Financial Institutions Final

Calculate the annual cash flows of a $2 million, 10-year fixed-payment deferred annuity earning a guaranteed 8 percent per year if annual payments are to begin at the end of the sixth (6th) year.

437,946

Generally, consumer finance companies make loans to borrowers who have been refused loans at banks due to low income or poor credit. Correct Answer True False

TRUE

In ratio analysis, the profit margin times the asset utilization ratio equals return on assets. True False

TRUE

Insurance companies charge different premiums to people based on preexisting health conditions in order to reduce the adverse selection problem. True False

TRUE

Life insurance policy reserves are the estimated current worth of expected future payouts.

TRUE

Life insurers write over 50 percent of all health insurance premiums.

TRUE

Loans are the major asset on a bank's balance sheet, and they generate the largest amount of revenue. True False

TRUE

Savings institutions must have at least 65 percent of their assets in mortgage-related areas in order to maintain their thrift charter.

TRUE

The National Credit Union Administration is the primary regulator of federally chartered credit unions.

TRUE

The largest U.S. banks are larger than the entire credit union industry. True False

TRUE

The primary asset for P&C insurers is bonds. True False

TRUE

There are more credit unions than other types of thrifts, but credit unions are generally smaller than other types of thrifts.

TRUE

An insurance line has a loss ratio of 62 percent and an expense ratio of 35 percent; the firm pays 2 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 9 percent. The operating ratio for this line is

62 + 35 + 2 - 9 = 90

A policyholder wishes to annuitize the cash value of her insurance policy at retirement. The cash value is $725,000. What payment (to the nearest dollar) can he expect if he wishes to receive 15 years of payments (starting next year) and interest rates are 5.25 percent?

71,033.43.

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 _______ A) Community bank; super-regional bank; money center bank B) Community bank; money center bank; super-regional bank C) Money center bank; super-regional bank; community bank D) Money center bank; community bank; super-regional bank E) Super-regional bank; money center bank; community bank

A

Blue Ridge Bank has a PM of 12 percent, an interest income to total assets ratio of 6.00 percent, and a noninterest income to assets ratio of 1.50 percent. Blue Ridge also has $9 in assets per dollar in equity capital. Blue Ridge's ROE is A) 8.10 percent. B) 7.50 percent. C) 5.75 percent. D) 6.48 percent. E) 9.00 percent.

A

Credit unions are I. mutual associations. II. not open to the general public. III. for profit institutions. A) I and II only B) II only C) I, II, and III D) II and III only E) I only

A

Fernando Bank has interest expense of $150 million, earning assets of $1,400 million and a NIM of 5.00 percent. The bank also has interest-bearing liabilities of $1,100 million. Fernando Bank's spread is A) 2.08 percent. B) 1.94 percent. C) 2.16 percent. D) 1.65 percent. E) 1.10 percent.

A

State chartered banks ________ be members of the Federal Reserve System and nationally chartered banks ________ be members of the Federal Reserve System. _______ A) may; must B) may; may C) must; may D) must; must

A

The largest single category of loans on the typical bank's balance sheet in 2016 was ______ A) real estate loans. B) interbank loans. C) U.S. government securities. D) commercial and industrial loans. E) consumer loans.

A

Which one of the following is the definition of the NIM? A) (Interest income − Interest expense)/Earning assets B) (Interest income − Interest expense)/Interest-bearing liabilities C) (Interest income/Earning assets) − (Interest expense/Interest-bearing liabilities) D) Net interest income/Interest-bearing liabilities E) (Net interest income − Net noninterest income)/Earning assets

A) (Interest income − Interest expense)/Earning assets

Most of the changes in size, structure, and composition of the banking industry in recent years are due to A) mergers and acquisitions. B) bank failures. C) new charters granted. D) increasing regulations. E) declines in the number of branch offices.

A) mergers and acquisitions.

Loans past due 90 days or more and loans that are not accruing interest because of problems of the borrower are called A) noncurrent loans. B) net charge-offs. C) loan losses. D) provisional loans. E) contra loans.

A) noncurrent loans.

The largest full-service broker is ________ with about 17,000 financial advisors and $2.2 trillion in client assets. A) Bank of America Merrill Lynch B) Charles Schwab Corp. C) Ameritrade D) Smith Barney

A) Bank of America Merrill Lynch

Investment banks sell ________ securities to the public, and brokerage firms sell ________ securities to the public. A) new; existing B) new and existing; existing C) existing; new D) existing; new and existing

A) new; existing

In a ________, new issues of a security are sold to buyers by the corporation or government agency ultimately using the funds. A) primary market B) secondary market C) capital market D) money market

A) primary market

By law, investors must be given a portion of the registration statement before they can invest in a new security. This document is called a A) prospectus. B) proxy statement. C) fiduciary warrant. D) debenture.

A) prospectus.

Calculate the annual cash flows of a $500,000, 12-year fixed-payment annuity earning a guaranteed 6 percent per year if annual payments are to begin at the end of the current year. A. $59,638.51. B. $56,262.75. C. $29,819.26. D. $83,841.52. E. $28,131.37.

A. $59,638.51.

Oceanside Bank converts a dollar of equity into 10 cents of net income and has $9.50 in assets per dollar of equity capital. Oceanside also has a profit margin of 15 percent. What is Oceanside's AU ratio? A) 1.05 percent B) 7.02 percent C) 3.55 percent D) 6.45 percent E) 5.56 percent

B

Rank the following from greatest to smallest in terms of industry asset size in 2016. I. Banks II. Savings institutions III. Credit unions IV. Finance companies A) IV, I, II, III B) I, IV, III, II C) II, IV, III, I D) I, II, IV, III E) I, II, III, IV

B

Sales finance companies A) specialize in making installments and other loans to whatever consumers are interested. B) specialize in making loans to customers of a specific retailer or manufacturer. C) specialize in international factoring and forfeiting. D) specialize in providing loans to businesses. E) None of these options are correct.

B

Which of the following is not an off-balance sheet activity? A) Futures contract B) Consumer loans C) Standby letter of credit D) Swap transaction E) Commercial letter of credit

B) Consumer loans

The largest U.S. underwriter of global debt and equity issues, as of 2016, was A) Merrill Lynch. B) J.P. Morgan. C) Morgan Stanley. D) Goldman Sachs.

B) J.P. Morgan.

An investment bank agrees to pay $26.75 for 5 million shares of a company in a firm commitment stock offering. It then can sell those shares to the public for $25.50 per share. What is the profit to the investment bank? A) Profit of $6,250,000 B) Loss of $6,250,000 C) Loss of $5,000,000 D) Loss of $7,500,000 E) Profit of $1,000,000

B) Loss of $6,250,000

From an investment banker's perspective, the best outcome occurs when a new issue is A) undersubscribed. B) fully subscribed. C) oversubscribed. D) syndicated.

B) fully subscribed.

An investment bank is a financial institution that A) bundles small deposits into larger loans. B) helps corporations raise funds. C) holds most of its assets in commercial paper. D) does all of the above. E) does only A and B of the above.

B) helps corporations raise funds

A full-service broker offers its clients all of the following except A) execution of trades on request. B) low transaction fees. C) research and investment advice. D) development of long-term customer relationships.

B) low transaction fees.

An instruction to a securities agent to buy or sell the security at the current market price is called a A) limit order. B) market order. C) stop loss order. D) margin order.

B) market order.

Which of the following refers to the process used to determine the value of mutual fund shares each per day? A. Directed brokerage. B. Marking-to-market. C. Late trading. D. Market timing. E. Spinning.

B. Marking-to-market

Identify the primary regulator (s) of mutual funds. A. Fed. B. SEC. C. NASD. D. State regulators. E. Stock exchanges.

B. SEC.

Deposits at savings banks are backed by the ________ and deposits at savings institutions are backed by the ________. A) BIF; BIF B) SAIF; BIF C) DIF; DIF D) SAIF; SAIF E) BIF; SAIF

C

In comparison to small banks, larger banks typically have _______ A) more equity capital. B) larger net interest margins. C) more off-balance-sheet activities. D) more core deposits. E) All of these choices are correct.

C

Plains National Bank has interest income of $250 million and interest expense of $110 million, noninterest income of $40 million and noninterest expense of $65 million on earning assets of $3,900 million. What is Plains' overhead efficiency ratio? A) 44.00 percent B) 42.45 percent C) 61.54 percent D) 9.23 percent E) 37.46 percent

C

Policy reserves are a(n) A) separate account item. B) insurance guarantee fund payment. C) balance sheet liability. D) balance sheet asset. E) income statement revenue item.

C

Bank A has a higher ROA than Bank B. Both banks have similar interest income to asset ratios and noninterest income to asset ratios. We know that I. Bank A has a higher profit margin than Bank B. II. Bank A has a higher AU ratio than Bank B. III. Bank A must have a higher PLL/OI ratio. A) I, II, and III B) II only C) I only D) I and II only E) III only

C) I only

Nationally chartered banks receive chartering and merger approval from the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Office of Comptroller of the Currency. D) Office of Thrift Supervision. E) All of these choices are correct.

C) Office of Comptroller of the Currency.

Bank assets tend to have ________ maturities and ________ liquidity than/as bank liabilities. A) equal; equal B) longer; greater C) longer; lower D) shorter; lower E) shorter; greater

C) longer; lower

An investment bank agrees to underwrite a $100 million, 15-year, 10 percent semiannual bond issue for a company on a firm commitment basis. The investment bank pays the company on Monday and plans to begin a public sale on Tuesday. If interest rates rise 0.5 percent, or fifty basis points, overnight, what will be the impact on the profits of the investment bank? A) $4,258,365; loss B) $4,258,365; gain C) $3,735,975; loss D) $3,735,975; gain E) $1,239,175; gain

C) $3,735,975; loss

An investment banker agrees to a best efforts offering of 2.5 million shares of Crew stock. The offer price is set at $35 per share. If the stock is actually sold to the public at $34.50 and the banker charges a 3.45 cent commission per share sold, what is the amount of funds Crew receives? (Ignore any other fees or expenses.) A) $88,750,000 B) $87,500,000 C) $86,163,750 D) $85,176,430 E) $84,122,560

C) $86,163,750

To take advantage of anticipated stock price decreases, an investor would use A) a market order. B) a limit order. C) a short sell. D) margin credit.

C) a short sell.

Investment banks may lose ________ if new securities issues are ________. A) large amounts of money; oversubscribed B) large amounts of money; fully subscribed C) future business; oversubscribed D) future business; undersubscribed

C) future business; oversubscribed

The primary function of investment banks is A) the bundling of deposits into loans. B) extending long-term credit to other financial institutions. C) helping corporations raise funds. D) providing credit to firms engaged in international trade.

C) helping corporations raise funds.

An investor invests $100,000 in a mutual fund that has a 5 percent front-end load, charges a management fee of 0.5 percent, and a 12b-1 fee of 0.25 percent. The investor plans to leave the investment for one year. What is the dollar amount of the total shareholder cost? A. $5,000. B. $5,500. C. $5,750. D. $750. E. $500.

C. $5,750.

The net asset value of a mutual fund is found by A. subtracting the daily market value of the fund's asset portfolio from the previous days' value. B. dividing the cumulative value of all asset positions held by the fund by the total number of asset shares held by the fund. C. computing the daily market value of the fund's total asset portfolio and then dividing this amount by the number of mutual fund shares outstanding. D. comparing the daily market value of the fund's total asset portfolio with that of its peers. E. subtracting expenses, commissions, and dividends from the fund's total asset portfolio.

C. computing the daily market value of the fund's total asset portfolio and then dividing this amount by the number of mutual fund shares outstanding.

7. A mutual fund that charges investors a fee similar to a commission charge is called a A. 12b-1 fee. B. no-load fund. C. load fund. D. long-term fund. E. short-term fund.

C. load fund.

Mutual funds that purchase Treasury bills, bank negotiable certificates of deposit, commercial paper, and other short-term securities would be classified as A. contractual institutions. B. investment institutions. C. money market funds. D. securities dealers. E. PC insurance companies.

C. money market funds.

The following type(s) of life insurance policies do not have a savings feature: A) Universal life B) Variable life C) Both variable life and universal life D) Term life E) Whole life

D

The predominant liabilities for savings institutions are A) checking accounts and money market mutual funds. B) wholesale money market notes and reserves at the Fed. C) commercial deposits and FHLB borrowings. D) transaction accounts, small time and savings deposits.

D

________ are the most diversified of depository institutions and ________ are on average the largest depository institutions. A) Credit unions; commercial banks B) Credit unions; credit unions C) Banks; savings institutions D) Commercial banks; commercial banks E) Savings institutions; commercial banks

D) Commercial banks; commercial banks

The QTL test requires that thrifts A) lend no more than 80 percent of the value of a home to a borrower to ensure mortgage safety. B) limit the amount of mortgage-related assets on the balance sheet to improve diversification. C) keep 35 percent of their assets in safe liquid investments to ensure adequate deposit liquidity. D) invest at least 65 percent of their assets in mortgages or mortgage-related assets. E) invest in a minimum percentage of government-backed securities to protect their mortgage loans.

D) invest at least 65 percent of their assets in mortgages or mortgage-related assets.

A finance company that makes loans to high-risk customers is called a A) commercial bank. B) factor. C) warehouse lender. D) subprime lender. E) credit lender.

D) subprime lender.

Core deposits are deposits that are A) very frequently turned over. B) typically for larger denominations than hot money sources. C) at the bank solely for the interest rate earned. D) very stable funds sources.

D) very stable funds sources.

Tasks that investment bankers perform when acting as underwriters to sell securities to the public include A) pricing the security. B) preparing the filings required by the Securities and Exchange Commission. C) arranging for the security to be rated. D) all of the above. E) only A and B of the above.

D) all of the above.

The registration statement the securities underwriter files with the SEC contains information about A) the firm's financial condition, management, competition, industry, and experience. B) how the funds will be used. C) management's assessment of the risk of the securities. D) all of the above. E) only A and B of the above.

D) all of the above.

Which of the following observations is true of open-end mutual funds? A. They have a fixed number of shares outstanding. B. The value of shares changes with the demand for the fund by investors. C. Investors buy and sell shares on a stock exchange. D. The demand for shares determines the number outstanding. E. Shares may trade at a premium or discount.

D. The demand for shares determines the number outstanding.

A bank has interest income to total assets ratio of 5.45 percent and has noninterest income of $45 million and total assets of $700 million. What is the bank's asset utilization ratio? A) 6.43 percent B) 5.45 percent C) 15.02 percent D) 9.67 percent E) 11.88 percent

E

In property and casualty insurance the combined ratio is equal to ________ divided by total premiums written. A) 1 minus the operating ratio B) the operating ratio minus dividends paid to policyholders C) the nominal ratio plus the real ratio D) the sum of the loss ratio plus loss adjustment expenses E) the sum of the loss ratio plus the expense ratio

E

In terms of profitability, a well-run bank usually has an ROA of _______ A) 15-20 percent. B) 10-15 percent. C) 5-10 percent. D) 3-5 percent. E) 0.5-3 percent.

E

After 2011, savings institutions have primarily been regulated by A) National Credit Union Administration. B) Office of Thrift Supervision. C) Federal Home Loan Bank Board. D) Federal Deposit Insurance Corporation. E) Office of the Comptroller of the Currency.

E) Office of the Comptroller of the Currency.

Which one of the following has the highest concentration of mortgage-related assets on the balance sheet? A) Commercial banks B) Finance companies C) Credit unions D) Pension funds E) Savings institutions

E) Savings institutions

Commercial banks are the ________ financial intermediary in the United States as measured by asset size. A) second-largest B) fourth-largest C) third-largest D) fifth-largest E) largest

E) largest

The Glass-Steagall Act A) separated commercial and investment banking. B) made it illegal for a commercial bank to buy or sell securities on behalf of its customers. C) made it illegal for investment banks to engage in the underwriting of corporate securities. D) did all of the above. E) did only A and B of the above.

E) did only A and B of the above.

Closed-end investment companies A. have a fixed number of shares. B. can trade at a price that is greater than, equal to, or less than the NAV. C. will trade at a different price as the number of shares of the fund changes. D. A and C only. E. A and B only.

E. A and B only.

A man has what he believes is a mild heart attack but he doesn't go to the hospital. Instead he calls his insurance agent and doubles the amount of his life insurance. This is an example of the moral hazard problem in insurance.

FALSE

Composite rating 5 is the rating for the soundest financial institutions. True False

FALSE

Finance companies are regulated at the federal and state levels similar to commercial banks. Incorrect Response True False

FALSE

Financial institutions generally do not face liquidity risk. True False

FALSE

In a typical variable life policy the policyholder may vary the premium payments and the maturity date of the policy

FALSE

Loans to consumers and to individuals are jointly termed C&I loans on a bank's balance sheet. True False

FALSE

Policy reserves are the primary asset of the typical life insurer.

FALSE

Savings institution deposits and bank deposits are backed by two different insurance funds.

FALSE

Small banks control about 70 percent of banking industry assets. True False

FALSE

The National Association of Insurance Commissions (NAIC) examines and regulates insurance companies. True False

FALSE

The adverse selection problem arises in situations when the policyholders engage in risky activities that increase the probability of an insurance payoff. True False

FALSE

The majority of banks are nationally chartered and insured by the FDIC. True False

FALSE

Since 1980, the number of banks in the United States has been increasing dramatically due to deregulation of the industry. True False

False

A bank's balance sheet equates the value of total assets to the sum of total liabilities and equity capital. True False

TRUE

A whole life insurance policy pays the face value of the contract on death of the policyholder to the beneficiaries. True False

TRUE

Banks have higher leverage than most manufacturing firms. True False

TRUE

Because of the differences in the makeup of their major loan types, finance companies typically have shorter-term loans than banks. True False

TRUE

Credit unions are not taxed and, as a result, well-run credit unions are often able to charge lower loan rates and pay slightly higher deposit rates than banks.

TRUE

Generally, a captive finance company is wholly owned by major manufacturing companies with the purpose of providing financing to customers purchasing the parent company's product. True False

TRUE

Property and casualty insurers hold ________ short-term assets than life insurers because property and casualty loss rates are ________ predictable than life insurance loss rates. A) more; more B) no; highly C) less; more D) more; less E) less; less

d

The primary regulator of insurance firms is the A) NAIC. B) SEC. C) FDIC. D) state insurance regulator. E) McCarran-Ferguson Commission.

d

Nontransaction deposits at banks include NOW accounts and demand deposits.

false

The majority of banks are nationally chartered and insured by the FDIC.

false

Banks have an average total debt ratio of about 90 percent.

true

Loans comprise the single largest asset category for a bank.

true

On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.

true