FIM Self-Study Questions
A bank has total assets of $620 million and $68.2 million in equity. The managers of the bank realize that $18.6 million of its $372 million loan portfolio will not be repaid. After the bank charges off these unexpected bad loans, the bank's equity to asset ratio will be __________________.
($68.2 million − $18.6 million)/($620 million − $18.6 million) = 8.25%
If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 10 percent, the spot exchange rate is $1.75/£1, and interest rate parity holds, what must be the one-year forward exchange rate?
(1 + rUS) = 1/S × (1 + rUK) × F 1.10 = 1/1.75 × 1.08 × F F = 1.10 /(1/1.75 × 1.08) = (1.10 × 1.75)/1.08 = $1.7824/£1
In terms of probability, a well-run bank usually has an ROA of:
0.5-3 percent
As a result of the alleged conflicts of interest between analysts and underwriting, which of the following changes were implemented? 1. Analysts cannot participate in nor attend certain presentations to potential investors conducted by investment bankers associated with underwriting an issue. 2. Analyst compensation can no longer be tied to the amount of underwriting business a firm generates. 3. Securities firms must divest stock research divisions to ensure independence from their investment banking business.
1. Analysts cannot participate in nor attend certain presentations to potential investors conducted by investment bankers associated with underwriting an issue. 2. Analyst compensation can no longer be tied to the amount of underwriting business a firm generates.
On March 13, 2020, you convert 630,000 U.S. dollars to Japanese yen in the spot foreign exchange market and purchase a six-month forward contract to convert yen into dollars. How much will you receive in U.S. dollars at the end of six months?
1. Convert $630,000 to yen at a rate of 107.98 yen per dollar: $630,000 × 107.98 = ¥68,027,400. 2. 6-month forward rate for USD for yen on 3/13/2020 was $0.00941/¥1. 3. At the end of the month, convert ¥68,027,400 to dollars at $0.00941 per ¥, or you will have¥68,027,400 × 0.00941 = $640,137.83.
Day-to-day trading practices of securities firms currently may be regulated by which of the following? 1. FINRA 2. SEC 3. Federal Reserve 4. SIPC
1. FINRA
Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following? 1. Lower expense ratios for index funds 2. Higher turnover ratios for index funds 3. Differences in returns in sectors of the market and the overall market return
1. Lower expense ratios for index funds 3. Differences in returns in sectors of the market and the overall market return
Which of the following indexes are value-weighted? 1. NYSE Composite 2. S&P 500 3. NASDAQ Composite 4. Dow Jones Industrial Average
1. NYSE Composite 2. S&P 500 3. NASDAQ Composite
Secondary markets help support primary markets because secondary markets:
1. offer primary market purchasers liquidity for their holdings 2. update the price or value of the primary market claims 3. reduce the cost of trading the primary market claims
Bank A has a higher ROA than Bank B. Both banks have similar interest income to asset ratios and noninterest income to asset ratios. We know that: 1.. Bank A has a higher profit margin than Bank B. 2.. Bank A has a higher AU ratio than Bank B. 3.. Bank A must have a higher provision for loan loss to operating income ratio.
1.. Bank A has a higher profit margin than Bank B.
Equity capital at commercial banks in 2019 comprised about ____________ of liabilities and equity.
11 percent
In a bear market, which option positions make money? 1. Buying a call 2. Writing a call 3. Buying a put 4. Writing a put
2. Writing a call 3. Buying a put
Bear Market
A steady drop in the stock market over a period of time, encouraging selling
You plan to purchase a $210,000 house using a 30-year mortgage obtained from your local credit union. The mortgage rate offered to you is 7.25 percent. You will make a down payment of 20 percent of the purchase price. a. Calculate your monthly payments on this mortgage. (see self-study questions 2 for more practice on these)
A. $168,000 = PMT {[1 − (1/(1 + 0.0725/12)^30*(12))]/(0.0725/12)} or PMT = $168,000/{[1 − (1/(1 +0.0725/12) ^30*(12))]/(0.0725/12)} therefore PMT = $168,000/146.59 = $1,146.06
a. Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $21,500 per year until the end of that person's life. The insurance company expects this person to live for 15 more years and would be willing to pay 6 percent on the annuity. How much should the insurance company ask this person to pay for the annuity? b. A second 65-year-old person wants the same $21,500 annuity, but this person is healthier and is expected to live for 20 more years. If the same 6 percent interest rate applies, how much should this healthier person be charged for the annuity? c. In each case, what is the new purchase price of the annuity if the distribution payments are made at the beginning of the year?
A. 21,500{[1−(1/(1+ 0.06)^15)]/0.06} = $208,813.35 B. 21,500{[1−(1/(1+ 0.06)^20)]/0.06} = $246,603.31 C. For 15 years, the lump sum is $208,813.35 × (1.06) = $221,342.15. For 20 years, the lump sum is $246,603.31 × (1.06) = $261,399.50.
Calculate the yield to maturity on the following bonds: A. A 8.3 percent coupon (paid semiannually) bond, with a $1,000 face value and 23 years remaining to maturity. The bond is selling at $900. B. An 5.4 percent coupon (paid quarterly) bond, with a $1,000 face value and 10 years remaining to maturity. The bond is selling at $914. C. An 7.4 percent coupon (paid annually) bond, with a $1,000 face value and 8 years remaining to maturity. The bond is selling at $1,064.
A. 900 = (1,000(0.083)/2) {[1 − (1/(1 + ytm/2)^2*(23))]/ytm/2} + 1,000/(1 + ytm/2)^2*(23) ytm = 9.367% Or in Excel: Rate(nper,pmt,-pv,[fv],[type]) where: nper = 23 * 2 = 46 pmt = 1000 * .0415 = $41.5 pv = 900 FV = 1000 B. 914 = (1,000(0.054)/4) {[1 − (1/(1 + ytm/4)^4*(10))]/ytm/4} + 1,000/(1 + ytm/4)^4*(10) ytm = 6.581% C. 1,064 = 1,000(0.074) {[1 − (1/(1 + ytm)^8)]/ytm} + 1,000/(1 + ytm)^8 ytm = 6.355%
You can invest in taxable bonds that are paying a yield of 8.9 percent or a municipal bond paying a yield of 7.15 percent. Assume your marginal tax rate is 21 percent. a. Calculate the after-tax rate of return on the taxable bond? b. Which security bond should you buy?
A. After-tax yield = (1-tax rate)*pretax yield After-tax yield = (1-.21)*8.9% = 7.03% B. The municipal bond that pays 7.15% is a better deal.
The MEP company has issued 5,200,000 new shares. Its investment bank agrees to underwrite these shares on a best efforts basis. The investment bank is able to sell 4,400,000 shares for $58 per share. It charges MEP $1.60 per share sold. A.How much money does MEP receive? B. What is the investment bank's profit? C. What is the stock price of MEP?
A. Amount received = (58-1.60)*4,400,000 = $248,160,000 B. Profit = 1.60 * 4,400,000 = $7,040,000 C. Stock price = $58
You have purchased a put option on Pfizer common stock. The option has an exercise price of $41 and Pfizer's stock currently trades at $43. The option premium is $0.80 per contract. a. What is your net profit on the option if Pfizer's stock price does not change over the life of the option? b. What is your net profit on the option if Pfizer's stock price falls to $35 and you exercise the option?
A. If the price of the underlying stock is $43 (greater than the exercise price), you will not exercise the option. Thus, your profit is −$0.80 per share (the cost of the option). B. Total profit = ($41 − $35) − $0.80 = $5.20 per share.
You have taken a long position in a call option on IBM common stock. The option has an exercise price of $146 and IBM's stock currently trades at $150. The option premium is $5 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit on the option if IBM's stock price increases to $160 at expiration of the option and you exercise the option? c. What is your net profit if IBM's stock price decreases to $140?
A. Intrinsic value of option = (trading price - exercise price) = 150-146 = $4 Time value of option = option premium - intrinsic value = $5-$4 = $1 B. Total profit = (final stock price - original stock price) - option premium = (160-146) - 5 = $9 per share C. If the price of the underlying stock is $140 (less than the exercise price), you will not exercise the option. Thus, your profit is −$5 per share (the cost of the option).
A mutual fund has 600 shares of General Electric, currently trading at $28, and 300 shares of Microsoft, Incorporated, currently trading at $39. The fund has 1,000 shares outstanding. a. What is the NAV of the fund? b. If investors expect the price of General Electric to increase to $30 and the price of Microsoft to decline to $24 by the end of the year, what is the expected NAV at the end of the year? c. Assume that the price of General Electric shares is realized at $30. What is the maximum price to which Microsoft can decline and still maintain the NAV as estimated in (a)?
A. NAV = (assets-liabilities)/#shares outstanding =(600*28 + 300*39)/1000 = $28.50 B. E(NAV)=(600 × $30 + 300 × $24)/1,000 = $25,200/1,000 = $25.20 C. [(600 × $30) + (600 × Pm)]/1,000 = $28.50, implies that Pm= $35, a decrease of $4.
Which of the following is/are money market instruments? A. Negotiable CDs B. Common Stock C. T-bonds D. 4-year maturity corporate bond E. Negotiable CDs, common stock, and T-bonds
A. Negotiable CDs
Calculate the present value of $4,000 received six years from today if your investments pay for the following interest rates: A. 6 percent compounded annually B. 8 percent compounded annually C. 10 percent compounded annually D. 10 percent compounded semiannually E. 10 percent compounded quarterly
A. PV = 4000/(1+.06)^6 = $2819.84 B. PV = 4000/(1+.08)^6 = $2520.68 C. PV = 4000/(1+.10)^6 = $2257.90 D. PV = 4000/(1+.05)^12 = $2227.35 E. PV = 4000/(1+.025)^24 = $2211.50
At the beginning of the year, you purchased a share of stock for $35. Over the year the dividends paid on the stock were $2.75 per share. a. Calculate the return if the price of the stock at the end of the year is $30. b. Calculate the return if the price of the stock at the end of the year is $40.
A. Return = (dividend/purchase price) +[(ending price - purchase price)/purchase price] = $2.75/$35.00 + (($30.00 − $35.00)/$35.00) = −6.43% B. Return = $2.75/$35.00 + (($40.00 − $35.00)/$35.00) = 22.14%
Which one of the following has the highest concentration of mortgage-related assets on the balance sheet? A. Savings Institutions B. Commercial banks C. Credit Unions D. Finance companies E. Pension funds
A. Savings institutions
According to the table: A. What was the spot exchange rate of Bahrain dinar for U.S. dollars (USD/BHD) on March 13, 2020? B. What was the six-month forward exchange rate of Swiss Franc for U.S. dollars (USD/CHF) on March 13, 2020? C. What was the six-month forward exchange rate of U.S. dollars for Swiss Franc (CHF/USD) on March 13, 2020?
A. Spot Exchange Rate = BHD0.3775/US$1 B. 6-month forward exchange rate = CHF0.9455/US$1 C. 6-month forward exchange rate = $1.05760/CHF1
A bundle of goods in Japan costs ¥2,690,000 while the same goods and services cost $38,000 in the United States. a. If purchasing power parity holds, what is the current exchange rate of U.S. dollars for yen? b. If, over the next year, inflation is 8 percent in Japan and 6 percent in the United States, what will the goods cost next year? c. Will the dollar depreciate or appreciate relative to the yen over this time period?
A. current exchange rate = $38,000/¥2,690,000 or $0.0141/¥1. B. Next year, the Japanese goods will cost ¥2,905,200, and likewise the U.S. goods will cost $40,280. C. The new implied exchange rate is $40,280/¥2,905,200 = $0.0139/¥. Thus, the dollar will appreciate because the U.S. inflation rate is lesser than the Japanese inflation rate.
The FOMC has instructed the FRBNY Trading Desk to purchase $480 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 6 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. a. Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply? b. What is the full effect of this purchase on bank deposits and the money supply if borrowers return only 94 percent of these funds to their banks in the form of transaction deposits?
A. increase in bank deposits and money supply by $8 billion (1/.06) * $480 million = $ 8 billion b. increase in bank deposits and money supply by $4 billion (1/(.06 + (1-0.94))) * 480 million = $4 billion
What does an asset transformer do? Why is asset transformation a risky activity?
An asset transformer buys one security from a customer and makes or creates a separate claim in order to raise funds. (Ex: a bank accepts deposits and uses them to make loans.) This is normally a risky activity because the asset acquired will be riskier than the security (or deposit) used to raise funds because the intermediary hopes to profit on the spread between the rate earned on the asset claim and the rate paid on the liability claim. In order for this spread to be positive, generally speaking, the asset must be riskier than the liability.
All else held constant, 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 ____________________. A. increase the money supply; do nothing B. do nothing; decrease the money supply C. decrease the money supply; do nothing D. do nothing; increase the money supply E. increase the money supply; decrease the money supply
B. do nothing; decrease the money supply
Which one of the following is the definition of the net interest margin? A. (Net interest income − Net noninterest income)/Earning assets B. Net interest income/Interest-bearing liabilities C. (Interest income − Interest expense)/Earning assets D. (Interest income − Interest expense)/Interest-bearing liabilities E. (Interest income/Earning assets) − (Interest expense/Interest-bearing liabilities)
C. (Interest income − Interest expense)/Earning assets
A banker's acceptance is: A. a time draft drawn on the exporter's bank. B. A method to help importers evaluate the creditworthiness of exporters. C. A liability of the importer and the importer's bank. D. An add-on instrument. E. For a maturity of greater than one year.
C. A liability of the importer and the importer's bank.
Which of the following is the primary regulator of bank holding company activities? A. Federal Bank Holding Company Board B. FDIC C. Federal Reserve D. State regulatory agency in the chartering states E. US Treasury
C. Federal Reserve
In general terms, which one of the following plan types is the riskiest for an employee on a year-to-year basis?
Defined contribution plan invested in equities
What is the discount yield, bond equivalent yield, and effective annual return on a $1 million Treasury bill that currently sells at 97.375% of its face value and is 80 days from maturity?
Discount yield = [(par value - purchase price)/par value] *(360/days to maturity) D = (($1 million − $973,750)/$1 million)(360/80) = 11.813% Bond equivalent yield = [(par value - purchase price)/purchase price] *(360/days to maturity) BE = (($1 million − $973,750)/$973,750)(365/80) = 12.299% Effective Annual Rate = ([1 + (nominal interest rate/# periods)]^#periods) -1 EAR = (1 + 0.12299/(365/80))365/80 − 1 = 12.904%
You would like to purchase a Treasury bill that has a $14,500 face value and its 68 days from maturity. The current price of the Treasury bill is $14,375. Calculate the discount yield on this Treasury bill.
Discount yield = [(par value - purchase price)/par value] *(360/days to maturity) D = (($14,500 − $14,375)/$14,500) (360/68) = 4.56%
All else held constant, which one of the following bonds is likely to have the highest required rate of return? A. AAA-rated noncallable corporate bond with a sinking fund B. AA-rated callable corporate bond with a sinking fund C. AAA-rated callable corporate bond with a sinking fund D. High-quality municipal bond E. AA-rated callable corporate bond without a sinking fund
E. AA-rated callable corporate bond without a sinking fund
The primary policy tool used by the Fed to meet its monetary policy goals is: A. changing the discount rate B. changing reserve requirements C. devaluing the currency D. changing bank regulations E. open market operations
E. open market operations
Compute the future values of the following annuities first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period:
FV = $273 {[(1 + 0.09)^14 − 1]/0.09} = $7,103.24 FV = $273 {[(1 + 0.09)^14 − 1]/0.09} (1 + 0.09/1) = $7,742.53 FV = $6,055 {[(1 + 0.14)^9 − 1]/0.14} = $97,396.77 FV = $6,055 {[(1 + 0.14)^9 − 1]/0.14}(1 + 0.14/1) = $111,032.32 FV = $75,984 {[(1 + 0.16)^6 − 1]/0.16} = $682,144.61 FV = $75,984 {[(1 + 0.16)^6 − 1]/0.16(1 + 0.16/1) = $791,287.75 FV = $168,832 {[(1 + 0.07)^10 − 1]/0.07} = $2,332,658.54 FV = $168,832 {[(1 + 0.07)^10 − 1]/0.07}(1 + 0.07/1) = $2,495,944.64
You can save $4,000 per year for the next three years, at the start of each year, in an account earning 7% per year. How much will you have at the end of the third year if you make the first deposit today?
FV = $4,000 {[(1 + 0.07)^3 − 1]/0.07}(1 + 0.07) = $13,759.77
A particular security's equilibrium rate of return is 8%. For all securities, the inflation risk premium is 1.95% and the real risk-free rate is 3.2%. The security's liquidity risk premium is 0.25% and maturity risk premium is 0.95%. The security has no special covenants. Calculate the security's default risk premium.
Fair interest rate on a financial security (i*) = IP + RFR + DRP + LRP + SCP + MP therefore, 8% = 1.95% + 3.2% + DRP + 0.25% +0% + 0.95% DRP = 1.65%
T/F Dual class stock refers to firms with both common and preferred stock outstanding.
False
T/F: At equilibrium, a security's required rate of return will be less than its expected rate of return.
False
T/F: In an environment of declining interest rates, financial institutions generally have a decreased incentive to focus on cost-cutting measures.
False
T/F: In the United States, the SEC provides deposit insurance for $250,000 per person per bank
False
T/F: financial institutions generally do not face liquidity risk.
False
T/F: forward contracts are marked to market daily.
False
Money Market securities exhibit which of the following? 1. Large Denomination 2. Maturity greater than one year 3. Low default risk 4. Contractually determined cash flows
Large Denomination Low Default Risk Contractually determined cash flows
You purchase a $255,000 house and you pay 20 percent down. You obtain a fixed-rate mortgage where the annual interest rate is 5.85 percent and there are 360 monthly payments. What is the monthly payment?
Loan Amount = Purchase price - Purchase * 20% = 255000 * (1-20%) = 204000 Rate = 5.85%/12 Number of periods = 360 PMT = PV/(1-(1+r)-n)/r = 204000/(1-(1+5.85%/12)-360)/(5.85%/12) = $1203.48
You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance?
Minimum down payment to avoid mortgage insurance = 20% of cost = .20(250,000) =$50,000
Citibank holds $36 million in foreign exchange assets and $30 million in foreign exchange liabilities. Citibank also conducted foreign currency trading activity in which it bought $7 million in foreign exchange contracts and sold $18 million in foreign exchange contracts. a. What is Citibank's net foreign assets? b. What is Citibank's net foreign exchange bought? c. What is Citibank's net foreign exposure?
Net foreign exposure= (FX assets − FX liabilities) + (FX bought − FX sold)= Net foreign assets + Net FX bought A. Net foreign assets = $36 million - $30 million = $6 million B. Net foreign exchange bought = $7 million - $18 million = -$11 million C. Net foreign exposure = $6 million + (-$11 million) = -$5 million
An employee contributes $16,800 to a 401(k) plan each year, and the company matches 10 percent of this annually, or $1,680. The employee can allocate the contributions among equities (earning 12 percent annually), bonds (earning 5 percent annually), and money market securities (earning 3 percent annually). The employee expects to work at the company 20 years. The employee can contribute annually along one of the three following patterns (See photo). Calculate the terminal value of the 401(k) plan for each of the 3 options, assuming all returns and contributions remain constant over the 20 years.
Option 1: $18,480 (0.6){[(1 + 0.12)^20 − 1]/0.12} + $18,480(0.4){[(1 + 0.05)^20 − 1]/0.05} = $1,043,341 Option 2: $18,480 (0.50){[(1 + 0.12)^20 − 1]/0.12} + $18,480 (0.45){[(1 + 0.05)^20 − 1]/0.05}+ $18,480 (0.05){[(1 + 0.03)^20 − 1]/0.03} = $965,569 Option 3: $18,480 (0.40){[(1 + 0.12)^20 − 1]/0.12} + $18,480 (0.50){[(1 + 0.05)^20 − 1]/0.05} + $18,480 (0.10){[(1 + 0.03)^20 − 1]/0.03} = $887,798
How much money would you have to deposit today in order to have $6,000 in three years if the discount rate is 6% per year?
PV = 6,000/(1.06)^3 = $5037.72
You buy a stock for $34 per share and sell it for $36 after you collect a $1.00 per share dividend. Your pre-tax capital gain yield is ________________ and your pre-tax dividend yield is ________________.
Pretax capital gain yield = (final stock price - initial stock price)/initial stock price =($36 − $34)/$34 = 0.0588, or 5.88% pretax dividend yield = annual dividend per share/current stock price = 1/34 = .0294 or 2.94%
A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be __________.
Pretax net interest income = (original interest rate spread - final interest rate spread) * assets = (1.50%-.50%) * 30,000,000 = $300,000
You have purchased a put option on Kimberly Clark common stock. The option has an exercise price of $82 and Kimberly Clark's stock currently trades at $83.18. The option premium is $1.49 per contract. One option equals 100 shares of the underlying stock. a. Calculate your net profit on the option if Kimberly Clark's stock price falls to $80 and you exercise the option. b. Calculate your net profit on the option if Kimberly Clark's stock price does not change over the life of the option.
Purchase option: -$1.49 x 100 shares = -$149 Buy stock to exercise option: -$80 x 100 shares = -$8000 Sell stock by exercising option: $82 x 100 shares = $8200 Net profit = -149 + -8000 + 8200 = $51 B. The option never moves into the money, so it would never be exercised. purchase option: -1.49 x 100 shares = -$149
Anytown Bank has the following ratios: a. Profit margin: 31% b. Asset utilization: 11% c. Equity multiplier: 10X Calculate Anytown's ROA and ROE.
ROA = PM * AU = .31 *.11 = 3.41% ROE = ROA * EM = .0341 * 10 = 34.1%
An investor purchases a mutual fund for $40. The fund pays dividends of $1.10, distributes a capital gain of $2, and charges a fee of $2 when the fund is sold one year later for $44.90. What is the net rate of return from this investment?
Return = Dividend + capital gain + (sell price - purchase price) - selling fee = $1.10 + $2 + ($44.90 − $40) − $2 = $6 therefore, rate of return = 6/40 = 15%
T/F "On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued.
True
T/F On a fixed-rate mortgage the dollars of interest the homeowner pays falls each year the mortgage is outstanding.
True
T/F: A corporate borrower failing to repay a loan on time due to equipment breakdowns is an example of firm specific credit risk.
True
T/F: A fintech charter is a special-purpose bank charter for non-bank fintech companies to operate in the banking system providing preemption from many state laws.
True
T/F: Credit unions are not taxed and, as a result, well-run credit unions are often able to charge lower loan rates and pay slightly higher deposit rates than banks.
True
T/F: Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.
True
T/F: Hedge funds can short sell securities, whereas most mutual funds cannot.
True
T/F: If interest rates increase, the value of a fixed-income contract decreases and vice versa.
True
T/F: If you believe that taxes are going to go up and you will likely have to pay a high tax rate when you retire, you will probably be better off with a Roth IRA than with a traditional IRA.
True
T/F: One of the factors responsible for globalization of financial markets and institutions is regulation
True
T/F: Savings institutions must have at least 65 percent of their assets in mortgage-related areas in order to maintain their thrift charter.
True
T/F: The Glass-Steagall Act came about due to concerns about excessive risk taking at banks and conflicts of interest between commercial and investment banking activities.
True
T/F: The difference between the private costs of regulations and the private benefits for the producers of financial services is called the net regulatory burden.
True
T/F: The duration of a four-year maturity, 10% coupon bond is less than four years.
True
T/F: The monetary base is the amount of coin and currency in circulation plus reserves.
True
T/F: The top 10 property and casualty firms underwrite half of all the P&C premiums written.
True
A bank has Tier I capital of $90 million and Tier II capital of $70 million. The bank has total assets of $2,522 million and risk-weighted assets of 2,017.6 million. This bank is:
Undercapitalized TC/RWA = ($90 million + $70 million)/$2,017.6 million = 0.0793, or 7.93%; Tier I/RWA = $90 million/$2,017.6 million = 0.0446,or 4.46%; TC/TA = ($90 million + $70 million)/$2,522 million = 0.0634, or 6.34%, the first ratio puts the bank in the undercapitalized zone.
BSW Corporation has a bond issue outstanding with an annual coupon rate of 5.4% paid quarterly and four years remaining until maturity. The par value of the bond is $1,000. Determine the fair present value of the bond if the market conditions justify a 11%, compounded quarterly, required rate of return.
Vb = (1,000(0.054)/4) {[1 − (1/(1 + 0.11/4)^4*(4))]/0.11/4} + 1,000/(1 + 0.11/4)^4*(4) = $820.74 Or in excel: =-PV(rate,nper,pmt,fv) where: rate = 11%/4 = .0275 nper = 4*4 = 16 PMT = 100 * 5.4 * .25 = $13.50 FV = 1,000
You buy a principal STRIP maturing in five 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?
YTM = [(100/75.75)(1/(5 × 2)) − 1] × 2 = 0.05632, or 5.632%
On October 5, 2022, you purchase a $12,000 Treasury-note that matures on August 15, 2031 (settlement occurs one day after purchase, so you receive actual ownership of the bond on October 6, 2022). The coupon rate on the Treasury-note is 4.386 percent and the current price quoted on the bond is 105.59375 percent. The last coupon payment occurred on May 15, 2022 (144 days before settlement), and the next coupon payment will be paid on November 15, 2022 (40 days from settlement). a. Calculate the accrued interest due to the seller from the buyer at settlement. b. Calculate the dirty price of this transaction.
a.Accrued interest over the 144 days is calculated as: (coupon rate/2)*(settlement day/total days) (4.386%/2) × 144/184 = 1.716261% or $205.95 per $12,000 face value bond. B. Dirty price = clean price + accrued interest dirty price = 105.59375% + 1.716261% = 107.310011% of the face value of the bond, or $12,877.2 per $12,000 face value bond.
The application of computational tools to address tasks traditionally requiring human sophistication is broadly termed:
artificial intelligence
Which of the following is not one of the advantages that retail banks maintain over fintechs?
banks are known for having greater agility and a more innovative mindset.
The largest asset category of life insurers is _______________ and the largest liability category is ___________.
bonds; policy reserves
____________ are the most diversified of depository institutions and ______________ are on average the largest depository institutions.
commercial banks; commercial banks
Bitcoin and other digital currencies are underpinned by ______ technology, which is an electronic ledger or database that records and verifies transactions made using the currency.
distributed ledger
Open Banking and PSD2 have catalyzed the development of ______ which provide financial APIs to help incumbent banks comply and compete.
fintech utilities
The risk that an unanticipated increase in liability withdrawals may cause an FI to have to sell assets at fire sale prices is an example of:
liquidity risk
Security dealers who will buy or sell securities at any time in the market are called:
market makers
The Financial Stability Board defines fintech as "technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated ________ effect on the provision of financial services."
material
Under ERISA, pension fund managers are required to invest fund assets as wisely as if they were investing their own money. This requirement is called the:
prudent person rule
Money market mutual funds (MMMFs) have caused disintermediation at banks at times. This is because MMMFs:
sometimes pay higher interest rates than bank deposits
Aggregate finance company profitability was poor in the late 2000s primarily due to which segment of the finance company industry?
subprime lending
In property and casualty insurance the combined ratio is equal to ______________________ divided by total premiums written.
the sum of the loss ratio plus the expense ratio
Investment firms that pool money from individuals and/or institutions and invest equity funds in start-up firms are called:
venture capital firms
