FINA 365 Final

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An open-ended fund has stocks of three companies: 200 shares of IBM currently valued at $50.00, 100 shares of GE currently values at $20 and 100 shares of Digital currently valued at $30. The fund has 1000 shares outstanding. What is the net asset value (NAV) of the fund? $60.00. $15.00. $37.50. $30.00. $120.00.

$15.00

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is: -$112,500. +$112,500. +$1,125,0000. -$1,125,0000. -$150,000.

-$112,500

The net worth of a bank is the difference between the: value of retained earnings and the provision for loan losses. market value of assets and the market value of liabilities. book value of assets and book value of liabilities. rate-sensitive assets and rate-sensitive liabilities. None of the above.

market value of assets and the market value of liabilities

By 2012, there were approximately ________ securities firms and investment banks operating. 7,600 480 9,100 1,200 220

480

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually. What is the maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars? 6.5 percent. 7.0 percent. 7.5 percent. 8.0 percent. 8.5 percent.

7.5 percent

As of 2012, commercial banks with over $10 billion in assets constituted approximately ____ percent of the industry assets and numbered approximately _____. 70; 525 90; 440 60; 165 50; 310 80; 90

80; 90

A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT A. rating at which the portfolio ended the year. B. transition probabilities. C. rating at which the portfolio of loans began the year. D. future migration expected in the portfolio. E. the average proportions of loans that began the year.

As compared to purchasing an individual stock, a no-load mutual fund investor will usually get: lower commission costs. All of these. better diversification. no-cost switching between funds within the same fund family. commission less reinvestment opportunities.

All of these

Finance companies often prefer to lease equipment to customers because: a lease with little or no down payment is more attractive to business customers. the finance company receives the benefit of depreciation expense. repossession in the event of default is easier. All of these.

All of these.

As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into A. credit risk and market risk. B. systematic risk and unsystematic risk. C. market risk and sovereign risk. D. regional risk and maturity risk. E. systematic risk and default risk.

Which function of an FI involves buying primary securities and issuing secondary securities? Brokerage. Asset transformation. Investment research. Self-regulator. Trading.

Asset transformation

Compared to commercial banks, why do finance companies often have substantial industry and product expertise? All of these. Because they are more often willing to accept risky customers. Because they are often subsidiaries of corporate-sector holding companies. Because they have no bank-type regulators looking directly over their shoulders. Because they are specialized in market research and analysis.

Because they are often subsidiaries of corporate-sector holding companies.

The risk that interest income will increase at a slower rate than interest expense is: credit risk. political risk. currency risk. interest rate risk. liquidity risk.

interest rate risk

Borrower reputation is important in assessing credit quality because A. good past payment performance perfectly predicts future behavior. B. preservation of a good customer/FI relationship acts as an additional incentive to encourage loan repayment. C. FIs only lend to customers they know. D. customers with poor credit histories always default on their loans. E. a reputation for honesty is important in credit appraisal.

The first mutual fund was founded in this city in 1924. London, England San Francisco, California Boston, Massachusetts New York, New York Paris, France

Boston, Massachusetts

Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par. Principal of $20,000,000 is due at the end of two years. A. 2 years. B. 1.91 years. C. 1.94 years. D. 1.49 years. E. 1.75 years.

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par. The $30,000,000 loan is 100 percent amortizing with annual payments. A. 2 years. B. 1.89 years. C. 1.94 years. D. 1.49 years. E. 1.73 years.

Calculate the modified duration of a two-year corporate loan paying 6 percent interest annually. The $40,000,000 loan is 100 percent amortizing, and the current yield is 9 percent annually. A. 2 years. B. 1.91 years. C. 1.94 years. D. 1.49 years. E. 1.36 years.

Credit scoring models include all of the following broad types of models EXCEPT A. Linear discriminant models. B. Linear probability models. C. Term structure models. D. Logit models. E. None of the above.

Cumulative default probability refers to A. probability that a borrower will default over a specified multiyear period. B. expected maximum change in the loan rate due to a change in the risk factor on the loan. C. historic default rate experience of a bond or loan. D. expected maximum change in the loan rate due to a change in the credit premium. E. probability that a borrower will default in any given year.

The long-term mutual fund sector includes: bond funds. All of the these. equity funds. Equity and Bond funds only. money market mutual funds.

Equity and bonds funds only

Interest rate risk management for financial intermediaries deals primarily with: controlling the overall size of the institution. controlling the scope of the institution's activities. limiting the geographic spread of the institution's offices. limiting the mismatches on the institution's balance sheet. continuously and carefully complying with all government regulations.

limiting the mismatches on the institution's balance sheet

First Duration Bank has the following assets and liabilities on its balance sheet 80. What is the duration of the commercial loans? A. 1.00 years. B. 2.00 years. C. 1.73 years. D. 1.91 years. E. 1.50 years.

First Duration Bank has the following assets and liabilities on its balance sheet 81. What is the FI's leverage-adjusted duration gap? A. 0.91 years. B. 0.83 years. C. 0.73 years. D. 0.50 years. E. 0 years.

The repricing model measures the impact of unanticipated changes in interest rates on the market value of equity. net interest income. both market value of equity and net interest income. the FI's capital position. the prices of assets and liabilities.

net interest income.

If the bank's expected net deposit drain is +4 percent, what is the bank's expected liquidity requirement? A. $7,560. B. $6,040. C. $16,000. D. $22,000. E. $14,760.

In applying the loan loss ratio models, the loss rate "β" for the whole loan portfolio is A. 0. B. 0.5. C. 1. D. 2. E. negative.

Regarding the money supply, deposits are considered to be None of these. All of these. Outside money Inside money Cash

Inside money

LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the expected return on the loan using the Moody's Analytics model? A. 6.50 percent. B. 5.50 percent. C. 6.00 percent. D. 14.0 percent. E. 13.5 percent.

What is the primary function of finance companies? Assist in the trading of securities in the secondary markets. Pool the financial resources of individuals and companies and invest in diversified portfolios of assets. Extend loans to banks and other financial institutions. Protect individuals and corporations from adverse events. Make loans to both individuals and corporations.

Make loans to both individuals and corporations.

Managers can achieve the results of duration matching by using these to hedge interest rate risk. A. Rate sensitive assets. B. Rate sensitive liabilities. C. Coupon bonds. D. Consol bonds. E. Derivatives.

Which of the following is traditionally the major type of consumer loans for finance companies? Home equity loans. Revolving loans. Motor vehicle loans and leases. Wholesale loans. Equipment leases.

Motor vehicle loans and leases

As of 2012, which of the following is true concerning payday lending? Interest rate on payday loans were capped at an annual interest rate of 30% by federal legislation. Less than $30 billion of payday loans were generated by the industry. Payday lending has been effectively banned in 18 states. Payday lenders were banned from forming relationships with nationally chartered banks. The typical borrower earns less than $25,000.

Payday lending has been effectively banned in 18 states.

Done

Question 92-114

Done

Questions 103-118

The larger the size of an FI, the larger the _________ from any given interest rate shock. A. duration mismatch B. immunization effect C. net worth exposure D. net interest income E. risk of bankruptcy

The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) proposed by the Bank for International Settlements are scheduled to take effect in A. 2011 for LCR and 2014 for NSFR. B. 2012 for both LCR and NSFR. C. 2015 for LCR and 2018 for NSFR. D. 2013 for LCR and 2016 for NSFR. E. 2014 for both LCR and NSFR.

What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using stored liquidity management techniques? A. Liquidate all cash holdings. B. Utilize further the Fed funds market. C. Liquidate some securities and/or loans. D. Liquidate all cash and use more Fed funds. E. All of the above are suitable techniques.

Which of the following balance sheet entries is not a tool used in purchased liquidity management? A. Bonds. B. Federal fund. C. Demand deposit. D. Repurchase agreement. E. Subordinated note.

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio? A. Sovereign debt. B. Bank capital. C. Government guaranteed mortgage-backed securities. D. Central bank reserves. E. Cash.

Which of the following is NOT used as a method of measuring liquidity risk? A. Liquidity coverage ratio. B. Liquidity index. C. Financing gap and financing requirement. D. Peer group ratio comparison. E. Current ratio.

Which of the following is not a qualitative factor in credit risk analysis? A. Borrower reputation. B. Borrower ethnic origin. C. Leverage position of the borrower. D. The level of interest rates. E. Collateral available.

Which of the following is the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk. A. The Bank Holding Company Act (1956). B. FDIC Improvement Act (1991). C. Depository Institutions Deregulation and Monetary Control Act (1980). D. Garn-St. Germain Depository Institutions Act (1982). E. Financial Institutions Reform Recovery and Enforcement Act (1989).

Which of the following is the major weakness of the linear probability model? A. The model is based on past data of the borrower. B. Measurement of the loan risk is difficult. C. Estimated probabilities of default may lie outside the interval 0 to 1. D. Neither the market value of a firm's assets nor the volatility of the firm's assets is directly observed. E. None of the above is a weakness of the linear probability model.

A method of measuring the interest rate or gap exposure of an FI is the duration model. the maturity model. the repricing model. the funding gap model. All of the above.

all of the above

A positive gap implies that an increase in interest rates will cause _______ in net interest income. no change a decrease an increase an unpredictable change Either A or B.

an increase

Hedge fund data such as assets held and trading activity All of these. are primarily self-reported. can be obtained from research agencies. can be independently tracked. can be obtained from SEC filings.

are primarily self-reported

For property-casualty insurers, loss rates are more predictable for: high severity low-frequency events. low severity medium-frequency events. low-severity high-frequency events. low-severity low-frequency events. high-severity high-frequency events.

low-severity high-frequency events

When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in: decreased fee income. increased operating costs. decreased monitoring costs. increased liquidity risk. increased interest rate risk.

decreased monitoring costs.

A company that specializes in making loans to the customers of a particular retailer or manufacturer would best be categorized as a: business credit institution. lease finance company. sales finance institution. personal credit institution. factoring company.

sales finance institution

An insurance policy that often is the least expensive to the insured because of the policy does not include a savings plan is called: endowment life. whole life. term life. variable life. universal life.

term life

Ally Financial [formerly General Motors Acceptance Corporation (GMAC)]: is the largest finance company in the U.S. is a wholly owned subsidiary of General Motors. did not participate in federal bailout funds during the financial crisis because of their financial strength. was classified as a commercial bank holding company in 2008. only provides financing to purchasers of automobiles built by General Motors.

was classified as a commercial bank holding company in 2008.

You start an annuity with $1million and expect to receive 10 equal annual payments beginning at the end of the first year. The guaranteed annual interest rate is 5 percent. The annual payments that you expect to collect are: $91,173.38 $129,504.57 $100,000 $88,333.33. $1,500,000.

$129,504.57

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent 101. Calculate the percentage change in this bond's price if interest rates on comparable risk securities decline to 7 percent. Use the duration valuation equation. A. +8.58 percent B. +12.76 percent C. -12.75 percent D. +11.80 percent E. +11.52 percent

All other things equal, longer term loans are more likely to be A. variable-rate loans. B. fixed-rate loans. C. commitment loans. D. lowest risk category loans. E. high interest rate loans.

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in T-Bills, and a credit line of $10 million to borrow in the repo market. It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. Assume that the T-Bills can only be sold at a 10 percent discount, what is the net liquidity of the bank given this information? A. $6.5 million. B. $11.5 million. C. $16.5 million. D. $20.5 million. E. $21.5 million.

An FI has financial assets of $800 and equity of $50. If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap? A. 0.9000 years. B. 0.9600 years. C. 0.9756 years. D. 0.8844 years. E. Cannot be determined.

Deregulation and the Financial Crisis has resulted in which of the following? A small change in asset concentration. An increase in asset concentration into the 5 largest US banks. A decrease in asset concentration into the 5 largest US banks. A large change in asset concentration.

An increase in asset concentration into the 5 largest US banks.

An open-end bond mutual fund is holding a three-year, $1 million face value 5 percent annual coupon bond selling at par. What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates? A. A decrease of $10,000. B. An increase of $10,000. C. A decrease of $26,730. D. An increase of $27,751. E. The answer depends upon the number of mutual funds shares outstanding.

The repricing model is based on an accounting world that reports asset and liability values at their market value. their book value. their historic values or costs. All of the above. Answers B and C only.

Answers B and C only.

Which of the following is NOT an advantage of a finance company over a commercial bank in providing services to small business customers? Finance companies often have substantial industry and product expertise. Finance companies are not subject to regulations that restrict the type of products and services they can offer. Finance companies are less willing to accept risky customers than are banks. Finance companies generally have lower overhead than banks. Finance companies do not accept deposits and therefore are not subject to bank-type regulatory restrictions.

Finance companies are less willing to accept risky customers than are banks.

For small change in interest rates, market prices of bonds move in an inversely proportional manner according to the size of the A. equity. B. asset value. C. liability value. D. duration value. E. Answers A and B only.

What type of risk focuses upon mismatched currency positions? Liquidity risk. Interest rate risk. Credit risk. Foreign exchange rate risk. Off-balance sheet risk.

Foreign exchange rate risk

How can discriminant analysis be used to make credit decisions? A. By discriminating between good and bad borrowers. B. By using statistical analysis to predict the default probabilities. C. By using statistical analysis to isolate and weight factors to arrive at default risk classification of a commercial borrower. D. By using statistical analysis to bypass qualitative credit decision making. E. By updating FI bankruptcy experiences.

If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds, what policy must the bank follow? A. Manage liquidity risk exclusively through reserve asset management. B. Manage liquidity risk exclusively through liability management. C. Reduce the bank's dependence upon demand deposits. D. Increase interest income by increasing lending. E. Increase interest income by increasing securities holdings.

If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down, what will be the impact on the balance sheet if stored liquidity management techniques are used? A. A reduction in cash of $21,000 and an increase in demand deposits of $29,000. B. A reduction in securities and/or current loans totaling $50,000. C. A reduction in cash of $21,000 and a decrease in securities holdings of $29,000. D. A decrease in equity of $50,000. E. A decrease in lending of $50,000.

In terms of liquidity risk measurement, the financing gap is defined as A. total deposits minus core deposits. B. financing requirement plus liquid assets. C. rate sensitive assets minus rate sensitive liabilities. D. total assets minus total liabilities. E. average loans minus average deposits.

The largest commercial bank in the U.S.A. is: JP Morgan Chase Bank of America Morgan Stanley Goldman Sachs

JP Morgan Chase

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. 83. If rates do not change, the balance sheet position that maximizes the FI's returns is A. a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs. B. a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans. C. a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD. D. a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans. E. a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans.

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. 84. What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years? A. The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. B. The risk that interest rates will rise since the FI must sell a 1-year CD in one year. C. The risk that interest rates will fall since the FI must sell a 2-year loan in one year. D. The risk that interest rates will fall since the FI must buy a 1-year loan in one year. E. There is no interest rate risk exposure.

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. 85. What is the duration of the two-year loan (per $100 face value) if it is selling at par? A. 2.00 years B. 1.92 years C. 1.96 years D. 1.00 year E. 0.91 years

The price at which an open-end investment fund stands ready to redeem existing shares is the A. strike price. B. face value. C. book value. D. net asset value. E. net worth.

Because of its simplicity, smaller depository institutions still use this model as their primary measure of interest rate risk. The repricing model. The maturity model. The duration model. The convexity model. The option pricing model.

The repricing model

Which of the following is true about reverse repurchase agreements? They account for less than 5 percent of assets of broker-dealers. They are securities purchased under agreements to resell. They amount to 40.8 percent of total liabilities and equity of broker-dealers. They are treated as liabilities. They are securities temporarily lent in exchange for cash received.

They are securities purchased under agreements to resell.

What is the drawback of deposit insurance facility? A. Even when the DI is in trouble, the deposit holder has no incentive to run. B. DIs are more likely to increase the liquidity risk on their balance sheets. C. Deposit holder's place in line affects his or her ability to obtain their funds. D. Deposit insurance does not deter contagious runs and panics. E. Deposit holders are less likely to panic if there is a perceived bank solvency problem.

When banks use stored liquidity management, they A. must pay interest on the funds that are stored. B. store the funds at the U.S. Treasury. C. necessarily increase the asset side of the balance sheet. D. may shrink the balance sheet if cash is used as the liquidity adjustment mechanism. E. threaten the capital position of the institution.

When does "duration" become a less accurate predictor of expected change in security prices? A. As interest rate shocks increase in size. B. As interest rate shocks decrease in size. C. When maturity distributions of an FI's assets and liabilities are considered. D. As inflation decreases. E. When the leverage adjustment is incorporated.

Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets? A. Quick ratio. B. Liquidity index. C. Financing gap and financing requirement. D. Peer group ratio. E. Current ratio.

Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds? Agency costs. Intermediation Liquidity risk. Credit risk. Price risk.

agency costs

Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds? Intermediation Agency costs. Price risk. Liquidity risk. Credit risk.

agency costs

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT: increased transactions costs. less price risk when funds are needed. better diversification of deposited funds. increased liquidity if funds are needed quickly. monitoring done by the bank on your behalf.

increased transactions costs

The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets relative to its liabilities is referred to as: currency risk. sovereign risk. insolvency risk. liquidity risk. interest rate risk.

insolvency risk

If an FI's repricing gap is less than zero, then: it is deficient in its required reserves. it is deficient in its capital ratio requirement. its liability costs are more sensitive to changing market interest rates than are its asset yields. its liability costs are less sensitive to changing market interest rates than are its asset yields. the duration of the FI's liabilities exceeds the duration of FI's assets.

its liability costs are more sensitive to changing market interest rates than are its asset yields.

A finance company may be classified as a subprime lender if it: lends to high-risk customers. is wholly owned by a parent corporation. lends to low-risk customers. charges interest rates below those charged by commercial banks. originated from check cashing outlets in the early 1990s.

lends to high-risk customers

National-chartered commercial banks are most likely to be regulated by: the FDIC and the Federal Reserve System. the FDIC, the Federal Reserve System, and the Comptroller of the Currency. the Federal Reserve System and the Comptroller of the Currency. the Federal Reserve System only. the FDIC only.

the FDIC, the Federal Reserve System, and the Comptroller of the Currency

State-chartered commercial banks may be regulated by: the FDIC and the Federal Reserve System. the Federal Reserve System only. the FDIC, the Federal Reserve System, the Comptroller of the Currency, and state banking commissions. the FDIC only. the FDIC, the Federal Reserve System, and the Comptroller of the Currency.

the FDIC, the Federal Reserve System, the Comptroller of the Currency and state banking commissions.

The surrender value of an insurance policy is: a fund established and held separately from the company's other assets. the same as the endowment payout. the expected payment commitment on existing policy contracts. the price at which the company may repurchase the policy. the cash value paid to the policyholder if the policy is terminated before it matures.

the cash value paid to the policyholder if the policy is terminated before it matures

Safety and soundness regulations include all of the following layers of protection EXCEPT: requiring minimum levels of capital. monitoring and surveillance. the provision of guaranty funds. the creation of money for those FIs in financial trouble. requirements encouraging diversification of assets.

the creation of money for those FIs in financial trouble.

Credit Unions were generally less affected than other depository institutions by the recent financial crisis because: they had relatively more assets in consumer loans than other DIs. they had relatively more assets in consumer loans than other DIs and they hold more government and agency securities, on average. they had relatively more residential mortgages. they hold less government and agency securities, on average. they hold more government and agency securities, on average.

they had relatively more assets in consumer loans than other DIs and they hold more government and agency securities, on average

The gap ratio expresses the reprice gap for a given time period as a percentage of: equity. total liabilities. current liabilities. total assets. current assets.

total assets

Calculate the annual cash flows of a $100,000, 10-year fixed-payment deferred annuity earning a guaranteed 3.6 percent per year if annual payments are to begin at the end of year 4 (beginning of year 5). (Hint: Grow the original investment for 4 years and then all payments are paid at the beginning of the year.) $13,437.53 $486,202.50 $52,243.81 $62,195.01. $115,196.43

$13,437.53

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually. What is the bank's net interest income for the current year? $300,000. $140,000. $160,000. $280,000. $80,000.

$140,000

An investor invests $100,000 in a mutual fund that has a 4 percent front-end load, charges a management fee of 0.5 percent, and a 12b-1 fee of 0.25 percent. The investor plans to own the investment for one year. What is the dollar amount of the total shareholder cost? $500. $4,000. $4,750. $750. $4,500.

$4,750

The balance sheet of XYZ Bank appears below. All figures are in millions of US Dollars. Assets: Short-term consumer loans (one year maturity): $150 Long-term consumer loans: $125 Three-month treasury bills: $130 Six-month treasury notes: $135 Three-year treasury bonds: $170 Ten-year, fixed-rate mortgages: $120 30-year, floating-rate mortgages (rate adjusted every nine months): $140 Total Assets: $970 Liabilities: Equity capital (fixed): $120 Demand deposits (two-year maturity): $40 Passbook savings: $130 Three-month CDs: $140 Three-month bankers acceptances: $120 Six-month commercial paper: $160 One-year time deposits: $120 Two-year time deposits: $40 Total Liabilities: $970 Total one-year rate-sensitive assets is: $540 million. $580 million. $555 million. $415 million. $720 million.

$555 million

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). Assets: Fed Funds --Overnight: $20 Loans --Overnight: $0 --1-30 days: $10 --31-91 days: $15 --92-181 days: $80 Liabilities: Fed Funds --Overnight: $50 Euro CDs --Overnight: $5 --1-30 days: $25 --31-91 days: $40 --91-181 days: $0 How will a decrease of 25 basis points in all interest rates affect Gotbuck's net interest income over a planning period of 91 days? +$0.1875 million. +$0.1250 million. -$0.1375 million. +$0.0625 million. 0

+$0.1875 million.

If interest rates decrease 40 basis points (0.40 percent) for an FI that has a cumulative gap of -$25 million, the expected change in net interest income is +$100,000. -$100,000. -$625,000. -$250,000. +$250,000.

+$100,000 ∆NII = (CGAP) × ∆R ∆NII = (- $25,000,000) × (-0.004) = +$100,000

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually. What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a rate of 6.0 percent? -$60,000. -$140,000. +$140,000. +$60,000. +$800,000.

+$60,000

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is -$112,500. +$112,500. +$1,125,0000. -$1,125,0000. -$150,000.

-$112,500. ∆NII = (CGAP) × ∆R ∆NII = (- $15,000,000) × (+0.0075) = -$112,500

An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD. Use the repricing model to determine (a) the FI's repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FI's annual net interest income? $0; $0. -$200,000; +$2,000. -$200,000; -$2,000. +$50,000; -$500. -$200,000; -$1,000.

-$200,000; +$2,000. 1-year CGAP = RSA - RSL = $0 - $200,000 = -$200,000 ∆NII = (CGAP) × ∆R ∆NII = (- $200,000) × (-0.01) = +$2,000

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is + $2,500. + $25,000. + $250,000. - $250,000. - $25,000.

-$25,000 ∆NII = (CGAP) × ∆R ∆NII = +$5,000,000 × (-0.005) = -$25,000

The following are the assets and liabilities of a government security dealer. Assets: $ 150 million 30 day treasury bills $ 275 million 91 day treasury bills $ 90 million 180 day municipal notes $ 350 million 2 year treasury notes Liabilities: $ 575 million 14 day repurchase agreements $ 290 million 1 year commercial paper Use the repricing model to determine the funding gap for a maturity bucket of 30 days. -$425 million. -$95 million. -$10 million. -$475 million. +$150 million.

-$425 million

If losses on a particular line of fire insurance were $430 million, premiums earned were $595 million, and loss adjustment expenses were $95 million, the combined ratio would be: 0.88 implying that this line of insurance is unprofitable. 1.13 implying that this line of insurance is profitable. 0.88 implying that this line of insurance is profitable. 0.22 implying that this line of insurance is profitable. 1.13 implying that this line of insurance is unprofitable.

0.88 implying that this line of insurance is profitable

In what year did housing prices begin to deteriorate leading to a jump in defaults in the subprime mortgage markets and the onset of the recent financial crisis? 2006. 2001. 2008. 2003. 2010.

2006

By late 2012, the number of commercial banks in the U.S. was approximately: 12,700. 6,170. 8,100. 2,200. 4,680.

6,170

As of 2011, approximately ________ of the industry total brokerage fee income was generated by firms operating as subsidiaries of commercial bank holding companies. 40 percent 65 percent 25 percent 15 percent 50 percent

65 percent

In total, about the percentage of all retirement plan investments are in institutional funds. 20 percent Zero percent 40 percent 6.0 percent 80 percent

80 percent

87. Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points. A. -$1.756 B. -$1.775 C. +$98.24 D. -$1.000 E. +$1.924

A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest. The duration of this bond is 4.99 years. What will be the new price using the duration model if interest rates increase to 8.5 percent? A. $23.10. B. $976.90. C. $977.23. D. $1,023.10. E. -$23.10.

A DI has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans. If the DI must liquidate its T-bills today, it receives $98 per $100 of face value; if it can wait to liquidate them on maturity (in one month's time), it will receive $100 per $100 of face value. If the DI has to liquidate its real estate loans today, it receives $90 per $100 of face value liquidation at the end of one month will produce $92 per $100 of face value. The one-month liquidity index value for this DI's asset portfolio is A. .973. B. .940. C. .979. D. 1.06. E. 1.10.

A bank's net deposit drain A. is negative if deposits exceed withdrawals. B. is positive if deposits exceed withdrawals. C. decreases during holiday and vacation periods. D. in unaffected by holiday and vacation periods. E. fluctuates unpredictably on any given day.

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent 100. What is the duration of the bond? A. 4.677 years. B. 5.000 years. C. 4.674 years. D. 4.328 years. E. 4.223 years

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent 99. What is the bond's current market price? A. $962.09. B. $961.39. C. $1,000. D. $1,038.90. E. $995.05.

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent. Use the duration valuation equation. A. +4.25 percent B. -4.25 percent C. +8.58 percent D. -3.93 percent E. -3.84 percent

A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is A. the resulting shrinkage of the FI's balance sheet. B. the relatively high cost of purchased liabilities. C. the accessibility of international money markets. D. tax considerations. E. loss of flexibility as a result of dependence upon purchased liabilities.

A disadvantage of using stored liquidity management to manage a FI's liquidity risk is A. the resulting shrinkage of the FI's balance sheet. B. the high cost of purchased liabilities. C. the accessibility of international money markets. D. tax considerations. E. loss of flexibility as a result of dependence upon purchased liabilities.

A regression of sectoral loan losses against total loans losses, both measured as a percentage of total loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: βRE = 1.2, βCL = 1.6. The intercept for both regressions is zero. The results can be interpreted as A. If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the real estate sector, measured as a percentage of total loans, is 1.2 percent. B. If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 3.2 percent. C. If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 6.4 percent. D. If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the commercial sector, measured as a percentage of total loans, is 5.2 percent. E. If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the real estate sector, measured as a percentage of total loans, is 4 percent.

A weakness of migration analysis to evaluate credit concentration risk is that the A. information obtained for this analysis is usually ex-post (i.e. after the fact). B. information obtained for this analysis is ex-ante (i.e. before the fact). C. analysis makes use of historical data classified only by industries. D. analysis makes use of historical data classified by individual firms. E. migration of firms may only be temporary.

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm? A. Less than 1. B. 1. C. Between 1 and 1.81. D. Between 1.81 and 2.99. E. Greater than 2.99.

According to Moody's Analytics, default correlations tend to be _____ and lie between _______. A. Low; 0.002 and 0.15 B. High; 1.86 and 2.99 C. Low; 0.001 and 0.002 D. High; 2.99 and 3.50 E. Low; 0 and 0.001

Factors that affect the predictability of claims loss exposure include: unexpected increases in inflation. property versus liability coverage. the frequency and severity of loss. the concept of long-tail risk. All of the above.

All of the above

The yield curve relates rates for different maturities of assets. for U.S. Treasury securities is the most commonly reported yield curve. may change shape over time. which is inverted does not last very long. All of the above.

All of the above

Economically speaking, OBS activities are contractual claims that may or may not occur. if the contingency does occur, the asset or liability is transferred onto the FI's balance sheet. impact the economic value of the equity. if the contingency never occurs, there is virtually no economic meaning to the OBS activity. All of these.

All of these

The number of funds and assets size of the mutual fund industry have grown dramatically since 1970 because of the introduction of: All of these. 401-k retirement plans sponsored by employers. money market mutual funds in 1972. tax-exempt money market mutual funds in 1979. special-purpose equity, bond, and derivative funds.

All of these

The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is: because FIs have a cost advantage in monitoring their portfolios. significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive. All of these. because individual savers cannot benefit from risk diversification. because diversification allows an FI to predict more accurately the expected returns on its asset portfolio.

All of these

What led to the rise of finance companies? A severe decline in credit availability and bank failures. The Great Depression All of these Failure of banks A severe decline in credit availability to customers

All of these

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in T-Bills, and a credit line of $10 million to borrow in the repo market. It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. What are the bank's current total uses of liquidity? A. $1 million. B. $3 million. C. $8 million. D. $10 million. E. $15 million.

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in T-Bills, and a credit line of $10 million to borrow in the repo market. It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. What are the bank's total available sources of liquidity? A. $17 million. B. $18 million. C. $20 million. D. $21 million. E. $22 million.

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in T-Bills, and a credit line of $10 million to borrow in the repo market. It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. What is the net liquidity of the bank? A. $7 million. B. $12 million. C. $17 million. D. $21 million. E. $22 million.

An FI purchases a $9.982 million pool of commercial loans at par. The loans have an interest rate of 8 percent, a maturity of five years, and annual payments of principal and interest that will exactly amortize the loan at maturity. What is the duration of this asset? A. 4.12 years. B. 3.07 years. C. 2.50 years. D. 2.85 years. E. 5.00 years.

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration. If interest rates rise by 4 percent, calculate the bond's new value. Recall that Treasury bonds pay interest semiannually. Use the duration valuation equation. A. $28,572 B. $20,864 C. $15,000 D. $22,642 E. $71,428

Any model that seeks to estimate an efficient frontier for loans, and thus the optimal proportions in which to hold loans made to different borrowers, needs to determine and measure the A. expected return on each loan to a borrower. B. risk of each loan made to a borrower. C. correlation of default risks between loans made to borrowers. D. expected return of the entire loan portfolio E. All of the above.

C B

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par. 88. What is the duration of this Treasury note? A. 1.500 years. B. 1.371 years. C. 1.443 years. D. 2.882 years. E. 1.234 years. 89. If interest rates increase by 20 basis points (i.e., ΔR = 20 basis points), use the duration approximation to determine the approximate price change for the Treasury note. A. $0.000. B. $0.2775 per $100 face value. C. $2.775 per $100 face value. D. $0.2672 per $100 face value. E. $2.672 per $100 face value.

Which of the following would one typically find in the trading portfolio of an FI? Cash, loans, and deposits. Premises and equipment. Relatively illiquid assets. Assets held for long holding periods. Bonds, equities, and derivatives.

Bonds, equities, and derivatives

Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings? Money supply management. Disintermediation services. Administration of the payments mechanism. Brokerage services. Asset transformation services.

Brokerage services.

Calculating modified duration involves A. dividing the value of duration by the change in the market interest rate. B. dividing the value of duration by 1 plus the interest rate. C. dividing the value of duration by discounted change in interest rates. D. multiplying the value of duration by discounted change in interest rates. E. dividing the value of duration by the curvature effect.

Which of the following identifies the primary function of the Office of the Comptroller of the Currency? Regulate and examine bank holding companies as well as individual commercial banks. Manage the deposit insurance fund and carry out bank examinations. Charter national banks and approve their merger activity. Determine permissible activities for state chartered banks. Stand as the "lender of last resort" for troubled banks.

Charter national banks and approve their merger activity.

For an FI investing in risky loans or bonds, the probability is relatively the lowest for which of the following occurrences? Repayment of principal and promised interest in full. Partial default on interest payments. Complete default on interest payments. Partial default of the principal remaining on a loan. Complete default on principal and interest.

Complete default on principal and interest

Confidence Bank has made a loan to Risky Corporation. The loan terms include a default risk-free borrowing rate of 8 percent, a risk premium of 3 percent, an origination fee of 0.1875 percent, and a 9 percent compensating balance requirement. Required reserves at the Fed are 6 percent. What is the expected or promised gross return on the loan? A. 11.19 percent. B. 11.90 percent. C. 12.29 percent. D. 12.02 percent. E. 12.22 percent.

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. 94. If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation? A. -$7.985 B. -$7.941 C. -$3.990 D. +$3.990 E. +$7.949

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. 95. Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points. A. $1,007.94. B. $992.02. C. $992.06. D. $996.01. E. $1,003.99.

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. What is the duration of this bond? A. 5 years. B. 4.31 years. C. 3.96 years. D. 5.07 years. E. Not enough information to answer.

Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000. If the assets of the mutual fund are worth $900, what is the net asset value for each one of the mutual fund shares? A. $0.9. B. $9. C. $90. D. $10. E. $0.10.

Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. 76. What is the price of the bond if market interest rates are 7 percent? A. $99,050.15. B. $99,457.94. C. $99,249.62. D. $100,000.00. E. $99,065.42.

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the percentage price change for the bond if interest rates decline 50 basis points from the original 5 percent? A. -2.106 percent. B. +2.579 percent. C. +0.000 percent. D. +3.739 percent. E. +2.444 percent.

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the price of the bond if market interest rates are 6 percent? A. $95,082.68. B. $95,769.55. C. $95,023.00. D. $100,000.00. E. $96,557.87.

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. 77. What is the price of the bond if market interest rates are 4 percent? A. $105,816.44. B. $105,287.67. C. $105,242.14. D. $100,000.00. E. $106,290.56.

Which of the following is NOT a back-office service function in the securities industry? Clearance of securities transactions. Escrow services. Services related to settlement of securities transactions. Correspondent banking services. Research services.

Correspondent banking services

Credit rationing by an FI A. involves restricting the quantity of loans made available to individual borrowers. B. results from a positive linear relationship between interest rates and expected loan returns. C. is not used by FIs at the retail level. D. involves rationing consumer loans using price or interest rate differences. E. is only relevant to banks.

Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy primarily because: DI deposits are a major portion of the money supply. U.S. DIs compete with foreign financial institutions. bank loans are highly regulated. loans to corporations are part of the money supply. savings institutions provide a large amount of credit to finance residential real estate.

DI deposits are a major portion of the money supply

Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs? Market intermediation. Economies of scope. Break-even point. Economies of scale. Business continuity plan.

Economies of scope

Emerging market banks tend to have higher bank capital-to-assets ratios compared to developed market banks because: Emerging market banks experience lower loan losses. None of these. Emerging market banks experience higher loan losses. Developed market banks experience higher loan losses. All of these.

Emerging market banks experience higher loan losses.

September 17-20, 2019, the U.S. Federal Reserve took unusual monetary policy action to provide short-term liquidity to ease a liquidity crunch in overnight lending markets. What policy tool did the Fed employ to meet funding market needs? Enter Repurchase Agreements (Repos). Purchase US Treasuries. Reduce Reserve Requirements. Start New Quantitative Easing (QE). Raise the Target Fed Funds rate.

Enter repurchase agreements (repos)

Estimate the standard deviation of Bank A's asset allocation proportions relative to the national benchmark. A. 15.00 percent. B. 21.21 percent. C. 29.89 percent. D. 34.32 percent. E. 40.44 percent.

Estimate the standard deviation of Bank B's asset allocation proportions relative to the national benchmark. A. 40.44 percent. B. 34.32 percent. C. 29.89 percent. D. 21.21 percent. E. 15.00 percent.

Which of the following is NOT true? Consumer loans represent the largest portion of the loan portfolio of finance companies. The fastest growing area of finance companies in recent years has been in the area of leasing and business loans. Finance companies are now the largest issuers of commercial paper in the U.S. Finance companies rely on short-term commercial paper and long-term debt to finance their assets. Finance companies rely on short-term commercial paper and customer deposits to finance their assets.

Finance companies rely on short-term commercial paper and customer deposits to finance their assets.

Which of the following is NOT true? The finance company industry tends to be very concentrated. Finance companies often provide captive financing for the purchase of products manufactured by their parent company. Twenty of the largest finance companies account for more than 65% of the industry assets. Finance companies specialize only in consumer loans and do not make business loans. Many of the largest finance companies tend to be wholly owned or are captive subsidiaries of major manufacturing firms.

Finance companies specialize only in consumer loans and do not make business loans.

First Duration Bank has the following assets and liabilities on its balance sheet 82. What is the FI's interest rate risk exposure? A. Exposed to increasing rates. B. Exposed to decreasing rates. C. Perfectly balanced. D. Exposed to long-term rate changes. E. Insufficient information.

C C

First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent. 74. What is the impact on the dealer's market value of equity per $100 of assets if the change in all interest rates is an increase of 0.5 percent [i.e., ΔR = 0.5 percent] A. +$336,111. B. -$0.605. C. -$336,111. D. +$0.605. E. -$363,000. What conclusions can you draw from the duration gap in your answer to the previous question? A. The market value of the dealer's equity decreases slightly if interest rates fall. B. The market value of the dealer's equity becomes negative if interest rates rise. C. The market value of the dealer's equity decreases slightly if interest rates rise. D. The market value of the dealer's equity becomes negative if interest rates fall. E. The dealer has no interest rate risk exposure.

For a DI, what does a high ratio of loans to deposits indicate? A. DI relies heavily on the short-term money market to fund loans. B. High degree of loan commitments. C. DI has large amounts of asset-side liquidity. D. Liquidity concerns are at a bare minimum for the FI. E. DI relies heavily on core deposits to fund loans.

From the lender's point of view, debt can be evaluated as A. writing a call option on the borrower's assets with the exercise price equal to the face value of the debt. B. buying a call option on the borrower's liabilities with the exercise price equal to the market value of the debt. C. buying a put option on the borrower's assets with the exercise price equal to the face value of the debt. D. writing a put option on the borrower's assets with the exercise price equal to the face value of the debt. E. writing a put option on the borrower's liabilities with the exercise price equal to the market value of the debt.

From the perspective of an FI, which of the following is an advantage of a floating-rate loan? A. Stable interest payments will be received throughout the loan period. B. The pre-specified interest rate remains in force over the loan contract period no matter what happens to market interest rates. C. The bank can request repayment of a loan at any time in the contract period. D. The default risk is completely eliminated. E. The interest rate risk is transferred to the borrower.

How does purchased liquidity management affect profitability? A. By its impact on the interest rate sensitivity of assets. B. By its impact on the interest rate sensitivity of liabilities. C. By determining the default risk of investment securities. D. By its impact on the cost of purchased funds. E. By enhancing the liquidity of assets held.

If Bank A's average return on its loan portfolio is lower than that of Bank B's, A. its risk-adjusted return is higher than Bank B's. B. its risk-adjusted return is lower than Bank B's. C. its standard deviation is lower than Bank B's. D. its standard deviation is higher than Bank B's. E. Answers b and d

If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default? A. 5 percent. B. 10 percent. C. 15 percent. D. 20 percent. E. 25 percent.

If purchased liquidity is used by a DI to fund an exercised loan commitment A. the balance sheet will decrease by the amount of the new loan. B. only the asset side of the balance sheet will increase. C. the balance sheet will increase by the amount of the new loan. D. only the liability side of the balance sheet will increase. E. there will be no effect on the balance sheet.

If stored liquidity is used by a DI to fund an exercised loan commitment A. the balance sheet will decrease by the amount of the new loan. B. only the asset side of the balance sheet will increase. C. the balance sheet will increase by the amount of the new loan. D. only the liability side of the balance sheet will increase. E. there will be no effect on the balance sheet.

If the amount lost per dollar on a defaulted loan is 40 percent, then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to A. 5 percent. B. 15 percent. C. 25 percent. D. 30 percent. E. 50 percent.

If the spot interest rate on a prime-rated one-month CD is 6 percent today and the market rate on a two-month maturity prime-rated CD is 7 percent today, the implied forward rate on a one-month CD to be delivered one month from today is A. 9 percent. B. 11 percent. C. 18 percent. D. 10 percent. E. 8 percent.

Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio. A. book value of assets B. maturity C. market prices D. interest rates E. duration

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when A. the maturity gap is zero. B. the repricing gap is zero. C. the duration gap is zero. D. the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI. E. after-the-fact analysis demonstrates that immunization coincidentally occurred.

In 1994, The Federal Reserve Board ruled against a proposal to use quantitative models to assess credit concentration risk because A. current methods to identify concentration risk were not sufficiently advanced. B. there was no public data on default rates on publicly traded bonds. C. there was sufficient information on commercial loan defaults for banks to perform in-house analysis. D. problems related to credit concentration risk have been minimal for U.S. banks. E. there was already a law that requires banks to set aside capital to compensate for credit concentration risk.

In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts? A. Correspondent banks. B. Small business corporations. C. Individual depositors. D. Mutual funds. E. Foreign depositors.

In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and thrifts? A. Correspondent banks. B. Small business corporations. C. Individual depositors. D. Mutual funds. E. Pension funds.

In making credit decisions, which of the following items is considered a market-specific factor? A. Whether the borrower's capital structure is beyond the point where additional debt increases the probability of loss of principal or interest. B. Whether the relative level of interest rates will encourage the borrower to take excessive risks. C. Whether property can be pledged as collateral. D. Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk. E. Whether the record of the borrower is sufficient to create an implicit contract.

In making credit decisions, which of the following items is considered a market-specific factor? A. Whether the reputation of the borrower enhances the credit application. B. Whether the current debt-equity ratio is sufficiently low to not impact the probability of repayment. C. Whether the debt can be secured by specific property. D. Whether the position of the economy in the business cycle phase would affect the probability of borrower default. E. Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk.

In models that are based on loan loss ratios, a β that is found to be less than one for a particular loan sector indicates that A. the loans in that sector will soon be downgraded soon. B. the FI should increase its concentration in that loan sector due to the high rates of return. C. the loan losses in that sector are systematically lower relative to total loan losses. D. the FI should decrease its exposure to that sector because losses are higher than the rest of the portfolio E. the calculation is in error because β is restricted to be greater than one.

In terms of liquidity risk measurement, the financing requirement is defined as A. total deposits minus core deposits. B. financing gap plus liquid assets. C. rate sensitive assets minus rate sensitive liabilities. D. total assets minus total liabilities. E. average loans minus average deposits.

In the Moody's Analytics portfolio model, the expected loss on a loan is A. the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. B. annual all-in-spread minus the loss given default. C. annual all-in-spread minus the expected default frequency. D. the product of the expected default frequency and the estimated loss given default. E. the volatility of the loan's default rate around its expected value.

In the Moody's Analytics portfolio model, the expected return on a loan is the A. annual all-in-spread minus the expected loss on the loan. B. annual all-in-spread minus expected probability of the borrower defaulting over the next year. C. annual all-in-spread minus the loss given default. D. the interest and fees paid by the borrower minus the interest paid by the FI to fund the loan. E. the interest and fees paid by the borrower minus the expected loss on the loan.

In the Moody's Analytics portfolio model, the risk of a loan measures A. the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. B. annual all-in-spread minus the loss given default. C. annual all-in-spread minus the expected default frequency. D. the product of the expected default frequency and the estimated loss given default. E. the volatility of the loan's default rate around its expected value times the amount lost given default.

In the event of financial distress, open-ended mutual fund investors A. have an incentive to cash in their shares quickly since they are paid on a first come, first served basis. B. have an incentive to avoid a run since that will deplete the fund net asset value. C. have an incentive to cash in their shares quickly since that will increase the fund's net asset value. D. will switch into low risk bank deposits. E. have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings.

The repricing gap does not accurately measure FI interest rate risk exposure because: FIs cannot accurately predict the magnitude change in future interest rates. FIs cannot accurately predict the direction of change in future interest rates. accounting systems are not accurate enough to allow the calculation of precise gap measures. it does not recognize timing differences in cash flows within the same maturity grouping. equity is omitted.

It does not recognize timing differences in cash flows within the same maturity grouping.

Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. Suppose Kansas Bank wants to ensure that its maximum loss on a secured (collateralized) loan is 10 percent (as a percent of capital). If it wishes to keep a concentration limit at 40 percent for secured loans, what is the estimated amount lost per dollar of defaulted secured loan? A. 40 cents. B. 35 cents. C. 30 cents. D. 25 cents. E. 20 cents.

Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a % of capital) for secured loans made by this bank? A. 10 percent. B. 20 percent. C. 33 percent. D. 40 percent. E. 50 percent.

Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank? A. 5 percent. B. 10 percent. C. 15 percent. D. 20 percent. E. 25 percent.

LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the risk of the loan using the Moody's Analytics model? A. 4.75 percent. B. 0.48 percent. C. 6.89 percent. D. 2.18 percent. E. 1.50 percent.

Which of the following investment banks is no longer in business as a result of the most recent financial crisis? Morgan Stanley. Lehman Brothers. Goldman Sachs. Merrill Lynch. Bear Stearns.

Lehman Brothers

Marginal default probability refers to the A. probability that a borrower will default over a specified multiyear period. B. marginal increase in the default probability due to a change in credit premium. C. historic default rate experience of a bond or loan. D. expected maximum change in the loan rate due to a change in the credit premium. E. probability that a borrower will default in any given year.

Which of the following is the practice that involves short-term trading of mutual funds seeking to take advantage of short-term discrepancies between the price of a mutual fund's shares and out-of-date values on the securities in the fund's portfolio? Directed brokerage. Market timing. Late trading. Spinning. Insider trading.

Market timing

Which practice is especially common in international funds as traders can exploit differences in time zones? Market timing. Insider trading. Spinning. Late trading. Directed brokerage.

Market timing

Matrix Bank has compiled the following migration matrix on consumer loans. Which of the following statements accurately summarizes this data? A. Ten percent of grade two loans were upgraded during the year. B. Grade one loans have a higher probability of downgrade than grades two or three. C. Grade three loans have a higher probability of upgrade than grade two loans. D. Grade three loans have a higher probability of downgrade than grade two loans. E. All of the above.

Migration analysis is a tool to measure credit concentration risk and refers to A. the identification of problem loans in sectors by observing periodic migration of industries. B. the identification of credit concentration by observing trends in market borrowing by different sectors of the industry. C. the identification of credit concentration by observing the downgrading or upgrading of credit ratings on securities in different sectors of industry by public rating agencies. D. the identification of borrowing patterns such as long or short term debt by different sectors of industry. E. the identification of shifts in debt/asset ratios of firms in specific industries.

Which of the following refers to the term "maturity intermediation"? The transfer of wealth from one generation to the next. Reducing information costs or imperfections between households and corporations. Overcoming constraints to buying assets imposed by large minimum denomination size. Creation of a secondary market mature enough to withstand volatility. Mismatching the maturities of assets and liabilities.

Mismatching the maturities of assets and liabilities

Which of the following is traditionally the major type of consumer loans for finance companies? Wholesale loans. Home equity loans. Equipment leases. Revolving loans. Motor vehicle loans and leases.

Motor vehicle loans and leases.

These organizations were originated to avoid the legal definition of a bank. Savings banks. Money center banks. Financial services holding companies. Savings associations. Nonbank banks.

Nonbank banks

On loans fully secured by physical, non-real estate loans, the Basel Committee has set a loss given defaults (LGD) rate of A. 15 percent B. 25 percent C. 40 percent D. 45 percent E. 60 percent

Retirement funds under management of mutual funds manage approximately what percentage of the mutual fund assets. One-half One-quarter Zero. One-tenth Three-quarters

One-quarter

The BIS definition: "the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events," encompasses which of the following risks? Credit risk and liquidity risk Operational risk and technology risk Credit risk and market risk Technology risk and liquidity risk Sovereign risk and credit risk

Operational risk and technology risk

Which of the following describes the condition known as runoff in the repricing model approach to measuring interest rate risk of an FI? Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. Mismatch of asset and liabilities within a maturity bucket. The relations between changes in interest rates and changes in net interest income. Those deposits that act as an FI's long-term sources of funds.

Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates.

An investment banker agrees to underwrite an issue of 5 million shares of stock for NetChoice, Inc. on a firm commitment basis. The investment banker pays $31.50 per share to NetChoice, Inc. for the 5 million shares of stock. It then sells those shares to the public for $30.00 per share. If the investment bank can sell the shares for $34 per share, what is the profit (loss) to the investment banker? Profit of $10,000,000. Loss of $7,500,000. Profit of $12,500,000. Profit of $7,000,000. Loss of $12,500,000.

Profit of $12,500,000

An investment banker agrees to underwrite an issue of 5 million shares of stock for NetChoice, Inc. on a firm commitment basis. The investment banker pays $33.50 per share to NetChoice, Inc. for the 5 million shares of stock. It then sells those shares to the public for $35.00 per share. What is the profit (loss) to the investment banker? Loss of $2,000,000. Profit of $2,000,000. Loss of $7,500,000. Profit of $7,000,000. Profit of $7,500,000.

Profit of $7,500,000

Which term refers to the risk that the cost of rolling over or re-borrowing funds will rise above the returns being earned on asset investments? Reinvestment risk. Credit risk. Refinancing risk. Liquidity risk. Sovereign risk.

Refinancing risk

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually. To what risk is the bank exposed? Reinvestment risk. Refinancing risk. Interest rate risk. Reinvestment risk and Interest rate risk. Refinancing risk and Interest rate risk.

Refinancing risk and Interest rate risk

What is essentially understood to be insurance for property-casualty insurance companies? Surplus notes. Policy reserves. Conditional reserve funds. Reinsurance. Unearned premiums.

Reinsurance

Revolving loans are credit lines A. that allow the borrower to borrow the repeat credit only after the first loan is repaid. B. that specify a maximum size and a maximum period of time over which the borrower can withdraw funds. C. whose interest rate adjusts with movements in an underlying market index interest rate. D. on which a borrower can both draw and repay many times over the life of the loan contract. E. that include new and used automobile loans, mobile home loans, and fixed-term consumer loans.

Identify the primary regulator (s) of mutual funds. Stock exchanges. NASD. SEC. Fed. State regulators.

SEC

This type of finance company competes directly with depository institutions for consumer loans because they can frequently process loans faster and more conveniently. Business credit institution. Sales finance institution. Lease finance company. Personal credit institution. Factoring company.

Sales finance institution.

Which of the following is true of private placement of securities? Public trading in these securities is not allowed. Subject to more stringent disclosure and informational requirements than those imposed by the SEC on publicly registered issues. Securities are placed with few large institutional investors. Securities of private firms are sold to the investing public at lower prices. They must be registered with the SEC.

Securities are placed with few large institutional investors

Which of the following differentiates securities firms from investment banks? Securities firms underwrite new issues of securities while investment banks provide brokerage services. Securities firms are concerned with the commercial side of the business while investment banks are concerned with the retail side of the business. Securities firms are concerned with private placements of securities whereas investment banks are concerned with publicly traded securities. Securities firms originate new issues of securities and investment banks underwrite the securities. Securities firms assist in trading of existing securities while investment banks specialize in underwriting new securities.

Securities firms assist in trading of existing securities while investment banks specialize in underwriting new securities.

Simulations by Moody's Analytics have shown which of the following models to be relatively better predictors of corporate failure and distress? A. Z score-type models. B. S&P rating changes. C. Expected Default Frequency (EDF) models. D. Linear probability models. E. Logit models.

Which of the following is the most important source of funds for savings institutions? Direct federal fund borrowings. Small time and savings deposits. Negotiable certificates of deposit. Borrowings from the Federal Home Loan Bank. Repurchase agreements.

Small time and savings deposits

Which of the following is the most important source of funds for savings institutions? Negotiable certificates of deposit. Repurchase agreements. Small time and savings deposits. Borrowings from the Federal Home Loan Bank. Direct federal fund borrowings.

Small time and savings deposits.

Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors influencing the past default behavior of borrowers. Based on past default (repayment) experience, the linear probability model is estimated as: PDi = 0.5(D/Ei) + 0.1(S/Ai). If a prospective borrower has a debt-equity ratio of 0.4 and sales-asset ratio of 1.8, the expected probability of default is A. 0.02. B. 0.35. C. 0.38. D. 0.62. E. 0.98.

This risk of default is associated with general economy-wide or macro conditions affecting all borrowers. Systematic credit risk. Firm-specific credit risk. Refinancing risk. Liquidity risk. Sovereign risk.

Systematic credit risk

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate? A decrease in interest rates generally leads to an increase in the value of assets. Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. None of the above.

The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase.

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term. What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution. A. $10,000. B. $15,000. C. $30,000. D. $40,000. E. $50,000.

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term. What will be the cost of using a strategy of reducing its asset base to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as a liquidity precaution. A. $10,000. B. $15,000. C. $30,000. D. $40,000. E. $50,000.

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term. What will be the size of the bank if a purchased liquidity management strategy is adopted? A. $9 million. B. $11 million. C. $12 million. D. $14 million. E. $15 million.

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term. 93. What will be the size of the bank if a stored liquidity management strategy is adopted? A. $9 million. B. $11 million. C. $12 million. D. $14 million. E. $15 million.

The duration of a consol bond is A. less than its maturity. B. infinity. C. 30 years. D. more than its maturity. E. given by the formula D = 1/(1-R).

The duration of all floating rate debt instruments is A. equal to the time to maturity. B. less than the time to repricing of the instrument. C. time interval between the purchase of the security and its sale. D. equal to time to repricing of the instrument. E. infinity.

What is spread effect? Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. The effect of mismatch of asset and liabilities within a maturity bucket. The premium paid to compensate for the future uncertainty in a security's value. The value of an FI to its owners.

The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change.

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. 86. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question. A. +1.25 years B. +1.12 years C. -1.12 years D. +0.92 years E. -1.25 years

Which of the following observations concerning mortgages is NOT valid? Home equity loans are examples of second mortgages. Mortgage-backed securities are created by securitization. They are a minor component in finance company portfolios. They may refer to loans secured by lien on residential houses. The interest on a mortgage loan secured by a primary residence is not tax deductible to the homeowner.

The interest on a mortgage loan secured by a primary residence is not tax deductible to the homeowner.

Which theory of term structure states that long-term rates are equal to the geometric average of current and expected short-term rates plus a risk premium that increases with the maturity of the security? The unbiased expectations theory. The liquidity premium theory. The loanable funds theory. The market segmentation theory. None of the above.

The liquidity premium theory.

If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's credit risk exposure? The loans' negative correlations will decrease the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. The loans' negative correlations will increase the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. The loans' negative correlations will increase the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. The loans' negative correlations will decrease the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. There is no impact on the bank's credit risk exposure.

The loans' negative correlations will decrease the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans.

Which theory of term structure argues that individual investors have specific maturity preferences? The unbiased expectations theory. The liquidity premium theory. The loanable funds theory. The market segmentation theory. None of the above.

The market segmentation theory.

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation. (That is, ΔR/(1 + R) = -1 percent) A. The bank's market value of equity increases by $325,550. B. The bank's market value of equity decreases by $325,550. C. The bank's market value of equity increases by $336,500. D. The bank's market value of equity decreases by $336,500. E. There is no change in the bank's market value of equity.

The surrender value of an insurance policy is A. its promised payoff. B. normally a portion of the contract's face value. C. its value upon bankruptcy. D. the value of the junk bonds in the insurance company's portfolio. E. its holdup value.

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates? The unbiased expectations theory. The liquidity premium theory. The loanable funds theory. The market segmentation theory. None of the above.

The unbiased expectations theory.

Which of the following is true of off-balance-sheet activities? They include contingent activities recorded in the current balance sheet. They involve generation of fees without exposure to any risk. They invite regulatory costs and additional "taxes." The risk involved is best represented by notional or face value. They have both risk-reducing as well as risk-increasing attributes.

They have both risk-reducing as well as risk-increasing attributes.

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. 90. What is the duration of the assets? A. 0.708 years. B. 0.354 years. C. 0.350 years. D. 0.955 years. E. 0.519 years.

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. 91. What is the duration of the liabilities? A. 0.708 years. B. 0.354 years. C. 0.350 years. D. 0.955 years. E. 0.519 years.

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. 92. What is the leverage-adjusted duration gap? A. 0.605 years. B. 0.956 years. C. 0.360 years. D. 0.436 years. E. 0.189 years.

Under which model does an FI compare its own allocation of loans in any specific area with the national allocations across borrowers to measure the extent to which its loan portfolio deviates from the market portfolio benchmark? A. CreditMetrics. B. Credit Risk +. C. Loan loss ratio-based model. D. Moody's Analytics portfolio manager model. E. Loan volume-based model.

Using standard deviations, which bank is in a better position if the average earnings on the assets of Bank A is 11 percent and Bank B is 12 percent (ignore all other factors)? A. Bank B, because its earnings of 12 percent is higher than Bank A's 11 percent while, its standard deviation is lower. B. Bank B, because its earnings of 12 percent is higher compared to Bank A's 11 percent, while its standard deviation is higher. C. Bank B, because its earnings of 12 percent is higher compared to Bank A's 11 percent, while its standard deviation is the same. D. Bank A, because although its earnings of 11 percent is lower compared to Bank B's 12 percent, its standard deviation is significantly lower. E. Bank A, because although its earnings of 11 percent is lower compared to Bank B's 12 percent, its standard deviation is the same.

Which of the following statements is true? An increase in interest rates leads to an increase in the market value of financial securities. Value of longer term securities decreases at a diminishing rate for increases in interest rates. Value of longer term securities increases at an increasing rate for any decline in interest rates. The shorter the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate increase. The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease.

Value of longer term securities decreases at a diminishing rate for increases in interest rates.

Which of the following is true about the values of most money market mutual fund shares? They depend on market demand. Values are fixed at $1. They are considered closed-end funds. They fluctuate heavily. Values are fixed at $100.

Values are fixed at $1

What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques? A. Utilize further the Fed funds market. B. Utilize repurchase agreements. C. Liquidate all cash holdings. D. All of the above. E. Answers A and B only.

What are the two major liquidity risk insulation devices available? A. Deposit insurance and discount window. B. Liquidity planning and maturity ladder. C. Scenario analysis and liquidity index. D. Financing gap and the financing requirement. E. Secondary credit and seasonal credit.

What does Moody's Analytics Portfolio Manager Model use to identify the overall risk of the portfolio? A. Maximum loss as a percent of capital. B. Historical loan loss ratios. C. Default probability on each loan in a portfolio. D. Market value of an asset and the volatility of that asset's price. E. Mean of the value of loans in a portfolio.

What does the Moody's Analytics model use as equivalent to holding a call option on the assets of the firm? A. The value of equity in a firm. B. Total liabilities of a firm. C. Net income of a firm. D. Dividend yield of investments. E. Short-term debt liabilities of a firm.

What information does the net liquidity statement provide? A. A long-term focus on liquidity. B. Sources and uses of liquidity. C. Net asset value. D. Liquidity index information. E. Peer group ratio comparison.

What is Bank A's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook. A. 7.23 percent. B. 10.89 percent. C. 18.71 percent. D. 19.15 percent. E. 27.36 percent.

What is Bank B's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook. A. 14.16 percent. B. 33.33 percent. C. 5.66 percent. D. 3.00 percent. E. 1.50 percent.

What is a fire-sale price? A. Market value of an asset. B. Price received for an asset that has to be liquidated immediately. C. Maximum price that will be received on sale of an asset irrespective of the time of sale. D. Replacement value of an asset. E. Book value of an asset.

What is the FI's expected return on its loan portfolio? A. 15.00 percent. B. 18.00 percent. C. 12.00 percent. D. 14.67 percent. E. 13.33 percent.

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio. A. A $96,007 reduction in assets. B. A $96,007 increase in assets. C. A $100,000 reduction in assets. D. A $100,000 increase in assets. E. A $100,000 increase in liabilities.

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually? A. 0.50 years. B. 2.00 years. C. 4.40 years. D. 5.00 years. E. 4.05 years.

What is the duration of an 8 percent annual payment two-year note that currently sells at par? A. 2 years. B. 1.75 years. C. 1.93 years. D. 1.5 years. E. 1.97 years.

What is the essential idea behind RAROC? A. Evaluating the actual or contractually promised annual ROA on a loan. B. Analyzing historic or past default risk experience. C. Balancing expected interest and fee income less the cost of funds against the loan's expected risk. D. Extracting expected default rates from the current term structure of interest rates. E. Dividing net interest and fees by the amount lent.

What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year, $100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares. A. An increase of $0.24 per share. B. A decrease of $0.265 per share. C. An increase of $0.05 per share. D. A decrease of $0.05 per share. E. An increase of $0.265 per share.

What is the least important factor determining bankruptcy, according to the Altman Z-score model? A. Working capital to assets ratio B. Retained earnings to assets ratio C. Earnings before interest and taxes to assets ratio D. Market value of equity to book value of long-term debt ratio E. Sales to assets ratio

What is the most important factor determining bankruptcy, according to the Altman Z-score model? A. Working capital to assets ratio. B. Retained earnings to assets ratio. C. Earnings before interest and taxes to assets ratio. D. Market value of equity to book value of long-term debt ratio. E. Sales to assets ratio.

What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated (ρ = 0)? A. 1.41 percent. B. 1.63 percent. C. 0.93 percent. D. 3.57 percent. E. 1.18 percent.

What refers to the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan contract? A. Liquidity risk. B. Interest rate risk. C. Sovereign risk. D. Default risk. E. Solvency risk.

When comparing banks and mutual funds, A. mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. B. mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. C. mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. D. mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. E. mutual funds have the same liquidity risk as banks because both shareholders and depositors share the fall in the loss of value on a pro rata basis.

Which intermediation function results in an FI's exposure to liquidity risk? A. Information production. B. Asset transformation. C. Conduit for monetary policy. D. Lender of last resort. E. Brokering between funds deficit units and funds surplus units.

Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio? A. CreditMetrics. B. Credit Risk +. C. Loan loss ratio-based model. D. KMV portfolio manager model. E. Loan volume-based model.

Which of the following completes the statement: All else equal, the higher the duration of a loan, A. the lower the current level of interest rates, the higher the RAROC. B. the lower the expected change in risk premium, the lower the RAROC. C. the higher the expected change in risk premium, the higher the RAROC. D. the higher the loan amount, the lower the RAROC. E. the lower the loan amount, the lower the RAROC.

Which of the following factors may affect the promised return an FI receives on a loan? A. The collateral backing of the loan. B. Fees relating to the loan. C. The interest rate on the loan. D. The credit risk premium on the loan. E. All of the above.

Which of the following is NOT a potential causes of liquidity risk for a DI? A. A decrease in the DI's stock price caused by market factors. B. An increase in requests to fund large amounts of loan commitments. C. A decrease in the availability of short-term borrowed funds. D. An increase in requests by depositors to withdrawal large amounts of deposits. E. A decrease in asset prices of securities held in the investment portfolio.

Which of the following is NOT a primary source of liquidity? A. Excess cash reserves over and above regulatory reserve requirements. B. Borrowings in the money market. C. Borrowings in the purchased funds market. D. Capital notes and other long-term financing alternatives. E. Cash-type assets that can be sold with little price risk and low transaction costs.

Which of the following is NOT a valid conceptual or application problem of the mortality rate approach to estimate default risk? A. Implied future probabilities are sensitive to the period over which MMRs are calculated. B. The estimates are sensitive to the number of issues in each investment grade. C. Syndicated loans seem to have higher mortality rates than corporate bonds. D. The estimated probability values are historic or backward-looking measures. E. The estimates are sensitive to the relative size of issues in each investment grade.

Which of the following is NOT characteristic of the consumer loans at U.S. banks? A. Non revolving consumer loans is the largest class of loans. B. Credit card loans often have default rates between four and eight percent. C. Usury ceilings affect the rate structure for consumer loans. D. Consumer loans differ widely with respect to collateral, rates, maturity, and noninterest fees. E. Revolving consumer loans include new and used automobile loans, mobile home loans, and fixed-term consumer loans.

Which of the following is NOT characteristic of the real estate portfolio for most banks? A. Commercial real estate mortgages have been the fastest growing component of real estate loans. B. Adjustable rate mortgages have rates that are periodically adjusted to some index. C. Borrowers prefer fixed-rate loans to ARMs during periods of high interest rates. D. Residential mortgages are the largest component of the real estate loan portfolio. E. The proportion of ARMs to fixed-rate mortgages can vary considerably over the rate cycle.

Which of the following is a condition for a DI to be growing? A. Net positive drain on deposits. B. Peak of the net deposit drain probability distribution should lie at a point to the right of zero. C. Average deposit drain such that new deposit funds more than offset deposit withdrawals. D. The liability side of its balance sheet is decreasing. E. Unused loan commitments is increasing.

Which of the following is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio? A. Loss rate. B. Systematic loan loss risk. C. Concentration limit. D. Loss given default. E. Expected default frequency.

Which of the following is a problem in using discriminant analysis to evaluate credit risk? A. It does not consider gradations of default. B. The weights in the discriminant function are assumed to be dynamic. C. It can include hard-to-quantify factors. D. Data on loan specific information of banks are readily available. E. It does not assume that variables are independent of one another.

Which of the following is a source of loan volume data? A. Commercial bank call reports. B. Data on shared national credits. C. Commercial databases. D. All of the above. E. Only the Federal Reserve has this data.

Which of the following is indicated by high numerical value of the duration of an asset? A. Low sensitivity of an asset price to interest rate shocks. B. High interest inelasticity of a bond. C. High sensitivity of an asset price to interest rate shocks. D. Lack of sensitivity of an asset price to interest rate shocks. E. Smaller capital loss for a given change in interest rates.

Which of the following is not a characteristic of a loan commitment? A. The maximum amount of the loan is negotiated at the time of the loan agreement. B. The interest rate on fixed-rate loans is determined at the time of the loan is actually taken down. C. Floating-rate loans transfer the interest rate risk to the borrower. D. The time period for which the loan is available is negotiated at the time of the loan agreement. E. In a floating-rate loan the borrower pays interest rate in force when the loan is actually taken down.

Which of the following is true of commercial paper? A. It is a secured long-term debt instrument issued by corporations. B. It is always issued via an underwriter. C. It may help a corporation to raise funds often at rates below those banks charge. D. All corporations can tap the commercial paper market. E. Total commercial paper outstanding in the US is smaller than total C&I loans.

Which of the following is true of the prime lending rate? A. It is most commonly used in pricing longer-term loans. B. It is the lending rate charged to the FI's lowest-risk customers. C. It is also known as LIBOR. D. It is the rate for interbank dollar loans of a given maturity in the Eurodollar market. E. The best and largest borrowers commonly pay above this lending rate.

Which of the following loan applicant characteristics is not relevant in the credit approval decision? A. Leverage position of the borrower. B. Borrower income. C. Value of collateral. D. Borrower reputation. E. None of the above.

Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades? A. Migration analysis. B. Concentration limits. C. Loan loss ratio-based model. D. Moody's Analytics portfolio manager model. E. Loan volume-based model.

Which of the following observations concerning concentration limits is not true? A. Limits are set by assessing the borrower's current portfolio, its operating unit's business plans, its economists' economic projections, and its strategic plans. B. FIs set concentration limits to reduce exposures to certain industries and increase exposures to others. C. When two industry groups' performances are highly correlated, an FI may set an aggregate limit of less than the sum of the two individual industry limits. D. FIs may set aggregate portfolio limits or combinations of industry and geographic limits. E. Bank regulators in recent years have limited loan concentrations to individual borrowers to a maximum of 30 percent of a bank's capital.

Which of the following observations concerning floating-rate loans is NOT true? A. They have less credit risk than fixed-rate loans. B. They better enable FIs to hedge the cost of rising interest rates on liabilities. C. They pass the risk of interest rate changes onto borrowers. D. In rising interest rate environments, borrowers may find themselves unable to pay the interest on their floating-rate loans. E. The loan rate can be periodically adjusted according to a formula.

Which of the following observations concerning the Fed's discount window is true? A. The facility is provided to meet DIs' permanent liquidity needs. B. Four lending programs are offered through the Fed's discount window. C. Primary credit is available to sound depository institutions on a very short-term basis. D. Secondary credit is available only to depository institutions that are eligible for primary credit. E. Eligible institutions for seasonal credit are big banks located in urban areas.

Which of the following observations is NOT true? A. Traditionally, DI managers have relied on purchased liquidity management as the primary mechanism of liquidity management. B. Today, many DIs rely on purchased liquidity management to deal with the risk of cash shortfalls. C. The largest banks with access to the money market and other nondeposit markets for funds rely on purchased liquidity management to deal with the risk of cash shortfalls. D. Purchased liquidity management and stored liquidity management are ways of managing a drain on deposits. E. None of the above.

Which of the following observations is true of a spot loan? A. It involves a maximum size and a maximum period of time over which the borrower can withdraw funds. B. It involves immediate withdrawal of the entire loan amount by the borrower. C. It is an unsecured short-term debt instrument issued by corporations. D. It is a nonbank loan substitute. E. It is a line of credit.

Which of the following refers to restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower? A. Mortality rates. B. RAROC. C. Implicit contracts. D. Covenants. E. Credit rationing.

Which of the following refers to the term "mortality rate"? A. The success rate of new investments. B. A one-period rate of interest expected on a bond issued at some date in the future. C. The probability that a borrower will default in any given year. D. Historic default rate experience of a bond or loan. E. The probability that a borrower will default over a specified multiyear period.

Which of the following statements about leverage adjusted duration gap is true? A. It is equal to the duration of the assets minus the duration of the liabilities. B. Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. C. It reflects the degree of maturity mismatch in an FI's balance sheet. D. It indicates the dollar size of the potential net worth. E. Its value is equal to duration divided by (1 + R).

Which of the following statements does NOT reflect credit decisions at the retail level? A. Loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions. B. Most loan decisions at the retail level tend to be accept or reject decisions. C. Mortgage loans often are discriminated based on loan to price ratios rather than interest rates. D. Household borrowers require higher costs of information collection for lenders. E. Retail loans tend to be smaller than wholesale loans.

Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models? A. Reputation is an implicit contract regarding borrowing and repayment that extends beyond the formal explicit legal contract. B. A borrower's leverage ratio is positively related to the probability of default over all levels of debt. C. Firms with high earnings variance are less attractive credit risks than those firms that have a history of stable earnings. D. Loans can be collateralized or uncollateralized. E. Reputation is a key reason why initial public offering of debt securities by small firms have a higher interest rate than do debt issues of more seasoned borrowers.

Which of the following statements involving the promised return on a loan is NOT true? A. Credit risk may be the most important factor affecting the return on a loan. B. Compensating balances reduce the effective cost of loans for the borrower because the deposit interest rate is typically greater than the loan rate. C. Compensating balances represents the portion of the loan that must be kept on deposit at the bank. D. Compensating balance requirements provide an additional source of return for the lending institution. E. Increased collateral is a method of compensating for lending risk.

Which of the following statements is NOT true? A. Stored liquidity management involves liquidation of assets. B. Traditionally DIs have stored cash reserves at the Federal Reserve and in their vaults to overcome liquidity risk. C. When the DI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract. D. DIs hold cash reserves in excess of the minimum required to meet liquidity drains. E. A DI sustains no cost under stored liquidity risk management.

Which of the following statements is true? A. Closed-end funds issue an unlimited number of shares as liabilities. B. Open-end funds supply limited number of shares to investors. C. Open-end funds need not stand ready to buy back previously issued shares from investors at the current market price for the fund's shares. D. At a given market price, the supply of open-end fund shares is perfectly inelastic. E. The number of outstanding shares of a closed-ended fund may change when the issuing fund chooses to repurchase them.

Which of the following statements is true? A. The optimal duration gap is zero. B. Duration gap measures the impact of changes in interest rates on the market value of equity. C. The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. D. The duration of all floating rate debt instruments is equal to the time to maturity. E. The duration of equity is equal to the duration of assets minus the duration of liabilities.

Which type of financial intermediary is more highly exposed to liquidity risk? A. Property-casualty insurance companies. B. Life insurance companies. C. Mutual funds. D. Depository institutions. E. Pension funds.

Why have purchased liquidity management techniques become very popular in spite of its limitations? A. Because it insulates the assets of an FI from normal drains on liability liquidity. B. Because funds can be easily raised in the eventuality of a liquidity crunch. C. Because of decrease in the cost of funds during periods of high interest rate volatility. D. Because the funds are covered by deposit insurance. E. Because the adjustment to the deposit drain occurs on the liability side of the balance sheet.

Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero? Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. No, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. Yes, because the maturity model does not consider the timing of cash flows. No, because the timing of cash flows is relevant to immunization against interest rate risk exposure. No, because a representative bank will always have a positive maturity gap.

Yes, because the maturity model does not consider the timing of cash flows.

The qualified thrift lender test is designed to ensure that: a ceiling is set on the mortgage related assets held by commercial banks. an interest rate ceiling is imposed on small savings and time deposits at savings institutions. a floor is set for the mortgage related assets held by savings institutions. regulators could close thrifts and banks faster. savings associations are covered by risk-based deposit insurance premiums.

a floor is set for the mortgage related assets held by savings institutions.

Separate accounts business of a life insurance company represents: a fund established separately from the other funds of the insurance company and invested without regard to the usual diversification restrictions. the cumulative price that the company may repurchase policies from existing customers. policies written that cover individuals as a group. the cumulative cash value paid to policyholders if the policies are terminated before maturity. liabilities owed to other life insurance companies as a result of reinsurance.

a fund established separately from the other funds of the insurance company and invested without regard to the usual diversification restrictions.

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: risk arbitrage. pure arbitrage. an agency transaction. best efforts underwriting. a principal transaction.

a principal transaction

An FI's net interest income reflects its asset-liability structure. rates of interest when the assets and liabilities were put on the books. the riskiness of its loans and investments. the cost of its deposit and non-deposit sources of funds. All of the above.

all of the above

Which of the following is a weakness of the repricing model to measure interest rate risk? Potential for overaggregation of assets and liabilities within each maturity bucket. It ignores how changes in interest rates affect the market value of assets and liabilities. It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates. It fails to recognize off-balance-sheet activities that may be rate sensitive. All of the above.

all of the above

In its role as a delegated monitor, an FI works with financially distressed borrowers in danger of defaulting on their loans. maintains contact with borrowers to ensure that loan proceeds are utilized for intended purposes. All of these. holds portfolios of loans that they continue to service. keeps track of required interest and principal payments on loans it originates.

all of these

The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is: All of these. because diversification allows an FI to predict more accurately the expected returns on its asset portfolio. because FIs have a cost advantage in monitoring their portfolios. significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive. because individual savers cannot benefit from risk diversification.

all of these

Why do households prefer to use FIs as intermediaries to invest their surplus funds? Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information. The FI can provide insurance at relatively low cost that will protect funds under management. To receive the benefits of diversification that households may not be able to achieve on their own. All of these. The FI has can benefit from combining funds and negotiating lower asset prices and transactions costs.

all of these

Variable universal life insurance policies: have fixed premiums, but allow the benefit payout to vary with investment returns. allow both the premium and benefit payout to vary with investment returns, but have a fixed maturity date. have fixed premiums and a fixed benefit payout. allow both the premium and benefit payout to vary with investment returns. have a fixed benefit payout, but allow the premium to vary with investment returns.

allow both the premium and benefit payout to vary with investment returns

Regulatory forbearance refers to a policy of Only rescheduling of all loans of a client in the event of non-payment. strict regulation of banks, closing them down as soon as they are insolvent. foreclosing real estate properties in the event on non-payments of mortgages. allowing insolvent banks to continue to operate. rescheduling of all loans of a client in the event of non-payment.

allowing insolvent banks to continue to operate

Regulatory forbearance refers to a policy of: Only rescheduling of all loans of a client in the event of non-payment. allowing insolvent banks to continue to operate. rescheduling of all loans of a client in the event of non-payment. strict regulation of banks, closing them down as soon as they are insolvent. foreclosing real estate properties in the event on non-payments of mortgages.

allowing insolvent banks to continue to operate.

Regulatory forbearance refers to a policy of: foreclosing real estate properties in the event on non-payments of mortgages and strict regulation of banks, closing them down as soon as they are insolvent. strict regulation of banks, closing them down as soon as they are insolvent. rescheduling of all loans of a client in the event of non-payment. foreclosing real estate properties in the event on non-payments of mortgages. allowing insolvent banks to continue to operate.

allowing insolvent banks to continue to operate.

To be deemed "accredited" and able to invest in a hedge fund, an investor must have: an annual income of at least $500,000 if married. a net worth of over $4 million. a net worth of over $2 million. a retirement savings plan and over $1 million in net worth. an annual income of at least $200,000.

an annual income of at least $200,00

Guaranteed investment contracts (GICs) offered by a life insurance company: earn a return based on the consumer price index (CPI). Short- and medium-term investments in venture capital firms. are short- and medium-term debt instruments sold to fund their pension plan business. can only be purchased by a group life insurance plan. are endowment life policies marketed to group insurance policyholders.

are short- and medium-term instruments sold to fund their pension plan business

Life insurance guaranty funds: require uniform contributions from each state when there is a failure of an insurance company. are sponsored by state insurance regulators. are regulated by the Federal Reserve Bank. involve a permanent reserve fund similar to the FDIC's bank deposit reserve. make policyholder payments immediately in the event of an insurance company failure.

are sponsored by state insurance regulators

Finance companies have enjoyed very high rates of growth because they: charge higher rates on lower risk loans. face very high levels of regulation, which assures their success. are willing to lend to riskier customers than commercial banks. do not have ties or affiliations with manufacturing firms. do not sell the loans that they originate.

are willing to lend to riskier customers than commercial banks.

The two policy categories offered by property-casualty insurers that are most likely to be subject to rate regulation are: homeowner multiple peril and commercial multiple peril. product liability and farm owner multiple peril. earthquake and flood. surety bonds and financial guaranty. auto insurance and worker's compensation.

auto insurance and worker's compensation

An interest rate increase benefits the FI by increasing the market value of the FI's liabilities. harms the FI by increasing the market value of the FI's liabilities. harms the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's assets.

benefits the FI by decreasing the market value of the FI's liabilities.

The largest asset on property-casualty insurers' balance sheet as of 2012 was: common stock. cash. short-term securities. bonds. mortgages and mortgage-backed investments.

bonds

A company that provides financing to corporations, especially through equipment leasing and factoring would best be categorized as a: loan shark. personal credit institution. subprime lender. sales finance institution. business credit institution.

business credit institutions.

Open-end mutual funds: may experience fluctuations in the number of shares outstanding on a daily basis. require that NAV consider the amount of discount or premium in the share value. calculate the NAV based on the total value of assets held divided by the number of fund shares outstanding. All of these. calculate the NAV based on the total value of assets held divided by the number of fund shares outstanding and may experience fluctuations in the number of shares outstanding on a daily basis.

calculate the NAV based on the total value of assets held divided by the number of fund shares outstanding and may experience fluctuations in the number of shares outstanding on a daily basis.

The problem of adverse selection: creates a savings element along with the insurance component of the premium and policy. does not exist in the insurance industry. implies that many people who do not need insurance coverage have it through group plans. means that those people who apply for insurance are the least likely to need insurance coverage. causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums.

causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums

Program trading involves: buying blocks of securities in anticipation of some information release. purchase and sale of assets that are potentially but not necessarily equivalent. computer-driven buying or selling of baskets of 15 or more stocks by institutional traders. providing a platform for customers to trade without the use of a broker. online trading services provided to customers by electronic trading securities firms.

computer-driven buying or selling of baskets of 15 or more stocks by institutional traders

The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to provide incentives to comply with: safety and soundness regulation. entry regulation. consumer protection regulation. investor protection regulation. credit allocation regulation.

consumer protection regulation

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to: increases in net interest income and decreases in the market value of equity when interest rates fall. decreases in net interest income and decreases in the market value of equity when interest rates fall. decreases in net interest income and increases in the market value of equity when interest rates increase. increases in net interest income and increases in the market value of equity when interest rates increase. decreases in net interest income and decreases in the market value of equity when interest rates increase.

decreases in net interest income and decreases in the market value of equity when interest rates increase

decreases in net interest income and decreases in the market value of equity when interest rates increase.

An increase in interest rates increases the market value of the FI's financial assets and liabilities. decreases the market value of the FI's financial assets and liabilities. decreases the book value of the FI's financial assets and liabilities. increases the book value of the FI's financial assets and liabilities. has no impact on the market value of the FI's financial assets and liabilities.

decreases the market value of the FI's financial assets and liabilities

The federal government has traditionally extended safety nets to DIs consisting of: deposit insurance protection. deposit insurance, open market operations, and discount window borrowing. deposit insurance and discount window borrowing. deposit insurance, discount window borrowing, and reserve requirements. deposit insurance, unemployment insurance, and discount window borrowing.

deposit insurance and discount window borrowing.

Traditionally, regulation of FIs in the U.S. has been: extensive, as a result of the importance of FI to the economy. minimal, because the free market is allowed to allocate financial resources. no different from regulation of nonfinancial firms. minimal, as evidenced by the recent financial crisis. extensive, because banks have monopoly power.

extensive, as a result of the importance of FI to the economy.

The function of institutional venture capital firms is to: lend funds to established companies that are faltering. find and fund the most promising new firms. none of these. lend funds on a long-term basis to promising new companies with no track record. take equity positions in successful established companies.

find and fund the most promising new firms

The risk that a foreign government may devalue the currency relates to: credit risk. sovereign risk. foreign exchange risk. liquidity risk. interest rate risk.

foreign exchange risk

Closed-end investment companies: will trade at a different price as the number of shares of the fund changes. have a fixed number of shares and will trade at a different price as the number of shares of the fund changes.. have a fixed number of shares and can trade at a price that is greater than, equal to, or less than the NAV. have a fixed number of shares. can trade at a price that is greater than, equal to, or less than the NAV.

have a fixed number of shares and can trade at a price that is greater than, equal to, or less than the NAV.

Net regulatory burden for FIs is higher because regulators may require the FI to: hold more debt than what would be held without regulation. hold fewer reserves than they would without regulation. produce less information than would be produced without regulation. hold more capital than what would be held without regulation.

hold more capital than what would be held without regualtion

Net regulatory burden for FIs is higher because regulators may require the FI to: hold fewer reserves than they would without regulation. hold more debt than what would be held without regulation. hold more capital than what would be held without regulation. produce less information than would be produced without regulation.

hold more capital than what would be held without regulation.

Net regulatory burden for FIs is higher because regulators may require the FI to: produce less information than would be produced without regulation. hold fewer reserves than they would without regulation. hold more capital than what would be held without regulation. hold more debt than what would be held without regulation.

hold more capital than what would be held without regulation.

Compared to commercial banks, finance companies usually signal solvency and safety concerns by: holding higher leverage ratios. holding less liquid long-term assets. holding higher capital-asset ratio. holding lower capital-asset ratio.

holding higher capital-asset ratio.

An insurance company collected $45.0 million in premiums and disbursed $47 million in losses. Loss adjustment expenses amounted to $3.0 million. The firm is profitable: if dividends paid to policyholders is $17 million and income generated on investments is $23 million. if dividends paid to policyholders is $4 million and income generated on investments is $2 million. if dividends paid to policyholders is $17 million and income generated on investments is $21 million. if dividends paid to policyholders is $7 million and income generated on investments is $4 million. if dividends paid to policyholders is $6 million and income generated on investments is $8 million.

if dividends paid to policyholders is $17 million and income generated on investments is $23 million.

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT: increased liquidity if funds are needed quickly. better diversification of deposited funds. monitoring done by the bank on your behalf. increased transactions costs. less price risk when funds are needed.

increased transaction costs

Each of the following is a special function performed by FIs at a macro level EXCEPT: intergenerational wealth transfers or time intermediation. transmission of monetary policy. credit allocation. interbank lending and investing. denomination intermediation.

interbank lending and investing

"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the FI from: liquidity risk. interest rate risk. credit risk. foreign exchange risk. off-balance-sheet risk.

interest rate risk

Participation in the activities relating to the underwriting and distribution of new issues of debt and equity by a securities firm involves the function of: trading. investing. merger and acquisitions. investment banking. market making.

investment banking

A corporate venture capital firm: is subject to more stringent disclosure requirements than other venture capital firms. is a subsidiary of a nonfinancial corporation. has publicly-traded common stock. provides equity funds to companies that already have publicly traded common stock. provides debt funding to only to established corporations.

is a subsidiary of a nonfinancial corporation

Annuities offered by life insurance companies are a financial contract that: is used to build up a fund. pays only variable returns to individuals. None of these are correct. pays only fixed returns to groups of employees. is used to liquidate a fund.

is used to liquidate a fund

Customer deposits are classified on a DI's balance sheet as: liabilities, because DIs are required to serve depositors. liabilities, because the DI uses deposits as a source of funds. liabilities, because the DI must meet reserve requirements on customer deposits. assets, because customers view deposits as assets. assets, because the DI uses deposit funds to earn profits.

liabilities, because the DI uses deposits as a source of funds.

Securities firms have equity ratios that are lower than those for commercial banks because their balance sheets contain a larger portion of: illiquid assets. current liabilities. fixed assets. liquid assets. long term liabilities.

liquid assets

A mutual fund that charges investors a fee similar to a commission charge is called a: short-term fund. 12b-1 fee. no-load fund. long-term fund. load fund.

load fund

For property-casualty insurers, losses are higher for lines that are exposed to: long tails and low inflation. short tails and low inflation. short tails and no inflation. short tails and high inflation. long tails and high inflation.

long tails and high inflation

Regarding the relative asset size and asset growth rate of mutual fund sectors: More than one of the above is correct. long-term funds had more assets at the end of 2012, but short-term funds had grown at a faster rate since 1980. long-term funds had more assets at the end of 2012, and long-term funds had grown at a faster rate since 1980. short-term funds had more assets at the end of 2012, but long-term funds had grown at a faster rate since 1980. short-term funds had more assets at the end of 2012, and short-term funds had grown at a faster rate since 1980.

long-term funds had more assets at the end of 2012, and long-term funds had grown at a faster rate since 1980.

Economies of scale refer to an FI's ability to: lower its average costs of operations by expanding its output of financial services. generate cost synergies by producing more than one output with the same inputs. understand each risk and its interaction with other risks. finance its assets completely with borrowed funds. moderate the long-tailed downside risk of the return distribution.

lower its average costs of operations by expanding its output of financial services

As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading, they are more subject to: credit risk. market risk. political risk. sovereign risk. liquidity risk.

market risk

The risk that a debt security's price will fall, subjecting the investor to a potential capital loss is: credit risk. market risk. currency risk. liquidity risk. political risk.

market risk

The short-term mutual fund sector includes: equity funds. tax-exempt municipal bond funds. bond funds. hybrid funds. money market mutual funds.

money market mutual funds

The largest asset class on FDIC-insured savings institutions' balance sheet as of year-end 2012 was: mortgage loans. investment securities. cash. non-mortgage Loans. deposits.

mortgage loans

A consumer lending function is performed by each of the following FIs EXCEPT: mutual funds. finance companies. depository institutions. pension funds. insurance companies.

mutual funds.

n the Moody's Analytics model, which of the following is a function of the historical returns of the individual assets. A. The risk of a loan. B. The expected default frequency. C. The loss given default. D. The correlation of default risk. E. The volatility of the loan's default rate.

In contrast to earlier periods in the finance company industry, during the middle 2000s: mortgages originated were generally not securitized. regulatory reform led to decreasing profits. mortgage lending become less important to the industry. finance companies were required to offer time deposit products to their customers. new car loan rates charged by finance companies were been lower than those of commercial banks.

new car loan rates charged by finance companies were been lower than those of commercial banks.

The largest liability on U.S. commercial banks' balance sheet as of September 30. 2012 was: cash. investment securities. borrowings. non-transaction accounts. transaction accounts.

non-transaction accounts

The largest liability on U.S. commercial banks' balance sheet as of September 30. 2012 was: cash. borrowings. transaction accounts. investment securities. non-transaction accounts.

non-transaction accounts.

When the assets and liabilities of an FI are not equal in size, efficient hedging of interest rate risk can be achieved by: increasing the duration of assets and increasing the duration of equity. issuing more equity and reducing the amount of borrowed funds. not exactly matching the maturities of assets and liabilities. issuing more equity and investing the funds in higher-yielding assets. efficient hedging cannot be achieved without the use of derivative securities.

not exactly matching the maturities of assets and liabilities

Compared to banks and savings institutions, credit unions are able to pay a higher rate on the deposits of members because: they do not issue common stock. they intend to attract new members. they are subject to the provisions of the Community Reinvestment Act. of their tax-exempt status. Regulation Q still applies to the industry.

of their tax-exempt status.

The largest line of life insurance in terms of total contract value in the U.S. is: group life. ordinary life. industrial life. noncontributory life. credit life.

ordinary life

The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers to market value effect. overaggregation. runoffs and pre-payments. OBS activities. the spread effect.

overaggregation

A person with a history of bad credit and an inconsistent record of payments on other debt is most likely to find a short-term loan through a: payday lender. commercial bank. personal credit institution. savings bank. sales finance institution.

payday lender

A company that specializes in making installment loans to consumers would best be categorized as a: factoring company. sales finance institution. lease finance company. business credit institution. personal credit institution.

personal credit institution

The origination of a home mortgage loan is considered to be a primary security, because the mortgage note is a newly created security. secondary security if the sale is for an existing home and a primary security if it is for a new home. primary security, because this is the FI's primary source of business. derivative security because the value of the mortgage note depends on the underlying value of the home. secondary security, because mortgages are typically resold in the secondary market.

primary security, because the mortgage note is a newly created security.

The origination of a home mortgage loan is considered to be a: primary security, because this is the FI's primary source of business. secondary security, because mortgages are typically resold in the secondary market. secondary security if the sale is for an existing home and a primary security if it is for a new home. derivative security because the value of the mortgage note depends on the underlying value of the home. primary security, because the mortgage note is a newly created security.

primary security, because the mortgage note is a newly created security.

In market-making: market makers take inventory positions to stabilize the market in the securities. principal transactions are when market makers take long or short positions and seek profits on price movements and market makers take inventory positions to stabilize the market in the securities. principal transactions are two-way transactions on behalf of customers, such as a dealer working for a fee or commission. principal transactions are two-way transactions on behalf of customers, such as a dealer working for a fee or commission and market makers take inventory positions to stabilize the market in the securities. principal transactions are when market makers take long or short positions and seek profits on price movements.

principal transactions are when market makers take long or short positions and seek profits on price movements and market makers take inventory positions to stabilize the market in the securities.

The primary function of insurance companies is to: protect policyholders from adverse events. generate fees for the banks that sell insurance products. provide contracts that encourage policyholders to save current income. assist in the transfer of wealth into the future. sell a variety of consumer investment products.

protect policyholders from adverse events

Factoring involves: approving of collateral that depository institutions do not find acceptable. providing financing through equipment leasing. providing financing for the purchase of products manufactured by the parent company. purchasing of accounts receivable by finance company from corporate customers. making loans to customers that depository institutions find too risky to lend.

purchasing of accounts receivable by finance company from corporate customers

Factoring involves: providing financing through equipment leasing. approving of collateral that depository institutions do not find acceptable. making loans to customers that depository institutions find too risky to lend. providing financing for the purchase of products manufactured by the parent company. purchasing of accounts receivable by finance company from corporate customers.

purchasing of accounts receivable by finance company from corporate customers.

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the: current assets from the current liabilities. long term liabilities from the fixed assets. rate sensitive assets from the total assets. rate sensitive liabilities from the rate sensitive assets. current liabilities from tangible assets.

rate sensitive liabilities from the rate sensitive assets

The largest asset class on U.S. commercial banks' balance sheet as of September 30, 2012 was: real estate loans. commercial and industrial loans. investment securities. deposits. cash.

real estate loans

The largest asset class on U.S. commercial banks' balance sheet as of September 30, 2012 was: real estate loans. investment securities. deposits. commercial and industrial loans. cash.

real estate loans.

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as: liquidity risk. reinvestment risk. credit risk. foreign exchange risk. off-balance-sheet risk.

reinvestment risk

Soft dollars is a term often used in reference to the portion of a fee or commission that is allocated to: back office services. research and other advisory services. banking services. clearance and settlement services. custody and escrow services.

research and other advisory services

The largest category of assets for broker-dealers as of the beginning of 2012 was: receivables from other broker-dealers. securities purchased under agreement to resell. receivables from customers. long position in securities and commodities. exchange membership.

securities purchased under agreement to resell

The largest category of liabilities of broker-dealers as of the beginning of 2012 was: short positions in securities and commodities. bank loans payable. payables to customers. payables to non-customers. securities sold under repurchase agreements.

securities sold under repurchase agreements

Politically motivated limitations on payments of foreign currency may expose an FI to: sovereign country risk. interest rate risk. credit risk. foreign exchange risk. off-balance-sheet risk.

sovereign country risk

The term structure of interest rates assumes that: the risk of all assets is the same. the time to maturity for all assets is the same. the coupon rate of all assets is the same. The market value of assets is the same. All of the above.

the risk of all assets is the same.

If the chosen maturity buckets have a time period that is too long, the repricing model may produce inaccurate results because: as the time to maturity increases, the price volatility increases. price changes will be overestimated. there may be large differentials in the time to repricing for different securities within each maturity bucket. the FI will be unable to accurately measure the quantity of rate sensitive assets. the FI will be unable to accurately measure the quantity of rate sensitive liabilities.

there may be large differentials in the time to repricing for different securities within each maturity bucket.

As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model over the last decade: it became easier to measure the riskiness of individual loans. it became more difficult for households to obtain credit. banks became more financially stable. the Federal Reserve decreased the number of services that banks could provide. there was a dramatic increase in systematic risk of the financial system.

there was a dramatic increase in systematic risk of the financial system

Open-end mutual funds guarantee: that there will be no load charges. investors a minimum rate of return. to earn the rate of return promised in the prospectus. to redeem investors' shares upon demand at the daily Net Asset Value (NAV). investors a minimum Net Asset Value (NAV).

to redeem investors' shares upon demand at the daily Net Asset Value (NAV)

During the period from 1977 to 2012: total assets in finance companies grew over 1,000%. assets in finance companies became less diversified. commercial paper became a less important source of funds for finance companies. in finance companies, consumer lending increased as a percent of total assets. mortgage lending declined in importance to finance companies.

total assets in finance companies grew over 1,000%.

The most common benchmark of relative size of a firm in the securities trading and underwriting industry is based on: total debt. annual profits. total equity. total asset value. annual sales.

total equity

In which of the following situations would an FI be considered net long in foreign assets if it has ¥100 million in loans? ¥120 million in liabilities. ¥80 million in liabilities. ¥100 million in liabilities. ¥110 million in liabilities. Answers A and D only.

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