Financial Institutions

NOW account

(a type of transaction deposit) are similar to demand deposit accounts in that they allow the depositor to write checks and use debit cards against their account balance; however, the accounts usually require a much higher minimum balance and pay interest on the balance.

Demand deposit accounts

(a type of transaction deposit) require a small minimum deposit of around $165 on average, pay no interest, and allow the depositor to write checks and use debit cards against their account balance

risk

- If the firm has risky operations, its stock price is more volatile, therefore increasing the bid-ask spread

passbook savings account

-The typical savings deposit account is known as a ___ -typically require no minimum balance; however, they do not allow the depositor to write checks or use debit cards against the account balance.

High Frequency Trading

-represents the use of electronic platforms to execute orders based on an algorithm with programmed instructions. -is also known as: Automated trading, Algorithmic trading, Algo trading

best possible price

A Market Order is executed at the...

limit

A ____ order to buy a stock means to execute the transaction at the best possible price but pay no more than a specified maximum price

regression analysis

A bank can assess interest rate risk by determining how performance has historically been influenced by interest rate movements. • This requires that proxies be identified for bank performance & for prevailing interest rates & that a model be chosen that can estimate their relationship

it should consider hedging that risk

A bank can consider the measurement of its interest rate risk along with its forecast of interest rate movements to determine whether...

credit card & consumer loans

A bank concerned with maximizing its return could use most of its funds to provide __________

hedge the risk

A bank measures the risk & then uses its assessment of future interest rates to decide whether & how to

asset structure

A bank's _____ will strongly influence its interest revenue on the income statement.

sources of funds

A bank's decisions on _______ will heavily influence its interest expenses on the income statement.

present value of its future cash flows

A commercial bank's value is the

$33.30

A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm's shares based on the price-earnings (PE) method is

potential crisis

A large volume of margin lending • exposes the stock markets to a ...

10.2 percent

A stock's beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market return is expected to be 9 percent. What is the expected return on the stock based on the CAPM?

Interest Rate Caps

Agreements (for a fee) to receive payments when the interest rate of a particular security or index rises above a specified level during a specified time period.

Using Floating-Rate Loans

Allows banks to support long-term assets with short-term deposits without overly exposing themselves to interest rate risk.

a. the bid or ask prices offered can be more favorable than those available in the public stock exchanges. b. an investor can accumulate a large number of shares of a particular stock without putting excessive upward pressure on the stock price. c. they are convenient for high frequency traders using computer algorithms to catch price discrepancies.

An advantage of trading in dark pools is that

Interest Rate Swaps

An arrangement to exchange periodic cash flows based on specified interest rates

appreciation of the euro

An expected ________ will result in higher expected cash flows in U.S. dollars, resulting in an increase in the present value of the stock, meaning the stock price will increase. This is beneficial to the U.S. investor.

stop-buy order with a specified purchase price of $55 per share

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss of more than $5 per share on the short sale transaction, she could place a

standby letter of credit

An off-balance sheet activity entered into by banks that backs a customer's obligation to a third party is known as a(n):

bank's financial statements

Analysts & investors alike rely heavily on the _______ to evaluate a bank's performance.

technological innovation

Another important industry characteristic that can affect a bank's cash flows is

savings deposits and small time deposits; large time deposits and short-term borrowings

As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____

Money markets

As banks offer deposits, they must compete with other financial institutions in the _______ along with the Treasury to obtain short-term funds. They serve households that wish to invest funds for short-term periods.

market risk

As banks pursue new services related to the trading of securities, they have become much more susceptible to ....

working capital loans.

Bank loans designed to support a firm's ongoing business operations are called

gap

Banks can attempt to determine their interest rate risk by monitoring their ____ over time

Federal Reserve District Banks

Banks can borrow funds from the _______ for a few days to a few weeks to meet their short-term financial needs. They are charged the primary credit rate, which is typically higher than the fed funds rate to incentivize banks to figure out their short-term funding issues, rather than allowing them to become permanent.

Federal Funds Market

Banks can borrow funds from the federal funds market for one to seven days to meet their short-term financial needs. They are charged the fed funds rate in exchange for access to the funds

sufficient liquidity

Banks can ensure _________ by using most of their funds to purchase short-term Treasury securities or other money market securities.

value-at-risk (VaR)

Banks commonly measure their exposure to market risk by applying the _______ method

revise; investment & credit positions; market conditions

Banks continually _____ their estimate of market risk in response to changes in their ___________ & to changes in ___________.

the overall composition of their loan portfolios & the economic environment.

Banks continually assess both

financial information; creditworthiness

Banks employ credit analysts who review the ______ of corporations applying for loans & evaluate their _________

the liquidity objective

Banks must be concerned about achieving a reasonable return on their assets, which often conflicts with

cash

Banks need ______ in order to meet the reserve requirements set by the Fed. In order to meet these requirements, they keep some of the deposits in the form of

diversify their loans

Banks should _________ to ensure that their customers are not dependent on a common source of income.

bonds

Banks that intend to purchase long-term assets, such as land, buildings, equipment, etc., may issue _____ to finance the long-term purchases.

eurodollars

Banks that want to borrow money from institutions outside of the United States are borrowing U.S. currency known as

repurchase agreements

Banks use ________ to sell securities to another financial market participant with the stipulation that they will purchase them back at a higher price in the future

credit default swap contracts

Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities.

their decisions as board members may affect their jobs as managers.

Board members who are also managers of the bank (i.e. inside directors) • may sometimes face a conflict of interests because ....

bid quote; ask quote

Broker may provide a ________ if the investor wants to sell a stock or an _____ if the investor wants to buy a stock

Working capital loans

Businesses need to pay for raw material and other costs up front during their products' production stage. They will not receive payment for the finished goods until they have sold, which can cause many businesses to have a lag between when they need materials to create products and when they receive the cash inflows. ________ are typically short-term loans given by banks to help support these ongoing business operations.

Swaps markets

CBs engage in interest rate swaps to hedge interest rate risk.

Bond markets

CBs purchase bonds issued by corporations, the U.S. Treasury, & municipalities.

Futures markets

CBs take positions in futures to hedge interest rate risk

Options markets

CBs take positions in options on futures to hedge interest rate risk.

Retail CD

Cho wants to put a small amount of money in an interest-earning account for three years, doesn't plan on withdrawing the funds, and wants them to stay in the account until the end of the third year

Order Costs

Clearing costs & the costs of recording transactions increase the bid-ask spread

packaging their commercial loans

Commercial banks can obtain funds by ____ with those of other financial institutions.

short-term deposits

Commercial banks rely heavily on _______ as a source of funds, & the rates paid on these deposits are typically revised in accordance with other interest rate movements.

rising interest rates

During periods of ________, the interest rate cap provides compensation that can offset the reduction in spread during such periods

whether they can trust that banks have fully acknowledged the reduced valuations of their assets

During weak economic periods, investors may not know

very limited potential for high return

Emerging market stocks tend to exhibit all of the following except: a. high political risk. b. high exchange risk. c. very limited potential for high return. d. high volatility.

b. are legitimate if the consultants divulge only information that is already public. c. have raised concerns that the consultants provide inside information

Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants ("experts") by a hedge fund to provide insight about the company

economic conditions

Exposure also changes over time in response to ...

types of loans

Exposure is dependent on _______ a bank provides

net interest margin

Financial futures contracts can reduce the uncertainty about a bank's ______

Callable CD

Glass Builder Inc. wants to put $750,000 in an interest-earning account for five years and doesn't plan on withdrawing the funds until the end of the fifth year, but doesn't mind withdrawing them if the financial institution no longer wants them midway through the five-year period.

market interest rates

Gross interest expenses will normally be higher when ______ are higher

Competition

Having multiple market-makers promotes competition & reduces the bid-ask spread.

have less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects

Holding other factors constant, an increase in the capital gains tax rate will...

by selling them in the secondary market

How can banks eliminate loans that are causing excessive risk to their loan portfolio?

by creating additional liabilities or by selling assets

How can banks resolve cash deficiencies?

Treasury securities

If a bank wants to minimize credit risk, it can use most of its funds to purchase _______

the appropriate interest rate.

If the bank decides to grant the loan, it can use its evaluation of the firm to determine _______

• the price at which they initially sold the stock and • the price they paid to obtain the stock.

If the price of the stock declines by the time the short-sellers purchase it in the market, the short-sellers earn the difference between:

required rate of return by investors

If the risk premium on a commercial bank rises, so will the ______ who invest in the bank.

interest rate swap

If two parties agree to engage in an _______, a bank acts as an intermediary by guaranteeing that the payments will be made on time in exchange for a transaction fee. If either party defaults on the obligation, the bank steps in and makes the payment on their behalf

3 days

In October 2008, the SEC required that short-sellers borrow & deliver the shares to the buyers within _____.

futures contracts

Interest rate _____ lock in the price at which financial instruments can be purchased or sold on a specified future settlement date.

(1) the name of the stock (2) whether to buy or sell that stock (3) the number of shares to be bought or sold, and (4) whether the order is a market or a limit order

Investor communicates the order to the broker by specifying:

Stop-Buy Order

Investor specifies a purchase price that is above the current market price

stop loss order

Investor specifies a selling price that is below the current market price of the stock

maintenance margin

Investors are subject to a _____, which is the minimum proportion of equity that an investor must maintain in the account as a proportion of the market value of the stock (currently 25%).

stop-buy order

Investors commonly use a ________ to limit their losses.

credit default swaps

Investors who are concerned about their debt securities defaulting might purchase insurance, called _______, to protect their investment. Banks offer the insurance in exchange for periodic payments for the insurance.

Money Market Deposit

Kenji wants to put $10,000 in a low-rate interest-earning account that does not have a maturity and that has limited check-writing ability.

exposure to credit risk

Larger proportion of financing credit cards increases ...

$168.83

LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?

term loans

Loans used to purchase fixed assets like machinery, fixtures, manufacturing facilities, etc. are called

timing

Many banks classify interest-sensitive assets & liabilities into various categories based on the ______ in which interest rates are reset.

diversifying their loan portfolio internationally.

Many banks reduce their exposure to U.S. economic conditions by __________

subprime mortgage loans ; mortgage-backed securities

Many commercial banks aggressively funded ______ in the 2004-2006 period by originating the mortgages or purchasing _________ that represented subprime mortgages.

changes in the value of securities

Market risk results from ________ due to changes in financial market conditions such as interest rate movements, exchange rate movements, & equity prices

0.93 (ask price - bid price / ask price)

Marziano Co. stock is quoted by a broker as bid $21.20, ask $21.40. The bid-ask spread is ____ percent.

Maturity Matching

Match each deposit's maturity with an asset of the same maturity

Residential and Commercial Real Estate Loans

Most individuals and businesses can't afford an all-cash payment for a property. As a result, they turn to banks to lend them the money to purchase the property. Usually these loans have time periods ranging between 15 and 30 years.

credit card

Most individuals do not pay cash for all of their purchases. In order to make everyday purchases, as well as somewhat major purchases, they can get a ____ from a bank, which gives them a maximum credit limit they cannot exceed based upon their income and credit history. They can pay the borrowed amount off over time (while paying interest), or they can pay it off within the month at no cost.

regulation

One of the most important industry characteristics that can affect a commercial bank's cash flows is ...

25.18

Protsky Inc. paid a dividend of $2.20 per share this year. The dividend growth rate for Protsky's dividends is 3 percent per year. If the required rate of return on Protsky stock is 12 percent, the stock should be valued at $____ per share according to the dividend discount model.

shareholder activism

Publicly traded banks are subject to potential

• the same income statement items that affect ROA & • by the bank's degree of financial leverage

ROE (Return on Equity) is affected by:

Securities and Exchange Acts of 1933 and 1934

Regulation that requires that investors receive important information about securities being offered on public exchanges and prohibits misleading or unethical trading practices on security exchanges by requiring stock exchanges to discipline financial market participants who violate the regulation.

Trading Halts

Restrictions on trading when exchanges believe market participants need more time to gather complete information about a stock.

circuit breakers

Restrictions on trading when stock prices or a stock index reaches a specified threshold level.

• Firms must publicly disclose • all information about themselves that could affect the value of their securities. • Employees of firms may take positions in their own firm's securities only during periods when they do not know of inside information. • Participants in security markets who facilitate trades • must work in a fair & orderly manner

Some SEC regulations involve the following requirements:

asset composition

Some assets are more marketable than others, so a bank's _________ can affect its degree of liquidity.

mortgage market

Some banks offer mortgage loans on homes & commercial property; that is, they provide financing in the _________.

large short sales

Some critics argued that the _______ placed additional downward pressure on prices & created paranoia in the stock market

below the prime rate

Some loans to high-quality (low-risk) customers are commonly offered at rates .....

• Determine a compensation system for the bank's executives. • Ensure proper disclosure of the bank's financial condition & performance to investors. • Oversee growth strategies such as acquisitions. • Oversee policies for changing the capital structure, including decisions to raise capital or to engage in stock repurchases. • Assess the bank's performance & ensure that corrective action is taken if the performance is weak because of poor management.

Some of the more important functions of bank directors are to:

less dispersed than that of Stock Y.

Stock X has a lower beta than Stock Y. The market return for next month is expected to be -1 percent, +1 percent, or +2 percent with an equal probability of each scenario. The probability distribution of Stock X returns for next month is

more liquid

Stocks that are ______ have a large trading volume & a lower bid-ask spread.

secondary capital

Subordinated notes and bonds are examples of

$126.00 per share

Suppose AirPower Co., a renewable energy startup is expected to generate earnings of $7 per share next year. If the mean ratio of share price to expected earnings of competing firms in the same industry is 18, then using the price-earnings valuation method, the valuation of the firm's shares is:

$37.50 per share

Suppose Hilary just bought stock in TurboLight Co., a renewable energy startup, and that Hilary estimates there will be a dividend of $3 per share, paid annually, forever. If the discount rate on the stock is 8 percent, then using the discount dividend model, the value of the stock is:

initial margin requirements

The Federal Reserve imposes _______, which represent the minimum proportion of funds that must be covered with cash (currently 50%).

exposure to interest rate risk

The Relationship between a Bank's Market & Interest Rate Risk is Partially dependent on its

all market participants.

The SEC requires that any quote provided by a market-maker be made available to

Sharpe

The ____ index can be used to measure risk-adjusted performance of a stock while controlling or the stock's volatility

secondary market for loans

The _______ has improved the liquidity, however this liquidity may lessen as economic conditions lessen & demand for selling loans increases.

subjectivity in accounting

The _________ causes a lack of transparency & can create much uncertainty when assessing banks

market for corporate control

The __________ serves as a form of governance because bank managers recognize that they could lose their jobs if their bank is acquired.

securitize assets

The ability to _________, such as automobile & mortgage loans can enhance a bank's liquidity

investors can monitor the supply & prices of shares & the demand for shares on different ECNs.

The advantage of a direct access broker is that

SEC

The agency that attempts to protect investors by ensuring firms fully disclose all relevant information that could affect the values of securities.

managers & its organizational structure

The bank can select its

the value of many homes would decline

The banks did not anticipate the credit crisis that occurred in the 2008-2009 period & that _____ far below the amount owed on the mortgage.

Inventory Costs

The cost of maintaining an inventory of a stock increases the bid-ask spread.

quicker

The deposit rates will typically be more sensitive • if their turnover is

Division of Trading and Markets

The division that reviews security trades by various organizations that facilitate the trading of securities, such as brokers and stock exchanges.

high frequency trading.

The flash crash was attributed to

risk-free rate

The formula for a stock portfolio's volatility does not contain the

increased participation in the trading of derivative contracts

The increase in banks' exposure to market risk is also attributed to their ...

correct short-term fund imbalances experienced by banks

The intent of federal funds transactions is to

net income

The key income statement item is ____, which accounts for any taxes paid

inverse of the capital ratio

The leverage measure is the ________ (when only equity counts as capital)

Short interest ratio

The number of shares that are currently sold short divided by the average daily trading volume over a recent period.

Management Abilities

The only one of the 4 characteristics over which the bank has control

leverage measure

The ratio (assets / equity) is called the...

Measuring the Short Position of a Stock

The ratio of the number of shares that are currently sold short divided by the total number of shares outstanding

average daily trading volume over a recent period

The short interest ratio is the shares sold short divided by the

20%

The tax rate on dividend income from stocks was increased from 15% to _____ in 2013 for investors in high income brackets

Income before tax

This is net interest income, noninterest income, & securities gains less the provision for loan losses & noninterest expenses

financial markets

To implement their strategy, commercial banks rely heavily on

brokerage firm

To place an order to buy or sell a specific stock, an investor contacts a _________.

Stop-Loss Order

To protect gains or to limit losses

true

True or False: The major use for bank funds is real estate loans.

true

True or False: The majority of all United States bank liabilities are made up of deposit accounts.

This statement is false. If a bank wants to expand internationally, it can establish a full-service bank or agency that provides simple loan services, or even purchase an existing bank in another country. The most common way for U.S. banks to expand is by establishing full-service branches of their current bank.

True or False: The most common way for U.S. commercial banks to expand internationally is by purchasing banks in other countries

Change in the Risk-Free Rate Change in the Risk Premium Impact of the Credit Crisis on Bank Valuations

What are some Factors that Affect the Required Rate of Return by Investors?

• Maturity matching • Using floating rate loans • Using interest rate futures contracts • Using interest rate swaps • Using interest rate caps

What are some Methods Used to Reduce Interest Rate Risk?

• Could reduce the amount of transactions in which it serves as guarantor for its clients, or reduce the bank's investment in foreign debt securities that are subject to adverse events in a specific region. • Could attempt to take some trading positions to offset some of its exposure to market risk. • Could sell some of its securities that are heavily exposed to market risk.

What are some Methods Used to Reduce Market Risk

• Incurring excessive interest expenses • Low interest received on loans & securities • Insufficient non-interest income • Heavy loan losses • Excessive non-interest expenses

What are some Reasons for a Low ROA?

-order costs -inventory costs -competition -volume -risk

What are some factors that affect the spread on stock transactions?

gap analysis gap ratio duration measurement duration gap regression analysis

What are some methods used to assess interest rate risks?

(1) retail certificate of deposits (retail CDs) (2) negotiable certificate of deposits (NCDs) (3) callable certificate of deposits (callable CDs)

What are some time deposit accounts?

• The Division of Corporate Finance reviews the registration statement filed when a firm goes public, corporate filings for annual & quarterly reports, & proxy statements. • The Division of Market Regulation requires the orderly disclosure of securities trades. • The Division of Enforcement assesses possible violations of the SEC's regulations & can take action against individuals or firms.

What are the key divisions of the SEC?

the bank's sale of securities.

What do Securities gains & losses result from?

salaries, office equipment, and other expenses not related to the payment of interest on deposits

What do non-interest expenses include?

interest paid on deposits & on other borrowed funds.

What does Gross interest expenses represent?

• more sales • putting downward pressure on stock prices • leading to additional margin calls.

What does a high volume of margin calls result in?

the volume of assets a firm supports with equity.

What does leverage reflect?

Electronic communication networks

What does one call automated systems that disclose and execute orders for investors?

the sale of assets by the bank to a trustee, who issues securities that are collateralized by the assets.

What does the process of securitization involve?

other market rates may also decline, which may result in a stronger demand for the commercial bank's loans.

What happens if the risk free interest rate decreases?

• all income statement items & • the policies that affect those items

What is return on assets influenced by?

the proportion of the investment that is from borrowed funds

What is the return (R) affected by?

the stock price may increase over time, forcing the short-seller to pay a higher price for the stock than the price at which it was initially sold

What is the risk of a short sale?

a bank's NIM will likely decrease if its liabilities are more rate sensitive than its assets

What will happen to a bank's net interest margin (NIM) during a period of rising interest rates?

when cash outflows (due to deposit withdrawals, loans, etc.) exceed cash inflows (new deposits, loan repayments, etc.)

What's a situation where banks can experience illiquidity?

the website

Whats the broker in an ECN?

require collateral

When a bank assesses a request for credit, it must decide whether to ___________ that can back the loan in case the borrower is unable to make the payments

foreign currency balances

When a bank has _______, the strategy of matching the overall interest rate sensitivity of assets to that of liabilities will not automatically achieve a low degree of interest rate risk

its market value would change in response to specific interest rate movements.

When a bank uses regression analysis to determine its sensitivity to interest rate movements, it may combine this analysis with the value-at-risk (VaR) method to determine how ....

direct lease loan

When a business needs to invest in major assets like machinery but does not want the purchase to negatively affect their balance sheet, they can get a ______from a bank, which involves the bank purchasing the asset and then leasing it to the business.

other investments

When banks have excess funds above the reserve requirement, they will sometimes take speculative positions on securities, such as Treasury securities, agency securities, corporate bonds, municipal bonds, mortgage-backed securities, etc. Additionally, banks will engage in repurchase agreements, eurodollar loans, and proprietary trading to increase the value of the bank

informal line of credit or revolving credit loan

When businesses know they will need funding in the future but aren't completely sure when, they can ask a bank for an __________, which allows them to borrow a certain amount from the bank within a specific time period. The two types of credit differ in that the informal line of credit does not need to be honored by the bank, while the revolving credit loan must be honored by the bank.

installment loan

When individuals need funding for major purchases, such as cars, house appliances, or home remodels, they can get an ______ from a bank, which allows them to make periodic payments to the bank over the life of the loan.

short positions

When the credit crisis intensified in 2008, hedge funds and other investors took large ______ on many stocks.

return required by investors

When the risk-free rate increases, so does the ...

market order

When the stock price drops to the specified level, the stop-loss order becomes a

market order

When the stock price rises to the specified level, the stop-buy order becomes a

-It can result in inaccurate valuations when investors are misled by firms who use accounting methods to indicate that earnings in a particular period will be substantial, even though they will not be able to sustain that level of earnings in the future. -It can result in inaccurate valuations when a stock buyback occurs unexpectedly.

Which of the following are limitations to the price-earnings model? Check all that apply. -It can result in inaccurate valuations when investors are misled by firms who use accounting methods to indicate that earnings in a particular period will be substantial, even though they will not be able to sustain that level of earnings in the future. -It can result in inaccurate valuations when a stock buyback occurs unexpectedly. -It assumes that uncertainty cannot be accounted for because it doesn't allow expectations about investors' required rate of return to change. -It can result in inaccurate valuations when the dividends to be paid in the next year are incorrectly estimated.

Many major international stock exchanges have become computerized. Many major international stock exchanges have become more consolidated.

Which of the following are reasons that barriers to international stock transactions have been reduced over the past few years? Check all that apply. -Many major international stock exchanges have become more consolidated. -Many major international stock exchanges have become less consolidated. -Many major international stock exchanges have become computerized. -Many major international stock exchanges have begun training their floor brokers to work more quickly and efficiently.

-Economies of scale make it so banks incur lower average total costs as they expand. -Passed in 1994, the Riegle-Neal Interstate Banking and Branching Act began allowing banks to expand their branches across state lines.

Which of the following are reasons why commercial banks have been consolidated over the past few decades in the United States? Check all that apply. -Passed in 1994, the Riegle-Neal Interstate Banking and Branching Act began allowing banks to expand their branches across state lines. -Economies of scale make it so banks incur constant average total costs as they expand. -Economies of scale make it so banks incur lower average total costs as they expand. -Constant returns to scale make it so banks incur lower average total costs as they expand.

-Lend money through the federal funds market -Provide term loans to support business' purchasing of fixed assets like land, machinery, fixtures, manufacturing facilities, etc.

Which of the following are ways that commercial banks use the funds they receive? Check all that apply. -Lend money through the federal funds market. -Provide installment loans to support individuals' minor purchases, such as small household appliances, clothing, etc. -Provide working capital loans to support business' purchasing of fixed assets like land, machinery, fixtures, manufacturing facilities, etc. -Provide term loans to support business' purchasing of fixed assets like land, machinery, fixtures, manufacturing facilities, etc.

potential errors in the forecast of the firm's beta

Which of the following is not a reason the PE ratio method may result in an inaccurate valuation for a firm? a. potential errors in the forecast of the firm's beta b. potential errors in the forecast of the firm's future earnings c. potential errors in the choice of the industry composite used to derive the PE ratio d. All of the above are reasons the PE ratio method may result in an inaccurate valuation for a firm

consumer loans

Which of the following is not an off-balance sheet activity for commercial banks? a. consumer loans b. loan commitments c. standby letters of credit d. swap contracts e. All of the above are off-balance sheet activities.

The primary credit lending rate is set at a level above the federal funds rate

Which of the following is true? a. The primary credit lending rate is set by the president of the United States. b. The federal funds rate is set by the president of the United States. c. The primary credit lending rate is set by commercial banks. d. The primary credit lending rate is set at a level above the federal funds rate.

Market makers are required to purchase the stocks they are assigned for a price existing when the market opened on any given day.

Which of the following statements is incorrect? a. Market makers take positions to capitalize on the discrepancy between the prevailing stock price and their own valuation of a stock. b. Market makers may take the opposite position of uninformed investors and therefore stand to benefit if their expectations are correct. c. Market makers are required to purchase the stocks they are assigned for a price existing when the market opened on any given day. d. The spread quoted for a given stock may vary among market makers

There are approximately 5,000 banks as compared to approximately 14,000 in 1985.

Which of the following statements is true about banks in the United States? -There are approximately 20,000 banks as compared to approximately 14,000 in 1985. -There are approximately 1,000 banks as compared to approximately 14,000 in 1985. -There are approximately 5,000 banks as compared to approximately 14,000 in 1985. -There are approximately 30,000 banks as compared to approximately 14,000 in 1985.

their broker

Who do investors establish a margin account with?

Negotiable Order of Withdrawal (NOW)

Yvette is a 21-year-old college student who wants to put $1,000 in an account that allows him to write checks and make payments using a debit card. He is interested in collecting interest on funds in the account.

Money market deposit accounts (MMDAs)

___ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month).

gross interest income

_________ tends to increase when interest rates rise & to decrease when interest rates decline

Demand deposit accounts

__________ are offered to bank customers who desire to use debit cards and write checks against their account.

Bots

___________ are computerized systems used by high frequency traders for accessing stock market information, interpreting information, and submitting orders.

High frequency trading

_____________ represents the use of electronic platforms to execute orders based on an algorithm with programmed instructions.

Electronic Communication Networks

are automated systems for disclosing & executing stock trades.

bank capital

are funds collected through retained earnings or stock issuances. Banks have no obligation to pay out these funds in the future, which is what makes them different from any other kind of funding.

trading halts

are intended to reduce stock price volatility, as the market price is adjusted by market forces in response to news.

Callable CDs

are retail CDs with a callable feature that allows banks to call the CD prior to its maturity. Due to the risk of the CD being called, it offers a higher interest rate than the standard retail CD.

Money Market Deposit Accounts — MMDAs

are similar to CDs; however, the major difference is that they do not have a maturity. Depositors can withdraw funds form the account whenever they want without incurring a penalty.

NCDs

are similar to retail CDs in that they have a minimum deposit requirement and maturity; however, the minimum deposit requirement of $100,000 is much higher than the retail CD requirement, which makes these accounts ideal for corporate customers

Noise traders

are uninformed investors who take buy or sell positions on a stock, causing the stock's price to deviate from its true value. These traders distort the true value of the stock because—instead of analyzing market trends, firm behavior, and firm financial statements—they trade using limited knowledge that is not reflective of current stock conditions.

naked shorting

brokerage firms were allowing speculators to engage in ________, in which they sell a stock short without first borrowing the stock.

standby letter of credit (SLC)

can help financial market participants strengthen their borrowing position with potential lenders. If the borrower does not meet its interest and principal obligations, the bank backing the borrower will. The bank charges the borrower a fee in exchange for backing its financial obligations

technological innovation

can improve efficiencies & thereby enhance cash flows

Designated market makers (DMMs)

facilitate transactions by matching up buy and sell orders that come in from brokers. They are the point of contact between companies and investors, and they are responsible for providing information about the company to the investor and about trading conditions to the company

The Securities Act of 1933 & the Securities Exchange Act of 1934

gave the SEC authority to monitor exchanges & required listed companies to file a registration statement & financial reports with the SEC & the exchanges.

Margin Trading

investors use cash along with funds borrowed from their broker to make the purchase

value-at-risk (VaR) method

involves determining the largest possible loss that would occur as a result of changes in market prices based on a specified percent confidence level.

The loan loss provision

is a reserve account established by the bank in anticipation of loan losses in the future

A direct access broker

is a trading platform on a computer website that allows investors to trade stocks without the use of a broker

forward currency contract

is an agreement between a financial market participant and a bank to exchange one currency for another at a certain date in the future for a predetermined exchange rate. The reason this is an off-balance sheet activity is because banks will simultaneously purchase and sell forward currency contracts so that they will purchase a certain amount of currency from one financial market participant, while instantly turning around and selling the same currency to a different financial market participant for a profit.

Gross interest income

is interest income generated from all assets

duration gap

is measured as the difference between the weighted duration of the bank's assets & the weighted duration of its liabilities, adjusted for the firm's asset size

gap ratio

is measured as the volume of rate sensitive assets divided by rate-sensitive liabilities

Net interest income

is the difference between gross interest income & interest expenses and is measured as a % of assets

Net Interest Margin (spread)

is the difference between interest payments received and interest paid:

the spread on stock transactions

is the difference between the ask price & the bid price, and is measured as a % of the ask price.

limit order

places a limit on the price at which a stock can be purchased or sold

program trading

represents a computerized response by institutional investors to either buy or sell a large basket of stocks in response to movements in a particular stock index.

Retail CDs

require the depositor to deposit a specific minimum amount of funds, which varies across institutions, into an account for a specific period of time, ranging from a few weeks to several years. Interest is earned on the balance of the account, and depositors can withdraw the funds prior to the maturity date if they pay a penalty for doing so.

Noninterest income

results from fees charged on services provided, such as lockbox services, banker's acceptances, cashier's checks, & foreign exchange transactions

floor brokers

situated on the floor of a stock exchange and fulfill & execute orders

Change in Economic Growth

this can enhance a commercial bank's CFs by increasing the household or business demand for loans.

loan commitment

through a ______, financial market participants that will require a certain amount of funding at some point in the future—but aren't sure when—can lock in a specific loan amount and interest rate in exchange for paying a bank a small fee and telling them exactly what their plans are for the loan

Floor brokers

work on the floor of a stock exchange, where they communicate with and execute orders for their firm's clients.

Market-Makers (Specialists)

• Can serve a broker function by matching up buy & sell orders on the New York Stock Exchange. • Making a market implies that they stand ready to buy or sell certain stocks even if no other investors are willing to participate. • ______ take positions to capitalize on the discrepancy between the prevailing stock price & their own valuation of the stock. • May take the opposite position to uninformed, "noise traders."

Structure of the SEC

• Consists of 5 commissioners appointed by • the President of the United States and confirmed by the Senate. • Each commissioner serves a 5-year term. • The terms are staggered so that, each year, 1 commissioner's term ends & a new appointee is added. • The president also selects 1 of the 5 commissioners • to chair the commission

Short Selling

• Investors place an order to sell a stock that they do not own. • The investor borrows the stock from another investor • & will return it to the investor from whom they borrowed it.

Dark Pools

• Platforms that use software to connect buyers & sellers of stocks • Trades are not immediately disclosed to the public, allowing investors to accumulate large amounts of shares without public knowledge. • Also attract high-frequency traders. • Increasing in popularity & might account for 40% of all trading of stocks.

Outside directors (directors who are not managers

• are generally expected to be more effective at overseeing a bank: • They do not face a conflict of interests in serving shareholders.

uptick rule

• the SEC reinstated this in 2009 • prohibits speculators from taking a short position except after the stock price increases. • This rule is intended to prevent short selling in response to a stock's continuous downward price momentum.

(3) Firm-Specific Factors

•Changes in dividend policies •Changes in earnings expectations •The potential for an acquisition

(1) Economic Factors

•Changes in indicators of economic growth: unemployment rate, gross domestic product, retail sales, consumers' personal income, etc. •Changes in fiscal policy: government spending, tax adjustments, tariff policies, etc. •Changes in monetary policy: reserve requirement, discount rate, open market operations, etc. •Changes in exchange rates: strengthening and weakening of the dollar

(2) Market-Related Factors

•Investor sentiment •The January effect