Chapter 5 The Performance of Non-Traditional Banking Companies
38. Discuss why community banks might oppose Wal-Mart from being granted a charter for an industrial loan company.
- Community banks argued against granting Wal-Mart a charter because they were concerned that traditional banking services would be offered in all stores and potentially drive them out of business. - Criticisms against the charter included: 1. There should be a separation between commerce and banking to protect customers from potential conflicts of interest. 2. Firms like Wal-Mart could dominant business in communities. 3. ILCs are not subject to the same regulations as commercial banks which may create safety and soundness problems.
21. The Dodd-Frank Volker Rule: a. allows commercial and investment banks to merge. b. prohibits proprietary trading using FDIC insured funds. c. encourages investing and sponsoring of hedge funds d. both a. and b. e. both b. and c.
Answer: b
24. Historically, most industrial loan companies have operated to: a. accept deposits. b. assist their parent company in some facet of the firm's core business. c. exclusively make commercial loans. d. increase the safety and soundness of the parent company. e. purchase municipal securities.
Answer: b
26. Investment banks are prohibited from making a market in the stock of publically traded companies.
Answer: False
28. Net interest income made up a significant portion of Goldman Groups' net revenue in 2012.
Answer: False
30. Today, most industrial loan companies are located in Florida.
Answer: False
31. Mortgage origination makes up the largest portion of Goldman Groups' business.
Answer: False
32. Goldman Group has converted from an investment bank to a bank holding company.
Answer: False
35. BMW Financial Services is owned by BMW Bank.
Answer: False
27. When an investment bank acts as a broker, it does not take ownership of the underlying security.
Answer: True
29. "Hot money" represents Goldman Groups' greatest credit risk.
Answer: True
33. Mutual of Omaha's business model is to combine insurance and banking activities.
Answer: True
34. BMW bank has more financial leverage than its peers.
Answer: True
15. Under FASB 157, Level _______ assets valuation are based on observable market prices for the identical instrument. a. 1 b. 2 c. 3 d. 4 e. 5
Answer: a
18. Under FASB 157, the valuation of Level 1 assets is labeled: a. marking to market. b. marking to matrix. c. marking to myth. d. marking to major. e. marking to minor.
Answer: a
2. If a security is a first-time placement for a firm, it is called a(n): a. initial public offering. b. first time equity offering. c. primary offering. d. secondary offering. e. seasoned offering.
Answer: a
23. BMW Bank is chartered by the: a. state of Utah. b. FDIC. c. Federal Reserve. d. Office of the Comptroller of the Currency. e. National Credit Union Administration.
Answer: a
6. Which of the following investment banking services would be classified as an advisory services? a. Managing investments for governments. b. Designing an initial public offering c. Acting as a broker that facilitates security trading d. Running a hedge fund e. Proprietary trading
Answer: a
1. Investment banks generally engage in all of the following types of business activities except: a. proprietary trading. b. goodwill recovery. c. market making. d. securities underwriting. e. advisory services
Answer: b
14. Goldman Group listed all of the following key risk faced by the firm in its 2007 annual report except: a. widening credit spreads.. b. an increase in the number of securities underwritings. c. declines in equity values. d. declines in the number of mergers and acquisitions. e. an increase in market volatility.
Answer: b
16. Under FASB 157, Level _______ assets valuation are based on observable market prices for similar assets or liabilities. a. 1 b. 2 c. 3 d. 4 e. 5
Answer: b
19. Under FASB 157, the valuation of Level 2 assets is labeled: a. marking to market. b. marking to matrix. c. marking to myth. d. marking to major. e. marking to minor.
Answer: b
7. When an investment bank stands willing to buy securities from participants who want to sell and to sell securities to participants who want to buy, it is: a. underwriting. b. market making. c. principal investing. d. proprietary trading. e. organizing a market.
Answer: b
11. On Goldman Groups' 2012 balance sheet, ___________ consist of securities that Goldman Sachs has loaned under an agreement to repurchase at a later date. a. collateralized agreements b. financial instruments c. collateralized financings d. receivables e. payables
Answer: c
17. Under FASB 157, Level _______ assets valuation are based on management's best judgment of what the underlying asset is worth. a. 1 b. 2 c. 3 d. 4 e. 5
Answer: c
20. Under FASB 157, the valuation of Level 3 assets is labeled: a. marking to market. b. marking to matrix. c. marking to myth. d. marking to major. e. marking to minor.
Answer: c
5. During the underwriting process, the investment bank receives payment for all of the following except: a. flotation costs. b. legal costs. c. Federal Reserve costs. d. accounting costs. e. marketing costs.
Answer: c
8. When an investment bank commits its own funds to take a risk position in an underlying security, it is known as: a. underwriting. b. market making. c. proprietary trading. d. organizing a market. e. brokering.
Answer: c
12. ______________ represent amounts owed to Goldman Group by brokers, the firm's customers, and counter-parties to derivative contracts. a. Collateralized agreements b. Financial instruments c. Collateralized financings d. Receivables e. Payables
Answer: d
22. Mutual of Omaha bank is charted as a: f. commercial bank. g. consumer bank. h. mutual savings bank. i. thrift. j. credit union.
Answer: d
25. Which of the following is not a criticism against granting commerce companies industrial loan company charters? a. There should be a separation between commerce and banking to protect customers from potential conflicts of interest. b. Firms could become so large and powerful that they might dominate business in many communities. c. Industrial loan companies are not subject to the same regulations as commercial banks. d. All of the above are criticisms against granting commerce companies industrial loan company charters e. a. and b. only
Answer: d
3. If a firm already has stock outstanding that is publically traded, additional offerings are called: a. initial public offering. b. second time equity offering. c. primary offering. d. secondary offering. e. flavored offering.
Answer: d
9. A __________ is an investment fund that is limited to a small number of sophisticated investors. a. money market mutual fund b. private equity fund c. risk management fund d. hedge fund e. market development fund
Answer: d
10. On Goldman Groups' 2012 balance sheet, Financial Instruments Owned consists of: a. cash. b. collateralized agreements. c. derivative securities. d. a. and b. e. a. and c.
Answer: e
13.______________ represent amounts owed by Goldman Group to brokers, the firm's customers, and counter-parties to derivative contracts. a. Collateralized agreements b. Financial instruments c. Collateralized financings d. Receivables e. Payables
Answer: e
4. The underwriting process involves all of the following except: a. helping a firm design a security to meet all legal requirements. b. identifying potential buyers. c. pricing the security. d. selling the security to the market place. e. All of the above are part of the underwriting process.
Answer: e
37. Discuss the risks faced by Goldman Group.
Credit crisis of 2007-2009 caused money and capital markets to stop functioning normally. A. Commercial paper market froze and large institutions were hesitant to lend to each other. B. Goldman faced a potential run on the firm as lenders were hesitant to roll over debts and Goldman was unable to sell a sufficient volume of assets to readily access cash ---1. Management decided to covert to a financial holding company which allowed access to more stable core deposits for its funding. ---2. On the negative side, Goldman agreed to be regulated by the Federal Reserve as a bank.
36.Discuss the four types of businesses that investment banks traditionally engage in.
Investment banking Institutional client services Investing and lending Investment management