements

What are the criteria(s) needed in order to open a bank? A. Public's need B. Honesty and competency C. Capital D. All of the statements mentioned

All of the statements

Which of the following are types of securitized assets? A. Residential mortgages B. Home Equity loans C. Automobile loans D. Commercial Mortgages E. All of the statements mentioned.

All of the statements

Which of the following is a modern bank role? a. Intermediation role b. All of the statements mentioned c. Payments role d. Guarantor role

All of the statements

U.S. banking laws require the organizers of a proposed new bank to demonstrate: a. Adequate future earnings prospects. b. Existing banks will not be endangered. c. Evidence of a public need for a new bank. d. All of the statements are correct.

All of the statements are correct.

What situations will cause the value of the firm's stock to rise? a. Value of stream of future dividends is expected to increase. b. Firm's level of risk falls c. Market interest rates decrease. d. All of the statements are correct.

All of the statements are correct.

A financial Institution with a negative gap could reduce the risk of loss due to changing interest rates by: a. Extending asset maturities b. Increasing short term interest sensitive liabilities c. Using financial futures or options contracts d. All of the statements mentioned

All of the statements mentioned

Which of the following are ways managers can reduce risk exposure from standby credit loans (SLC) they have issued. a. Frequently renegotiating loans to customers with SLCs. B. Diversifying SLCs by region and industry C. Selling participation in standbys to other lending institutions. D. All of the statements mentioned

All of the statements mentioned

Which of the following securities dominate bank investment portfolios A. U.S. Government securities B. State and local government municipals C. Equities * D. All of the statements mentioned

All of the statements mentioned

The risk-management system is to be comprised of: a. Policies and procedures to control financial risk taking. b. Risk measurement and reporting systems. c. independent oversight and control processes. d. All options are correct

All option are correct

Securitization is A. Using the security markets to fund a portion of a lenders loan portfolio B. Allocate capital more efficiently C. Diversify funds sources and possibly lower the cost of fund raising D. All the points mentioned

All the points mentioned

Define, explain, and give an example of interest-rate cap

An interest-rate cap protects its holder against rising market interest rates. In return for paying an up-front premium, borrowers are assured that institutions lending them money cannot increase their loan rate above the level of the cap. For example, let's say a bank purchases a cap of 11% from an insurance company on its borrowings of $100 million in the euro dollar market for one year. Suppose interest rates in this market rise to 12% for the year. Then the financial institution selling the cap will reimburse the bank purchasing the cap the additional 1%

What is the purpose of an interest-rate swap?

An interest-rate swap is a way to change a borrowing institution's exposure to interest-rate fluctuations and achieve lower borrowing costs. Swap participants can convert from fixed to floating interest rates or from floating to fixed interest rates and more closely match the maturities of their liabilities to the maturities of their assets.

https://www.wsj.com/articles/amazon-seeks-recusal-of-ftc-chairwoman-lina-khan-in-antitrust-investigations-of-company-11625067962?mod=business_lead_pos1 What type of case Amazon is in? A. Tax Avoidance B. Antitrust C.Fraud D. Assault

Antitrust

Define, explain and give examples of structured notes.

Arise from security dealers who assembled pools of federal agency securities and offered investment officers a packaged investment whose interest yield could be reset periodically based on what to a reference interest rate. An example for this would be a five-year bond coupled with a future contract.

Which of the following is not a component of interest rates? A.Risk Premium B.Yield Curves C.Maturity Gap D. Asset-Liability Committee (ALCO)

Asset-Liability Committee (ALCO)

Which of the following is considered the "basic accounting equation"? -Assets = Liabilities + Equity -Liabilities = Assets + Equity -Equity = Liabilities + Assets -Liabilities = Assets + Equity + Revenues

Assets = Liabilities + Equity

Given the balance sheet of The National Bank of South Florida you where tasked with finding the equity capital of the bank. The National Bank of South Florida has 300 million dollars in assets and 95 million dollars in Liabilities. What is The National Bank of South Florida Equity capital?

Assets = Liabilities + Equity capital Solution300m = 95m + equity capital 300m - 95m = Equity capital Equity capital = 205m

What is an electronic limited service facility? Give an example of one and explain what it does.

Automated teller machines (ATMS) are electronic service machines that are connected to the bank's computers that can do many of the small transactions that a banker could. Point-of-Sale Terminals (POS) are electronic devices that are placed in stores that sell goods and are connected to the bank's computer system. These devices take a card that the customer has that is connected to their bank account, it withdraws the money from them and deposits it into the store's deposit account.

Why are Banks closely regulated?

Banks are closely watched because of their power to create money by making loans and investment; banks have a long history of working with federal, state and local governments.

Why are banks closely regulated?

Banks have a long history of involvement with federal, state, and local governments. Banks are among the leading repositories of the public's savings and are closely watched because of their power to create money in the form of readily spendable deposits by making loans and investments.

A futures contract on euro dollar deposit is currently selling at an interest yield of 4 percent, while yields on 3 month Eurodollar deposits currently stand at 4.60. What is the basis for the Eurodollar futures contracts?

Basis for future contracts = Yield on 3 month deposits - Yield on the Deposits =4.60%- 4.00% =0.60% 0r 60 basis points

The Mountain High Bank has Gross Loans of $750 million with an ALL account of $45 million. Two years ago the bank made a loan for $10 million to finance the Mountain View Hotel. 2 million dollars in principal was repaid before the borrowers defaulted on the loan. The Loan Committee at Mountain High Bank believes the hotel will sell at auction for $7 million and they want to charge off the remainder immediately. What is the dollar figure for Net Loans before the charge-off and what is the after charge off for Gross Loans.

Before Charge off for Net Loans: $705 Million Net Loans= Gross loans - ALL (Allowance for loan losses) = $750 (GL)- $45 (ALL) = $705 Million After Charge off for Gross Loans: $742 Million Gross Loans= Original amount of gross loans - bad debt before auction = $750Mil (GL) - ($10MIL - $2MIL) = $742 Million

A corporate bond has a yield to maturity of 8%, what will be the yield after a 30% tax?

Before tax gross yield * (1 - marginal income tax rate)= After tax gross yield 8% * (1 - 30%)= 5.6%

In theory, what is the best indicator of a big financial firm's performance ? Select the best response below. A. The amount of control the stockholders have over the firm's decisions in future investments. B. The accuracy of its reporting on its financial statements C. Behavior of its Stock price because it reflects the markets evaluation of that firm D. Hiring the correct personnel to avoid inside factors damaging the firm's performance

Behavior of its Stock price because it reflects the markets evaluation of that firm

Which of the following organizational banking structures expands its geographical boundaries by buying or opening multiple convenient locations and offices? -Virtual Banks -Unit Banks -Holding Companies -Branch Banks

Branch Banks

What is a branch banking organization? Explain why branch banks perform differently? Give examples of differences?

Branch banking is a banking method wherein a bank operates in more than one place to provide banking services to customers, through its branches. Branch banks perform differently because it's comparatively less. Independence of operations is less and Supervision Cost is high.

Which of the following is true concerning branch offices? A. The number of full-service offices in the U.S. have shrunk in recent years. B. An ideal location for a new branch bank is one with below average population density C. Branch offices are generally cheaper to establish than chartering a whole new banking corporation D. The decision about whether to establish a new branch is a cash management problem

Branch offices are generally cheaper to establish than chartering a whole new banking corporation

Why would a financial institution create a new branch? In what ways are they good?

Branches are a really efficient way to enter a new market as an already established financial institution. Many times a bank's customers are moving around and as nearby cities develop, and they need to take those customers. Creating a new branch is an easier process than chartering a whole new financial institution and is usually much cheaper. It also often needs fewer officers and employees. The application process for a branch is much less detailed than a corporate charter.

Define, explain, and give examples of branchless banking.

Branchless banking is carrying out banking duties through limited-service facilities, such as point-of-sale (POS) terminals, automated teller machines (ATMs), telephone banking, and internet-supplied services. Online banking is a great example of branchless banking. Many of the useful services found in physical bank branches are available online; such as checking account balances, moving funds between accounts, view and print images of checks, apply for credit cards or loans, and more. Additionally, ATMs are placed in convenient locations instead of an entire branch office to reduce costs while still allowing customers to make deposits, withdrawals, or just to check their balance.

Define a Call Option, a Put Option, and when would you implement each of these options.

Call Option is when the buyer receives the right, but not obligation, from an option writer to buy and take delivery of securities. It can be implemented when a stock is expected to rise and the buyer wants to secure a fixed price. A Put option is the buyer receives from the option writer the right to sell and deliver securities at an agreed-upon strike price. It can be implemented when a stock is expected to drop and you want to secure a fixed selling price.

The principal factors on which investments are chosen includes all of the following except: a. Call Risk b. Interest Rate Risk c. Cash Flow Risk d. Liquidity Risk

Cash Flow Risk

What are primary reserves and secondary reserves, and what are they supposed to do?

Cash and due from depository institution account is referred to as primary reserves. This means that these assets are the first line of defense against customer deposit withdrawals and the first source of funds to look to when a customer comes in with a loan request. Liquid security holdings are called secondary reserves which occupies the middle ground between cash assets and loans, earning some income but also held for the ease with which they can be converted into cash on short notice.

Suppose a $100,000 par value Treasury Bond futures contract is traded at a price of $99,700 initially, but then interest rates on T-bonds increase a full percentage point from 7 to 8 percent. IF the T-Bond had a duration of nine years, then the change in the value of one T-bond would be:

Change in market value of T-bond= -9 x $99,700 x (0.02/(1 x 1.07)) = $8,385.98

Suppose a financial firm has an average duration in its assets of three years, an average liability duration of two years, total liabilities of $100 million, and total assets of $120 million. Interest rates were originally 10%, but suddenly they rise to 12%. What is the change in the value of net worth?

Change in value of net worth= [-3 x (.02/1.10) x $120 million] - [-2 x (.02/1.10) x $100 million]Change in value of net worth= -$2.91 million

Which federal banking act reduces the need for banks to transport paper checks across the country? a. Glass-Steagall Act b. Check 21 Act c. FACT Act d. USA Patriot Act

Check 21 Act

Which of the following would not be listed on a banking firm's balance sheet. A. Commercial and industrial loans. B. Colleagues loans. C. Real estate loans. D. Security loans.

Colleagues loans.

Credit Unions usually: A. Collect deposits from and make loans to their members as nonprofit associations of individuals sharing a common bond B. Include payday lenders, pawn shops, and check-cashing outlets, offering small loans C. Collect liquid funds from individuals and institutions and invest these monies in quality securities of short duration D. Sell shares to the public representing an interest in a professionally managed pool of stocks

Collect deposits from and make loans to their members as nonprofit associations of individuals sharing a common bond

An Interest rate collar: a. Combines a rate floor and rate cap in one agreement B. Is a restriction on only the rate floor. C. Is a punishment for delinquent payments D. Belongs on a dog

Combines a rate floor and rate cap in one agreement

Short-term, unsecured IOUs offered by major corporation are defined as a. European Paper b. Commercial Paper c. Commercial securities d. Commercial discount

Commercial paper

Explain the difference between consolidation and convergence. Are these trends in banking and financial services related? Do they influence each other? How?

Consolidation refers to increase in the size of financial institutions. The number of small, independently owned financial institutions is declining and the average size of individual banks, as well as securities firms, credit unions, finance companies, and insurance firms, has risen significantly. Convergence is the bringing together of firms from different industries to create conglomerate firms offering multiple services. These trends are related in banking and financial services as both markets needs to make their ends meet with the rival environment. In their effort to compete with each other, banks and their closest competitors have acquired other firms in their industry as well as across industries to provide multiple financial services in multiple markets. The larger the customer base, the sooner the requirements are met.

Define, explain, and give an example of utilizing credit derivatives

Contracts involving lenders who wish to slough off some of the default risk in their loan portfolios and investors who are willing to bear that risk and hope the derivatives will subsequently rise in value. Credit derivatives help financial managers "unbundle" credit risk from other forms of risk and may provide a more efficient method for dealing with default-risk exposure.

When financial service providers offer a range of services including banking, insurance and securities services it is known as: A. Consolidation B. Convergence C. Economies of scale D. E-Efficiencies

Convergence

Define convexity and its relationship to asset and market interest rates.

Convexity refers to the presence of a nonlinear relationship between changes in an asset's price and changes in market interest rates. It is a number designed to aid portfolio managers in measuring and controlling the market risk in a portfolio of assets.

Which of these is not a popular money market investment instrument? A.Treasury Bills. B.Certificates of Deposit. C. Corporate Notes and Bonds. D. International Eurocurrency Deposits.

Corporate Notes and Bonds.

You are comparing two bonds; one is a AAA-rated corporate bond at 8% gross yield and the other is a AAA-rate municipal bond at %5.5. The tax rate is 28%. Which bond should you select:

Corporate bond 8% * (1-.28) = 5.76% Municipal bond %5.5 * (1-0) = 5.5% You would choose the corporate bond.

Define, explain and give examples of Credit enhancement

Credit Enhancement- is an assurance that investors will be repaid in the event of the default of the underlying loans in a securitization. These can be internal or external to the securitization process and lower the risk of the securities. Credit enhancement is used to make a business more creditworthy and reduce the cost of borrowing. credit enhancement is used to protect the investor against some of the potential risks of the investment

A treasury bill currently sells for $9,750, has a face value of $10,000 and has 73 days to maturity. What is the bank discount rate on this security?

DR = (10,000 - 9,750/10,000) * 360/73 DR = 12.33% Answer: The discount rate is 12.33%

Suppose a money market security can be purchased for a price of $95 and has a face value of $100 to be paid at maturity. If the security matures in 80 days, its interest rate measured by the Bank Discount Rate (DR) must be:

DR= ((100-95))/100) x (360/80)= 0.225 or 22.5 percent

In the last decade, the number of banks has __________ and the number of branches has _________. A. Declined; Increased B. Grown; Increased C. Grown; Decreased D. Declined; Decreased

Declined; Increased

Securitized assets carry a unique form of risk called: a. Default risk b. Inflation risk c. Interest-rate risk d. Prepayment risk e. None of the answer choices

Default Risk

What are the differences between demand deposits, savings deposits, and time deposits?

Demand deposits are checking accounts which can have unlimited number of withdrawals and do not bear interest, while saving deposit bear interest and may have limited withdrawn. Finally, time deposit has a fixed maturity. The bank can impose a penalty if the customer withdraws the fund before maturity date. The interest rate is negotiated at the time of the deposit, and can be either fixed or floating

What is the principal liability of any bank? A.Federal funds purchased and repurchase agreements B.Trading liabilities C.Deposits D.Subordinated debt

Deposits

A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity. What is the bank discount rate on this security?

Discount rate = ((face value - current value)/ face value) / ( days to maturity / 360)= ((10000 - 9845) / 10000) / ( 46/360)= 12.13%

The company Tesla booted from the S&P 500 is outperforming it. Analysis from Research Affiliates' Rob Arnott, Vitali Kalesnik, and Lillian Wu, Apartment Investment and Management pattern is not uncommon. Frequently, additions to the index underperforming companies often do very well once they're removed for the S&P 500. What was suggested if you're not just a index buyer?

Do the opposite of what the index does: buy the deletion and sell the addition.

________ shape means that short-term interest rates are higher than long-term rates. a. Downwards sloping b.Upward sloping c. Convex shape d.Concave shape

Downwards sloping

Which is NOT an example of a limited service facility that carries branchless banking? A Drive-in Window B Point of Sale Terminal C Telephone Banking D Automated Teller Machine

Drive in window

An institutional arrangement in which federal and state authorities both have significant bank regulatory powers is referred to as: A: Balance of Power B: Federalism C: Dual Banking System D: Cooperative Regulation

Dual Banking System

Define, explain, and give an example of duration?

Duration is a value and weighted measure of maturity that considers the timing of all cash inflows from earning assets and all cash outflows associated with liabilities. It measures the average maturity of a promised stream of future cash payments. For example, you might have an annuity that has a YTM of 12 year but a duration of 8 because it's when you make your own money back.

Let's suppose management knows the following return and risk information about a proposed new branch office project: 17 percent 5 percent 12 percent 5 percentSuppose the proposed new branch would represent 25 percent of total assets (or W = 0.25), meaning the other assets must represent the remaining 75 percent (or [1 - W] = 0.75) of all assets. The new branch's returns are presumed to be negatively related to the returns from other assets, specifically -.40. This bank's expected return after investing in the new branch B would be

E(RT) = 0.25 (17%) + 0.75 (12%)E(RT) = 13.25% The total risk carried by the bank after adding the new branch would be σ^2(RT) = (0.25)^2 (5%)^2 + (0.75)^2 (5%)^2 + 2(0.25) (0.75) (-0.40) (5%) (5%)σ^2(RT) = 11.875%

Explain what efficiency measures indicate and give examples of them.

Efficiency measures indicate how well management and staff have been able to keep the growth of revenues ahead of rising costs. Net operating margin, net interest margin, and net non interest margin are examples.

Tri-State Bank has $1.60 million in its ALL account at the beginning of the year. This year's provision for loan losses (PLL) is $1.01 million. During the year, the bank charged off worthless loans of $0.50 million and recovered $0.08 million on loans previously charged off. What is the end year balance for the ALL account?

End year ALL = Beginning year ALL + PLL - charge-offs worthless loans + recoveries from previously charged-off loans $2.19 million

Who also filed a lawsuit against Google and Apple and why? A. Epic Games because they removed Fortnite from the Play Store and Apple Store. B. Epic Games because both Apple and Google sued Epic Games first, but did not win the case C. 2k Interactive because they removed 2k Mobile from the Play Store and Apple Store. D. 2k Interactive because both Apple and Google sued 2k Interactive first, but did not win the case.

Epic Games because they removed Fortnite from the Play Store and Apple Store.

What are the factors affecting the choice of investment securities and define at least 3 of them.

Expected rate of return, Liquidity risk, Tax exposure, Call risk, Interest rate risk, Prepayment risk, Credit or default risk, Inflation risk, Business risk, Pledging requirements. Inflation risk is the risk that inflation will undermine an investment's returns through a decline in purchasing power. Liquidity risk refers to how a bank's inability to meet its obligations (whether real or perceived) threatens its financial position or existence. Business risks refers to the possibility of a commercial business making inadequate profits due to uncertainties - for example: changes in tastes, changing preferences of consumers, strikes, increased competition, changes in government policy, obsolescence etc.

Define, explain, and give examples of expense-preference behavior.

Expense-preference behavior is when management of a financial firm decides that benefits exclusively for managers should be the primary objective of the organization. It is sometimes considered the opposite of cost control and efficiency. Companies that display this behavior completely ignore the interests of the stockholders and the public. Examples include expensive, prestigious offices, or excessive travel budgets. Expense-preference behavior is likely to be found in companies where management dominates and the stockholders are not very organized.

A multibank holding company must be approved by the Fed if looking to acquire 5% or more equity shares of an additional bank. True or False?

False

About half of all FDIC-insured commercial bank assets are held in small and medium sized banks.

False

Changing interest rates impact the balance sheet but not the statement of income and expenses of financial firms.

False

Collateralized Mortgage Obligations (CMOs) is a type of complex debt security that registers and secures the payments of principal and interest from a collateral pool to different types and maturities of securities.

False

Community banks represent the industry leaders, spreading along regions,nations, and continents.

False

Convexity decreases with the duration of an asset.

False

Duration is a future-value-weighted measure of maturity of an individual security or portfolio of securities.

False

If a financial firm wants to avoid higher borrowing costs and declining asset values, they should use a long hedge.

False

Loan-backed bonds are not a securitization device used to help raise funds.

False

Low traffic count is desirable when looking for a new branch location because less traffic means more safety for customers.

False

Money Market Instruments reach maturity at 10 years.

False

Nearly three quarters of all U.S banks exceed $100 million in asset size apiece.

False

One difference between a banking product and financial products is that a bank can offer a retirement plan, but a financial institution cannot.

False

Section 20 in the Glass-Steagall Act prohibited national banks from investing in stocks and underwriting new issues of ineligible securities such as corporate stocks and bonds. True or false?

False

The CEO of retail banks is the person in charge to set policy and monitor the performance of the company.

False

The Office of the Comptroller of the Currency is a division of the department of defense.

False

The department that set up laws to charter new national banks through the U.S treasury department is called the Federal Reserve System.

False

The largest asset item in the financial firm's balance sheet is Cash.

False

The law that set up the federal banking system and provided for the chartering of national banks was the Glass-Steagall Act.

False

The number of bank branches is increasing.

False

The ratio of net loans to total assets is considered to be a measure of credit risk in banking. True or False?

False

The total number of full-service branch offices has declined in the United States in recent years.

False

The two most important financial statements for a banking firm are the balance sheet and cash flow statements.

False

Traditional bank branches offer higher saving rates than online banks.

False

True or false, the Federal Reserve System is the oldest federal banking agency?

False

Unit banks usually offer very limited services and don't use limited service facilities.

False

A trustee collects payments on the securitized loans and passes those payments along to the servicer.

False A servicer collects...to the trustee

Marketable notes and bonds sold by agencies owned by or sponsored by the federal government are known as ............ ? -Federal Home Loans -Federal Agency Securities -Certificate of Deposit -Banker's Acceptance

Federal Agency Securities

How has the stock market changed in terms of jobs data?

Following a quiet session earlier in the day, stock futures opened marginally higher Wednesday evening, with the three major indexes closing neutral ahead of another batch of significant economic data this week.After both the S&P 500 and the Dow closed Wednesday's session down, contracts on both indexes stabilized. Nasdaq futures increased after the index surged for the third day in a row, setting new intraday and record highs.This week, technology companies have outperformed, with traders reinvesting in growth stocks that had underperformed so far this year.

Explain why the physical presence of a bank is still important to many customers despite the recent advances in technology.

For some important financial services, physical presence is still important to many customers. Such services include transaction accounts, smaller savings deposits, safety deposit boxes, and consumer and small business loans. Customers provided these services usually prefer physical presence especially when a customer encounters overdraft or suspects fraud or identity theft.

A lender extending a $30 million floating-rate loan to one of its corporate customers for a year at prime insists on a minimum (floor) interest rate on this loan of 9 percent. If the prime rate drops below the floor to 7 percent for one year, the customer will pay not only the 7 percent prime rate (or $30 million X 0.07 = $2,100,000 in interest) but also pay out an interest rebate to the lender.

Formula = (Floor Rate - Current Loan Interest Rate) X Amount Borrowed (9%-7%) x 30,000,000 = (0.09-0.07) x 30,000,000 =600,000

A bank purchases a cap of 9 percent on its borrowings of $200 million in the Eurodollar market for one year. Suppose interest rates in this market rise to 10 percent for the year How much money the financial institution selling the cap will reimburse the bank purchasing the cap ?

Formula: (market interest rate - cap rate) * amount borrowed = ( 10% - 9%) * $200M = $2 million The financial institution selling the cap will reimburse the bank purchasing the cap $2 million.

A bond possesses a duration of 8.89 years. Suppose that market interest rates on comparable bonds were 7.5 percent this morning, but have now shifted downward to 7.25 percent. What percentage change in the bond's value occurred when interest rates decreased by 25 basis points?

Formula: Percentage change in price = - Duration * [ change in interest rate/ 1+(1/m) initial rate] = -8.89 x (( 7.25% - 7%)/ 1 + 7%) = -8.89 x ( 0.025/1.07) = - 0.2077 Thus the percentage of the bond is = -2.08%.

Suppose Small Bank, NA has 9 branches located in Midtown, USA. If Midtown, USA has a total population to be served of 8,963, then what would be Small Bank's population per branch office in Midtown, USA? (round to the nearest whole number)

Formula: Population Per Branch Office= Total Population To Be Served/Number of Branches Offices Presented In Area 996 population per branch office

Find interest income. Total interest income $130 Total interest expenses $100 Total noninterest income $55 Total noninterest expenses $85

Formula: Total interest income − Total interest expense = 130-100 = 30

Define, explain and give examples of how banks and other financial institutions have undergone changes in recent decades.

Functions and services of both banks and their competitors have changed within the financial industry. Many institutions, such as security dealers, investment bankers, brokerage firms, credit unions, thrift institutions, mutual funds and insurance companies are trying to be as similar to banks as possible, offering the same type of services. For example, during the financial crisis of 2008, Goldman Sachs and Morgan Stanley transitioned from being among the highest ranked investment banks to being commercial bank holding companies, accepting deposits from the public.

What was the name of the Act used to create boundaries on commercial banking and provided constraints that ere effective for more than 60 days? A. Glass-Steagall Act B. Federal Deposit Insurance Corporation Improvement Act C. The Act of 1922 D. The FDIC Act

Glass-Steagall Act

Suppose you are managing a medium-size branch banking organization (holding about $25 billion in assets) with all of its branch offices located within the same state. The board of directors has asked you to look into the possibility of the bank offering limited security trading and investment banking services as well as insurance sales. What laws open up the possibility of offering the foregoing services and under what circumstances may they be offered? What do you see as the principal benefits from and the principal stumbling blocks to successful pursuit of such a project?

Gramm Leach Bliley Act of 1999 allows banks to offer selected non-banking financial services. Bank could offer these services either as bank holding company or through any other bank. The financial holding company form have the advantage because each affiliated firm would have its own capital and its own profits and losses that are separate from the profits and losses of any other part of the firm

What is the function of a Credit Option? A. Guards against losses in the value of a credit asset or helps to offset higher borrowing costs that may occur due to changes in credit ratings. B. Offers protection against loss when default occurs on a loan, bond, or other debt instrument. C. Two lenders agree to exchange a portion of their customers' loan repayments. D. It fuses together a normal debt instrument, such as a bond, plus a credit option contract to give a borrower greater payment flexibility.

Guards against losses in the value of a credit asset or helps to offset higher borrowing costs that may occur due to changes in credit ratings.

A(n) _________________________ allows homeowners to borrow against the residual value of their residence. a. Loan-Backed Bonds b. Home Equity Loans c. Mortgage Loan d. Personal Loan

Home Equity Loans

What does the OE for a bank reflect?

How well the assets of the bank are managed, the bank's use of leverage, and how well the bank controls expenses.

How much has the U.S. home prices risen this year?

In April, property prices in the United States increased at their quickest rate ever. Due to low mortgage interest rates, many people are bidding to acquire a limited quantity of properties. Because of the tremendous demand for homes, sellers are willing to sell for more than the asking price. According to the S&P CoreLogic Case-Shiller National Home Price Index, average home prices in major metropolitan areas across the United States increased 14.6 percent in the year ended April, up from 13.3 percent the previous month (the highest annual rate of price growth since 1987). The median price of an existing home increased by 24%.

Suppose the Fed purchases $500 million in government securities from a primary dealer. What will happen to the level of legal reserves in the banking system and by how much will they change?

In case of open market operations, the central bank purchases and sells securities which influences the interest rates and increase the supply of credit. Open market operations would therefore increase the volume of bank deposits and increase the lending and also interest rate related to borrowing. If central bank is purchasing the government securities, then total bank reserves will have to be increased by $500 million. If the $500 million is excess reserves then loan and deposits would increase the multiplicative factor which is related to reserve requirement of different deposits with the bank.

The Raymond Burr National Bank has $1000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at 6% and fall by 1%. What is the change in net worth of this bank?

Increase in asset = -asset duration*change in yield*asset value =-5*(-0.01)*1000=50 Increase in liabilities = =6.25*(-0.01)*800=50 Change in net worth = Increase in asset-Increase in liabilities = 50-50 = 0

The concentration of U.S bank deposits in the hands of the largest banks has _____ recently. a. Decreased b. increased c. stayed the same d. all statements are incorrect.

Increased

Which of the following is NOT a measure of risk in banking and financial services? a. Risk occurs inside and outside firms control b. Fraudulent financial statements c. Economic conditions d. Increasing interest rates

Increasing interest rates

Define, explain and give examples of how the ability of banks to provide individuals and businesses with loans demands government regulation.

Individual and business loans support consumption and investment spending. This gives the public an interest in an adequate supply of credit from the financial system. If discrimination in granting credit exists, those individuals and businesses who are discriminated against will face significant obstacles to their well being and standard of living. An example of this is how the government prohibited the discrimination concerning the sale, rental or financing of housing based on race, religion, national origin or sex with the Fair Housing Act of 1968.

Posted by Reginald Miller on 07/05/2021 in WAP:-Class 03-Week 02 (June 29- July 05, 2021) Read the article " Fed chair Powell met with coinbase CEO Brian Armstrong in May" What does Mr. Powell believe Crypto currencies soaring prices might lead to? A. Investors have more faith in crypto currency than regular stock market stocks. B. Inflation to increase due to cryptos unregulated funds and high volatility C. Countries to start adopting it as main currency such as El Salvador D. Mr Powell believes crypto currencies are more effective than digital currencies.

Inflation to increase due to cryptos unregulated funds and high volatility

What is the toughest and potentially most damaging forms of risk that all financial institutions must face? A. Credit card risk B. Loan loss risk C. risk of the banks D. Interest rate risk

Interest Rate Risk

Explain interest rates regarding Municipal Bonds.

Interest on the majority of these bonds is exempt from U.S. federal income tax provided they are issued to fund public, not private, projects.

Define interest rate cap, interest rate floor, and interest rate collar.

Interest rate cap sets the maximum interest rate that a lender can charge on a floating-rate loan and is designed to protect the holder from rising interest rates. An interest rate floor sets the minimum rate that the borrower must pay on a floating-rate loan and protects the lender from falling interest rates. An interest collar means that there is both an interest rate floor and cap.

What are the advantages of interest-rate caps?

Interest rate caps protect holders against rising market interest rates. Institutions lending money cannot increase their loan rate above the level of the cap. And borrowers can purchase an interest-rate cap from a third party, which will cover any additional interest above the cap.

What is the correct relationship? a. Interest rate goes UP the market value for bonds/assets goes DOWN. b. Interest rate goes UP the market value for bonds/assets goes UP. c. Interest rate goes DOWN the market value for bonds/assets goes DOWN. d. All of the statements mentioned above.

Interest rate goes UP the market value for bonds/assets goes DOWN.

A way to change a borrowing institution's exposure to interest-rate fluctuations and achieve lower borrowing costs is a/an: a. Interest rate option b. Interest rate swap c. Put option d. Call option

Interest rate swap

What is interstate banking? Can you see any advantages in allowing interstate banking? What are potential disadvantages?

Interstate banking refers to a bank holding company that is permitted to own and operate banks in more than one state. Advantage to allowing interstate banking includes a convenience factor for bank customers, increased efficiency in the banking industry, and geographical diversification of banking loan portfolios. Potential disadvantages included the possibility of decrease in competition as small banks may fail, interstate lending may cause a reduction in lending to small businesses, and there may be increased risk from expanding into new geographical markets.

All of the following are recognized investment instruments available to financial firms except: a. Options and Certificate of Deposits b. Money Markets and Capital Markets c. Equity and Liabilities d. Inventories and Right-of-use assets

Inventories and Right-of-use assets

Explain and define 3 nonbank businesses.

Investment banking firms purchase new government and municipal bonds and corporate stocks and bonds from the issuer and offer these securities to buyers.Mortgage companies provide short-term credit to improve real property for residential or commercial use.Savings associations offer savings deposit plans and housing-related credit, predominantly to individuals and families.

Define, explain, and give an example of investment banks.

Investment banks are banks that sell large holdings of new shares and sell them to investors. They provide professional advice to corporations and governments to help clients raise funds in the financial marketplace, find business acquisitions, and trade securities. Some examples of investment banks are Goldman Sachs and Raymond James Financial.

Why is it difficult for new charters to grow and become a successful bank nowadays? Explain.

It is becoming increasingly difficult for new charters to become successful as more cash reserves are needed to be able to sustain possible market corrections and defaults on loans. Besides this, large banks that are already established hold the most market share in banking and are constantly opening new branches and taking away market share of smaller banks.

Define and explain what liquidity risk is. Then, give examples how the bank can reduce liquidity risk.

It is the risk a bank faces for not having sufficient cash and borrowing capacity to meet customer withdrawals, loan demand, and other cash needs. The most common threat to liquidity to a bank happens when unexpectedly heavy deposit withdrawals take place, which forces a depository institution to borrow funds at an elevated interest rate, higher than the interest rates other institutions are paying for similar borrowings. The banks can reduce liquidity risk by making sure it has enough purchased funds within its assets that can be sold quickly in order to raise capital. The bank also can keep an eye on liquidity ratios like: "Cash and due from balances held at other depository institutions/Total assets", and "Cash assets and government securities/Total assets".

The interest rate on one year Treasury Bonds is 5%.The interest rate on five year Treasury Bonds is 7.5%.The interest rate on ten year Treasury Bonds is 10%.What is true about the yield curve? a. It is downward sloping b. It is upward sloping c. It is a horizontal line d. Cannot be determined from the information given

It is upward sloping

Which of the following best describes the definition of a money centered bank? A. A bank that sells deposits and make loans to businesses, individuals, and institutions B. Largest commercial banks based in leading financial centers Smaller, locally focused commercial and savings banks C. Larger commercial banks serving corporations and governments D. Banks that attract savings deposits and make loans to individuals and families

Largest commercial banks based in leading financial centers Smaller, locally focused commercial and savings banks

Define Legal risk and Compliance risk

Legal risk creates variability in earnings resulting from actions taken by our legal system. Unenforceable contracts, lawsuits, or adverse judgements may reduce a financial firm's revenues and increase its expense. Compliance risk reaches beyond violations of the legal system and includes violations of rules and regulations.

A Negative IS GAP means the institution is: a. Asset Sensitive b. Exposed to Interest Rate Risk c. Liability Sensitive d. All statements are correct

Liabiltiy sensitive

Who is a central figure in a movement that favors sweeping changes to antitrust enforcement? A. Lina Khan B. Mina Khan C. Lina Kong D. Jennifer Psaki

Lina Khan

Define Liquidity risk and explain how it may affect a firm's performance. Give examples on why it's important for a firm to monitor its liquidity.

Liquidity Risk is a financial risk where a company, investor, or firm can't meet their short term debt obligations due to the inability to convert an asset into cash quickly enough.Liquidity risk may cause a firm to dig into emergency funds or reserve cash therefore lowering its earnings and increasing its chances of higher debts in the future during economic crisis such as the Covid-19 pandemic. If firms don't have enough cash available they might suffer when a client unexpectedly wants to withdraw a huge amount of funds. Or when someone wishes to apply for a loan and they don't have enough money to supply that demand.

Religious opposition decreased during the Renaissance because: a. Loans to the poor often carried high interest rates b. Loans and deposits were primarily for wealthy customers c. Wars took away most of the money d. The Industrial Revolution demanded new methods of making payments and obtaining credit

Loans and deposits were primarily for wealthy customers

What is the difference between shorts and long hedges in futures? A.Long Hedge: Sells futures and then cancels with a subsequent sale of different contracts. Short Hedge: Buys futures and then cancels with a subsequent purchase of different contracts B. Long Hedge: Sells futures and then cancels with a subsequent sale of similar contracts. Short Hedge: Buys futures and then cancels with a subsequent purchase of similar contracts C. Long Hedge: Buys futures and then cancels with a subsequent sale of similar contracts. Short Hedge: Sells futures and then cancels with a subsequent purchase of similar contracts. D.Long Hedge: Buys futures and then cancels with a subsequent sale of different contracts. Short Hedge: Sells futures and then cancels with a subsequent purchase of different contracts.

Long Hedge: Buys futures and then cancels with a subsequent sale of similar contracts. Short Hedge: Sells futures and then cancels with a subsequent purchase of similar contracts.

Define, explain, and give an example of corporate bonds

Long-term debt securities issued by private corporations are usually called corporate notes when they mature within five years. A longer original maturity would make it a corporate bond.

An upward shaped yield curve means: A. Both short-term and long-term interest rates are equal B. Short-term interest rates are higher than long-term rates C. Long-term interest rates are higher than short-term rates D. All of the options

Long-term interest rates are higher than short-term rates

A bond has three years to maturity and has a coupon rate of 15 percent. This bond is selling in the market for $1072 and has a yield to maturity of 12%. What is the duration of this bond?

Macaulay Duration= (1*15%*1000/1.12+2*15%*1000/1.12^2+3*15%*1000/1.12^3+3*1000/1.12^3)/1072= 2.638739

Which of the following situations would NOT increase the value of the financial firm's stock? A. Market interest rate decrease B. The financial organization's level of risk falls C. Expected dividend increases D. Market interest rate increase

Market interest rate increase

Which region of the United States contains the most banks?

Midwest

The word "hedge" defines which of the following options? a. Maximize risk. b. Risk averse. c. Transfer risk. d. Minimize risk.

Minimize Risk

Define, explain, and give an example of monetary policy.

Monetary policy is a central bank's primary job to make sure the supply and cost of money and credit from the financial system contribute to the nation's economic goals. The Fed ensures that the economy grows, the unemployment rate is kept low, and inflation is held down. They try to achieve this by controlling the growth of money and credit. Examples of monetary policy are open market operations, discount rate, and reserve requirements.

Define monetary policy. Explain why it is so important for the central bank. Give an example of how it is conducted here in the United States.

Monetary policy is a nation's control of both money supply and interest rates to control the economy's inflation, consumption, growth and liquidity. Central banks are important sources for short term loans. Most of the largest banks tend to be frequent borrowers who need to replenish their reserves and asset liquidity. Handling the creation of money during the correct economic conditions is essential to a country's debt management. For Instance here in the US if not enough people are borrowing, the Fed will lower interest rates to attract clients and increase the amount of people borrowing therefore increasing the demand which will boost the economy since there is more money to go around in circulation.

Define, Explain, and Give examples of the difference between Money Centered Banks and Community Banks

Money-center banks are industry leaders, spanning whole regions, nations, and continents, offering the widest possible menu of financial services, gobbling up smaller businesses, and facing tough competitionfrom other giant financial firms around the globe.

How well do new Charters perform at the beginning?

Most new firms grow at a moderate rapid rate, despite having a track record of loan losses that may exceed established banks; those new charters are analyzed to be profitable within 2-3 years of first opening.

Where are most of the new U.S banks chartered? and why?

Most of the new U.S banks are chartered in relatively large urban areas such as congested cities. The reason for this being is that organizers can earn higher expected rates of return on their investments.

Loans typically fall into each of the following categories except: A. Real estate B. Consumer C. Agricultural D. Municipal

Municipal

Long term debt obligations issued by cities, state, and other local government units are known as collectively as __________ A.Municipal Bonds B.Corporate Bonds C.Treasury Bills D.Commercial Papers

Municipal Bonds

Long-term debt obligations issued by states, cities, and other local governmental units are known collectively as A. Corporate bonds B. Municipal bonds C. Corporate notes D. Certificate of deposit (CD)

Municipal bonds

Suppose a large international bank records $4 billion in interest revenues from its loans and security investment and $2.6 billion in interest expenses paid out to attract borrowed funds. If this bank holds 40 billion in earning assets, its net interest margin is?

NIM = (Interest income from loans and investments-interest expense on deposits and other borrowed funds)/total earning assetsSolution(4 billion - 2.6 billion) /40 billion * 100= 3.5%

The banking Act of 1933 (G-S) included section 16 article which stated: a. National banks were not allowed to invest in stocks. b. National Banks were allowed to invest in stocks and underwrite new issues. c. National Banks were prohibited from investing stocks and underwriting new issues. d. National banks were not allowed to underwrite new issues.

National Banks were prohibited from investing stocks and underwriting new issues.

What is taken into consideration for a new bank branch? a. Heavy traffic count. b. Nearby retail stores, shopping centers, grocery stores. c. Population growth and age. d. All of the statements mentioned.

Nearby retail stores, shopping centers, grocery stores.

The difference between such sources of bank income as service charges on deposits and trust-service fees and such sources of bank expenses as salaries and wages and overhead expenses divided by total assets or total earning assets is called the: -Net profit margin -Net operating margin -Net noninterest margin -Net return on assets

Net noninterest margin

Posted by Jorge Nunez on 06/23/2021 in WAP:-Class 01-Week 01 (June 22-28, 2021) Based on the article "New York's economy is Americas Worst" Which of the following is Not a factor of New York's under performing economy in 2020? A. New York relies on tourism which was affected due to Covid-19 travel restrictions. B. New York was a main epicenter of the coronavirus outbreak with high # of cases.. C. New York Governor Cuomo was accused of corruption and stealing millions. . D. New York has one of the highest unemployment rates in the country at 7.8%

New York Governor Cuomo was accused of corruption and stealing millions. .

What country regulates the bitcoin? A. Nicaragua B. Honduras C. United states D. No country

No country

Aside from the state banking commissions, which federal agency can issue a charter of incorporation to start a new U.S. Bank?

OCC

The oldest federal bank agency is the: A. FDIC B. FRS C. BHC D. OCC

OCC

Define off balance sheet? What are off balance sheet items, and why are they important to some financial firms?

Off-balance sheet transactions are assets or liabilities that are not booked on the balance sheet, but deferred or contingent. They allow a party to have the benefit of an asset while transferring its liabilities to another party. For most companies, off-balance sheet items exist in relation to financing, enabling the company to maintain compliance with existing financial covenants. Off-balance sheet items are also used to share the risks and benefits of assets and liabilities with other companies, as in the case of joint venture (JV) projects.

Wich of the following statements is true about options? A. Options do not obligate any party to deliver securities. B. Options grant the obligation to take or deliver a security, not the right to do so. C. The option buyer can exercise the option, but cannot sell to another buyer. D. Once the option is created, it cannot expire.

Options do not obligate any party to deliver securities.

A bank is expected to pay a dividend of $5 per share, dividends are expected to grow 6 percent a year for all future years, and the appropriate discount rate is 10 percent. Then the bank's stock price must be valued at

P = 5/(10%-6%) = 125

Suppose a bank is expected to pay a dividend of $1 per share in year 1, dividends are expected to grow at 4 percent a year for all future years, and the appropriate discount rate to reflect share shareholder risk is 12 percent.

P = D/(r - g)SolutionP = D/(r - g)1/(.12-.04)=p1/.08=pP= 12.5

If P is the price of the standby, NL is the cost of a nonguaranteed loan, and GL is the cost of a loan backed by a standby guarantee, then a borrower is likely to seek an SLC if:

P<(NL - GL)

Which of the following is considered a fringe bank? a. Community bank b. Payday lender c. Merchant bank d. Wholesale bank

Payday lender

MJ Bank is expected to pay a dividend of $9 per share in period 1. The discount rate is 10 percent and dividends are expected to grow 7 percent a year for all future years. What is the bank's stock price valued at?

Po = D1 / (r - g) Po = $10 / (0.10 - 0.07) $300 per share

What theory does a rise in market rates of interest will cause the market value of both fixed income rate assets and liabilities to decline derive from? A. Duration theory B. Loan loss theory C. Big Bang theory D. Portfolio theory

Portfolio Theory

Which of the following is NOT a factor of liquidity risk? a. Danger in lending b. Promote high interest rates to attract its customers c. Possession of stocks might be unavailable d. Purchased funds such as eurodollars

Possession of stocks might be unavailable

What are primary reserves and secondary reserves?

Primary reserves are cash kept by other firms such as the federal reserve, long-term bonds, and deposits at other banks. Secondary reserves are held similarly to primary reserves; however, in the kind of short-term government bonds or commercial paper, the secondary reserve is more liquid than the primary.

What are primary and secondary reserves? Explain what their differences are.

Primary reserves are often cash and deposits in other institutions. Secondary reserves are usually securities such as short-term government securities and privately issued money market securities. While primary reserves are the first line of defense and do not earn interest, secondary reserves provide a second line of defense to meet demands of cash and occupy the middle ground between cash assets and loans, earning some income but are also highly liquid.

Explain profitability.

Profitability is a measurement of efficiency and its success or failure. A further definition of profitability is a business's ability to produce a return on an investment. Profitability ratios assess a company's ability to earn profits from its sales or operations, balance sheet assets, or shareholders' equity.Gross margin measures how much a company makes after accounting for COGS. Operating margin is the percentage of sales left after COGS and operating expenses. The pretax margin shows a company's profitability after further accounting for non-operating expenses. The net profit margin is a company's ability to generate earnings after all expenses and taxes

Larger U.S. banks, with $3 billion or more in assets, must meet requirements for setting up outside audit committees, including: a. Requiring at least two audit committee members to have prior banking experience b. Prohibiting the most significant customers from serving on such a committee. c. Audit committees have access to legal counsel that is independent of bank management. d. a and c only. e. All the statements mentioned.

Prohibiting the most significant customers from serving on such a committee.

Define the goals of interest rate hedging.

Protecting the Net Interest Margin is one of the goals of interest rate hedging. The net interest income of a company is calculated to understand how it will change if interest rates rise. The cumulative gap is a helpful overall indicator of interest rate risk exposure.The total dollar difference between those assets and liabilities that can be repriced during a specified time period. We can estimate how a change in market interest rates will affect net interest income given any specific change in market interest rates.

Which one is the primary indicator of managerial efficiency? A. ROE B. ROA C. net interest margin D. none of them

ROA

What is Miller Bank's ROA if its Net Profit is 14.1%, Net Income $2000, Total Asset $85200, and Total Equity $5250?

ROA = Net Income / Total Assets ROA = $2000 / $85200 ROA = 0.023 Answer: ROA is 2.3%

A bank ROE can be calculated by: a. ROA minus its Total Assets divided by total equity capital b. ROA times its Total Assets divided by total equity capital c. ROA divided by its Total Assets times total equity capital d. ROA plus its Total Assets divided by total equity capital

ROA times its Total Assets divided by total equity capital

Explain who establishes regulatory bodies and why.

Regulatory bodies are established by governments or other organizations to oversee the functioning and fairness of financial markets and the firms that engage in financial activity. The goal of regulation is to prevent and investigate fraud, keep markets efficient and transparent, and make sure customers and clients are treated fairly and honestly

What is the difference between repriceable assets and repriceable liabilities?

Repriceable assets are interest sensitive assets such as loans that are about to mature, come up for renewal or repricing. These allow the bank to free up funds to reinvest in current interest rates. Repriceable liabilities are interest sensitive liabilities, such as CDs that are soon to mature and require the bank to renew or fulfill.

Which of the following belongs to Non-deposit Borrowings? a. NOW accounts. b. Repurchase Agreement ("REPO"). c. Saving deposits. d. None of the statements mentioned.

Repurchase Agreement ("REPO").

Define, explain, and give an example of a reputation.

Reputation risk is the uncertainty associated with public opinion. Negative publicity, whether true or not, can affect a financial firm earning by dissuading customers from using the institution. For example, employees of a corporation that posts racist comments on social media where the public knows that the employee is associated with the corporation, will give the corporation a reputation risk because people will think that corporation is racist.

A bank expects an average gross annual yield of 7% on a packaged securitization. It is expected at a discount from par that results in a net interest cost to the issuer of 5%. The bank expects 2% of the packaged loans to default. Advisory fees will cost 0.4%, a liquidity facility costing 0.5%, and a credit guarantee of 0.7%. Calculate the residual income.

Residual income= Loan Yield - Security interest rate - default risk - advisory fee - liquidity facility - credit fee ?= 7% - 5% - 2% - 0.4% - 0.5% - 0.7% = -1.6%

What did Robinhood do that has made them settle $70 million? A. Gave free stock B. Traded secret information C. Avoid tax D. Restricted traded

Restricted Trading

What is return on equity capital, and what aspect of performance is supposed to measure? Can you see how this performance measure might be useful to the managers of financial firms?

Return on equities and measure of rate of return on the fund requested by the shareholders in the financial institution park. Return on equity is an important measure of financial performance. A higher return on equity indicates that better profitability of an organization over the others. An organization must be able to meet at least some minimum return expectations of its shareholders to survive in the long run. The return on equity is of substantial importance to the managers of financial firms as all such institutions exist with the primary objects to maximize the shareholders wealth. A higher return on equity implies imagine that its pursuit this objective. It is a measure of financial performance, and it is usually compared with other firms usually in the same sector to gauge an idea of magic perform performance versus its competitors.

https://www.marketwatch.com/story/the-u-s-dollar-is-falling-for-the-right-reasons-and-thats-good-news-for-stocks-11609874436 So USD liquidity is now falling, due, in all likelihood, to the Fed allowing banks to get 5bps in the o/n reverse repo market (this is likely reducing demand for short-term treasury notes). This is the reverse of QE, and potentially has negative implications for equities. Why do banks preform reverse repo transactions?

Reverse repos are commonly used by businesses like lending institutions or investors to lend short-term capital to other businesses during cash flow issues. In essence, the lender buys a business asset, equipment or even shares in the seller's company and at a set future time, sells the asset back for a higher price.

Which Act adequately capitalized and managed holding companies can acquire banks anywhere in the United States. a.Bank Secrecy Act B. Glass-Steagall Act c. Riegle-Neal Act D. Banking Regulation Act

Riegle-Neal Act

Which role have assisted customers in preparing financially for the risk of loss to property, persons, and financial assets. A. Savings/Investment advisor B. Investment banking C. Guarantor D. Risk Management

Risk Management

Robinhood to pay $70 million for outages and misleading customers, the largest-ever FINRA penalty. Why were the reasons outages and misleading customers and how do they plan on fixing the problem?

Robinhood had blocked their traders to buy that stock in order to stop the price to go up, making customers really angry as they advertised their platform to be free trading for everyone, but they will limit them to buy certain stocks at a specific moment, which enraged a lot of people as they have money on the line. Robinhood has increased their staff by triple and have increased customer support and other forms of communication.

List and describe three leading competitors of banks.

Savings associations: Specialize in selling savings deposits and granting home mortgage loans and other forms of household credit to individuals and families, Credit unions: Collect deposits from and make loans to their members as nonprofit associations of individuals sharing a common bond Fringe banks: Include payday lenders, pawn shops, and check-cashing outlets, offering small loans bearing high risk and high interest rates to cover the immediate financial needs of cash-short individuals and families Money market funds: Collect liquid funds from individuals and institutions and invest these monies in quality securities of short duration Mutual funds (investment companies): Sell shares to the public representing an interest in a professionally managed pool of stocks, bonds, and other securities Hedge funds: Sell shares in a pool of assets mainly to upscale investors that typically include many different kinds of assets (including nontraditional investments in commodities, real estate, loans to new and ailing companies, and other risky assets) Security brokers and dealers: Buy and sell securities on behalf of their customers and for their own accounts Finance companies: Offer loans to commercial enterprises (such as auto and appliance dealers) and to individuals and families using funds borrowed in the open market or from other financial institutions

____of loans and other assets is a simple idea for raising new funds- so simple, in fact, one wonders why it was not fully developed until the 1970s and 1980s. -Securitizations -Expiration Fees -Maturity -Fixed Rates

Securitizations

Which of the following is NOT Noninterest Income: A. Fees earned from fiduciary activities B. Service charges on deposit account C. Security investment accounts D. Trading account gains

Security investment accounts

Which one is not true about Bretton Woods (New Hampshire) 1944 Act? -Implemented gold exchange standard -Was discontinued -Caused high inflation, Volcker raised short term interest rates to fight inflation -Separated commercial banking and investment banking

Separated commercial banking and investment banking

Which of the following is not part of the SLCs? A. Commitment from the issuer B. Account party C. Beneficiary D. Servicing rights

Servicing Rights

Mention a repriceable asset?

Short term securities issued by the government about to mature owned by the bank

Apple is trading today at $110, the strike price is $100, and the options premium is $2, calculate the profit if the buyer purchases one contract.

St - (Sp - P) * 100 = ? 110-(100+2)*100=800

Define, Explain, and Give examples of the Riegle-Neal Interstate Banking and Branching Efficiency Act

Stated that adequately capitalized and managed holding companies can acquire banks anywherein the United States. It enforced that interstate holding companies may consolidate their affiliated banks acquired across state lines into full-service branch offices. However, branch offices established acrossstate lines to take deposits from the public must also create an adequate volume of loans to support their local communities. No single banking company can control more than 10 percent of nationwide deposits or more than 30 percent of deposits in a single state.

Which is not an example of a financial intermediary a. A stock certificate b. A finance company c. A credit union d. A life insurance company

Stock certificate

A bank holding company is chartered with the purpose of holding bank stocks and can hold: A. Stocks of only one type of bank B. Stocks of multiple banks, but only banks. C. Stocks of multiple banks, and other businesses. D. Stocks of only one type of bank, and other businesses.

Stocks of multiple banks, and other businesses.

What were early banks in Europe used for ? a. Transporting goods b. Storage for wealth (gold and silver) c. Trading wealth between kings and queens d. To protect against other countries

Storage for wealth (gold and silver)

Which of the following is not a principal factor when investments are chosen? A. Expected rate of return B. Interest rate risk C. Stripped security D. Liquidity risk

Stripped Security

Define and explain the purpose of the FDIC. Provide an example of how we use it in our lives.

The FDIC is a government agency that guarantees the repayment of the public's deposits in US banks even in the event that the institution fails. It was created in 1934 under the Glass-Steagall Act to guarantee the public's deposits up to a substantial amount, today of up to $250,000. That way the government could reduce the number of "bank runs" and enhance public confidence in the banking system. Today, I can deposit up to $250,000 without worrying about the bank going bust and losing all my money as they have to be FDIC insured in order to take deposits.

Tell me what is the FED's main function.

The Fed's three main functions are to 1) conduct the nation's monetary policy to achieve monetary and economic stability and prosperity, 2) provide and maintain an effective and efficient payments system, and 3) supervise and regulate depository institutions.

What key roles does the Federal Reserve System perform in the banking and financial system?

The Federal Reserve System supervises and examines the activities of state-chartered banks that choose to become members of its system and qualify for Federal Reserve membership and regulates the acquisitions and activities of bank holding companies. However, the Fed's principal responsibility is monetary policy—the control of money and credit growth in order to achieve broad economic goals. It also serves as a lender of last resort by providing temporary loans to depository institutions facing financial emergencies. The system helps stabilize the financial markets and the economy in order to preserve public confidence.

What is the Glass-Steagall Act, and why was it important in banking history?

The Glass-Steagall Act separated commercial banking from investment banking and insurance companies. The Federal Deposit Insurance Corporation (FDIC) was created to guarantee the public's deposits up to a stipulated maximum amount Initially $2,500 and today it is up to $250,000 in order to enhance public confidence in the banking system. The Glass-Steagall Act defined the boundaries of commercial banking by providing constraints that were effective for more than 60 years so it was important in banking history.

Define What the Interest Sensitive Gap is and explain how you can eliminate a positive gap or a negative gap and what are the risk of the one you are eliminating?

The IS Gap is the portion of the balance sheet that is affected by interest rate risk. A positive Gap means that the institution is Asset Sensitive and it can be eliminated by extending asset maturities or shorten liability maturities, and the risk of having a positive gap is that the institution will lose if interest rates fall because the net interest margin will be reduced.

Define, Explain, and Give examples of what the OCC in in charge of.

The OCC oversees issuing new charters of incorporation to start a new US bank. State chartering is more rigorous but federal chartering from the OCC gives a higher level of prestige.

Describe Islamic Banking.

The Quran also forbids interest and usury.Depositors at Islamic banks don't earn interest, instead they earn a share of return from the bank's investment of their deposits.A home mortgage is also structured differently.The bank buys the house, and the customer then buys the house back from the bank in installments which total to more than what the bank paid.Islamic banks refrain from investing in industries that are considered sinful.They make profits through equity participation.

What accounts make up the Report of Income (income statement of a bank)?

The Report of Income includes all sources of bank revenue (loan income, investment security income, revenue from deposit service fees, trust fees, and miscellaneous service income) and all bank expenses (including interest on all borrowed funds, salaries, wages, and employee benefits, overhead costs, loan loss expense, taxes, and miscellaneous operating costs.) The difference between operating revenues and expenses (including tax obligations) is referred to as net income.

What does the Riegle-Neal Act do, and what factors that made the U.S. created this act.

The Riegle-Neal Act was created in 1994, and it was an action supported by most states except Montana to acquire banks in the U.S. without the state's permission. The factors that made the U.S. created this law are that it needed new capital to revive struggling local economies, strong desire on the part of the largest financial firms to geographically diversify their operations and open up new marketing opportunities,belief that larger financial firms may be more efficient and less prone to failure, advances in the technology of financial-services delivery, and expansion of financial-service offerings by nonbank financial institutions that faced few restrictions on their ability to expand nationwide.

The act which requires financial institutions to share information about customer identities with government agencies is: a. The Sarbanes-Oxley Act b. The USA Patriot Act c. The 9/11 Act d. The FDIC

The USA Patriot Act

Explain the disadvantages and advantages of a Community bank.

The advantages of a Community bank is the close contact between management and staff, you are able to see the impact the bankers' actions have in the community, and bankers are very knowledgeable about the financial conditions of its clients. The disadvantage is not only that they have less resources than a larger bank but they are affected significantly by changes in local economy. Commercial bank also have limited opportunities for advancement. Problem Question

What are financial futures contracts? Which financial institutions use futures and other derivatives to risk management?

The agreement between a buyer and seller to deliver a security at some future date and agreed prices. The seller of the contract removes the asset from its balance sheet and records any gain or loss from the contract in the income statement. The buyer adds the asset to their balance sheet as purchases. Financial futures contracts are used by any bank or financial institution who may be exposed to interest rate risk. For example, an oil producer needs to sell their oil. They may use futures contracts to do it. This way they can lock in a price they will sell at, and then deliver the oil to the buyer when the futures contract expires.

Suppose a bank has an allowance for loan losses of $1.25 million at the beginning of the year, charges current income for a $250,000 provision for loan losses, charges off worthless loans of $150,000, and recovers $50,000 on loans previously charged off. What will be the balance in the allowance for loan losses at year-end?

The balance in the allowance for loan loss (ALL) account at year end will be: Beginning ALL= $1.25 million Plus: Annual Provisionfor Loan Losses= +0.25 Recoveries onLoans Previously= +0.05 Charged Off Minus: Charge Offs of Worthless= -0.15 Loans Ending ALL= $1.40 million

Explain one type of Accounts from the Balance Sheet

The balance sheet lists the assets, liabilities, and equity capital held by or invested in a bank or other financial firm on any given date. Because financial institutions are simply business firms selling a particular kind of product. The fundamental balance sheet identity must be valid for financial services providers, just as would be true for nonfinancial companies.

First Security Trust National Bank of Boston is considering making aggressive entry into the People's Republic of China, possibly filing the necessary documents with the government in Beijing to establish future physical and electronic service facilities. What advantages might such a move bring to the management and shareholders of First Security? What potential drawbacks should be considered by the management and board of directors of this bank?

The banking system of China is under the process of a generational program of reform in its attempt to approach a more welcoming system that will support in its unfolding into global economics. The first security trust National Bank of Boston must consider the merits and limitations before setting its foot into the People's Republic of China. By entering into the Chinese banking system, the first security trust National Bank shall be benefited in more than one way: There the state is a monopolist and monopolies in the private domain do not exist. Price is fixed by the government and not by the ever-changing market conditions, which proves stability at times. Rigid planning and overlooking of system in a centralized manner thus ensuring minimal waste of resources. However, it also has certain drawbacks: during the communist rule, China often had to face huge famine because their strategies of production amongst other things and have mostly been focused on the welfare of state policy and not of the public. Ignorance of public's demand and their needs might always lead to overproduction of some unwanted output and worse, under production of products and services that the people actually desire.

Explain the Biblical Regulation on Banking.

The bible contains several references prohibiting the practice of usury.From the Council of Nicea, the Catholic Church had several restrictions on lending for interest until it was universally prohibited in 1139.The Catholic Church only started to accept lending money at moderate rates in the 19th century (Protestant Nations).Instead of prohibiting interest, they regulated the level of interest that could be charged.They redefined usury as the excessive levels of interest.

What led to the sharp expansion in branchless banking? A. Virtual Banks B. The cost of chartering new firms and setting up full services branches. C. The decline in interest for the labor force in banking D. The online connectivity across the new generation

The cost of chartering new firms and setting up full services branches.

First State Security Bank is planning to set up its own Web page to advertise its location and services on the Internet and to offer customers selected service options, such as paying recurring households bills, verifying account balances, and dispensing deposit account and loan application forms. What factors should First State take into account as it plans its own Web page and Internet service menu? How can the bank effectively differentiate itself from other banks currently present on the Internet? How might the bank be able to involve its own customers in designing its website and pricing its Internet service package?

The factors that first state security bank must concentrate seriously on is the best possible usage of the Internet facility ensuring customer safety and privacy and making it customer friendly too. For example, trying to optimize the web services in such a manner that customer can self help in solving his issues or at least finds it easy to interact with the firm through chatter emails. The Internet in the 21st century has officially proved to be a boon to the financial service providers in connecting themselves to the customers nearly one half of their customers in America are able to obtain some or the other financial services online through Internet. Therefore, first state should carefully understand the importance of its presence on the Internet and look after making the most optimum utilization out of it. The bank might involve its own customers in its web designing by educating them: -Providing enough information to the customer when he wants to observe and evaluate his financial condition. -Explaining properly its internet service benefactions -Describing how the customer can access those services on his/her own etc. -The internet service package can be priced through several means such as creating a common pack, a combo pack wherein access to certain essential banking services can be clubbed together and charged accordingly.

A bank purchases a cap of 7% from an insurance company on its borrowings of $10 million in the Eurodollar market for one year. Suppose interest rates in this market rise to 9% on the year. In terms of dollars, how much rebate will the bank receive.

The formula is (Market interest rate - Cap Rate) X Amount borrowed. (9%-7%) X $10,000,000 = $200,000

Describe the sequence of events in the Securitization process.

The home buyer receives a mortgage loan. This loan and similar loans are then pooled together and removed from the lender's balance sheet. The pool of loans is placed in a special-purpose entity (corporation or trust). The pooled loans become collateral for issuing asset-backed securities. These securities are sold to capital-market investors around the world who frequently were attracted by their superior liquidity and credit rating. Investors receive loan interest and principal payments through servicing firms that collect loan payments.

Define, explain, and give examples of the key federal regulators.

The key federal regulators of banks include the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System (FRS), and the Office of the Comptroller of the Currency (OCC). The OCC supervises and examines federally chartered (national) banks, while the FRS oversees state-chartered banks that have elected to join the Federal Reserve System. The FDIC regulates state-chartered banks that are not members of the Federal Reserve System. State regulation of banks is carried out in the 50 U.S. states by boards or commissions.

https://www.cnn.com/2021/07/07/investing/china-didi-kyle-bass/index.html According to the article, what does the law that former President Trump signed last year do?

The law states that if Chinese companies fail to comply with United States auditing standards for three years in a row, they will get removed from the US exchanges

The duration of a bond is the weighted average maturity of the future cash flows expected to be received on a bond. Which of the following is a true statement concerning duration? -The longer the time to maturity, the greater the duration -The higher the coupon rate, the higher the duration -The shorter the duration, the greater the price volatility -A and B are correct

The longer the time to maturity, the greater the duration

What are the principal money market and capital market instruments available to institutions today?

The main money markets and capital markets range from treasury bills, notes, bonds, municipal bonds, federal agency securities, Certificate of Deposit, international euro currency deposits, corporate notes, bonds, banker acceptances, etc.

Convergence is a. A measure of the non-linear relationship of bond prices to changes in interest rates, the second derivative of the price of the bond with respect to interest rates. (Bond convexity) b. When the price of an asset is moving in the opposite direction of a technical indicator. (Divergence) c. The movement in the price of a futures contract toward the spot or cash price of the underlying commodity over time. d. None mentioned

The movement in the price of a futures contract toward the spot or cash price of the underlying commodity over time.

What are 401k and pension plans and how do they differ?

The pension plan is a retirement plan that requires an employer to make contributions that are put aside for the worker's future benefits. 401k is different where it allows an employee to deposit a percentage of their pre-tax salary to a retirement account. The pension is more stable than 401k plans where the pension guarantees a fixed monthly payment every month after you retire and you don't cost a penny out of your paycheck.

Define and explain the purpose of the financial system. Provide an example of how we use it in our lives.

The primary purpose of the financial system is to encourage individuals and institutions to save and transfer those savings to those individuals and institutions planning to invest in new projects and needing credit to do so. Banks help transform savings into investments by using depositor's money to provide services such as lending. As an individual trying to purchase my first home, I would apply for a loan at a bank for a mortgage.

Define, explain, and give an example of capital Market Instruments

They are longer term financial instruments in the form of debt or equity that are traded either on a securities exchange or directly between investors and borrowers. For example some capital market instruments are municipal bonds, corporate bonds, and corporate notes.

All of these are profitability measures except: A. ROE B. Times interest earned C. Net interest margin D. Net operating margin

Times interest earned

Which of the following best describes why the federal deposit insurance corporation (FDIC) was created? A. To ensure that states regulate their own banking laws without the central bank's approval. B. To provide easier licensing for smaller local banks compared to national banks. C. To Restore the public's faith in the banking system and insure the public's deposits in the bank. D. To watch over the Fed and make sure the federal reserve system follows regulations and compliances.

To Restore the public's faith in the banking system and insure the public's deposits in the bank.

What factors have motivated financial institutions to develop funds management techniques in recent years?

To begin with, fund management are the managements of cash flows of a financial institution. The manager of the fund ensures that the maturity of demand deposits schedule match with the loans demand. Which in turn can influence the ability to issue credit. The need for them begun in the 1970s where they needed additional sources of funds and were having problems with loans and volatile interest rates. This led to the concept of planning and controlling the assets and liabilities side of the balance sheet. An example would be investment managers who fix the assets of pension funds for pension investors.

What was the Comptroller of the Currency established to do?

To charter and regulate U.S. national banks and regularly examine them

Which of the following is the purpose of POS terminals? A. It allows customers to enter a financial firm's bookkeeping system and allows them to make deposits, withdrawals, balance inquiries and bill pay. B. To make an internal transfer between accounts. C. To debit a customer's account and credit the merchant's deposit account when a customer is purchasing a good or service. D. A program that allows customers to view their accounts, make transfers, etc. from a mobile device.

To debit a customer's account and credit the merchant's deposit account when a customer is purchasing a good or service.

Harrison Bank has the following financial information. ROE= 16%, Net Income= $1000, Total Assets= $62,500 and Total Equity= $6250 What is this bank's asset utilization ratio?

Total Revenue= Net Income= 1000 Total Assets= 62500 Banks assets utilization ratio= Total Revenues / Total assets= 1000/62500= 0.016

You know the following information about the Webb State Bank -Accumulated Depreciation $40 Net Loans $600 Fed Funds Purchased and Repurchase Agreements $200 Cash and Due from Banks $50 Trading Account Securities $40 Miscellaneous Assets $100 Deposits $500 Undivided Profits $140 Gross Premises $90 Surplus $40 Subordinated Debt $100 Investment Securities $160 Common Stock Par $20 Gross Loans $700 Given this information, what is this firm's Total Liabilities?

Total liabilities = net loan + undivided profits + surplus + common stock Total liabilities = $600 + $140 + $40 + $20 Total liabilities = $800

Define, explain and give examples of Treasury Bill

Treasury Bill- is a security issued by the federal government which has less than one year to maturity when it is issued. These securities are widely regarded as low-risk and secure investments. The Treasury Department sells T-Bills during auctions using a competitive and non-competitive bidding process

A PIN gives a bank customer access to his or her account through an ATM:

True

A Relative IS GAP greater than zero means the institution is asset sensitive

True

A balance sheet, lists the assets, liabilities, and equity capital held by or invested in a bank or other financial firm on any given date.

True

A bank is any institution that could qualify for deposit insurance administered by the FDIC.

True

A bank that is asset sensitive will suffer a decline in net interest margin if market interests fall.

True

A fair evaluation of any financial firms' performance should start by evaluating whether it has been able to achieve the objectives its management and stockholders have chosen. True or False?

True

A financial firm that is liability sensitive will experience a decrease in its net interest margin when market interest rates rise.

True

A financial institution that buys a put option has the right to make delivery of the underlying security at the contract price if they wish.

True

A popular interest rate measure is the bank discount rate, which is often quoted on short-term loans and money market securities (such as Treasury bills).

True

A study of history shows that one of the first services offered by banks was currency exchange.

True

A third type of loan sale is the loan strip. Strips are short-dated pieces of a longer-term loan and often mature in a few days or weeks.

True

According to the Riegle-Neal Act no institution can hold more than 10% of nation's deposits and 30% of states deposit.

True

According to the Rule 115 passed in May 1993, banks must divide their security holdings into two broad groups: those they planned to hold to maturity and those that may be traded before they reach maturity.

True

An Interest-rate swap is a way to change a borrowing institution's exposure to interest-rate fluctuations and achieve lower borrowing costs

True

An example of a contra-asset account is the loan and lease loss allowance.

True

Automatic Teller Machines (ATMs) are machines that allow customers to enter a financial firm's bookkeeping system and allow them to make deposits, withdrawals, balance inquiries and bill pay.

True

Bank assets fall into each of the Demand deposits.

True

Banking is the oldest of all financial-service professions.

True

Banks are the principal source of credit for millions of individuals and families and for many units of government.

True

Both federal and state authorities have significant regulatory powers

True

Buyer of a futures contract takes a long position and will profit if the price of the underlying instrument.

True

Changes in volume are directly correlated with economic conditions.

True

Commercial banks are the conduit through which the Fed conducts the nation's monetary policy and the nation's payments system. True or False?

True

Financial firms often sell off selected securities at a loss to offset significant amounts of loan income, thereby reducing their tax liability.

True

Futures contracts are also traded over the counter, often less costly for traders are most often called forward contracts

True

Holding period yield (HPY) is different from yield to maturity (YTM) when an investment is sold before maturity date.

True

If you have concerns about declining interest rates, you could create a long hedge.

True

In a participation loan at least a portion of a lender's interest in a loan is transferred to another lending institution.

True

Interest Rate Risk is the most damaging form of risk for a financial institution, mainly because changes in interest rates affect the market value of a firm's assets, liabilities, and stockholders' equity.

True

Interest-Rate Option grants a holder of securities the right to place those instruments with another investor at a prespecified exercise price before the option expires.

True

Lower interest rates increase the present value of all projected cash flows from a loan backed security so that its market value could rise.

True

Managers of Financial Firms actively seek out newer, more efficient, and less costly ways to deal with risk.

True

Money-center banks are industry leaders, spanning whole regions, nations, and continents, offering the widest possible menu of financial services, gobbling up smaller businesses, and facing tough competition from other giant financial firms around the globe.

True

Montana is one of the few states that has opted out of interstate banking.

True

Most loans that banks sell off their balance sheets have minimum denominations of at least a million dollars.

True

Nonperforming loans over total loans ratio is used to measure a bank's credit risk.

True

OREO stands for "Other Real Estate Owned" and is a term that refers to real estate property assets that a bank holds

True

One of the most popular of all short-term investments is the U.S. Treasury bill-a debt obligation of the United States government that, by law, must mature within one year from date of issue.

True

One of the most popular of all short-term investments is the U.S. Treasury bill?

True

One of the toughest and potentially most damaging forms of risk that all financial institutions must face is interest face.

True

Online banks offer higher interest rates to compensate for lack of "real-live" service support.

True

Only the banking commissions in each of the 50 states and the Office of the Comptroller of the Currency can issue a charter of incorporation to start a new U.S Bank.

True

POS terminal in a retail store allows a customer to pay for goods and services by instantly debiting his or her checking account.

True

Regulation of financial firms takes place in a dual system in the United States— both federal and state governments are involved in chartering, supervising, and examining selected financial-service companies. True or False?

True

Reviewing financial statements regularly and analyzing future cash flows is critical to a financial institution's success.

True

Securitization is the idea of using an asset-backed asset instrument to raise funds.

True

Smaller Banks prefer investing in federal bonds.

True

Some of the advantages of securitization is to diversify risk exposure, generate new sources of capital and generate fee income.

True

T-bills are issued in weekly and monthly auctions and are particularly attractive to financial firms because of their high degree of safety.

True

The Fed's principal roles are to serve as a lender of last resort and to help stabilize the financial markets and the economy

True

The Federal National Mortgage Association is the federal agency in the United States that has more securities outstanding in the financial marketplace for investors to buy

True

The Glass-Steagall Act allowed the FED to set the margin requirements.

True

The Report of Income shows net earnings after all costs are deducted from the sum of all revenues.

True

The USA Patriot Act requires that financial service providers establish the identity of any customers opening new accounts.

True

The Yield to Maturity is the total return anticipated if loan/bond is held until the maturity date.

True

The allowance for loan losses (ALL), which is a contra-asset (negative) account, represents an accumulated reserve against which loans declared to be uncollectible can be charged off.

True

The discount rate that equalizes the current market value of a loan or security with the expected stream of future income payments from that loan or security is known as Yield to Maturity.

True

The key objective of a firm is to maximize the value of the firm.

True

The lender whose loans are securitized is known as the originator

True

The minimum acceptable rate of return is sometimes referred to as an institution's cost of capital.

True

The most recently chartered banks show evidence of being "financially fragile" and more prone to failure than established banks

True

The net profit margin (NPM) reflects the effectiveness of expense management (cost control) and service pricing policies.

True

The two most Important financial statements for a banking firm is its balance sheet and its report of income.

True

The ultimate goal of liability management is to gain control over a financial institution's source of funds.

True

The value of a financial firm's stock will tend to rise if market interest rates decrease.

True

The yield to maturity (YTM) is the discount rate that equalizes the current market value of a loan or security with the expected stream of income of future payments that the loan or security will generate.

True

True or False: Community banks service local communities and towns, offering a narrower, but often more personalized, menu of financial services to the public.

True

U.S. FDIC-insured banks are constantly decreasing.

True

Unit Banks are a type of bank organization that provides all its services from one office.

True

Unit banks, one of the oldest kinds, offer all of their services from one office, although some services (such as taking deposits, cashing checks, or paying bills) may be offered from limited-service facilities, such as drive-up windows and automated teller machines (ATMs) that are linked to the bank's computer system.

True

Upward shape means that long-term interest rates are higher than short-term rates.

True

Which is most common financial futures contracts: A. U.S. Treasury Bond Futures Contracts B. Three-Month Eurodollar Time Deposit Futures Contract C. 30-Day Federal Funds Futures Contracts D. All of the statements mentioned

U.S. Treasury Bond Futures Contracts

What are the most common option contracts used by banks and explain one of them

U.S. Treasury Bond futures options and the Eurodollar Futures option. The Eurodollar Futures option gives the buyer the right to deliver or accept delivery of one Eurodollar deposit futures contract for every option exercised.

What item consists of interest income on loans received from customers, but not yet earned under the accrual method of accounting banks use today? A. unearned income B. special income C. income tax D. fee income

Unearned Income

https://finance.yahoo.com/m/082b4013-b418-3751-966b-9cdbc73264f4/etfs-the-gateway-to.html Which one of the following options is not a pro of investing in ETH: -Ethereum's developer ecosystem is expanding with more than 250,000 active developers, as per Consensys. -Ethereum has no over-concentration of users, with 15,7911 nodes spread across the globe. -Unlike Bitcoin, ether (ETH) is not capped and has practical utility. -Unlike Bitcoin, often considered crypto gold, some claim that ether is more like gas used to run smart contracts.

Unlike Bitcoin, often considered crypto gold, some claim that ether is more like gas used to run smart contracts.

Most religions frown upon ______. a. Interest b. Silver c. Tradesmen d. Usury

Usury

Which state was the one to lead the lawsuit against Google on the antitrust laws? A. Florida B. Virginia C. Utah D. Nevada

Utah

The Clearwater National Bank is planning to set up a new branch. This new branch is anticipated to generate 5 percent of the total business of the bank after it is opened. The bank also expects the return for this branch to be 15 percent with a standard deviation of 5 percent. Currently the bank has a 10 percent rate of return with a standard deviation of 5 percent. The correlation between the bank's current return and returns on the new branch is expected to be -0.3. What is this bank's expected risk (measured by the standard deviation) after adding this branch?

Variace=.05^2 X .05^2 + .95^2 X .05^2 + 2 X .05 X .95(-.3) X .05 X .05 = .0022 Then take the square root of the covariance. = .0468 or 4.68%

Banks that Provide their services exclusively through the web are called? A. Virtual Banks B. Online Banks C. Internet Banks D. Chrome Banks

Virtual Banks

Define and explain what is interest rate risk. Then, give examples how Interest rate can be measured.

When interest rates change in the financial marketplace, the sources of revenue that financial institutions receive-especially interest income on loans and investment securities-and their most important source of expenses-interest cost on borrowings-must also change. Moreover, changing interest rates also change the market value of assets and liabilities, thereby changing each financial institution's net worth-the value of the owner's investment in the firm. Thus, changing interest rates impact both the balance sheet and the statement of income and expenses of financial firms. Over the years a bewildering array of interest rate measures have been developed. For example, one of the most popular rate measures is the yield to maturity (YTM) the discount rate that equalizes the current market value of a loan or security with theexpected stream of future income payments that the loan or security will generate. Another popular interest rate measure is the bank discount rate, which is often quoted on short-term loans and money market securities (such as Treasury bills).

The bank manager wants to know what happens when interest rates rise from 10% to 11%. The total asset value is $100 million, and the total liability value is $95 million. Use Equation 1 to calculate the change in the market value of the assets and liabilities.

With a total asset value of $100 million, the market value of assets falls by $2.5 million ($100 million 0.025 $2.5 million): %P DUR where DUR duration 2.70 i change in interest rate 0.11 0.10 0.01 i interest rate 0.10 Thus: %P 2.70 0.025 2.5% With total liabilities of $95 million, the market value of liabilities falls by $0.9 million ($95 million 0.009 $0.9 million): %P DUR where DUR duration 1.03 i change in interest rate 0.11 0.10 0.01 i interest rate 0.10 Thus: %P 1.03 0.009 0.9% The result is that the net worth of the bank would decline by $1.6 million ($2.5 million ($0.9 million) $2.5 million $0.9 million $1.6 million).

A bank with a duration gap of 4 years and total assets of $100 million uses a futures contract with a duration of 7 years and a price of $150,000 to hedge. The number of contracts that are needed is:

Work: # of future contracts required = portfolio value * duration of portfolio / (duration of futures * price of future) # of future contracts required = 100 million * 4 years / (7 years * 150,000) = 380 contracts

A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are 9 percent and are expected to decrease to 7 percent in the near future. What will this bond's price be after the change in market interest rates?

Work: bond price = 950; interest rate = 9%; expected decrease in future = 9% - 7% = 2% New interest rate = 9%+2% = 11%; new price of bond = 950*11% = 104.5 or 105 950 + 105 = 1,055

A 25-year U.S. Treasury bond with a par value of $1,500 is currently selling for $1,000 from various securities dealers. The bond carries a 5 percent coupon rate with pay-ments made annually. If purchased today and held to maturity, what is its expected yield to maturity?

YTM =(I +((FV + PV)/t))/ (FV+PV)/2 YTM= (50+((1500+1000)/25)/ (1500+1000)/2 YTM= 150/1250 YTM= 0.12 or 12%.

Suppose a borrower can get a nonguaranteed loan at an interest cost of 8%, but its told that an SLC would reduce the loans face value to 7.25%. If a bank offers the borrower a standby for 0.50%, is the borrower likely to seek this agreement?

Yes because 0.50% < (8%-7.25%). 0.5%<0.75%

Suppose a bank reports that his net income for the current year is $51 million, its assets total $1144 million dollars and its liabilities would amount to 126 million. What is it what is its return on equity capital? Is that return on equity you have calculated good or bad question mark what information you need to answer this last question?

a. in the given question comma net income for the bank is 51 million in equity capital is 218,000,000 period thus return equity for the bank can be calculated as follows. b. Return on equity =Net income/total equity capital= 51/218 = 23.39% c. Total equity capital is equal to total assets net of liabilities IE 1444 - 926 million which amounts to 218 million. Thus, the return on equity is 23.39% d. The return on equity calculated above can be considered good or bad depending upon the minimum return expected by shareholders. If this return is more than the minimum return expected by the shareholders, it can be considered as good. If the return is less than the minimum return expected by shareholder, it can be considered as bad. to assert and whether the return calculated good slash bad we required them in return on equity expected by shareholders how period however return equity of 23.39% is considered to be good in the banking industry.

______________ refers to a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors. A.Securitization B.collateralized mortgage obligation C.collateralized debt obligation D. Home Equity Loan

collateralized debt obligation

Operating income is defined as: a. Money spent in operations. b. everything that contributes to the bank's income. c. Accounts payable. d. None of the statements mentioned.

everything that contributes to the bank's income.

The Federal Reserve announced last June the results of the latest stress showing: a. firms do not have enough capital to withstand a severe global recession. b. firms have enough capital to withstand a severe global recession. c. firms are on the brink of collapse. D. firms are very liquid.

firms have enough capital to withstand a severe global recession.

A bank's GAP is defined as:

he dollar amount of interest-sensitive assets minus the dollar amount of interest-sensitive liabilities.

What roles can Securitizations offer?

managing interest rate risk and possibly credit risk, depending on the quality of the packaged loans, choosing what loans to package and move off the balance sheet.

A bank has placed 5000 consumer loans in a package to be securitized. These loans have an annual yield of 15.25 percent. This bank estimates that the securities on these loans are priced to yield 10.95 percent. The bank expects 1.45 percent of the loans will default. Underwriting and advisory services will cost .25 percent and a credit guarantee if more loans default than expected will cost .35 percent. What is the residual income from this loan securitization?

residual income = annual yield - yield pricing - loan default - advisory service cost - credit guarantee 15.25-10.95-1.45-.25-.35 =2.25%

A bank that is asset sensitive will ___________ in its net interest margin if market interest rates fall. A. suffer a decline B. result in an incline C. be unaffected D. more than likely double

suffer a decline

A set area has a total 40,000 customers for XYZ Bank, and there are 8 branches in the area, what will be the average?

x= 40,000/8; X=5,000