financial markets & institutions (FINAL)

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

Depository institutions include: A) Banks B) Thrifts C) Finance companies D) All of the above E) A and B only

banks and thrifts ONLY

An unregistered issue sold to a few large institutional buyers is an example of a

private placement

Full line investment banks act as both broker dealers and securities underwriters.

true

Households generally supply more funds to the markets as their income and wealth increase, ceteris paribus.

true

If the FOMC wished to generate faster economic growth, they could issue a policy directive to the Federal Reserve Board Trading desk to purchase U.S. government securities.

true

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

true

In the recent past, stock research analysts received bonuses for generating allegedly biased research reports that helped to sell new issues underwritten by their firm.

true

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

true

MMDAs are a type of savings accounts that has some limited checking features. These accounts were designed to help banks compete with MMMFs.

true

Money markets are the markets for securities with an original maturity of 1 year or less.

true

Money markets exist to help reduce the opportunity cost of holding cash balances.

true

Most of the recent growth of long term mutual funds has occurred because of the bull market of the 1990s.

true

Nationally chartered banks are required to become members of the Federal Reserve System.

true

One could argue that decimalization has cut dealer profit margins but may have helped increase broker profits.

true

Over the last ten years the number of banks has been declining, but the number of mutual funds has been growing.

true

Primary markets are markets where users of funds raise cash by selling securities to funds suppliers.

true

Program trading is the simultaneous buying and selling of at least $1 million worth of at least 15 stocks.

true

Securities firms often provide deposit type services through cash management accounts.

true

Simple interest calculations assume the interest earned is never reinvested.

true

T-notes and T-bonds are issued in minimum denominations of $1,000 or multiples of $1,000.

true

TIPS are a Treasury offering that protects investors from unexpected increases in inflation.

true

The European Central Bank inflation target specifies that inflation in the euro area should not exceed 2% per year.

true

The NYSE is an example of a secondary market.

true

The allowance for loan and lease losses is bank management's estimate of the amount of gross loans and leases that will not be repaid to the bank.

true

The largest commercial mortgage lender in the U.S. is a finance company.

true

The largest secondary money market in the U.S. is the secondary market for T-Bills.

true

The major source of funds for securities firms are repurchase agreements.

true

The monetary base is the amount of coin and currency in circulation plus reserves.

true

The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.

true

when does mortgage refinancing occur

when a mortgage borrower takes out a new mortgage and uses the proceeds obtained to pay off the current mortgage. -when a current mortgage has an interest rate that is higher than the current interest rate.

A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principle is paid by final maturity.

false

A market maker buys IBM at $185 for his own account and sells the stock later in the day at $187. He is acting as a broker in this transaction.

false

A private placement is allowed under SEC Rule 415 to allow large corporations to preregister an upcoming security offering for up to two years in advance.

false

A stock broker acts as a principle on behalf of the customer.

false

An increase in Treasury securities held by the Fed leads to a decrease in the money supply.

false

An increase in the perceived riskiness of investments would cause a movement up along the supply curve.

false

Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage.

false

Callable bonds have lower required yields than similar convertible bonds, ceteris paribus.

false

Commercial paper is a short term obligation of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.

false

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

false

Each fund's prospectus is required to disclose the fund's beta risk and total risk.

false

Earning a 5% interest rate with annual compounding is better than earning a 4.95% interest rate with semiannual compounding.

false

Equity capital levels of securities firms are higher than for banks since securities firms cannot offer insured deposits.

false

Euro commercial paper is a short term obligation of the European Central Bank.

false

home equity loans

let customers borrow on a line of credit secured with a second mortgage on their homes.

In July 2002 the U.S. Congress passed the Corporate Governance and Accounting Oversight bill. Among other things, this bill

Created an independent auditing oversight board run by the SEC Increased penalties for corporate wrongdoers

the largest market available for purchased funds is the

fed funds market

two classifications of mortgages

federally insured conventional

The _____________ is a network linking over 6000 banks with the Federal Reserve that is used to transfer deposits and make loan payments between participants.

fedwire

The Securities Investor Protection Corporation protects investors against losses due to unfavorable market moves of up to $500,000.

false

The bond equivalent yield times 365/360 is equal to the single payment yield.

false

The major asset of the Federal Reserve is currency outside banks, and the major liability is U.S. Treasury securities.

false

The majority of money market securities are low denomination, low risk investments designed to appeal to individual investors with excess cash.

false

The provision for loan loss account is actual loan losses less loan recoveries in a given time period.

false

The shares of a closed end fund with market value of assets of $200 million and 2 million shares outstanding will always trade at a market value of $100 per share.

false

The typical household that owns mutual funds owns no more than 3 mutual funds.

false

The unbiased expectations hypothesis of the term structure posits that long term interest rates are unrelated to expected future short term rates.

false

There are three types of major financial markets today; primary, secondary and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.

false

Thrift accounts are primarily used by investors to fund retirement savings.

false

We expect liquidity premiums to move inversely with interest rate volatility.

false

With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI.

false

largest category of mortgages by dollar volume is commercial mortgages

false

The dirty price plus accrued interest is called the clean price of the security.

false clean price+accrued interest= dirty price

Treasury notes and bonds and municipal bonds are default risk free.

false treasury notes are, but municipal bonds aren't

In a best efforts offering the investment banker acts as an agent for the issuer rather than as a principle.

true

In a private placement the issuer typically sells the entire issue to one or only a few institutional buyers.

true

In the T-Bill secondary market the ask yield will normally be less than the bid yield.

true

The market value of a fund's net assets divided by the number of mutual fund shares outstanding is called the NAV of the fund.

true

The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

true

The sale/securitization of mortgages in the secondary mortgage markets reduces the liquidity risk, interest rate risk, and credit risk

true

The seven members of the Board of Governors of the Federal Reserve System serve 14 year nonrenewable terms. Each Board member is appointed by the President and confirmed by the Senate.

true

With a zero interest rate both the present value and the future value of an N payment annuity would equal N x payment.

true

common stockholders can receive unlimited dividend payments if the firm is highly profitable, but they do not have any guaranteed dividend rights

true

in 1938 the government established the Federal National Mortgage Association (FNMA, or Fannie Mae) to buy mortgages from depository institutions so they could lend to other mortgage borrowers.

true

mortgage borrowers generally prefer fixed-rate loans when interest rates in the economy are low.

true

property purchased with the loan serves as collateral backing the loan

true

the government also established the Federal Housing Administration (FHA) and the Veterans Administration (VA) to insure certain mortgages against default risk

true

most mortgage lenders prefer ARMs when interest rates are low.

true -When interest rates eventually rise, ARM payments on their mortgage assets will rise.

common stockholders are given voting rights

true -help elect board of directors

how many times are common stock dividends taxed?

twice (firm level and personal/income tax level)

An installment loan is one where all the principle is repaid at maturity.

false

As of 2000, the largest finance company was General Motors Acceptance Corporation.

false

Banks generally pay higher interest rates on NOW accounts than on MMDAs.

false

Both retail and wholesale CDs are negotiable instruments despite their different denominations.

false

Everything else equal, the interest rate required on a callable bond will be less than the interest rate on a convertible bond.

false

Federal Reserve interest rate decisions can be vetoed by the U.S. President or the Congress.

false

Finance companies are now the largest issuers in the country in the short term banker's acceptance market.

false

If you earn 0.5% a month in your bank account, this would be the same as earning a 6% annual interest rate with annual compounding.

false

Issuers of privately placed securities must still register the issue with the SEC.

false

It is generally impossible to get a mortgage loan if you have a bankruptcy on your credit record, even from a subprime lender.

false

Load funds typically provide investors with higher rates of return and offer more services such as check writing, transfers between funds, etc.

false

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

false

Net new cash flows to money market mutual funds vary inversely with interest rate spreads on money market funds and savings deposits.

false

Of long term equity funds, municipal funds and growth and income funds are the largest categories.

false

Open end fund shares often trade at a discount or premium relative to NAV.

false

Privately placed securities are usually sold to one or more investment bankers and then resold to the general public.

false

Rate sensitive funding sources at a bank are termed core deposits.

false

Revenue bonds are backed by the full revenue of the municipality.

false

Sales finance institutions specialize in loan sales to banks and thrifts.

false

Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period.

false

The Federal Mutual Fund Commission (FMFC) is the primary regulator of the mutual fund industry.

false

The fed funds rate is the rate that

Banks charge each other on loans of excess reserves

Currently the Fed sets monetary policy by targeting

The Fed funds rate

A __________________ is a contra asset account.

Allowance for loan and lease losses

For the purposes for which they are used, money market securities should have which of the following characteristics?

Low trading costs Little price risk

Recently oil prices have risen in the U.S, 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.

Interest bearing retail accounts with limited checking features designed to compete with money market mutual fund investments are called ________________.

MMDAs

In the T-Bill auction process the competitive bidder is guaranteed a _____ and a noncompetitive bidder is guaranteed a _____.

Maximum price; given quantity

As the economy weakens, one would expect investment in _________ funds to increase and investment in __________ funds to decrease, ceteris paribus.

Money market mutual; equity

Sales finance companies

Specialize in making loans to customers of a specific retailer or manufacturer

typical voting rights arrangement

one vote per share of common stock

An insurance company is trying to sell you a retirement annuity. The annuity will give you 20 payments with the first payment in 12 years when you retire. The insurance firm is asking you to pay $50,000 today. If this is a fair deal, what must the payment amount be (to the dollar) if the interest rate is 8%?

$11,874 $50,000 1.0811 = Pmt PVIFA(8%,20 yrs)

You want have $5 million when you retire in 40 years. You believe you can earn 9% per year on your investment. How much must you invest each year to achieve your goal when you retire? (Ignore all taxes)

$14,798 $5 mill / [((1.09)^40v -1) / 0.09]

The largest type of municipal bonds outstanding are

General obligation bonds

A negotiable CD

Is a bank issued time deposit

can a shareholder cast all of their votes to one person?

yes, they can also spread them among multiple candidates

You buy a car for $38,000. You agree to a 60 month loan with a monthly interest rate of 0.55%. What is your required monthly payment?

$745.29 Pmt = 38,000 / PVIFA(i = 0.55%, n = 60)

An investment pays $400 in one year, X amount of dollars in two years and $500 in 3 years. The total present value of all the cash flows (including X) is equal to $1500. If i is 6%, what is X?

$789.70 X = [1500 - (400/1.06) - (500/1.06^3)]*1.06^2

Upon graduating from college this year you expect to earn $25,000 per year. If you get your MBA, in one year you can expect to start at $35,000 per year. Over the year, inflation is expected to be 5%. In today's dollars, how much additional (less) money will you make from getting your MBA (to the nearest dollar) in your first year?

$8,333 (35,000 / 1.05)-25,000

A T-Bond with a $1000 par is quoted at 97:14 Bid, 97:15 Ask. The clean price for you to buy this bond is

$974.69

Which one of the following is the definition of the NIM?

(Interest Income - Interest Expense) / Earning Assets

A dealer is quoting a $10,000 face 180 day T-Bill quoted at 2.75 bid, 2.65 ask. You could buy this bill at ________ or sell it at ________.

*****

Investment A pays 8% simple interest for 10 years. Investment B pays 7.75% compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to _____ (to the nearest penny).

-$3,094.67 [10000 + (80010)] - [100001.0775^10]

An individual actually earned a 4% nominal return last year. Prices went up by 3% over the year. Given that the investment income was subject to a federal tax rate of 28% and a state and local tax rate of 6%, what was the investor's actual real after tax rate of return?

-.36%

why do corporations like to issue preferred stock?

-can't force them into bankruptcy -funds raised through a preferred stock issue can be used by the firm to fund the purchase of assets that will produce income needed to pay debt holder

Federal National Mortgage Association Fannie Mae (FNMA)

-created in 1938 (oldest) -government sponsored -FNMA actually helps create pass- throughs by buying and holding mortgages on its balance sheet (more active)

why don't corporations like to issue preferred stock?

-if a preferred dividend payment is missed, new investors may be reluctant to make investments in the firm (makes them unable to generate new money) -b/c their rate of return corresponds with the riskiness of the stock, it may be a costlier source of funding for the issuing firm than bonds -dividends paid on preferred stock are not a tax- deductible expense

Government National Mortgage Association Ginnie Mae (GNMA)

-in 1968 split from FNMA -government owned - sponsors mortgage-backed securities programs of financial institutions such as banks, thrifts, and mortgage bankers -acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments from the financial institution or mortgage servicer to the bond holder. -supports loans only from govt. agencies

Money market securities exhibit which of the following?

-large denomination -low default risk -contractually determined cash flows

Federal Home Loan Mortgage Corporation Freddie Mac (FHLMC)

-more involved with thrifts -stockholder-owned

the four government agencies for mortgages

-the Federal Housing Administration (FHA) -the Veterans Administration (VA), -the Department of Housing and Urban Development's Office of Indian and Public Housing -the USDA Rural Development. *targets low-income families, young families, and veterans*

how can financial institutions remove mortgages from their balance sheets?

1) they can pool their recently originated mortgages together and sell them in the secondary mortgage market. 2) financial institutions can issue mortgage-backed securities, creating securities that are backed by their newly originated mortgages

The twelve Federal Reserve Banks perform what functions?

1. Assist in monetary policy 2. Supervise and regulate district state chartered member banks and bank holding companies 3. Serve as commercial bank for U.S. Treasury 4. Distribute and replace currency 5. Provide check clearing services 6. Provide wire transfer services 7. Provide economic research for monetary policy

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

1. Conducting monetary policy 2. Supervising and regulating depository institution 3. Maintaining the stability of the financial system 4. Providing payment and other services to institutions

Match up the given investor's desire with the appropriate intermediary or direct security. I. Money likely to be needed within 6 months II. Money to be set aside for college in 10 years III. Money to provide supplemental retirement income IV. Money to be used to provide for children in the event of death 1. Depository institutions 2. Insurer 3. Pension fund 4. Stocks or bonds

1. depository inst. 4. stocks/bonds 3. pension fund 2. insurer

what makes mortgages different from the other markets

1. mortgages are backed by a specific piece of real property. If the borrower defaults on a mortgage, the financial institution can take ownership of the property. 2. there is no set size or denomination for primary mortgages. Rather, the size of each mortgage depends on the borrower's needs and ability to repay. 3. primary mortgages generally involve a single investor (e.g., a bank or mortgage company). Bond and stock issues, on the other hand, are generally held by many (sometimes thousands of) investors. 4. the typical issuers in the mortgage market (individuals) are quite different from issuers (corporations and governments) in other financial markets.

Which of the following is/are capital market instruments?

10 year Corporate Bonds 30 year Mortgages 20 year Treasury Bonds 15 year U.S. Government Agency Bonds

A bank manager lends a corporate client $1,000,000 for six months. The bank charges a $1,000 fee to set up the loan. The corporate borrower repays $1,050,000 in six months. What is the effective annual rate on the loan?

10.47% {$1,050,000 / ($1,000,000 - $1,000)}^2 v- 1

You just bought a fifteen year maturity Xerox corporate bond rated AA with a 0% coupon. You expect to sell the bond in eight years. Find the expected interest rate at the time of sale (watch out for rounding error).

12.49%

You buy an investment today for $9,000. You sell the investment in 120 days for $9,500. The effective annual rate on this investment is

17.87% (9,500 / 9000)^^(365 / 120) v - 1

how much lower should the interest rate be to consider refinancing

2 percentage points lower than the current rate

Firms in the securities industry are required to maintain a minimum capital to asset ratio of _____

2%

Match the intermediary with the characteristic that best describes its function. I. Provide protection from adverse events II. Pool funds of small savers and invest in either money or capital markets III. Provide consumer loans and real estate loans funded by deposits IV. Accumulate and transfer wealth from work period to retirement period V. Underwrite and trade securities and provide brokerage services 1. Thrifts 2. Insurers 3. Pension funds 4. Securities firms and investment banks 5. Mutual funds

2. insurers 5. mutual funds 1. thrifts 3. pension funds 4. securities firms and investment banks

An 18 year T-Bond can be stripped into how many separate securities?

37

An investor requires a 3% increase to purchasing power in order to induce them to lend. She expects inflation to be 2% next year. The nominal rate she much charge is about

5%

You buy a principal STRIP maturing in 5 years. The price quote per hundred of par for the strip is 75.75%. Using semiannual compounding what is the promised yield to maturity on the STRIP?

5.632%

You borrow $95 today for six and a half weeks. You must repay $100 at loan maturity. What is the effective annual rate on this loan?

50.73% (100 / 95)^^(52 / 6.5)

what percentage of mortgage pools is FNA and FHLMC responsible for?

60%

The quoted ask yield on a 14 year $1000 par T-Bond with a 7% semiannual payment coupon and a price quote of 98:15 is

7.18%

A 15 payment annual annuity has its first payment in 9 years. If the payment amount is $1400 and the interest rate is 7%, what is the most you should be willing to pay today for this investment?

7421.24

The term structure of interest rates is upward sloping for all bond types. A certain AAA rated non-callable 10 year corporate bond has been issued at a 6.15% promised yield. Which one of the following bonds probably has a higher promised yield?

A callable AAA rated corporate bond with a 15 year maturity.

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may perhaps be explained by which one of the following:

A decrease in U.S. inflationary expectations

A banker's acceptance is

A liability of the importer and the importer's bank

down payment

A portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front. -decreases the probability that the borrower will default on the mortgage.

red herring prospectus

A preliminary version of the prospectus describing a new security issue distributed to potential buyers prior to the security's registration.

lien

A public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults. -also protects the property from being sold to anyone else

How does a repo differ from a Fed Funds transaction?

A repo is basically a collateralized loan whereas Fed Funds are uncollateralized.

preemptive rights

A right of existing stockholders in which new shares must be offered to existing share- holders first in such a way that they can maintain their proportional ownership in the corporation.

proxy

A voting ballot sent by a corporation to its stockholders. When returned to the issuing firm, a proxy allows stockholders to vote by absentee ballot or authorizes representatives of the stockholders to vote on their behalf. -b/c most do not attend annual meetings -can be done online

If the Fed is targeting interest rates and money demand increases an appropriate policy response would be to

Buy U.S. Treasury securities from government bond dealers

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

The _______________ is a nationwide network jointly operated by the Fed and private institutions that electronically process credit and debit transfers of funds.

ACH

option ARMs

Adjustable rate mortgages that offer the borrower several monthly payment options. "pick a payment"/"pay option"

Investors pay load changes to receive

Advice on which fund to buy

cumulative voting

All directors up for election are voted on at the same time. The number of votes assigned to each stockholder equals the number of shares held multiplied by the number of directors to be elected.

Money market mutual funds (MMMFs) have caused disintermediation at banks. This is because MMMFs

Allow investors access to higher interest rate money market securities with a relatively small capital investment

shell registration

Allows firms that plan to offer multiple issues of stock over a two-year period to submit one registration statement summarizing the firm's financing plans for the period.

naked access

Allows some traders to rapidly buy and sell stocks directly on exchanges using a broker's computer code without exchanges or regulators always knowing who is making the trades.

Underwriter spreads will normally be larger on

An IPO than a seasoned offering

other costs

Any other fees, such as VA loan guarantees, or FHA or private mortgage insurance.

Finance companies in foreign countries

Are usually subsidiaries of local banks and dependent on their parents for capital

IBM creates and sells additional stock to the investment banker, Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public. Morgan Stanley is acting as a(n)

Asset broker

application fee

Covers the issuer's initial costs of processing the mortgage application and obtaining a credit report.

Bank A has a higher ROA than Bank B. Both banks have similar interest income to asset and noninterest income to asset ratios. We know that

Bank A has a higher profit margin than Bank B.

Convertible bonds are

Bonds that may be converted to a certain number of shares of stock determined by the conversion ratio

loan origination fee

Covers the remaining costs to the mortgage issuer for processing the mortgage application and completing the loan.

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

C. I, II, and III only

The traditional liquidity premium theory states that long term interest rates are greater than the average of expected future interest rates.

true

Which one of the following statements about commercial paper is NOT true? Commercial paper issued in the U.S.

Carries an interest rate above the prime rate

The twenty largest finance companies own about 80% of the industry's assets.

true

Cash in the process of collection is

Checks that the bank is owed but has not yet collected

Standard revenue bonds are

Collateralized by the earnings from a specific project

As compared to purchasing a stock, a no load mutual fund investor will usually get

Commissionless reinvestment opportunities Better diversification Free switching between funds within the same family Lower commissions costs

Hybrid mutual funds normally invest significant amounts in

Common stock Long term bonds

The Federal Reserve System is charged with

Conducting monetary policy Providing payment and other services to a variety of institutions

title search

Confirms the borrower's legal ownership of the mortgaged property and ensures there are no outstanding claims against the property.

Finance company services include

Consumer lending Business lending Mortgage lending

closing agent and review fees

Cover the costs of the closing agent who actually closes the mortgage.

appraisal fee

Covers the cost of an independent appraisal of the value of the mort- gaged property.

The major liability of the Federal Reserve is

Currency outside banks

Total dollar value of debt underwriting exceeded total equity underwriting dollar volume in every year from 1990 to 2001.

true

Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy because

DI deposits are a major portion of the money supply

_________ and __________ allow a financial intermediary to offer safe, liquid liabilities such as deposits while investing the depositors' money in riskier, illiquid assets.

Monitoring ; diversification

The Securities Exchange Commission (SEC) does not

Decide whether a public issue is fairly priced

Of the following, the most likely effect of an increase in income tax rates would be to

Decrease the savings rate Decrease the supply of loanable funds Increase interest rates

Purchased funds include all but which one of the following?

Demand deposits

All but which one of the following is an example of noninterest income or noninterest expense?

Earnings on securities held for investment

a_________ is a contra asset account

Earnings on securities held for investment

Core deposits typically include all except which one of the following?

Eurodollar deposits

In the area of bank supervision, which of the following are functions of the Federal Reserve Banks?

Examinations of state member banks Approval of member bank and bank holding company acquisitions

specialists

Exchange members who have an obligation to keep the mar- ket going, maintaining liquidity in their assigned stock at all times.

Which of the following is the major monetary policy making body of the U.S. Federal Reserve System?

FOMC

In dollars outstanding in 2007 the largest money market security was

Fed funds & repos

A repo is in essence a collateralized

Fed funds loan

The largest market available for purchased funds is the ___________________.

Fed funds market

Uniform principles, standards and report forms for depository institutions are prescribed by the

Federal Financial Institutions Examination Council

Finance companies enjoy several advantages over banks. These include all but which one of the following?

Finance companies have lower funds costs than banks.

government owned vs government sponsored

GNMA is a government-owned enterprise, FNMA and FHLMC are government-sponsored enterprises (GSEs).

The AU ratio measures the bank's ability to __________ and the PM ratio measures the bank's ability to __________________.

Generate income from assets; control expenses

LIBOR is generally _____ the Fed funds rate because foreign bank deposits are generally _____ than domestic bank deposits

Greater than; more risky

Finance companies have lower funds costs than banks.

Have a lower percentage of mortgages Are shorter term Have higher credit risk

Money markets trade securities that: I . mature in one year or less II. have little chance of loss of principle III. must be guaranteed by the federal government

I and 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

Which of the following would normally be expected to result in an increase in the supply of funds, all else equal? I. The perceived riskiness of all investments decreases. II. Expected inflation increases. III. Current income and wealth levels increase. IV. Near term spending needs of households increase as energy costs rise.

I and III

An investor wants to be able to buy 4% more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2%. Which statement(s) below is/are true. I. 4% is the desired real rate of interest II. 6% is the approximate nominal rate of interest required III. 2% is the expected inflation rate over the period

I, II, and 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, and III

removing the PMI

In the event of default, the PMI issuer guarantees to pay the financial institution a portion (generally between 12 percent and 35 percent) of the difference between the value of the property and the balance remaining on the mortgage. As payments are made on the mortgage, or if the value of the property increases, a mortgage borrower can eventually request that the PMI requirement be removed.

residual claim

In the event of liquidation, common stockholders have the lowest priority in terms of any cash distribution. -makes common stock riskier than bonds

The Fed increases the money supply. The effect of the increase should be to

Increase consumption spending Increase nominal GDP

A decrease in reserve requirements could lead to a(n)

Increase in bank lending Increase in the money supply

During 2001 investment in money market mutual funds _____ and the investment in long term mutual funds ____.

Increased; increased

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

Insure deposits

If a bank has more purchased funds than the average bank, you would not be surprised to see a higher than average ____________________ ratio

Interest expense ratio

The largest source of income at a typical bank is

Interest income on loans and leases

A captive finance company is one that

Is owned by a retailer or manufacturer

why financial institutions sell mortgages

better manage credit risk better asset diversification improve liquidity risk improve interest rate risk

In recent years the fastest growing area of business at finance companies has been in

Leasing and business lending

LIBOR

London Interbank Offered Rate rate paid on eurodollars

A construction firm cannot obtain the necessary permits to begin building a shopping mall until it can show it either has or will have the necessary funding to complete the project. The firm may ask a bank for which of the following to allow it to obtain the permits?

Loan commitment Credit line

According to the liquidity premium theory of interest rates

Long term spot rates are higher than the average of current and expected future short term rates.

jumbo mortgages

Mortgages that exceed the conventional mortgage conforming limits. -limits are set by Fannie Mae and Freddie Mac -high interest rates -higher down payment

subprime mortgages

Mortgages to borrowers who have weakened credit histories. -have a higher rate of default than prime mortgage loans and are thus riskier loans for the mortgage lender. -tend to have higher interest rates

Day to day trading practices of securities firms currently may be regulated by which of the following?

NASD NYSE

The market value of a mutual fund's assets divided by the number of fund shares outstanding is equal to the

NAV

Investment securities plus _______________________ is equal to a bank's earning assets.

Net loans and leases

limited liability

No matter what financial difficulties the issuing corporation encounters, neither it nor its creditors can seek repayment from the firm's common stockholders. This implies that common stockholders' losses are limited to the original amount of their investment.

In a Treasury auction, preferential bidding status is granted to

Noncompetitive bidders

A loan agreement between Ford Motor Credit and a local Ford dealer is an example of

None of the above

Rates on federal funds and repurchase agreements are stated

On a bond equivalent basis with a 360 day year

Which one of the following statements is correct?

On the run Treasuries usually have lower yield rates than similar off the run Treasuries.

what is one discount point equal to?

One discount point paid up front is equal to 1 percent of the principal value of the mortgage.

If the average net interest margin for this type of bank is 4.65%, then, ceteris paribus, this particular bank is performing

Poorer than average because this bank has a NIM of 4.08%

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

Primary market transaction

title insurance

Protects the lender against an error in the title search.

Factoring is

Purchasing corporate accounts receivables at a discount

Full line securities firms engage in all but one of the following

Raising money via insured deposits

A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a

STRIP

The largest source of funds for a securities firm is

Securities sold under repurchase agreement

The rate of return on a repo is

Strongly affected by the current Fed funds rate at the time of the repo Determined at the time of the repo

Although finance company growth has generally been positive for the last ten years _______ _________ finance companies have recently been struggling.

Subprime and electronic

A finance company that makes loans to high risk customers is called a

Subprime leader

Which of the following do finance companies use to signal their safety and solvency to users?

Substantial equity to asset ratios Letters of credit from high quality banks

The most liquid of the money market securities are

T-bills

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

Taxable at federal level only; exempt from federal taxes

The discount rate is the rate that

The Federal Reserve charges on loans to commercial banks

Suppose the Fed buys $2 billion worth of yen from commercial bank currency traders in exchange for $2 billion in deposit accounts at the Federal Reserve. Which of the following would occur as a result, ceteris paribus?

The U.S. money supply would increase U.S. interest rates would fall

An annuity and an annuity due with the same number of payments have the same future value if r = 10%. Which one has the higher payment?

The annuity has the higher payment

recourse

The ability of a loan buyer to sell the loan back to the originator should it go bad.

An annuity and an annuity due that have the same number of payments also have the same present value if r = 10%. Which one has the higher payment?

The annuity has the higher payment

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))^M*N = FV, the i you get will be

The bond equivalent yield

exercise price

The cost per share at which an option or a warrant holder may buy or sell the underlying security. Syn. strike price.

underwriters spread

The difference between the gross proceeds and the net proceeds.

A money market mutual fund's total assets increase from $100 to $105 when the fund has 100 shares outstanding. Which of the following will happen?

The fund will issue a total of 5 new shares

The discount yield on a T-Bill differs from the T-bill's bond equivalent yield (BEY) because

The discount yield is the return per dollar of face value and the BEY is a return per dollar originally invested. A 360 day year is used on the discount yield and the BEY uses 365 days

The largest proportion of long term mutual fund assets are held by _____ and the largest proportion of money market mutual fund assets are held by _____.

The household sector, the household sector

as mortgage rates fall, what increases?

percentage of mortgages being refinanced (results in lower payments per month)

A best efforts offering is one where

The investment banker acts only as a distribution agent.

An investment banker may be unwilling to engage in a firm commitment offer if

The issuer is relatively unknown to the public The investment banker is concerned about overall market price volatility

what is the most actively watched security market

secondary market for corporate stock

Open end mutual funds guarantee

To redeem investor's shares upon demand at current NAV

The SEC primarily sets standards to regulate securities firms'

Trading and underwriting activities

dual-class firms

Two classes of common stock are outstanding, with differential voting rights assigned to each class. -class A and class B stockholders have different rights depending on the preset stipulations

Who are the major participants in money markets?

U.S. Treasury Commercial Banks Federal Reserve Brokers and dealers Corporations Other financial institutions

The major asset of the Federal Reserve is

U.S. Treasury securities

Net loans and leases plus ________________ plus _______________________________ equals gross loans and leases.

Unearned income; the allowance for loan and lease losses

Core deposits are deposits that are

Very stable funds sources

Which of the following is/are true about callable bonds?

Will normally be called after interest rates drop Have higher required returns than non-callable bonds

Cash management accounts

_____________ are examples of investment bankers offering traditional commercial banking services.

tranche

a bondholder class associated with a CMO

A fund has a NAV of $30 per share but the shares are currently selling for $32. This fund must be

a closed end fund

derivative securities

a financial security (such as a futures contract, option contract, swap contract, or mortgage-backed security) whose payoff is linked to another

Finance company loss reserves will typically be _____ percent of assets than/as a bank's loss reserves.

a higher

A negotiable CD is

a marketable bank issued time deposit that specifies the interest rate earned and a fixed maturity date

reverse-annuity mortgage (RAM)

a mortgage borrower receives regular monthly payments from a financial institution rather than making them. -When the RAM matures (or the borrower dies), the borrower (or the borrower's estate) sells the property to retire the debt. -RAMs were designed as a way for retired people to live on the equity they have built up in their homes without the necessity of selling the homes. -help retired homeowners to maintain financial independence as well as ownership of their home

amortized

a mortgage is amortized when the fixed principal and interest payments fully pay off the mortgage by its maturity date.

When an underwriter engages in a firm commitment, the underwriter is acting as

a principle

sinking fund provision

a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year

collateralized mortgage obligation (CMO)

a second vehicle for securitizing financial institution assets that is increasingly used. -guaranteed coupon

straight voting

a system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open

Fannie Mae's mandate

act as a secondary mortgage market facility that could purchase, hold, and sell mortgage loans.

participating preferred stock

actual dividends paid in any year may be greater than the promised dividends.

forward contract

agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date. The details of the asset and the price to be paid at the forward contract expiration date are set at time 0

futures contracts

agreement between a buyer and a seller at time 0 to exchange a standardized asset for cash at some future date. Each contract has a standardized expiration and transactions occur in a centralized market.

spot contract

agreement made between a buyer and a seller at time 0 for the seller to deliver the asset immediately and the buyer to pay for the asset immediately.

in the event of straight voting, can one person end up taking charge?

an owner of over half the voting shares can elect the entire board of directors because one vote is given per share

multifamily dwelling mortgages

are used to finance the purchase of apartment complexes, townhouses, and condominiums

farm mortgages

are used to finance the purchase of farms

Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because: A) FIs can diversify away some of their risk B) FIs closely monitor the riskiness of their assets C) The federal government requires them to do so

both (A) and (B)

A time draft payable to a seller of goods, with payment guaranteed by a bank is

banker's acceptance

Before 2003 the discount window loan rate was set

below the target fed funds rate

30 year fully amortizing

borrower pays both the interest and the loan

how can common stockholders minimize the double taxation?

by holding stocks in growth firms that reinvest most of their earnings to finance growth rather than paying larger dividends stockholders can sell their stock for a profit and pay capital gains taxes rather than ordinary income taxes on dividend income

which is lower? capital gains tax rates or income tax rates?

capital gains tax rates

The largest full service financial institution in the country that includes a finance company is

citigroup

The most diversified type of depository institutions are

commercial banks

In terms of asset size, rank the top three U.S. financial intermediaries from largest to smallest.

commercial banks mutual funds private pension funds

private mortgage pass-through issuers

commercial banks thrifts private conduits

A short term unsecured promissory note issued by a company is

commercial paper

two types of corporate stock

common and preferred --most corporations don't offer preferred stock

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely

conduct an IPO with the assistance of an investment banker

all-a mortgages (alternative a-paper)

considered more risky than a prime mortgage and less risky than a subprime mortgage. -do not meet the standard of conforming mortgages for sale to Fannie Mae and Freddie Mac.

widest held financial security

corporate stock both directly and indirectly through pension and mutual funds

The largest capital market security outstanding in 2007 measured by market value was

corporate stocks

primary stock markets

corporations raise through new issues of securities

bond holders

creditors of the issuing firm. They have no direct ownership interest in the firm, but they have a superior claim to the firm's earnings and assets relative to that of stockholders

two ways stockholders can vote

cumulative voting straight voting

stockholders votings

decide on who will oversee these operations and they can replace the board when they feel the firm is not being run efficiently from a value-maximizing perspective

If the Federal Reserve were to buy dollars by selling yen the result would be to _____ the supply of U.S. dollars and _____ the exchange rate in terms of the number of yen per U.S. dollar.

decrease, raise

what state requires straight voting unless the corporation opts out?

delaware (over 50% of all publicly traded companies are incorporated here)

Which of the following are not sources of funds for finance companies?

deposits

nonparticipating preferred stock

dividend is fixed regardless of any increase or decrease in the issuing firm's profits.

Ceteris paribus, if the Fed was targeting the quantity of money supplied and money demand dropped the Fed would likely ______________. If the Fed was instead targeting interest rates and money demand dropped the Fed would likely _______________.

do nothing, decrease the money supply.

By type of fund, there are more _____ funds than any other.

equity

When an investment banker purchases an offering from a bond issuer and then resells it to the public this is known as a

firm commitment

how are preferred stock dividends paid?

fixed (paid quarterly) and are expressed either as a dollar amount or a percentage of the face or par value of the preferred stock

private mortgage insurance (pmi)

insurance contract purchased by a mortgage borrower guaranteeing to pay the financial institution the difference between the value of the property and the balance remaining on the mortgage. -required from borrowers who don't make at least a 20% down payment

According to the UET

forward rates are less than the expected future spot rates

15 year fully amortizing

full principal and interest payment, but with a larger amount of principal paid each month than the 30 year pmt

common stock

fundamental ownership claim in a public or private corporation.

The Housing and Economic Recovery Act of 2008

gave the authority for the government's takeover of the GSEs. The act created a new GSE regulator, the Federal Housing Finance Agency (FHFA),

put option

gives a purchaser the right, but not the obligation, to sell the underlying security to the writer of the option at a prespecified price on or before a prespecified date.

Rank the following types of funds from most risky to least risky (variations exist but rank them generally)

growth growth&income bond fund MMMF

When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve.

true

four basic categories of mortgages

home multifamily dwelling commercial farm

what is the largest loan category? percentage?

home mortgages 75% of all mortgages

preferred stock

hybrid security that has characteristics of both bonds and common stock. -represents ownership in a co. like stocks -pays fixed dividends like bonds

drawbacks of preferred stock

if preferred dividend is missed, new investors are unlikely to invest dividends paid are not tax-deductible

From 1991 to 2001, foreign investor transactions in U.S. securities ___________ and U.S. investor transactions in foreign securities ______________.

increased increased

discount points

interest payments made when the loan is issued (at closing). One discount point paid up front is equal to 1 percent of the principal value of the mortgage.

major buyers of primary mortgage loans

investment banks vulture funds domestic banks foreign banks insurance companies/ pensions non-financial corporations

second mortgages

loans secured by a piece of real estate already used to secure a first mortgage.

mortgages

loans to individuals or businesses to purchase a home, land, or other real property.

fixed-rate mortgage

locks in the borrower's interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change.

4 major types of payment options for ARMs

minimum payment interest only 30 year fully amortizing 15 year fully amortizing

cumulative preferred stock

missed dividend payments go into arrears and must be made up before any common stock dividends can be paid.

major sellers of mortgage loans

money center banks regional/community banks foreign banks investment banks hedge funds U.S. government

Three major bond rating agencies

moody's Standard &poor fitch ratings

pass-through mortgage securities

mortgage-backed securities that "pass through" promised payments of principal and interest on pools of mortgages created by financial institutions to secondary market participants holding interests in the pools.

conventional mortgages

mortgages held by financial institutions and are not federally insured

securitized mortgage assets

mortgages packaged and used as assets backing secondary market securities -allows for them to be traded

Which of the following bond types pays interest that is exempt from Federal taxation?

municipal bonds

private mortgage pass-throughs

must be registered through the SEC & rated similar to corporate bonds

the longer the borrower takes to pay off the mortgage, the more likely he or she is to choose points and a lower mortgage rate.

true

Which of the following are money market instruments?

negotiable CDs

dark pools of liquidity

networks that provide liquidity but that do not display trades on order books.

do preferred stockholders have voting rights?

no

do corporations default if they miss dividend payments to common stockholders?

no. there is no legal recourse for them even if the corporation is highly profitable

If an underwriter overestimates the demand for a firm's securities in a firm commitment offering the underwriter can

none of the above

If your firm enters into an overnight reverse repurchase agreement your firm is

none of the above

Money market mutual funds invest primarily in

none of the above

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

none of the above correct: FOMC

Classify each of the following in terms of their effect on interest rates (increase or decrease): I. Perceived risk of financial securities increases II. Near term spending needs decrease III. Future profitability of real investments increases

none of these

Classify each of the following in terms of their effect on interest rates (increase or decrease): I. Covenants on borrowing become more restrictive II. The Federal Reserve increases the money supply

none of these

the most important characteristic identified in a mortgage contract is the interest rate on the mortgage.

true

preferred stock is typically

nonparticipating & cumulative

can preferred stockholders force a company into bankruptcy if dividends are not payed?

nope

mortgage sale

occurs when a financial institution originates a mortgage and sells it with or without recourse to an outside buyer. -the buyer bears all credit risk

The primary policy tool used by the Fed to meet its monetary policy goals is:

open market operations

federally insured mortgages

originated by financial institutions, with repayment guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA). -VA-insured loans are available only to individuals who served and were honorably discharged from military service in the United States).

3 major types of mortgage backed securities

pass through security collateralized mortgage obligation mortgage-backed bond

net proceeds

price at which the investment bank purchases the stock from the issuer.

gross proceeds

price at which the investment bank resells the stock to investors.

You buy French Francs in New York and simultaneously sell them in Frankfurt for a gain. This is an example of

pure arbitrage

balloon payment mortgages

requires a fixed monthly interest payment for a three- to five-year period. Full payment of the mortgage principal (the balloon payment) is then

interest only payment

requires the borrower to pay only the interest on the loan during the initial period of the loan. -then the mortgage must amortize so that the mortgage will be paid off by the end of its original term. -After 10 years from the start of the loan, the interest-only option typically goes away as well, and the borrower must pay using one of the two remaining payment options.

Inflation causes the demand curve for loanable funds to shift to the _____ and causes the supply curve to shift to the _____.

right , left

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

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

seasoned offering

sale of additional securities by a firm whose securities are currently publicly traded.

The Fed offers three types of discount window loans. _______ credit is offered to small institutions with demonstrable patterns of financing needs, _______ credit is offered for short term temporary funds outflows, and _______ credit may be offered at a higher rate to troubled institutions with more severe liquidity problems.

seasonal primary secondary

The primary regulator of mutual funds is the

sec

GNMA provides timing insurance

service provided by a sponsor of pass-through securities (such as GNMA) guaranteeing the bond holder interest and principal payments at the calendar date promised.

Commercial paper is

short term unsecured promissory note issued by a company to raise funds for a short time

amortization schedule

shows how the fixed monthly payments are split between principal and interest.

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

single pmt yield

correspondent banking

small banks making loans that are too big for them to hold on their balance sheets—either for lending concentration risk or capital adequacy reasons—and selling parts of these loans to large banks with whom they have had a long-term deposit and lending correspondent relationship.

trading post

specific place on the floor of the exchange where transactions on the NYSE occur.

market efficiency

speed with which financial security prices adjust to unexpected news pertaining to interest rates or a stock-specific characteristic.

The process of allocating shares of hot IPO issues to directors and/or executives of potential investment banking clients in exchange for subsequent investment banking business is called

spinning

penny stocks

stocks that trade for less than $5 per share

As of 2007, which one of the following derivatives instruments had the greatest amount of notional principle outstanding?

swaps

The relationship between maturity and yield to maturity is called the

term structure

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.

payment plan on mortgages is typically:

the early years of the mortgage, most of the fixed monthly payment represents interest on the outstanding principal and a small amount represents a payoff of the outstanding principal. As the mortgage approaches maturity, most of the payment represents a payoff of the outstanding principal and a small amount represents interest.

adjustable-rate mortgage

the interest rate is tied to some market interest rate. Thus, the required monthly payments can change over the life of the mortgage.

minimum payment option

the lowest of the four payment options and carries the most risk -the monthly payment is set for 12 months at an initial interest rate. After that, the payment changes annually, -minimum payment on most option ARM programs is 1 percent fully amortized. -After the loan balance reaches 110 to 115 percent (about 5 years), the borrower loses the minimum payment option, leaving the three remaining payment options.

Four seats on the FOMC are allocated to Federal Reserve Bank presidents on an annual rotating basis.

true

The term structure of interest rates is the relationship between interest rates on bonds similar in terms except for maturity.

true

pass-throughs are

the primary mechanism for securitization

call option

the right to buy an asset at a specified price on or before a specified expiration date

mortgage (asset) backed bonds [MBB]

the third type of mortgage-backed security. -remain on the balance sheet -the cash flows on the mortgages backing the bond are not necessarily directly connected to interest and principal payments on the MBB. -helps to raise long-term low-cost funds for FIs -decreases liquidity (least used)

how are the reduced voting rights in dual-class firms offset?

they are assigned higher dividends

"On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued.

true

360/ h times the difference between the face value and the current value divided by the face value gives you the discount yield on an instrument.

true

A 12 b-1 fee is an implicit load charge.

true

A drop in interest rates will usually result in an increase in the number of money market mutual fund shares.

true

A wholesale bank is one that focuses its business activities on commercial banking relationships.

true

About 40% of all U.S. banks are members of the Federal Reserve System.

true

According to the market segmentation theory short term investors will not normally switch to intermediate or long term investments.

true

Accrued interest owed to the bond seller increases as the next coupon payment date approaches

true

An example of a pure arbitrage strategy is to simultaneously buy and sell the same security in two different markets at different prices.

true

An improvement in economic conditions would likely shift the supply curve down and to the right and shift the demand curve for funds up and to the right.

true

An investor earned a 5% nominal rate of return over the year. However, over the year prices increased by 2%. The investor's real rate of return was less than their nominal rate of return.

true

As of 2001 total U.S. mutual fund assets exceeded U.S. insurer's assets but were less than commercial bank total assets.

true

Banks have higher leverage than most manufacturing firms.

true

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

true

Bond ratings use a classification system to give investors an idea of the amount of default rate risk associated with the bond issue.

true

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

true

C&I loans are loans to businesses used to finance capital needs, equipment purchases and plant expansions.

true

Ceteris paribus, an increase in the marginal tax rates for all U.S. taxpayers would probably result in reduced supply of funds by households.

true

Commercial paper, Treasury bills and banker's acceptance rates are all quoted as discount yields.

true

Convertible bonds will normally have lower promised yields than straight bonds of similar terms and quality.

true

Euro bonds are bonds denominated in the issuer's home currency, but are issued outside their home country.

true

Eurodollar bonds are dollar denominated bonds issued outside the United States.

true

Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.

true

Except for certain special promotional deals, finance companies generally charge higher rates for similar loans than do commercial banks.

true

Fed funds are short term unsecured loans while repos are short term secured loans.

true

Federal Reserve Board members are appointed by the U.S. President and confirmed by the Senate for a non-renewable 14 year term.

true

Financial intermediaries such as banks typically have assets that are riskier than their liabilities.

true

For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows and the future value of the same annuity will be greater than the sum of the cash flows.

true

For securities firms, income from investment management is more stable than the income from underwriting or trading.

true

commercial mortgages

used to finance the purchase of real estate for business purposes (e.g., office buildings, shopping malls).

home mortgages

used to purchase one to four family dwellings

Investment firms that pool money from individuals and/or institutions and invest equity funds in startup firms are called

venture capital firms

when are preferred stockholders paid

when profits have been generated and all debt holders have been paid (but before common stockholders are paid).

noncumulative preferred stock

which dividend payments do not go into arrears and are never paid. -generally has voting rights to make up for this^^


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