Finance 440 Test 1
The Sotects investors Investor Protection Corporation (SIPC) protects investors against losses of up to ______ on securities firm failures.
$500,000
The percentage of depository institutions' assets funded by some form of debt is in the range of
90%
Customer Loans are classified on a DI's balance sheet as
Assets, because DIs originate and monitor loan portfolios.
Holdings of U.S. Treasury securities are classified on a DI's balance sheet as
Assets, because securities holdings represent a use of funds for investment.
The process of providing custody and escrow services, clearance and settlement services, and research and other advisory services by a securities firm involves the function of
Back office functions
What is the defining characteristic of the dual banking system?
Coexistence of both nationally chartered and state chartered banks.
A primary advantage for a depository institution of belonging to the Federal Reserve System is
Direct access to the discount window of the Fed.
A primary advantage of belonging to the Federal Reserve System is
Direct access to the federal funds wire transfer network for interbank borrowing and lending. Direct access to the discount borrowing window of the Fed.
Decomposing ROE to examine the different underlying sources of profitability is known as
DuPont Analysis.
A financial intermediary acts as a lender of last resort.
False
Agency transactions allow the market maker to always make a profit whether or not the market price for a specific stock is rising or falling.
False
Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise more monitoring power and control over the borrower.
False
FIs typically provide secondary claims to household savers that have superior liquidity attributes than the primary securities of corporations such as equity and bonds.
False
Firms in industries that have high costs of entry tend to enjoy larger profits than firms in industries with low costs of entry.
False
In a public offering, an investment banker places new issues of securities with a handful of private, usually large investors.
False
Market making involves creating a primary market in an asset.
False
Maturity or denomination intermediation involves the investment of small amounts by investors into mutual funds which then invest in long-term securities such as bonds and equities.
False
Securities trading and underwriting is a profit generating activity that requires FIs to hold an inventory of securities they trade.
False
The Securities Investor Protection Corporation (SIPC) protects investors against losses of up to $1,000,000 on securities firm failures.
False
The ability of savers to transfer wealth between youth and old age and across generations is called time intermediation.
False
The asset transformation function of an FI is to issue secondary financial claims to households while purchasing primary claims issued by corporations.
False
Verification of requirements that encourage FIs to diversify their assets is the goal of safety and soundness regulation.
False
All banks with assets greater than $10 billion are considered money center banks.
False. Are NOT NECESSARILY. What makes a bank a money center bank is partly location and partly its heavy reliance on non deposit or borrowed sources of funds.
A major difference between banks and other non financial firms is the low amount of leverage in commercial banks.
False. HIGH Amount
Because of the amount of equity on a typical commercial bank balance sheet, credit risk is a significant risk to bank managers.
False. Is NOT
Smaller community banks specialize in providing residential mortgages and commercial loans.
False. Just residential mortgages, not commercial loans.
The maturity structure of the assets of commercial banks tends to be shorter than the maturity structure of liabilities.
False. LONGER
In recent years, the return on assets for banks with assets in excess of $10 billion has been less than the return of assets of banks with less than $100 million.
False. More than
Large banks tend to make business decisions based on personal knowledge of customers creditworthiness and business conditions in the local communities.
False. Small Banks
The charter values of FIs will be higher if regulators
Increase the cost of entry by requiring more capital. Restrict the number of FIs that can operate in a given market.
In its role as a delegated monitor, the FI
Keeps track of required interests and principal payments. Works with financially distressed borrowers in danger of defaulting on their loans. Holds portfolios of loans. Maintains contact with borrowers so as to ensure that the loan proceeds are utilized for intended purposes.
Which of the following investment banks is no longer in business as a result of the most recent financial crisis?
Lehman Brothers
Customer deposits are classified on a DI's balance sheet as
Liabilities because the DI uses deposits as a source of funds.
Customer deposits are classified on the FI's balance sheet as
Liabilities, because the FI uses deposits as a source of funds.
Creating a secondary market in an asset by a securities firm involves the function of
Market making
National full-line firms
May specialize in providing service to both retail and corporate customers. May specialize more in corporate finance with high activity in trading securities.
Which of the following measures the difference between the private costs of regulations and the private benefits for the producers of financial services?
Net regulatory burden
The largest libility on U.S. commercial banks balance sheet as of September 30, 2012 was
Non-transaction accounts.
In market-making
Principal transactions are when market makers take long or short positions and seek profits on price movements. Market makers take inventory positions to stabilize the market in the securities.
The largest asset class on U.S. commercial banks' balance sheet as of September 30, 2012 was
Real Estate Loans
Soft dollars is a term often used in reference to the portion of a free or commission that is allocated to
Research and other advisory services
Legislation designed to improve corporate governance practices, especially as they relate to accounting practices, is the
Sarbanes-Oxly Act
Thrifts are
Savings and loan associations, saving banks or credit unions that specialize in making long term residential mortgage loans.
Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacture?
THe large bank failure reduces credit availability throughout the economy.
An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share.
TWResearch, Inc. will receive $10.50 per share x 10,000,000 shares = $105,000,000
State-Chartered commercial banks may be regulated by
The FDIC, the Federal Reserve System, and state banking commissions.
National-Chartered commercial banks are regulated by
The FDIC, the Federal Reserve System, and the Comptroller of the Currency.
Negative externaalities occur when
The fear of FI insolvency leads to bank deposit runs. Lending activity is curtailed. There are delays in disbursements from insolvent FIs.
Offering bank deposit like accounts to individual customer by a securities firm involves
The function of cash management
An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. What is the profit (loss)to the investment banker?
The investment banker will have a profit of $7,000,000. ($11.20 - $10.50) x 10,000,000 shares = $0.70 per share x 10,000,000 = $7,000,000
Safety and soundness regulations include all of the following layers of protection.
The provision of guaranty funds. Requirements encouraging diversification of assets. Minimum levels of Capital. Monitoring and Surveillance.
One of the primary reasons that investment banks were allowed to concert to bank holding companies during the recent financial crisis was recognition that
Their operating activities were too risky and they needed the cushion of bank deposits to alleviate funding risks.
In a world without FIs, households will be less willing to invest in the corporate sector because
They are not able to monitor the activities of the corporation more closely than FIs. They are subject to price risk on the sale of securities.
Which of the following is typical of broker-dealers?
They assist in the trading of existing securities.
FIs perform their intermediary function in two ways
They specialize as brokers between savers and users. They serve as asset transformers by purchasing primary securities and issuing secondary securities.
An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. If the investment bank can sell the shares for $9.75 per share, how much money does TWResearch receive?
This is a firm commitment offering, so TWResearch still receives $105,000,000 $10.50 per share x 10,000,000 shares
Which of the following is not a provision of Sarbanes-Oxley Act?
Tied analysts' pay to the quality and accuracy of research.
Net regulatory burden for FIs is higher because regulators may require FIs
To hold more capital than what would be held without regulation.
Depository institutions serve as a conduit through which monetary policy actions impact the economy.
True
Financial institutions provide economies of scale in the area of information collection.
True
Investment banks engage in activities such as advising on mergers, acquisitions, and corporate restructuring.
True
Market makers are obliged to buy stocks from sellers when the market is crashing.
True
Money center banks rely more heavily on wholesale and borrowed funds as sources of liability funding than community banks do.
True
Negotiable certificates of deposits are distinguished from fixed time deposits by the negotiability and active trading in the secondary markets.
True
Not all commercial banks must be members of the Federal Reserve System. Only nationally chartered banks and some state-chartered banks have chosen to become members.
True
Off-balance-sheet activities involve the generation of fees and exposure to contingent liabilities and risk.
True
Since 1990, commercial banks have decreased the proportion of business loans and increased the proportion of mortgages in their portfolios.
True
The Federal Reserve System has regulatory supervision over all holding company banks whether they include national- or state-chartered banks.
True
The Financial Services Modernization Act of 1999 allows commercial banking activities and securities underwriting to operate simultaneously under the same ownership structure.
True
The concentration of business in the securities firm/investment banking business has increased significantly since the market crash of 1987.
True
The efficiency with which FIs provide payment services directly benefits the economy.
True
Verifying the minimum level of capital or equity funds that must be held to fund the operations of an FI is part of the goal of safety and soundness regulation.
True
The Federal Deposit Insurance Corporation manages the insurance funds for both commercial banks and savings associations.
True.
Which of the following would be a key area of activity for an investment bank specializing in the commercial side of business?
Underwriting issues of new securities.
Holdings of U.S. Treasury securities are classified on the FI's balance sheet as
assets, because securities holdings represent a use of funds.
An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called
e.a principal tranaction
In comparison to a typical commercial bank, an investment bank is likely to have
lower levels of capital.
The largest category of assets for broker-dealers as of the beginning of 2012 was
securities purchased under agreement to resell
The largest category of liabilities of broker-dealers as of the beginning of 2012 was
securities sold under repurchase agreements.
