Final Exam

A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be __________.

$300,000

An FI's position in FX markets generally reflects four trading activities. What are they, and which one(s) cause the FI to bear FX risk?

(1) Buying and selling foreign currencies that allow customers to complete international trade transactions. (2) Buying and selling foreign currencies to allow customers to take positions on foreign real and financial investments. (3) Buying and selling currencies to hedge bank positions arising from (1) and (2). (4) Speculating on currency movements for the bank's own account. (1), (2), and (4) add to the bank's risk.

The Fed changes reserve requirements from 10 percent to 7 percent, thereby creating $900 million in excess reserves. The total change in deposits (with no drains) would be

(1/0.07) × $900 million $12,857 million.

The Fed changes reserve requirements from 10 percent to 14 percent, thereby eliminating $750 million in excess reserves. The total change in deposits (with no drains) would be (rounded)

(1/0.14) × $750 million $5.357 billion.

A bank is earning 6 percent on its $150 million in earning assets and is paying 4.75 percent on its liabilities. The bank's interest rate spread is __________.

1.25%

Bank A has an increase in deposits of $20 million dollars and all bank reserve requirements are 10 percent. Bank A loans out the full amount of the deposit increase that is allowed. This amount winds up deposited in Bank B. Bank B lends out the full amount possible as well and this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these three banks?

20 + (20 × 0.90) + (18 × 0.90) $54.20 million

You are considering purchasing five-year corporate bonds as an investment. You have a choice of terms available. Which of the following terms would you find desirable, ceteris paribus? How does each feature affect the bond's required rate of return? Explain. Call feature Convertible feature Warrants Sinking fund Debenture

A. The call feature favors the bond issuer and unless the issue offers the investor a sufficiently higher rate of return, he would not want this feature. B. The convertible feature allows the bondholder to convert to stock if he or she so chooses. This sounds like a good deal but the quid pro quo is a reduced promised yield. This may be desirable if you believe the stock will increase sufficiently in price. C. Warrants allow the bondholder to purchase stock at a fixed price, and unlike convertible bonds, the bondholder does not have to surrender the bond. Offering warrants allows the bondholder to offer a lower required rate of return. This may be desirable if you believe the stock will increase sufficiently in price. D. Sinking funds help ensure that the bond issuer will be able to pay off the principal when due. If these are term bonds and the issuer sets aside money each year to ensure availability of funds when the principal is due, then the bondholders clearly benefit from this feature. Of course, this reduces the required promised yield. If the sinking fund requires retiring a certain percentage of the bonds each year, then the idea is not unambiguously better for bondholders. It may be that your bond is retired when rates have fallen and you must then reinvest at lower interest rates. E. The term debenture indicates that the bond has no specific collateral (other than the earnings and cash flows of the firm). The lack of security adds to bondholder risk and may imply a higher required rate of return than bonds with better collateral.

Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus?

AA-rated callable corporate bond without a sinking fund

What does an asset transformer do? Why is asset transformation a risky activity?

An asset transformer buys one security from a customer and makes or creates a separate claim in order to raise funds. For example, a bank accepts deposits and uses them to make loans. This is normally a risky activity because the asset acquired will be riskier than the security (or deposit) used to raise funds because the intermediary hopes to profit on the spread between the rate earned on the asset claim and the rate paid on the liability claim. In order for this spread to be positive, generally speaking, the asset must be riskier than the liability.

As a corporate treasurer who is unsure how soon funds will be needed, which type of money market investment might you prefer? Explain the trade-offs. Would your answer differ if you had a definite time period during which you would not need the money? Explain.

As a corporate treasurer unsure of how soons funds will be needed, I would prefer treasury bills. This is because they are short-term and issued by the government making them safer and easier. If needed for less than 24 hours, I would prefer federal funds. If given a definite time period where I wouldn't need the money, I would probably still choose treasury bills.

In 2007 the NYSE merged with _________________. A. Nasdaq B. Euronext C. American Exchange D. Chicago Mercantile Exchange E. London Stock Exchange

B. Euronext

Why did bank profitability decline beginning in late 2006 and through 2008?

Bank profitibablilty declined in late 2006 through 2008 due to the near financial collaspe that happened during that time period. The housing market prices fell and deregulation allowed anyone to buy a house no matter their credit.

What are the intended consequences from charging an interest on excess reserves by Central banks?

Banks lend less money. Interest rates increase. Banks deposits increase. Banks lend more money. All of these choices are correct.

Most nonfinancial firms would never hold as much of their assets in safe liquid securities as banks do. Why do banks maintain such a high percentage of investment in securities?

Banks maintain such a high percentage of investment in securities for a particular reason. First, financial firms, such as banks, hold so much liquid because people deposit money to them. Therefore, to decrease liquidity risk, they have to hold more liquid in case the customer decides to withdraw his money for example. Nonfinancial firms don't need to maintain such a high percentage of investments in securities because they tend to be less liquid.

A $2,600 face value corporate bond with a 6.5 percent coupon (paid semiannually) has 12 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.0 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 8.3 percent. What will be the change in the bond's price in dollars and percentage terms? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161))

Before the rating change: Vb = ($2,600(6.5%)/2) {[1 − (1/(1 + 0.070/2)2(12))]/0.070/2} + 2,600/(1 + 0.070/2)2(12) Solving for Vb, we get $2,495.6206110. On a financial calculator: PMT = 84.50, FV = 2,600, I = 7.00/2 = 3.50, N = 12(2) = 24 ⇒⇒ PV = −2,495.6206110 After the rating change:Vb = ($2,600(6.5%)/2) {[1 − (1/(1 + 0.083/2)2(12))]/0.083/2} + 2,600/(1 + 0.083/2)2(12) Solving for Vb, we get $2,248.6378474. On a financial calculator: PMT = 84.50, FV = 2,600, I = 8.3/2 = 4.15, N = 12(2) = 24 ⇒⇒ PV = −2,248.6378474 $ change in Vb = $2,248.6378474 − $2,495.6206106 = −$246.9827632 % change in Vb = ($2,248.6378474 − $2,495.6206106)/$2,495.6206106 = −$246.9827632/$2,495.6206106 = −9.897%

The major monetary policy-making arm of the Federal Reserve is the

Board of Governors. Council of Federal Reserve Bank presidents. Office of the Comptroller of the Currency. Federal Reserve Bank of New York. None of these choices are correct.

The Fed wishes to expand the money supply. What three things can it do? Which has the most predictable effects? Be specific.

Buy U.S. government securities.Decrease the discount rate.Decrease reserve requirements.Buying U.S. government securities has the most predictable effect.

You can exchange $1 for either Can$1.1221 or ¥104.38. What is the cross-rate between the Canadian dollar and Japanese yen?

Can$1.1221 = ¥104.3800 Can$.0108/¥

Use the information in the following stock quote to calculate McKesson's earnings per share over the last year.

Column 14 is the McKesson's P/E ratio, 18.00; Column 6 reports McKesson's price—the numerator of the P/E ratio—as $55.60. Thus, McKesson's earnings per share—the denominator of the P/E ratio—over the period August 2009 through August 2010 must have been $3.09 per share: E = P ÷ P/E = $55.60 ÷ 18.00.

Commercial banks face four unique risks due to their structure. Name, define, and give an example of each of the four types of bank risks.

Commercial banks face four unique risks due to their structure. They are listed below: 1. Credit (default) risk: Risk that loans will default, not get repaid. Example: If a company takes out a loan and then goes bankrupt, the loan will not get repaid. 2. Liquidity risk: Risk that there will not be sufficient cash on hand when needed at a certain point in time. Example: If a customer decides to withdraw their entire savings account and the bank does not have $100,000 cash to provide to the customer. 3. Interest rate risk: Risk that volatile interest rates could provide a loss even a gain. Example: If interest rates dramatically decrease and ultimately lose money to the person who loaned the money. 4. Insolvency risk: The risk that a company will go bankrupt. Example: If a company has been struggling with Covid-19.

Banking may be subdivided into at least three categories of banks. Match the definitions with the appropriate name. I. A bank that specializes in retail or consumer banking in a local market II. A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services III. A bank that is located in a financial center and relies on nondeposit or borrowed sources of funds for a significant portion of its liabilities

Community bank; super-regional bank; money center bank

The Federal Reserve does all but which one of the following?

Conducts monetary policy Supervises and regulates bank activities Serves as the commercial bank for the U.S. Treasury Operates check clearing and wire transfer facilities Insures deposits

What are the four major functions of the Federal Reserve System?

Conducts monetary policy. Supervises and regulates depository institutions. Maintains the stability of the financial system. Provides payment and other services to institutions.

The exchange rate is .7615 U.S. dollars per Brazilian real. How many U.S. dollars are needed to purchase 5,800 Brazilian reals?

Dollars needed = Real 5,800(.7615$ per Real)Dollars needed = $4,416.70

The exchange rate is 1.35 Swiss francs per dollar. How many U.S. dollars are needed to purchase 13,000 Swiss francs?

Dollars needed = SF13,000($1/SF1.35)Dollars needed = $9,629.63

You just returned from a trip to Italy and have 710 euros remaining. How many dollars will you receive when you return home if the exchange rate is .9165 euros per U.S dollar?

Dollars needed = €710($1/€.9165)Dollars needed = $774.69

For the purposes for which they are used, money market securities should have which of the following characteristics? I. Low trading costs II. Little price risk III. High rate of return IV. Life greater than one year

I & II

If the Fed wishes to stimulate the economy, it could I. buy U.S. government securities. II. raise the discount rate. III. lower reserve requirements.

I and III only

Reasons behind the drop in bank profitability in the second half of this decade include I. flattening of the yield curve. II. increase in competitive pressures on asset pricing. III. increases in foreclosures in the mortgage market. IV. increases in net interest margin.

I, II, & III

Secondary markets help support primary markets because secondary markets I. offer primary market purchasers liquidity for their holdings. II. update the price or value of the primary market claims. III. reduce the cost of trading the primary market claims.

I, II, & III

Which of the following indexes are value-weighted? I. NYSE Composite II. S&P 500 III. NASDAQ Composite IV. Dow Jones Industrial Average

I, II, & III

What factors are encouraging financial institutions to offer overlapping financial services such as banking, investment banking, brokerage, etc.? I. Regulatory changes allowing institutions to offer more services II. Technological improvements reducing the cost of providing financial services III. Increasing competition from full-service global financial institutions IV. Reduction in the need to manage risk at financial institutions

I, II, and III only

Which of the following statements about Eurobonds is/are true? I. The issuer chooses the currency of denomination. II. Spreads on firm commitment offers are lower for Eurobonds than for U.S. bonds. III. Eurobonds typically have denomination of $5,000 and $10,000. IV. Eurobonds are bearer bonds.

I, III, and IV only

Explain how a change in open market operations can affect a new college graduate.

If the Fed increases bank reserves by buying securities, interest rates on all loan types will be affected. For instance, when interest rates fall, corporations will likely have more projects with positive NPVs, leading to more spending and more jobs. A college graduate is then more likely to get hired, and your interest rates on new cars, homes, and so forth, will likely be lower, not to mention that the value of your stock holdings would probably go up.

Explain how a drop in the value of the dollar could affect the U.S. import and export sectors.

If the dollar drops in value, imports to the United States become more expensive. If the imports are foreign currency-denominated, U.S. buyers must spend more dollars to buy the same good after the dollar decline. If the imports are dollar-denominated, as most are, it is more complicated. The foreign supplier may raise the dollar price to preserve the amount of foreign currency per sale earned. If this happens, U.S. imports again become more expensive. Likewise, U.S. exports become cheaper for foreign buyers after a dollar decline. The net result should be a decrease in U.S. imports and an increase in U.S. exports. Some economists believe this helps create or keep more jobs in the United States.

What are the advantages and disadvantages of foreign investing? How does an ADR help overcome the disadvantages?

International investing can reduce risk by generating additional diversification benefits. These benefits have been small lately because the United States has dominated the rest of the world in economic performance, but this is not likely to continue indefinitely. International investing also introduces foreign exchange risk, information risk, and sovereign risk, as well as trading and tax complexities. The ADRs limit foreign exchange risk and other trading complexities. Foreign firms are also required to meet U.S. disclosure requirements when ADRs are issued, although the amount of disclosure varies with the level of the ADR.

Why are loans such a high percentage of total assets at the typical bank? What four broad classes of loans do banks engage in?

Loans are such a high percentage of total assets at the typical bank because they are the largest earning asset meaning that they hold a significant amount of weight on the balance sheet. The four broad classes of loans banks engage in include mortgage loans, consumer loans, commercial and industrial loans, and another category that lesser known loans fall into.

Advantages of going global for U.S. banks include all but which one of the following?

Low fixed costs involved in international expansion

Which of the following is not a goal of monetary policy?

Moderate long-term interest rates. Stable interest rates High employment. Stable prices. All of these choices are correct.

P.J. Chase Stanley Bank holds $75 million in foreign exchange assets and $68 million in foreign exchange liabilities. P.J. Chase Stanley also conducted foreign currency trading activity in which it bought $165 million in foreign exchange contracts and sold $128 million in foreign exchange contracts. a. What is P.J. Chase Stanley's net foreign assets?b. What is P.J. Chase Stanley's net foreign exchange bought?c. What is P.J. Chase Stanley's net foreign exposure?

Net foreign exposurei=(FX assetsi − FX liabilitiesi) + (FX boughti − FX soldi) =Net foreign assetsi + Net FX boughti a.Thus, for P.J. Chase Stanley, net foreign assets = $75 million − $68 million = $7 million. b.P.J. Chase Stanley's net foreign exchange bought = $165 million − $128 million = $37 million. c.P.J. Chase Stanley's net foreign exposure = $7 million + $37 million = $44 million.

Nationally chartered banks receive chartering and merger approval from the

Office of Comptroller of the Currency.

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n)

Primary Market Transaction

The diagram below is a diagram of the

Primary Market Transaction

According to the strong form of efficient market hypothesis:

Private information is of no help in earning abnormally high returns.

What are the main responsibilities of the FOMC?

Promote full employment; promote economic growth; promote price stability; promote sustainable pattern of international trade.

You are an investment banker and one of your large U.S. corporate clients has come to you asking for help deciding on the best market in which to place a sizable issue of bonds. You could try to issue dollar-denominated bonds, or Euro- or yen-denominated bonds. You could also issue in the United States or overseas. What major factors should you consider in advising your client on where to market the issue

Some of the key variables would include the following: Interest rates in the various markets Underwriter spreads on different types of bonds Expected changes in currency values; borrowers do not wish to borrow in currencies that are expected to appreciate in value. Regulations and taxes in the various countries Ability to market large-size issues in a given currency or country

What is the discount yield, bond equivalent yield, and effective annual return on a $1 million T-bill that currently sells at 98.375 percent of its face value and is 65 days from maturity? (Use 360 days for discount yield and 365 days in a year for bond equivalent yield and effective annual return. Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161)) Discount yield % Bond equivalent yield % Effective annual return %

Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual calculations. Discount yield: iT-bill, dy = (($1million − $983,750)/$1million)(360/65) = 9.000% Bond equivalent yield:iT-bill, bey = (($1million − $983,750)/$983,750)(365/65) = 9.276% Effective annual return:EAR = (1 + 0.09276/(365/65))365/65 − 1 = 9.636%

Explain how the deposit multiplier works.

Suppose the Fed increases bank reserves via open market operations. The bank now has too many excess reserves that earn no interest, so it seeks to loan out the funds. The lent funds are deposited in another bank. The second bank keeps some funds in the form of required reserves and lends the rest. The second loan is also redeposited at another bank and a portion of those funds is lent again, and so forth. At the limit, a change in reserves increases deposits by the amount equal to Δreserves x 1/reserve requirement.

The ROA for financial institutions such as banks is typically quite low as compared to nonfinancial firms. Why? With such a low ROA, how can banks attract stockholders?

The ROA for financial institutions is relatively lower compared to nonfinancial firms because most assets are loans and securtities. Banks attract stockholders by obtaining high leverages.

Calculate the bond equivalent yield and effective annual return on a jumbo CD that is 115 days from maturity and has a quoted nominal yield of 6.86 percent. (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161))

The nominal bond equivalent yield is calculated as: iCD, bey = 6.86%(365/360) = 6.955% The EAR on the CD is calculated as: EAR = (1 + (0.06955)/(365/115))365/115 − 1 = 7.122%

What determines the price of financial instruments? Which are riskier, capital market instruments or money market instruments? Why?

The price of any financial instrument is the present value of future cash flows discounted at an appropriate rate. A small change in interest rates causes a large change in present value of distant cash flows. Hence, the prices of long-term capital market instruments are more sensitive to changes in interest rates than prices of short-term instruments. In addition, distant cash flows for stocks are not known with certainty. Changing economic prospects can cause very large changes in current stock values. Money market instruments have predictable cash flows and mature in one year or less, so they are much less risky.

If you have $200, how many Polish zlotys can you get? (Do not include the Polish zlotys sign, Z. Round your answer to 2 decimal places, e.g., 32.16.) b.How much is one euro worth in U.S. dollars? (Round your answer to 4 decimal places, e.g., 32.1616.)c.If you have 5.20 million euros, how many dollars do you have? (Enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)d.Which is worth more, a New Zealand dollar or a Singapore dollar?e.Which is worth more, a Mexican peso or a Chilean peso?f-1.How many Swiss francs can you get for a euro? (Round your answer to 4 decimal places, e.g., 32.1616.)f-2.What do you call this rate?

Using the quotes from the table, we get: a:$200(Z3.3516/$1) = Z670.32 b:$1.2288 c:€5,200,000($1.2288/€) = $6,389,760 Alternatively the question can be answered as: €5,200,000/($.8138/€) = $6,389,776 The difference is due to rounding in the exchange rate quote. d:New Zealand dollar e:Mexican peso f-1.(SF.9770/$)($1.2288/€) = 1.2005 SF/€ f-2.This is a cross rate.

What are weak form, semi-strong form, and strong form efficiency? Does one form of efficiency imply another?

Weak form efficiency implies that past price and trading information is contained in today's stock price and is of no value to an investor. Semi-strong efficiency implies that an investor cannot use any publicly available information to predict tomorrow's price change. Strong form efficiency implies that public and inside information is of no value in predicting tomorrow's price change. Strong form efficiency implies that the markets are also weak and semi-strong form efficient. Likewise, semi-strong form efficiency implies that the markets are also weak form efficient.

Is there a trade-off between controlling domestic inflation and maintaining a sustainable pattern of international trade?

Yes. If the United States curtails money supply growth to the point that U.S. inflation is lower than inflation elsewhere, the dollar will tend to appreciate against foreign currencies. With a strong dollar, the United States will tend to import more and export less, possibly leading to a large and potentially unsustainable trade deficit.

You plan to purchase a $150,000 house using a 30-year mortgage obtained from your local credit union. The mortgage rate offered to you is 5.75 percent. You will make a down payment of 20 percent of the purchase price. a. Calculate your monthly payments on this mortgage.b. Construct the amortization schedule for the first six payments.

You will make a down payment of 20 percent of the purchase price, or you will make a down payment of $30,000 (0.2 × $150,000) at closing and borrow $120,000 through the mortgage. a.For your mortgage:$120,000 = PMT {[1 − (1/(1 + 0.0575/12)30(12))]/(0.0575/12)}or PMT = $120,000/{[1 − (1/(1 + 0.0575/12)30(12))]/(0.0575/12)}therefore PMT = $120,000/171.36 = $700.29 Thus, your monthly payment is $700.29.

You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28 percent and your capital gains tax rate is 20 percent. Your after-tax rate of return is ___________________.

[((33 − 30) × (1 − 0.20)) + (0.75 × (1 − 0.28))]/30 = 2.94/30 = 9.8%

A holder of Rainbow Funds convertible bonds with a $1,000 par and a $1,100 price can convert the bond to 25 shares of common stock. The stock is currently priced at $36 per share. By what percent does the stock price have to rise to make conversion potentially attractive?

[(1,100/25)/36] − 1At the current share price level, the value of each converted bond comes to 25 × 36 = $900 while the value of the bond is $1,100; this is a loss of $200, so it is not attractive to convert. If the stock price goes up to $44, then 25 × 44 = 1,100, and at this price the conversion is possible. The increase in the price from $36 to $44 is 22.22%.

At the beginning of the year, you purchased a share of stock for $54. Over the year the dividends paid on the stock were $2.45 per share. a. Calculate the return if the price of the stock at the end of the year is $49. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))b. Calculate the return if the price of the stock at the end of the year is $59.

a. Return = $2.45/$54.00 + (($49.00 − $54.00)/$54.00) = −4.72% b.Return = $2.45/$54.00 + (($59.00 − $54.00)/$54.00) = 13.80%

Bank USA recently purchased $10 million worth of euro-denominated one-year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is $1.104/€1. a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro?b. What will be the return on the one-year CD if the dollar appreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.004/€1? (Round your answer to 3 decimal places. (e.g., 32.161))c. What will be the return on the one-year CD if the dollar depreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.204/€1?

a.Bank USA is exposed to an appreciation of the dollar relative to the euro. b.Bank USA converts the $10 million to euros as follows:$10m/1.104 = €9,057,971 At the end of the year Bank USA gets back principal and interest on €9,057,971 in CDs and converts them to dollars as follows:€9,057,971 × (1.1) × 1.004 = $10,003,623The resulting return is ($10,003,623 − $10,000,000)/$10,000,000 = 0.036% c.Bank USA converts the $10 million to euros as follows:$10m/1.104 = €9,057,971At the end of the year Bank USA gets back principal and interest on €9,057,971 in CDs and converts them to dollars as follows:€9,057,971 × (1.1) × 1.204 = $11,996,377The resulting return is ($11,996,377 − $10,000,000)/$10,000,000 = 19.964%

Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $1,400, can be converted into common shares at a rate of 61.3002 shares of stock per $1,400 face value bond (the conversion rate), or $22.8384 per share. Hilton's common stock is trading (on the NYSE) at $22.42 per share and the bonds are trading at $1,375. a. Calculate the conversion value of each bond. (Round your answer to 2 decimal places. (e.g., 32.16))b. State whether it is currently profitable for bond holders to convert their bonds into shares of Hilton Hotels common stock.

a.If a bond holder were to convert Hilton Hotels bonds into stock, each bond (worth $1,375.00) could be exchanged for 61.3002 shares of stock worth $22.42. The conversion value of the bonds is:$22.42 × 61.3002 = $1,374.35 b.The bonds are currently worth $1,375.00 per bond, while their conversion value is $1,374.35. Thus, there is virtually no difference in dollar value of the investment to the investor if he or she holds Hilton's debt or its common stock equivalent.

In the aftermath of the 2007 financial crisis, the Fed used several programs to increase liquidity, including ________.

expansion of the discount window setting up the Term Auction Facility lending to investment banks purchase of long-term treasury bonds All of these choices are correct.

LIBOR is generally _______________ the Fed funds rate because foreign bank deposits are generally ________________ than domestic bank deposits.

greater than; more risky

A decrease in reserve requirements could lead to an

increase in bank lending and an increase in the money supply.

Bank assets tend to have _____________ maturities and _____________ liquidity than/as bank liabilities.

longer; lower

Assume oil prices rise in the United States, generating concerns that inflation may increase. If the Fed wishes to ensure that inflation does not get out of hand, the Fed could

lower the target money supply growth rate.

State chartered banks ________________ be members of the Federal Reserve System and nationally chartered banks ________________ be members of the Federal Reserve System.

may; must

A contingent item that may eventually be placed on the right-hand side of the balance sheet or expensed on the income statement is a(n)

off-balance-sheet liability.

An example of off balance sheet activity includes:

purchasing a futures contract.

that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.

risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.

The following formula is used to calculate the _____________ of a money market investment.

single-payment yield

Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________.

taxable at federal level only; exempt from federal taxes

Liquidity risk at a financial intermediary (FI) is the risk

that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.

You can exchange $1 for either .9102 euro or .7233 British pounds. What is the cross-rate in terms of pounds per euro?

£.7233 / €.9102 = £.7947/€