Liberty University BUSI321 test 4 exam solutions answers right

Liberty University BUSI321 test 4 exam solutions answers right

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Question 1 For a given level of return on assets, a bank with a higher level of capital will have a lower

Question 2 Fees charged by a bank on various services allow the bank to generate:

Question 3 Bank T generally obtains a high percentage of its funds from wholesale CDs. Bank V which obtains most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will incur the highest interest expenses is ____.

Question 4 A(n) ____ in interest rates could reduce a commercial bank's expected cash flows because the interest paid on deposits may ____ than the interest earned on loans and investments.

Question 5 Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A's return on assets is ____ than Bank B's. Bank A's return on equity is ____ than Bank B's.

Question 6 When only equity counts as capital, the leverage measure is

Question 7 Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.

Question 8 If a bank is too ____ in attempting to avoid loan losses, its net interest margin will be ____.

Question 9 The ____ savings institutions hold the most assets in aggregate.

Question 10 Which of the following statements is incorrect?

Question 11 During the credit crisis of 2008–2009:

Question 12 The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements.

Question 13 Credit unions obtain most of their funds from

Question 14 Which of the following is not an objective of a credit union?

Question 15 Because credit unions' sources and uses of funds are generally interest rate ____, movements in interest revenues and interest expenses of credit unions are ____.

Question 16 The primary source of funds for credit unions is

Question 17 If finance companies with a greater rate­sensitivity of liabilities than assets wanted to reduce interest­rate risk, they could

Question 18 Consumer finance companies primarily focus on for

Question 19 Finance companies can accumulate capital by doing all of the following except

Question 20 ____ finance companies concentrate on purchasing credit contracts from retailers and dealers.

Question 21 When a finance company's assets are ____ interest rate sensitive than its liabilities and when interest rates are expected to ____, bonds can provide long­term financing at a rate that is completely insulated from rising market rates.

Question 22 Finance companies commonly act as ____ for accounts receivable; that is, they purchase a firm's receivables at a discount and are responsible for processing and collecting the balances of these accounts.

Question 23 Finance companies are subject to

Question 24 Compared to other lending financial institutions, finance companies have a ____ loan delinquency rate, and the average rate charged on loans is ____ on average.

Question 25 The most common investment by closed­end funds is in

Question 26 To cover managerial expenses, mutual funds typically charge

Question 27 Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.

Question 28 ____ funds do not normally repurchase their shares from investors.

Question 29 Money market funds invest mostly in

Question 30 ____ funds are open to investment from investors at any time.

Question 31 ____ are beneficial for investors who want to invest in tax­exempt securities.

Question 32 Equity real estate investment trusts invest

Question 33 Which of the following is incorrect about money market funds (MMFs)?

Question 34 Which of the following is not a service that is commonly performed by an securities firm?

Question 35 Employees of a securities firm are less likely to engage in unethical behavior when the firm rewards employees with higher compensation based on:

Question 36 Securities firms commonly perform all of the following functions except for _____ when facilitating a secondary stock offering.

Question 37 When a securities firm provides a bridge loan, it would most likely be

Question 38 Which of the following is not an SEC rule?

Question 39 Competitive bidding by securities firms for underwriting the issue of new bonds is primarily used for

Question 40 The ____ offers insurance on cash and securities deposited at brokerage firms.

Question 41 The ____ is not involved in the regulation of the securities industry.

Question 42 Pension portfolios managed by trusts are expected to offer ____ returns than those managed by insurance companies and have a(n) ____ degree of risk.

Question 43 The most common use of funds for property and casualty insurance companies is

Question 44 Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies?

Question 45 Which of the following is not involved in the regulation of the insurance industry?

Question 46 Which type of life insurance policy does not build a cash value for policyholders?

Question 47 The most common type of mortgage held by life insurance companies are ____ mortgages.

Question 48 To reduce interest rate risk, pension fund managers can

Question 49 The ratio of an insurance company's net profit to policyholders' surplus is called

Question 50 Pension funds managed by life insurance companies are normally referred to as

1. The insuring agency for savings institutions is the

a. Securities and Exchange Commission (SEC).

b. Federal Deposit Insurance Corporation (FDIC).

c. U.S. Treasury.

d. Deposit Insurance Fund (DIF).

2. The ____ savings institutions hold the most assets in aggregate.

a. stock owned

b. mutual

c. closely-held

d. privatized

3. Which of the following statements is incorrect?

a. A mutual-to-stock conversion allows savings institutions to obtain additional capital by issuing stock.

b. Because of the difference in owner control, mutual savings institutions are more susceptible

to unfriendly takeovers.

c. When a mutual savings institution is involved in an acquisition, it first converts to a stockowned

savings institution.

d. Consolidation and acquisitions have caused the number of mutual and stock savings institutions to decline consistently over the years.

4. Savings institutions use most of their funds for ____. Commercial banks use most of their funds for ____.

a. mortgages; mortgages

b. mortgages; business loans and commercial real estate loans

c. business loans; commercial real estate loans and mortgages

d. commercial real estate loans and mortgages; business loans

5. Federally-chartered savings institutions are regulated by the

a. Securities and Exchange Commission (SEC).

b. National Credit Union Administration.

c. Office of Thrift Supervision (OTS).

d. Comptroller of the Currency.

6. Savings institutions obtain most of their funds from

a. savings and time deposits.

b. loans.

c. mortgages.

d. repurchase agreements.

7. When savings institutions are unable to attract sufficient deposits, they can

a. borrow in the federal funds market.

b. borrow from the Federal Reserve.

c. borrow through a repurchase agreement.

d. all of the above

8. The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.

a. True

b. False

9. If depositors move money from their checking account to short-term CDs, this would ____ the rate-sensitivity of the savings institution's liabilities to interest rate movements.

a. increase

b. have no effect on

c. decrease

d. A or C, depending on the size of the savings institution

10. ____ are the primary asset of savings institutions.

a. Mortgages

b. Cash balances

c. Investment securities

d. Business loans

11. Savings institutions that reduce their amount of ____ will best reduce their exposure to interest rate risk.

a. fixed-rate mortgages

b. consumer loans

c. commercial loans

d. short-term securities

12. ____ do not represent an asset of credit unions.

a. Mortgage-backed securities

b. Home equity loans

c. Automobile loans

d. Stocks

13. Which of the following is not an asset of savings institutions?

a. loans

b. mortgages

c. NOW accounts

d. mortgage-backed securities

14. Most mortgages originated by savings institutions are for

a. commercial buildings.

b. land for commercial purposes.

c. single-family homes or multifamily dwellings.

d. none of the above.

15. If a savings institutions' assets have considerably longer duration than its liabilities, it can reduce its exposure to interest rate risk by

a. reducing its proportion of assets in the short duration categories.

b. increasing its proportion of liabilities in the short duration categories.

c. increasing its proportion of liabilities in the long duration category.

d. A and B

16. Adjustable-rate mortgages ____ of rising interest rates on a typical savings institution's spread. They ____ of declining interest rates on the spread.

a. reduce the adverse impact; reduce the favorable impact

b. reduce the adverse impact; increase the favorable impact

c. increase the adverse impact; increase the favorable impact

d. increase the adverse impact; reduce the favorable impact

17. To measure ____ risk, some savings institutions measure the duration of their respective assets and liabilities.

a. credit

b. interest rate

c. liquidity

d. none of the above

18. A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n)

a. interest rate futures contract.

b. interest rate swap contract.

c. interest cap contract.

d. security swap contract.

19. When a savings institution uses interest rate swaps to hedge interest rate risk, it would likely exchange ____ outflows for ____ inflows.

a. variable-rate; fixed-rate

b. variable-rate; variable-rate

c. fixed-rate; variable-rate

d. fixed-rate; fixed-rate

20. An interest rate swap reduces the favorable impact of declining interest rates.

a. True

b. False

21. A savings institution owned by its depositors is a ____ savings institution.

a. mutual

b. stock

c. credit

d. closed-end

22. Which of the following was not a major reason for the savings institution crisis in the late 1980s?

a. a large proportion of loan losses on real estate loans

b. a large proportion of loan losses on loans by savings institutions to less-developed countries

c. fraud

d. illiquidity

e. increased interest expenses

23. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited

a. savings institutions from merging.

b. commercial banks from acquiring savings institutions.

c. savings institutions.

d. savings institutions from making loans to foreign governments.

24. The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk.

a. credit (default)

b. interest rate

c. liquidity

d. exchange rate

e. none of the above

25. Money market deposit accounts (MMDAs) represent

a. trust accounts managed by savings institutions.

b. checking accounts that do not pay interest.

c. accounts offered primarily by money market funds.

d. deposit accounts offering limited checking and close-to-market interest rates.

26. Savings institutions ____ allowed to borrow funds in the federal funds market; savings institutions ____ allowed to borrow funds from the Federal Reserve.

a. are; are

b. are; are not

c. are not; are not

d. are not; are

27. Savings institutions commonly ____ to reduce their risk.

a. purchase futures contracts on stock indexes

b. purchase futures contracts on treasury bonds

c. sell futures contracts on stock indexes

d. sell futures contracts on treasury bonds

28. Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions ____ susceptible to unfriendly takeovers.

a. are; are not

b. are; are

c. are not; are

d. are not; are not

29. Savings institutions can obtain capital by:

a. issuing stock.

b. repurchasing stock.

c. borrowing from the Federal Reserve.

d. borrowing in the federal funds market.

30. To obtain short-term funds, savings institutions commonly borrow funds in the ____ market.

a. stock

b. bond

c. mortgage

d. federal funds

e. futures

31. ____ risk is probably the least concern for savings institutions.

a. Liquidity

b. Exchange rate

c. Credit

d. Interest rate

32. Which of the following is not an advantage of credit unions?

a. They can offer attractive rates to their member savers and borrowers because they are nonprofit and therefore are not taxed.

b. Their noninterest expenses are relatively low, because their labor, office, and furniture are often donated or provided at a very low cost through the affiliation of their members.

c. Their large membership allows them to effectively diversify geographically.

d. All of the above are advantages of credit unions.

33. A savings institution's cash flows are ____ related to interest rate movements.

a. positively related to

b. negatively related to

c. unrelated to

d. none of the above

34. The primary use of credit union funds is

a. loans to credit union members.

b. the purchase of government securities.

c. the purchase of agency securities.

d. the purchase of corporate bonds.

e. none of the above

35. ____ are non-profit organizations composed of members with a common bond.

a. Credit unions

b. Savings banks

c. Savings and loan associations

d. Commercial banks

36. Because credit unions ____ stock, they are technically owned by the ____.

a. issue; depositors

b. do not issue; depositors

c. issue; stockholders

d. do not issue; management

37. Credit unions obtain most of their funds from

a. issuing common stock.

b. retained earnings.

c. share deposits by members.

d. issuing long-term bonds.

38. Checkable accounts offered by credit unions are called

a. NOW accounts.

b. money market deposit accounts.

c. share certificates.

d. share drafts.

39. The ____ acts as a temporary lender to credit unions.

a. World Bank

b. Central Liquidity Facility

c. Federal Home Loan Bank

d. National Credit Union Administration

40. The sensitivity of cost of funds to interest rate movements has been

a. greater for credit unions than savings institutions.

b. greater for credit unions than commercial banks.

c. lower for credit unions than for savings institutions or commercial banks.

d. similar for credit unions as savings institutions and commercial banks.

41. Credit unions use the majority of their funds to

a. purchase investment securities.

b. provide commercial real estate loans.

c. provide small business loans to members.

d. provide consumer loans to members.

42. If credit union members have a particular affiliation with their employers and large layoffs occur, the credit union's exposure to ____ risk may increase.

a. settlement

b. interest rate

c. credit

d. none of the above

43. The maximum insurance per depositor by the National Credit Union Insurance Fund is

a. $250,000.

b. $50,000.

c. $40,000.

d. $25,000.

44. Comparing credit unions with commercial banks and savings institutions

a. credit unions are less able to quickly generate additional deposits.

b. savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions cannot.

c. savings institutions and commercial banks are less able to quickly generate additional deposits.

d. credit unions have less exposure to liquidity risk.

45. The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements.

a. long; insensitive

b. short or medium; sensitive

c. long; sensitive

d. short or medium; insensitive

46. Because credit unions' sources and uses of funds are generally interest rate ____, movements in interest revenues and interest expenses of credit unions are ____.

a. sensitive; negatively correlated

b. insensitive; highly correlated

c. sensitive; uncorrelated

d. sensitive; highly correlated

e. insensitive; uncorrelated

47. Deposits at credit unions are called

a. NOW accounts.

b. money market deposit accounts.

c. shares.

d. credit union deposit accounts.

48. Credit unions differ from savings institutions in that they use a ____ proportion of their funds for mortgages and are ____ institutions.

a. smaller; non-profit

b. larger; non-profit

c. smaller; for-profit

d. larger; for-profit

49. Today, credit unions are regulated as to the

a. types of services they can offer.

b. rates they offer on deposits.

c. maturity of residential loans they make.

d. size of residential mortgage loans.

50. The National Credit Union Share Insurance Fund (NCUSIF) requires all

a. federal-chartered credit unions to obtain insurance from the NCUSIF.

b. state-chartered credit unions to obtain insurance from the NCUSIF.

c. credit unions to pay an annual supplemental insurance premium each year.

d. depository institutions to pay a supplemental insurance premium each year.

51. Federal credit unions are regulated and supervised by the

a. Central Liquidity Facility.

b. National Credit Union Administration.

c. Securities and Exchange Commission.

d. Corporate Credit Union Network.

e. none of the above

52. According to your text, about ____ percent of credit unions are insured by the National Credit Union Share Insurance Fund.

a. 20

b. 40

c. 60

d. 90

53. In general, savings institutions are larger than commercial banks.

a. True

b. False

54. Today, savings institutions are not permitted to invest in junk bonds.

a. True

b. False

55. Because savings institutions commonly use long-term liabilities to finance short-term assets, they depend on additional deposits to accommodate withdrawal requests.

a. True

b. False

56. Savings institutions commonly measure the gap between their rate-sensitive assets and rate-sensitive liabilities in order to determine their exposure to credit risk.

a. True

b. False

57. Savings institutions do not really know the actual maturity of the mortgages they hold and cannot perfectly match the interest rate sensitivity of their assets and liabilities.

a. True

b. False

58. In general, when interest rates fall, a savings institution's cost of obtaining funds declines more than the decline in the interest earned on its loans and investments.

a. True

b. False

59. High economic growth results in more risk for a savings institution, since its consumer loans, mortgage loans, and investments in debt securities are more likely to default.

a. True

b. False

60. Because credit unions do not issue stock, they are technically sole proprietorships.

a. True

b. False

61. Because credit unions are for-profit organizations, their income is taxable.

a. True

b. False

62. Credit unions obtain most of their funds by borrowing from the U.S. government.

a. True

b. False

63. Credit unions use the majority of their funds to invest in the stock market.

a. True

b. False

64. The National Credit Union Administration (NCUA) is responsible for regulating savings institutions.

a. True

b. False

65. Credit unions are unregulated as to the types of services they offer.

a. True

b. False

66. All federally chartered credit unions are required to obtain insurance from the National Credit Union Share Insurance Fund (NCUSIF).

a. True

b. False

67. The primary source of funds for credit unions is

a. share certificates.

b. share deposits.

c. share drafts.

d. borrowed funds from the Central Liquidity Facility (CLF).

e. none of the above

68. Which of the following is not an objective of a credit union?

a. to satisfy credit union members

b. to act as an intermediary for members by repackaging deposits

c. to provide loans to members who are in need of funds

d. all of the above are objectives of credit unions.

69. ____ are not a main source of funds for savings institutions.

a. Deposits

b. Borrowed funds

c. Capital

d. Mortgages

70. Which of the following is not a deposit source of funds for savings institutions?

a. passbook savings

b. retail CDs

c. money market deposit accounts

d. negotiable order of withdrawal (NOW) accounts

e. All of the above are deposit sources of funds for savings institutions.

71. ____ is not a main use of funds for savings institutions.

a. Capital

b. Mortgages

c. Consumer and commercial loans

d. Mortgage-backed securities

72. Savings institutions were adversely affected by the credit crisis because of their exposure to ____.

a. deposits

b. mortgages

c. commercial loans

d. loans from the Federal Reserve

73. To manage interest rate risk, a savings institution could use

a. fixed-rate mortgages.

b. currency options.

c. interest rate futures contracts.

d. letters of credit.

1. ____ finance companies concentrate on purchasing credit contracts from retailers and dealers.

a. Consumer

b. Sales

c. Commercial

d. None of the above

2. Which of the following is not a source of finance company funds to support operations?

a. loans from banks

b. commercial paper

c. federal funds

d. bonds

3. When a finance company's assets are ____ interest rate sensitive than its liabilities and when interest rates are expected to ____, bonds can provide long-term financing at a rate that is completely insulated from rising market rates.

a. less; increase

b. less; decrease

c. more; increase

d. more; decrease

4. Finance companies differ from commercial banks, savings institutions, and credit unions in that they

a. normally do not obtain funds from deposits.

b. focus on financing acquisitions by companies.

c. focus on providing residential mortgages.

d. use most of their funds to purchase stocks.

5. Which of the following is not a main source of funds for finance companies?

a. bank loans

b. commercial paper issues

c. bonds

d. capital

6. Finance companies are more likely to issue bonds when their assets are presently ____ interest-rate sensitive than their liabilities, and when interest rates are expected to ____.

a. more; decrease

b. less; increase

c. more; increase

d. less; decrease

1. Which of the following statements is incorrect?

a. Mutual funds serve as a key financial intermediary.

b. Managers of mutual funds do not analyze economic and industry trends.

c. Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.

d. Some mutual funds offer check-writing privileges.

2. No-load mutual funds are normally promoted by ____. Load funds are promoted by ____.

a. registered representatives of a brokerage firm; registered representatives of a brokerage firm

b. registered representatives of a brokerage firm; the mutual fund of concern

c. the mutual fund of concern; registered representatives of a brokerage firm

d. the mutual fund of concern; the mutual fund of concern

3. To cover managerial expenses, mutual funds typically charge

a. management fees of less than 2 percent of total assets per year.

b. commissions of typically 8 to 10 percent of transaction market value per year.

c. management fees of typically more than 10 percent of total assets per year.

d. commissions of typically 3 to 5 percent of the transaction market value per year.

4. Mutual funds that are willing to repurchase their shares from investors at any time are referred to as

a. closed-end funds.

b. load mutual funds.

c. no-load mutual funds.

d. open-end mutual funds.

5. ____ funds do not normally repurchase their shares from investors.

a. Closed-end

b. Load mutual

c. No-load mutual

d. Open-end mutual

6. Most closed-end funds invest in

a. stock and bonds.

b. money market securities.

c. gold.

d. derivatives.

7. Exchange-traded funds are like open-end funds in the sense that

a. their shares are traded on an exchange, and their share price changes throughout the day.

b. they have a fixed number of shares.

c. they are not actively managed.

d. none of the above

8. Hedge funds differ from open-end mutual funds in the sense that

a. they require a much smaller initial investment.

b. they are open to additional investments at any time.

c. their investors cannot sell shares back to the fund at any time they desire.

d. they invest in very limited set of securities.

9. Shares of open-end mutual funds are purchased and sold on exchanges.

a. True

b. False

10. Mutual funds

a. are unregulated.

b. are required to disclose the names of their portfolio managers in the prospectus.

c. are not required to disclose any information about their past performance.

d. are exempt from all taxes.

11. Which of the following is not disclosed in the prospectus?

a. the minimum amount of investment required

b. the investment objective of the funds

c. the fees incurred by the mutual fund

d. all of the above are disclosed

12. The net asset value of a mutual fund is estimated once every week.

a. True

b. False

13. Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.

a. lower; underperform

b. higher; outperform

c. lower; outperform

d. A and B

14. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.

a. True

b. False

15. Money market funds invest mostly in

a. stocks.

b. long-term bonds.

c. real estate.

d. short-term securities.

16. If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called

a. share price appreciation.

b. capital gains distribution.

c. dividends.

d. split net asset value.

17. Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called

a. income funds.

b. capital appreciation funds.

c. specialty funds.

d. dividend funds.

18. Mutual funds composed of bonds that offer periodic coupon payments are

a. income funds.

b. specialty funds.

c. dividend funds.

d. growth funds.

19. Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations.

a. longer; less

b. shorter; less

c. shorter; more

d. A and C

20. The net asset value of international stock mutual funds ____ as the dollar strengthens against foreign currencies. (Assume no change in the prices of foreign stocks.)

a. increases

b. decreases

c. is unaffected

d. can increase or decrease depending on the dollar's degree of strength

21. Mutual funds that include some non-U.S. stocks and U.S. stocks are called ____ funds.

a. global

b. foreign

c. combined

d. mixed

22. A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.

a. specialty

b. growth

c. capital appreciation

d. growth and income

23. The majority of mutual fund assets are in the form of

a. common stocks.

b. preferred stocks.

c. U.S. government bonds.

d. municipal bonds.

24. If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders.

a. 25

b. 50

c. 75

d. 90

25. When the redemptions of money market mutual fund shares exceeds sales of shares, the fund accommodates the amount of excessive redemptions by

a. selling some of the assets contained in the portfolio.

b. issuing stock.

c. issuing bonds.

d. borrowing from banks.

26. Money market fund assets include all of the following, except

a. stocks.

b. repurchase agreements.

c. Treasury bills.

d. CDs.

27. If money market funds definitely expect interest rates to increase, they will ____ their average asset maturity.

a. not adjust

b. shorten

c. lengthen

d. shorten (if the expected change is small) or lengthen (if the expected change is large)

28. Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.

a. low; high

b. high; high

c. high; low

d. low; low

29. Equity real estate investment trusts invest

a. in mortgage and construction loans.

b. directly in properties.

c. in common stocks issued by construction companies.

d. in common stocks issued by real estate brokerage firms.

30. Because ____ real estate investment trusts essentially represent a fixed income portfolio, their market value will ____ as interest rates increase.

a. equity; increase

b. equity; decrease

c. mortgage; increase

d. mortgage; decrease

31. When interest rates decline, investors who want to earn a high return may tend to ____ in stock mutual funds, and ____ deposits in depository institutions.

a. reduce; reduce

b. reduce; increase

c. increase; reduce

d. increase; increase

32. The composition of asset allocation funds

a. is focused completely on one type of security as specified by the particular mutual fund.

b. is fixed and not altered by the mutual fund managers.

c. A and B

d. none of the above

33. A mutual fund prospectus does not contain

a. minimum amount of investment required.

b. return on the fund since its inception.

c. investment objective of the mutual fund.

d. exposure of the mutual fund to various types of risk.

e. fees incurred by the mutual fund.

34. The ____ of a mutual fund indicates the value per share.

a. net asset value

b. gross asset value

c. net stock value

d. net bond value

e. none of the above

35. Mutual funds whose funds are promoted strictly by the mutual fund of concern are called

a. closed-end funds.

b. load mutual funds.

c. no-load mutual funds.

d. open-end mutual funds.

36. Mutual funds that are composed of bonds that offer periodic coupon payments are called ____ mutual funds.

a. tax-free

b. income

c. high-yield

d. growth

e. none of the above

37. ____ are most likely to invest in mortgages.

a. Stock mutual funds

b. Bond mutual funds

c. Load funds

d. Closed-end funds

38. Hedge funds that exceed a specified size must register with the

a. Securities and Exchange Commission (SEC).

b. Federal Reserve.

c. Office of Thrift Supervision.

d. Federal Mutual Fund Board.

39. According to SEC regulations, the majority of the members on a mutual fund's board of directors must be

a. employed by the fund.

b. outsiders (not employed by the fund).

c. certified public accountants.

d. certified financial analysts.

40. An expense ratio represents ____ divided by the fund's ____.

a. annual fees charged to investors; 12b-1 fees

b. annual fees charged to investors; net asset value

c. initial sales charge (load); 12b-1 fees

d. initial sales charge (load); net asset value

41. The most common investment by closed-end funds is in

a. derivatives.

b. bonds.

c. money market securities.

d. international equity securities.

42. ____ are beneficial for investors who want to invest in tax-exempt securities.

a. Municipal bond funds

b. Growth and income funds

c. International and global funds

d. Money market funds

43. When the demand for a particular closed-end fund is ____, the fund is likely priced at a ____.

a. high; discount

b. low; discount

c. high; premium

d. B and C are correct

44. Which of the following statements is incorrect?

a. Commercial paper is commonly purchased by money market funds.

b. From an investor's perspective, money market funds usually have a low level of credit risk.

c. Money market funds tend to have low interest rate risk compared to bond funds.

d. If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities today to purchase new securities with shorter maturities.

45. The number of exchange-traded funds has declined over the last several years because the cost of managing them was excessive.

a. True

b. False

46. Exchange-traded funds can be purchased on margin.

a. True

b. False

47. Investors can sell exchange-traded funds short.

a. True

b. False

48. Mutual fund managers seek securities that have much liquidity so that they could easily sell them in the secondary market at any time.

a. True

b. False

49. Closed-end funds are closed to new investment but allow redemptions by

shareholders.

a. True

b. False

50. Closed-end fund managers must hold more cash than mutual fund managers.

a. True

b. False

51. Index mutual funds are not traded throughout the day, while exchange-traded funds are.

a. True

b. False

52. Venture capital funds typically invest in stocks of publicly-traded companies.

a. True

b. False

53. Many businesses that go public are partially backed by venture capital before the IPO.

a. True

b. False

54. Private equity funds use most of their money to invest in stocks of publicly-traded companies.

a. True

b. False

55. Vulture funds are a type of private equity fund that purchase distressed assets of a firm that is in or near bankruptcy.

a. True

b. False

56. Hedge funds commonly engage in short selling.

a. True

b. False

57. ____ are not exchange-traded funds.

a. Spiders

b. Growth mutual funds

c. Diamonds

d. Sector Spiders

58. Which of the following statements is incorrect?

a. ETFs are like index mutual funds because the share price adjusts over time in response to the change in the index level.

b. Both ETFs and index mutual funds pay dividends in the form of additional shares to investors.

c. The portfolio management of both ETFs and index mutual funds is very complex.

d. ETFs can be traded throughout the day.

59. Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as

a. index mutual funds.

b. exchange-traded funds.

c. money market funds.

d. none of the above

60. Exchange traded funds can be

a. traded throughout the day.

b. purchased on margin.

c. sold short.

d. all of the above

61. ____ trade at one-tenth of the S&P 500 value.

a. Spiders

b. Cubes

c. Diamonds

d. World Equity Benchmark Shares

62. Mutual funds must register with the U.S. Treasury and provide to interested investors a prospectus that discloses details about the components of the funds and risks involved.

a. True

b. False

63. The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.

a. True

b. False

64. Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors.

a. True

b. False

65. The expenses incurred by a mutual fund are billed separately to investors, and are not included in the fund's net asset value (NAV).

a. True

b. False

66. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.

a. True

b. False

67. Large mutual funds can exert some control over the management of firms because they commonly represent the largest shareholders.

a. True

b. False

68. Investors who feel capable of making their own investment decisions often prefer to invest in load funds.

a. True

b. False

69. The term "mutual funds" is normally used to represent closed-end funds, and does not include open-end funds.

a. True

b. False

70. Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of every day.

a. True

b. False

71. Capital appreciation funds are suited for investors who are more willing to risk a possible loss in value.

a. True

b. False

72. The returns on international stock mutual funds are affected only by foreign companies' stock prices, and are independent of currency movements.

a. True

b. False

73. Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform indexes.

a. True

b. False

74. A mutual fund's performance is usually unrelated to market conditions.

a. True

b. False

75. The SEC requires that a majority of the directors of a mutual fund board be independent (not employed by the fund).

a. True

b. False

76. Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall investment.

a. True

b. False

77. Closed-end funds may sometimes engage in a stock repurchase, in which they purchase shares on the exchange where the shares are listed.

a. True

b. False

78. Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates.

a. True

b. False

79. Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with inflation.

a. True

b. False

80. Equity REITs essentially represent fixed-income portfolios. Thus, their market values will be influenced by interest rate movements.

a. True

b. False

81. Hedge funds are more heavily regulated than mutual funds.

a. True

b. False

82. Which of the following is not true regarding mutual funds?

a. They are a key financial intermediary.

b. They provide an important service to individual investors seeking to invest funds.

c. Most mutual funds use experienced portfolio managers, so investors do not have to manage the portfolio themselves.

d. They provide a way for individual investors to diversify, but most individual investors are unable to afford the purchase of mutual fund shares.

83. Which of the following statements is incorrect?

a. Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and are

traded on a stock exchange.

b. Unlike a closed-end fund, an ETF has a fixed number of shares.

c. ETFs differ from most open-end and closed-end funds in that they are not actively managed.

d. One disadvantage of ETFs is that each purchase of additional shares must be done through the exchange where they are traded.

84. A mutual fund prospectus does not contain the

a. minimum amount of investment required.

b. investment objective of the mutual fund.

c. exposure of the mutual fund to various types of risk.

d. return on the fund since its inception.

e. fees incurred by the mutual fund.

85. The ____ of a mutual fund represents the price at which shares can be purchased from a mutual fund.

a. gross asset value

b. net asset value

c. net stock value

d. net bond value

86. Which of the following is incorrect about money market funds (MMFs)?

a. The credit risk of MMFs is normally perceived to be lower than that of corporate bonds.

b. MMFs have higher interest rate risk than bond funds.

c. MMFs normally generate positive returns over time

d. All of the above are correct.

87. ____ are most likely to invest in mortgages.

a. Stock mutual funds

b. Real estate investment trusts (REITs)

c. Load funds

d. Closed-end funds

e. None of the above

88. Mutual funds are not required to disclose which of the following in the prospectus?

a. the names of the portfolio managers

b. the length of time that the portfolio managers have been employed by the fund in that position

c. the performance record in recent years

d. the number of investors currently investing in the mutual fund

e. Mutual funds are required to disclose all of the above in a prospectus

89. Which of the following is not a way in which mutual funds generate returns for their shareholders?

a. They can pass on any earned income as dividend payments to shareholders.

b. They distribute the capital gains resulting from the sale of securities within the fund.

c. The mutual fund price appreciates.

d. All of the above are ways in which a mutual fund generates returns to its shareholders.

90. A(n) ____ fund contains a sales charge.

a. load

b. no-load

c. closed-end

d. open-end

e. none of the above

91. ____ funds are open to investment from investors at any time.

a. Load

b. No-load

c. Open-end

d. Closed-end

e. None of the above

92. Which of the following statements is incorrect?

a. Investors can purchase shares directly from an open-end fund at any time.

b. The number of shares of an open-end fund is always changing.

c. Open-end funds typically maintain some cash on hand in case investments exceed redemptions.

d. There are many different categories of open-end mutual funds.

93. ____ funds focus on a group of companies sharing a particular characteristic.

a. Specialty

b. Growth and income

c. Closed-end

d. Capital appreciation

e. None of the above

94. Bond portfolios with some bonds rated below Baa by Moody's or BBB by Standard and Poor's, available for investors desiring high return and willing to incur high risk, are called ____ funds.

a. growth

b. capital appreciation

c. junk bond

d. bond

e. none of the above

95. Which of the following statements is incorrect?

a. A mutual fund is usually run by an investment company.

b. Although many mutual funds have grown substantially over time, their expense ratios have generally increased over time.

c. For each mutual fund, all expenses charged and reflected in the expense ratio are always valid.

d. The SEC requires that a majority of the directors of a mutual fund board be independent.

96. Money market funds commonly invest in

a. stocks.

b. real estate.

c. commercial paper.

d. U.S. Treasury bonds.

e. none of the above

97. Which of the following is not true with respect to venture capital funds?

a. They typically invest in young, growing firms that need equity funding but are not ready or willing to go public.

b. More than half of all VC investing is in businesses that are being created.

c. Venture capital funds tend to focus on technology firms, which have the potential for high returns but also exhibit a high level of risk.

d. Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail.

e. All of the above are correct with respect to venture capital funds.

98. ____ funds sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securities.

a. Growth

b. Open-end

c. Capital appreciation

d. Hedge

e. Specialty

1. Which of the following is not a service that is commonly performed by an securities firm?

a. setting regulatory rules for stock exchanges

b. origination

c. underwriting

d. distribution

2. Securities firms facilitate IPOs in the ____ market; they facilitate the trades of stocks between investors in the ____ market.

a. primary; primary

b. secondary; primary

c. primary; secondary

d. secondary; secondary

3. The ____ regulates the issuance of securities.

a. Securities and Exchange Commission

b. National Association of Securities Dealers

c. Federal Reserve Board

d. Securities Investor Protection Corporation

4. All information relevant to the security, as well as the agreement between the issuer and the securities firm, must be provided in the

a. origination.

b. registration statement.

c. best-efforts agreement.

d. none of the above

5. When a stock offering is based on a firm commitment, this means that the securities firm does not guarantee a price to the issuing corporation.

a. True

b. False

6. Research indicates that securities firms tend to

a. overprice IPOs.

b. underprice IPOs.

c. price IPOs correctly.

d. none of the above

7. The one-day return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors who purchase the shares a day after the IPO are generally ____.

a. high; high

b. high; low

Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital and Bank H holds a higher level of capital. Bank G's return on equity is probably ____ volatile than that of Bank H. Bank G's beta is probably ____ than that of Bank H.

Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A's return on assets is ____ than Bank B's. Bank A's return on equity is ____ than Bank B's.

The risk premium on a commercial bank is ____ related to economic growth and ____ related to management skills.

Net income measured as a percentage of assets is

Interest paid on deposits and borrowed funds is called

____ results from a bank's sale of securities.

If a bank has short-term deposits and provides long-term fixed rate loans, and interest rates decline over time, its net interest margin should be:

Interest income generated from all assets is called

Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.

During the credit crisis, the level of ____ was much higher than in other periods.

If a bank is too ____ in attempting to avoid loan losses, its net interest margin will be ____.

When only equity counts as capital, the leverage measure is

The sum of net interest income, non-interest income, and securities gains, minus provision for loan losses and non-interest expenses equals

If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____.

Which of the following banks would likely have the highest return on equity?

Answer

Federal credit unions are regulated and supervised by the

Savings institutions obtain most of their funds from

____ are the primary asset of savings institutions.

To obtain short-term funds, savings institutions commonly borrow funds in the ____ market.

Savings institutions can obtain capital by:

The primary use of credit union funds is

The ____ savings institutions hold the most assets in aggregate.

The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk.

Credit unions obtain most of their funds from

Which of the following is not an asset of savings institutions?

Today, credit unions are regulated as to the

____ are non-profit organizations composed of members with a common bond.

____ do not represent an asset of credit unions.

Savings institutions that reduce their amount of ____ will best reduce their exposure to interest rate risk.

____ risk is probably the least concern for savings institutions.

1. Which of the following statements is incorrect?

      A) Insurance provides a payment to the insured under conditions specified by the insurance policy contract.

      B) Individuals who are less exposed to specific conditions that cause financial damage are more likely to purchase insurance against those conditions.

     C) Insurance can cause the insured to take more risks because they are protected.

     D) Insurance companies employ underwriters to calculate the risk of specific insurance policies.

2. The insurance premium is _______ related to the uncertainty about the size of the payments; the premium is also _______ for group plans.

     A) higher; lower

     B) higher; higher

     C) lower; higher

     D) lower; lower

3. Those insurance companies whose claims are _______ predictable need to maintain _______ liquidity.

     A) less; less

     B) more; more

     C) less; more

     D) none of these

4.   A _______ life insurance company is owned by its policyholders; most life insurance companies are _______.

A)  stock‑owned; mutual

B)  mutual; mutual

C)  stock‑owned; stock‑owned

D)  mutual; stock‑owned

5.   A life insurance policy that protects the policyholder until death, or as long as premiums are promptly paid, is a _______ policy.

A)  whole life

B)  term

C)  universal life

D)  none of these

6.   _______ insurance provides insurance for a policyholder only over a specified period.

A)  Term

B)  Whole life

C)  Universal

D)  Term and universal

7.   Which type of life insurance policy does not build a cash value for policyholders?

A)  whole life

B)  term

C)  universal life

D)  All of these build a cash value.

8.   Which type of life insurance policy specifically accommo­dates the needs of people who need more insurance now than later?

A)  whole life

B)  term

C)  decreasing term

D)  universal life

9.   Which type of life insurance policy specifies a limited period of time over which the policy will exist, and builds a cash value for policyholders over time?

A)  whole life

B)  term

C)  universal life

D)  decreasing term

10. Which type of life insurance policy can offer flexibility on the size and timing of premium payments? (The policy­holder can decide the size of payments each period.)

A)  whole life

B)  term

C)  universal life

D)  decreasing term

11. Under _______ insurance, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy.

     A) whole life

     B) term

     C) variable life

     D) universal life

12. _______ is not a typical source of funds to life insurance companies.

A)  Deposit insurance premiums

B)  Annuity plans

C)  Investment income

D)  Life and health insurance premiums

13. _______ represent the most popular asset of life insurance companies.

A)  Corporate bonds

B)  Treasury securities

C)  Corporate stock

D)  State and local bonds

14. Which of the following is the least common use of funds by life insurance companies?

     A) government securities

     B) corporate bonds

     C) stocks

     D) real estate

15. Which of the following is not a ratio (or group of ratios) commonly used by insurance regulators to detect any problems in time to search for a remedy before the company deteriorates further?

A)   liquidity ratios

B)    operating expense ratios

C)   profitability ratios

D)   All of these ratios are commonly used by insurance regulators.

16. The ratio of an insurance company’s net profit to policy­holders' surplus is called:

A)  liquidity ratio.

B)  return on net worth.

C)  net underwriting margin.

D)  return on assets.

17. Because life insurance companies carry a large amount of _______ securities, the market value of their asset port­folio can be _______ to interest rate fluctuations.

A)  short‑term; insensitive

B)  short‑term; very sensitive

C)  long‑term; insensitive

D)  long‑term; very sensitive

18. Life insurance companies can attempt to reduce their exposure to interest rate risk by:

A)  increasing their proportion of long‑term assets.

B)  diversifying the age distribution of their customer base.

C)  increasing their proportion of short‑term assets.

D)  concentrating on an older age distribution of their customer base.

19. Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies?

A)  Property and casualty policies are longer term.

B)  The type of policies offered by life insurance com­panies are less focused.

C)   Future compensation amounts paid on property and casualty policies are more difficult to forecast.

D)  Life insurance companies need to maintain a more liquid asset portfolio.

20. The most common use of funds for property and casualty insurance com­panies is:

A)  municipal securities

B)  Treasury securities.

C)  corporate stock.

D)  corporate bonds.

21. Which of the following is not a difference between property and casualty insurance and life insurance?

     A) Property and casualty insurance policies often last ten years or more, as opposed to the short-term life insurance policies.

     B) Property and casualty insurance encompasses a wide variety of activities, while life insurance is more focused.

     C) Forecasting the amount of future compensation to be paid is more difficult for property and casualty insurance than for life insurance.

     D) All of these are differences between property and casualty insurance and life insurance.

     ANSWER:  A

22. _______ effectively reallocates a portion of an insurance company’s return and risk to other insurance companies.

A)  Reinsurance

B)  Cash flow underwriting

C)  Factor insurance

D)  Universal insurance

ANSWER:  A

23. _______ usually require individuals to choose a primary care physician.

     A) Indemnity plans

     B) Health maintenance organizations

     C) Preferred provider organizations

     D) None of these

     ANSWER:  B

24. _______ insurance covers losses due to dishonest employees.

     A) Key employee

     B) Credit line

     C) Malpractice

     D) Fidelity bond

     ANSWER:  D

25. _______ insurance covers losses due to lawsuits by dissatisfied customers.

     A) Fidelity bond

     B) Credit line

     C) Surety bond

     D) Business interruption

     ANSWER:  C

26. Which of the following is not involved in the regulation of the insurance industry?

     A) National Association of Insurance Commissioners (NAIC)

     B) Insurance Regulatory Information System (IRIS)

     C) Federal Deposit Insurance Corporation (FDIC)

     D) All of these are involved in the regulation of the insurance industry.

     ANSWER:  C

27. All regulation of insurance companies is performed by:

A)  federal agencies.

B)  the National Association of Insurance Commissioners (NAIC).

C)  the Insurance Regulatory Information System (IRIS).

D)  state agencies.

ANSWER:  D

28. In a _______ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ, depending on the assets backing the policy.

A)   universal life

B)    whole life

C)   variable life

D)   group life

E)    none of these

ANSWER:  C

29.  The most common type of mortgage held by life insurance companies are _______ mortgages.

A)   commercial

B)    residential

C)   farm

D)   none of these

ANSWER:  A

30.  The _______ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern.

A)   Securities and Exchange Commission

B)    Federal Deposit Insurance Corporation

C)   National Association of Insurance Commissioners

D)   National Association of Securities Dealers

ANSWER:  C

31. Life insurance companies can reduce their exposure to _______ risk by diversifying the age distribution of their customer base.

     A) interest rate

     B) market

     C) credit

     D) liquidity

     ANSWER:  D

32. Pension funds whose contributions are dictated by the benefits that will eventually be provided are called _______ plans.

A)  defined benefit

B)  defined contribution

C)  beneficiary

D)  guarantor‑insured

ANSWER:  A

33. A pension plan that provides benefits that are determined by the accumulated contributions and return on the fund’s investment performance is called a _______ plan.

A)  defined benefit

B)  defined contribution

C)  beneficiary

D)  guarantor‑insured

ANSWER:  B

34. A _______ plan allows a firm to know with certainty the amount of funds to contribute. A _______ plan allows a firm to know with certainty the amount of benefits that must be provided.

A)  defined benefit; defined benefit

B)  defined contribution; defined contribution

C)  defined contribution; defined benefit

D)  defined benefit; defined contribution

ANSWER:  C

35. There are more defined _______ pension plans; there are more parti­cipants in defined _______ plans.

A)  benefit; contribution

B)  contribution; benefit

C)  contribution; contribution

D)  benefit; benefit

ANSWER:  B

36. If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a _______ strategy. When comparing matched funding and projective funding, _______ is more flexible for portfolio managers.

A)  matched funding; matched funding

B)  projective funding; matched funding

C)  projective funding; projective funding

D)  matched funding; projective funding

ANSWER:  D

37. Pension funds managed by life insurance companies are normally referred to as:

A)  trust portfolios.

B)  insured plans.

C)  matched plans.

D)  projective plans.

ANSWER:  B

38. Pension portfolios managed by trusts are expected to offer _______ returns than those managed by insurance companies and have a(n) _______ degree of risk.

A)  lower; higher

B)  lower; lower

C)  the same; equal

D)  higher; lower

E)  higher; higher

ANSWER:  E

39. The asset composition of private pension portfolios is most heavily concentrated in:

A)  corporate bonds.

B)  mortgages.

C)  common stock.

D)  money market securities.

ANSWER:  C

40. Investing in a bond index portfolio is an example of a(n) _______ approach. Investing in an equity portfolio that mirrors the stock market is an example of a(n) _______ approach.

A)  passive; active

B)  active; active

C)  active; passive

D)  passive; passive

ANSWER:  D

41. Pension funds managed by life insurance companies concen­trate on:

A)  common stock.

B)  bonds and mortgages.

C)  preferred stock.

D)  money market instruments.

ANSWER:  B

42. Pension portfolios managed by trusts concentrate on:

A)  common stock.

B)  bonds.

C)  mortgages.

D)  money market instruments.

ANSWER:  A

43. To reduce interest rate risk, pension fund managers can:

A)  shift from variable‑rate to fixed‑rate bonds.

B)  increase the average maturity on fixed‑rate bonds.

C)  decrease the average maturity on fixed‑rate bonds.

D)  reduce the investment in money market securities.

ANSWER:  C

44. Most pension fund contributions are contributed by the:

A)   employer.

B)    employee.

C)   state government.

D)   federal government.

ANSWER:  A

45. Individuals who are insured under a managed health care plan can usually choose any provider of health care services.

     A) true

     B) false

     ANSWER:  B

46. The adverse selection problem as related to the insurance industry means that people who have insurance are less likely to suffer losses than people who do not have insurance.

A) true

B)   false

ANSWER:    B

47. The moral hazard problem as related to the insurance industry means that some people take more risks once they are insured.

A) true

B)   false

     ANSWER:  A

Which of the following statements is incorrect?

a.
Banks have expanded their business across services over time.
b.
Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.
c.
The banking industry has become less concentrated in recent years.
d.
All of the statements above are correct.

c.
The banking industry has become less concentrated in recent years.



____ are offered to bank customers who desire to write checks against their account.

a.
Time deposit accounts
b.
CDs
c.
Demand deposit accounts
d.
Money market deposit accounts

c.
Demand deposit accounts



A(n) ____ account provides checking services as well as interest.

a.
demand deposit
b.
negotiable order of withdrawal (NOW)
c.
passbook savings
d.
time deposit

b.
negotiable order of withdrawal (NOW)



A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market.

a.
retail CD
b.
negotiable CD
c.
market CD
d.
protective CD

b.
negotiable CD



Money market deposit accounts differ from conventional time deposits in that they

a.
specify a maturity.
b.
offer limited check writing privileges.
c.
are less liquid.
d.
none of the above

b.
offer limited check writing privileges.



The intent of federal funds transactions is to

a.
correct short-term fund imbalances experienced by banks.
b.
correct long-term fund imbalances experienced by banks.
c.
serve as a permanent source of bank capital.
d.
serve as the primary depository source of funds.

a.
correct short-term fund imbalances experienced by banks.



Obtaining funds through ____ is not a common source of funds for banks to satisfy a temporary deficiency of funds?

a.
issuing bonds
b.
the federal funds market
c.
repurchase agreements
d.
borrowing from the Federal Reserve

a.
issuing bonds



Which of the following is true?

a.
The primary credit lending rate is set by the president of the United States.
b.
The federal funds rate is set by the president of the United States.
c.
The primary credit lending rate is set by commercial banks.
d.
The primary credit lending rate is now set at a level above the federal funds rate.
e.
A and B

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



The Federal Reserve provides loans to banks in order to

a.
resolve permanent shortages of funds experienced by banks.
b.
resolve temporary shortages of funds experienced by banks.
c.
finance the shortages of funds of finance companies.
d.
none of the above

b.
resolve temporary shortages of funds experienced by banks.



When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a

a.
federal funds loan.
b.
discount window loan.
c.
repurchase agreement.
d.
commercial paper transaction.

c.
repurchase agreement.



When banks need funding for just a few days, they would most likely

a.
issue bonds and then call them.
b.
issue stock and then repurchase it.
c.
borrow in the federal funds market.
d.
issue NCDs.

c.
borrow in the federal funds market.



Subordinated notes and debentures are examples of

a.
primary capital.
b.
secondary capital.
c.
depository sources of funds.
d.
repurchase agreements.

b.
secondary capital.



All other things equal, when banks issue new stock, they

a.
increase reported earnings per share.
b.
decrease their ability to absorb operating losses.
c.
dilute the ownership of the bank.
d.
A and B

c.
dilute the ownership of the bank.



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

a.
time deposits and foreign deposits; savings deposits and short-term borrowings
b.
savings deposits and short-term borrowings; foreign deposits and time deposits
c.
savings and time deposits; foreign deposits and short-term borrowings
d.
foreign deposits and short-term borrowings; savings and time deposits

c.
savings and time deposits; foreign deposits and short-term borrowings



Cash held ____ represents the major portion of a bank's required reserves.

a.
at other commercial banks
b.
in a bank's vault
c.
on deposit at the federal funds window
d.
on deposit with the Board of Governors

b.
in a bank's vault



The main use of bank funds is for

a.
loans.
b.
investment securities.
c.
fixed assets.
d.
repurchase agreements.

a.
loans.



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

a.
term loans.
b.
working capital loans.
c.
direct lease loans.
d.
revolving credit loans.

b.
working capital loans.



____ loans are primarily used to finance the purchase of fixed assets.

a.
Term
b.
Working capital
c.
Informal line of credit
d.
Revolving credit

a.
Term



Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when?

a.
working capital loan
b.
direct lease loan
c.
term loan
d.
informal line of credit

d.
informal line of credit



The interest rate banks charge their most creditworthy customers is known as the

a.
federal funds rate.
b.
primary credit lending rate.
c.
prime rate.
d.
call money rate.

c.
prime rate.



Commercial banks are not allowed to invest in

a.
Treasury securities.
b.
Freddie Mac securities.
c.
Fannie Mae securities.
d.
Banks can invest in all securities mentioned above.

d.
Banks can invest in all securities mentioned above.



Money market deposit accounts (MMDAs)

a.
require a maturity of 6 months or longer.
b.
allow a limited number of checks to be written against the account.
c.
pay a higher interest rate than CDs.
d.
none of the above

b.
allow a limited number of checks to be written against the account.



Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?

a.
MMDAs
b.
federal funds
c.
the discount window
d.
retail CDs

b.
federal funds



____ is (are) not a major source of funds for commercial banks.

a.
Deposit accounts
b.
Borrowed funds
c.
Commercial loans
d.
Bank capital
e.
All of the above are commercial banks sources of funds.

c.
Commercial loans



Which of the following is not an off-balance sheet activity?

a.
highly leveraged transactions (HLTs)
b.
standby letters of credit
c.
forward contracts
d.
swap contracts

a.
highly leveraged transactions (HLTs)



Deposit insurance has a limit of:

a.
$10,000.
b.
$25,000.
c.
$100,000.
d.
$250,000.

d.
$250,000.



The opening of a commercial bank in the United States

a.
does not require a charter.
b.
always requires a charter from a state government.
c.
always requires a charter from the federal government.
d.
requires a charter from a state or the federal government.
e.
requires a charter from both the state and federal government.

d.
requires a charter from a state or the federal government.



All Fed member banks must hold

a.
private insurance on deposits.
b.
FDIC insurance on deposits.
c.
both FDIC and private insurance on deposits.
d.
none of the above

b.
FDIC insurance on deposits.



An "off-balance-sheet commitment" that provides the bank's guarantee on the financial obligations of a borrower to a specific party is a

a.
standby letter of credit.
b.
federal funds agreement.
c.
repurchase agreement.
d.
discount window agreement.

a.
standby letter of credit.



The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own

a.
reserve requirements.
b.
capital ratios.
c.
interest rates on savings deposits.
d.
corporate loan interest rates.

c.
interest rates on savings deposits.



The Glass-Steagall Act of 1933 prevented

a.
any firm that accepts deposits from underwriting stocks and bonds of corporations.
b.
any firm that accepts deposits from underwriting general obligation bonds of states and municipalities.
c.
any firm that accepts deposits from holding any corporate bonds in its asset portfolio.
d.
state-chartered banks from offering commercial loans.

a.
any firm that accepts deposits from underwriting stocks and bonds of corporations.



The Financial Reform Act was intended to:

a.
prevent another credit crisis.
b.
reduce capital ratios.
c.
impose interest rate ceilings on deposits.
d.
prevent banks from offering securities services.

a.
prevent another credit crisis.



The Garn-St. Germain Act of 1982

a.
permitted depository institutions to offer money market deposit accounts.
b.
prevented depository institutions from acquiring problem institutions across geographical boundaries.
c.
required the Fed to explicitly charge depository institutions for its services.
d.
allowed the Fed to provide check clearing to depository institutions at no charge.

a.
permitted depository institutions to offer money market deposit accounts.



Which of the following is not a specific criterion the FDIC uses to monitor banks?

a.
capital adequacy
b.
dollar value of fixed assets
c.
asset quality
d.
Earnings
e.
sensitivity to financial market conditions

b.
dollar value of fixed assets



The potential risk that financial problems can spread through financial institutions and the financial system is referred to as:

a.
Systemic
b.
Systematic
c.
Unsystematic
d.
Market

a.
Systemic



Which of the following statements is incorrect?
a.
The Basel Accord based capital requirements on a bank's risk level.
b.
The Basel Accord forced banks with greater risk to maintain a higher level of capital.
c.
The goal of the Basel II Accord is to properly account for a bank's risk so that the bank's capital requirements are in line with its corresponding risk.
d.
The Basel II Accord will explicitly account for interest rate risk.

d.
The Basel II Accord will explicitly account for interest rate risk.



Which of the following statements is incorrect?

a.
The validity of a bank's estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period.
b.
Some banks supplement the VAR estimate with stress tests.
c.
In general, the VAR model does not lend itself to determine capital requirements.
d.
All of the statements above are correct.

c.
In general, the VAR model does not lend itself to determine capital requirements.



Which of the following is an "off-balance-sheet commitment?"

a.
long-term debt
b.
additional paid-in capital
c.
notes payable
d.
guarantees backing commercial paper issued by firms

d.
guarantees backing commercial paper issued by firms



The liquidity component of the CAMELS rating refers to

a.
regulators' concern about how a bank's earnings would change if economic conditions change.
b.
how well the bank's management would detect its own financial problems.
c.
a bank's sensitivity to financial market conditions.
d.
monitoring the type of loans that are given, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases.
e.
excessive borrowing by banks from outside sources, such as the discount window.

e.
excessive borrowing by banks from outside sources, such as the discount window.



The key reason for regulatory examinations (such as CAMELS ratings) is to

a.
rate past performance.
b.
detect problems of a bank in time to correct them.
c.
check for embezzlement.
d.
monitor reserve requirements.

b.
detect problems of a bank in time to correct them.



Which banking act allowed banks to cross state lines in order to acquire a failing institution?

a.
McFadden Act
b.
Glass-Steagall Act
c.
DIDMCA
d.
Garn-St. Germain Act

d.
Garn-St. Germain Act



Which banking act permanently increased FDIC insurance up to $250,000?

a.
DIDMCA
b.
Sarbanes-Oxley Act
c.
Financial Reform Act
d.
Garn-St. Germain Act

c.
Financial Reform Act



Which banking act removed deposit rate ceilings?

a.
McFadden Act
b.
Glass-Steagall Act
c.
DIDMCA
d.
Garn-St. Germain Act

c.
DIDMCA



The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on

a.
economies of scale.
b.
financial leverage.
c.
diseconomies of scale.
d.
capital adequacy theory.

a.
economies of scale.



____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks.

a.
Capital adequacy
b.
Current stock price
c.
Asset quality
d.
Management
e.
All of the above are used by the FDIC to rate banks.

b.
Current stock price



The moral hazard problem is minimized when deposit insurance premiums are

a.
zero (not imposed by the FDIC).
b.
the same percentage of assets for all banks.
c.
set at a fixed percentage of assets for large banks, and is zero for small banks.
d.
set at a percentage of assets that is based on the bank's risk level.

d.
set at a percentage of assets that is based on the bank's risk level.



____ is not a rating criterion used by the FDIC.

a.
Capital adequacy
b.
Off-balance sheet financing
c.
Asset quality
d.
Management
e.
Liquidity

b.
Off-balance sheet financing



The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily consists of funds obtained from

a.
issuing commercial paper and bonds.
b.
retaining earnings and issuing commercial paper.
c.
retaining earnings and issuing common stock.
d.
issuing bonds and common stock.

c.
retaining earnings and issuing common stock.



During the 2008-2010 period, the ____ was implemented to alleviate the financial problems experienced by banks and other financial institutions with excessive exposure to mortgages or mortgage-backed securities.

a.
Riegle Program
b.
Sarbanes-Oxley Program
c.
FDIC Program
d.
Troubled Asset Relief Program (TARP)

d.
Troubled Asset Relief Program (TARP)



A federal bank charter is issued by the

a.
Comptroller of the Currency.
b.
Securities and Exchange Commission.
c.
U.S. Treasury.
d.
Federal Reserve.
e.
none of the above

a.
Comptroller of the Currency.



Which of the following statements is incorrect?

a.
Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests.
b.
Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk.
c.
To prevent agency problems, some banks provide stock as compensation to managers.
d.
The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders.

b.
Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk.



When cash outflows temporarily exceed cash inflows, banks are most likely to experience

a.
higher dividend payments.
b.
illiquidity.
c.
a negative duration on its assets.
d.
an excess of capital.

b.
illiquidity.



Banks can resolve cash deficiencies by

a.
creating additional liabilities.
b.
selling assets.
c.
buying back common stock.
d.
increasing dividend payouts.
e.
A or B

e.
A or B



As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability.

a.
higher; higher
b.
lower; lower
c.
higher; lower
d.
lower; higher

a.
higher; higher

