Finance 337 Exam #2
Credit unions main type of loans is______
Automobile loans
How can being oversubscribed of undersubscribed be a bad thing when issuing a security?
Because if you are undersubscribed that means you should have raised the price and gotten more for your shares. and visa versa
Suppose a companies pension plan promises employees a specific amount of income when they retire, but the plan does not have the assets to meet these future obligations to employees. This plan represents a defined ________ plan that is ________
Benefit; underfunded
What is the difference between a broker and a dealer?
Brokers are pure middleman; dealers make markets by standing ready to buy and sell at given prices (The actual investor)
What are the three main types of finance companies?
Business, sales, and consumer
Which type of Equity fund has the highest risk?
Capital Appreciation
The largest share of assets held by money market mutual funds is
Commercial paper
In 2010 the largest portion of loans made by finance companies was ______ representing 43.4% of the loans
Consumer loans
The largest share of life insurance companies assets are
Corporate bonds
Discuss the four primary classes of mutual funds available to investors
1. Equity funds: invest in common stocks which represent an ownership share (or equity) in corporations. 2. Money market: are fixed income securities with a very short time to maturity and high credit quality 3. Bond funds: Invest in bonds 4. Hybrid funds: Invest in both stocks and bonds
S&L accounts
1. FDIC insured up to $250,000 per account 2. Most are members of the Federal Home Loan Bank System - Set minimum capital requirements - Approves mergers and sets the rules for branching - Makes loans below the rates found in the open market
From the largest to the smallest in terms of total assets the 4 classes of mutual funds are..
1. Largest: Equity funds 2. Money Market Funds: 3. Bond funds 4. Smallest: Hybrid funds
How do consumer loans differ between those issued by finance companies and those issued by banks?
1. Loans made by finance companies are often riskier than those issued by banks 2. Consumer finance companies are typically owned by the manufacturer whose product are being financed
Thrifts suffered problems in the 1970s as of?
1. Market interest rates rose above the rates thrifts were allowed to pay on deposits and savings accounts 2. Thrift customers moved their funds from thrifts to money market mutual funds (Look up thrifts)
In the case of an insurance policy, _______ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ______ occurs when those most likely to get large insurance payoffs are the ones who want to purchase the insurance the most.
1. Moral Hazard; Adverse selection
What is a pro of bank consolidation?
1. More efficient banks 2. Will take advantage of economies of scale 3. Eliminates geographic restrictions
Tasks that investment bankers perform when acting as underwriters to sell securities to public includes?
1. Preparing the filings required by the SEC 2. Pricing the security 3. Arranging for the security to be rated
In 1980s, thrift institutions which had been restricted to only making loans for home mortgages where allowed by regulators to?
1. Purchase junk bonds 2. Finance acquisitions in commercial real estate 3. Extend consumers loans
The government granted thrifts greater power in the early 1980s in hopes of turning the industry's problems around. These powers were?
1. Required greater expertise in managing risk than thrifts managers possessed 2. Encouraged thrifts to expand lending rapidly in real estate, increasing their exposure to risk 3. Expanded the scope and complexity of thrift lending activities that went beyond what regulators could effectively monitor, given their limited resources
The Glass-Steagall Act did what two things?
1. Separated commercial and investment banking 2. Made it illegal for commercial banks to buy or sell securities on behalf of its customers
what two things are true about life insurance companies?
1. They primarily hold longterm assets that are not particularly liquid 2. Payouts to policyholders are relatively predictable
Savings and loan associations
1. Were established by Congress to encourage home ownership 2. Initially were not permitted to accept demand deposits 3. Held about 85% of their assets in the form of mortgages prior to the great depression
What are the three types of finance companies?
1.Business: (Commercial) No depositors to protect, no restricted activities 2. Consumer: Make loans to consumers for furniture home appliances, and retail credit cards 3. Sales Finance company: Sears cards, or compete directly with banks for consumer loans. IR are usually lower then banks to get sales up!
When and why was the Glass Steagall Act passed? When and why was it repealed?
1999 with the Gramm Leach Bliley Act
What are the two major risks that finance companies face?
Default risk - non repayment of Loans and liquidity risk - when a firm runs short on cash and cannot convert their assets to cash fast enough
Explain the difference between defined benefit and defined contribution pension plans
Defined benefit = employer pays Defined contribution pension = you pay, (401(K))
Which of the following pensions does not promise employees a specific retirement benefit?
Defined contribution plan
Bank loans from the Federal Reserve are called______ and are a ______ of cash?
Discount loans, source
What benefits do mutual funds offer investors...
Diversification, access to higher priced securities
Name and describe two benefits of mutual funds?
Diversified market, access to higher stocks
What is the structure of the banking system here in the united states?
Dueling banking system, federal government and state
What changes have banks made in their industry as a response to the many new technologies that have been developed? And which change do you believe was the most necessary?
Electronic banking, electronic payment, electronic money, and a cashless society
How did the Glass-Steagal Act restrict the Banking/Financial services system, until its repeal
Engaging in underwriting of and dealing in corporate securities, therefore separating commercial banking and investment banking
The Glass Steagall Act of 1933 prohibited commercial banks from..
Engaging in underwriting of and dealing in corporate securities, therefore separating commercial banking and investment banking
Today the united states has a duel banking system, it is supervised by..
Federal government and states
Banks are insolvent when their..
Liabilities exceed their assets
Most mutual funds are structured in two ways. The most common structure is an ________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. An _______ fund has fixed number of nonredeemable shares that are traded in the over the counter market
Open-end; closed-end
The Riegle Neal Act of 1994 did?
Overturned prohibition of interstate banking and branching
Who insures pension plans?
Pension Benefit Guarantee Corporation
By law investors must be given a portion of the registration statement before they can invest in a new security, this document is called a?
Prospectus
although finance companies are largely unregulated, they do face some regulations aimed primarily at
Protecting unsophisticated customers
Credit unions main source of funds is
Regular share accounts
What is the main reason for financial innovation?
Regulations is the main reason, also changes in demand have an effect
The policy of _______ exacerbated _____ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning solvency
Regulatory forbearance; Moral hazard
ROA
Return on Assets = Profits/Assets
ROE
Return on Equity = Profits/Equity Capital
Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?
Risk based premiums, screening, restrictive provisions and deductibles and coinsurance
The Federal Reserves Regulation Q is?
Set maximum interest rates bank could pay on deposits
Mutual Savings Banks
Similar to S&L but are jointly owned by the depositors (about half are chartered by the state) - FDIC insures up to $100,000 per account - Branching regulations are determined by the states in which they operate in - Depositors and lenders have voting rights
How did ownership by its depositors help mutual savings bonds survive the great depression?
Since Mutual Savings Banks are owned by its depositors, ownership led to a conservative investment posture, which prevented many of the mutual savings banks from failing during the recession at the end of the nineteenth century or during the Great Depression
A typical venture capital firm has a _______ number of investors who each contribute a ________ of money to the fund
Small; large
_______ is an insurance product that will help if you live longer then you expect. For an initial fixed sum or stream of payments, the insurance company agrees to pay you a fixed amount for as long as you live.
An annuity
Sweep Accounts
An arrangement in which any balances above a certain amount in a corporations checking account at the end of a business day are "swept out" of the account and invested in overnight repos that pay the corporation interest. Banks voluntarily hold more reserves than they are required to.
The largest share of total investment in mutual funds is in
Stock funds
Which of the following do not help people during their retirement?
Term life Insurance
which of the following is an advantage to investors of an open-end mutual funds?
The funds agrees to redeem at any point in time
Name some of the advantages of international banking facilities
They are not subject to the same interest rates of regulations that american banks are subject to
An undersubscribed issue occurs when sales agents have been unable to generate sufficient interest amoung their customer to sell all the securities by the issue date.
True
Finance companies essentially sell commercial paper use the proceeds to make loans:
True
In a lease financing arrangement a finance company will purchase equipment which it then leases to a company for a set period
True
Installment credit is a loan that requires the borrower to make a series of equal payments over some fixed length of time
True
The congressionally imposed cap on the interest rate that S&Ls could pay on savings accounts became a serious problem for them in the 1970s when inflation rose.
True
The primary purpose of loads is to provide compensation for sales brokers.
True
When a lifelong chain smoker attempts to purchase a life insurance policy the insurance company faces the problem of adverse selection
True
What are two differences between mutual funds and hedge funds
Usually hedge funds you need atleast 100k - 20m to invest in
What statutes limits the level of interest rates that finance companies can charge their customers?
Usury statutes
Total reserves =
Vault cash, and cash at the fed
A _______ is a specialized firm that finances young, start-up firms
Venture capital firms
Loads:
What is the difference between loaded mutual funds and no-load mutual funds? A load mutual fund charges a sales commission for buying shares in the fund. These charges can occur at the time of purchase, when you make the sale, or sometimes even both. How bad can the loaded mutual funds hit you in the end? There are some mutual funds that carry loads as much as 7%. Put that in perspective, a loaded mutual fund with a front-end load of 7% would take $7,000 of your money before you even get started if you invest $100,000. A no-load mutual fund is just as it sounds, free of any commissions or fees to buy or sell the fund.
Major controversy involving the U.S. banking industry in the early years was..
Whether the federal government or the states should charter banks (Charter means:A financial institution whose primary roles are to accept and safeguard monetary deposits from individuals and organizations, and to lend money out.)
Consumer finance companies typically make loans to consumers who
cannot obtain credit otherwise due to low income and poor credit
sales finance companies make loans to consumer to purchase items
from a particular retailer
A term life insurance policy provides
insurance benefits only
The federal funds rate is..
the interest rate on loans of reserves from one bank to another
How do finance companies differ from banks?
...
IBFs (International Banking Facilities) created to keep money in the US. Exempt from state and local taxes. Not subject to reserve requirements and restrictions on interest payments
...
Name one way venture capitalists reduce asymmetric information?
...
What are classes of load funds and a character for each?
...
What are the two alternatives for banks to keep from declaring bankruptcy?
...
What is the importance of regulating mutual funds?
...
Why did it take so long for the USA to charter a central bank for the country? Who was opposed to it, who was for it and why did each side feel the way they did?
...
Why was the Reform Recovery and Enforcement of Act of 1989 created and what was its purpose?
...
______ which insures against the loss of a ship, oldest form of insurance
...
Bank Leverage or EM ratio
Bank Leverage = Total assets/total net worth
Chapter 19: Seagall act of 1933
Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and investment banks
From an investment bank's perspective the best outcome occurs when a new issue is
Fully subscribed, look this up
Chapter 20:Mutual funds offer investors all the following except
Greater than average returns
An investment bank is a financial institution that
Helps corporations raise funds, helps them sell IPOs and new issue bonds and such. Defines the price they should sell them at.
Hedge funds are
High risk, even though they may be market neutral
How was the Automated Teller Machine innovated?
I believe because of the McFadden Act
______ perform their main function in the primary market for securities and ______ perform their main function in the secondary market
Investment banks; Securities brokers and dealers
The legislation that effectively prohibited banks from branching across state lines and forcred all national bankto conform to branching regulations of the state is which they redise is the
McFadden Act
Finance companies are ______ market intermediaries
Money
All ________ are open end investment funds that invest only in the money market securities
Money market mutual funds
The largest asset held by S&Ls is...
Mortgage loans
S&L associations most dominant assets are?
Mortgages
Calculating reserve amount requirement
Multiple the rate required by the amount of checking deposits, this will give you the required amount to have on hand
Credit unions are characterized by
Mutual ownership, Nonprofit tax exempt status and common bond membership
Compare the characteristics of an open-ended versus closed-end mutual funds
One you can take your money out, the other you can not.
