Question

1. Safety and soundness regulations include all of the following layers of protection EXCEPT

a)   the provision of guarantee funds.

b)   requirements encouraging diversification of assets.

c)    the creation of money for those FIs in financial trouble.

d)   requiring minimum levels of capital.

e)   monitoring and surveillance.

2. Which of the following would be a key area of activity for an investment bank specializing in the commercial side of the business?

a)   Purchase of existing securities.

b)   Sale of securities in the secondary market.

c)    Brokerage of existing securities.

d)   Underwriting issues of new securities.

e)   All of these.

3. Which of the following is NOT true?

a)   The finance company industry tends to be very concentrated.

b)   Twenty of the largest finance companies account for more than 65% of the industry assets.

c)    Many of the largest finance companies tend to be wholly owned or are captive subsidiaries of major manufacturing firms.

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

e)   Finance companies often provide captive financing for the purchase of products manufactured by their parent company.

4. A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The current price of the bond today will be ______ if the coupon rate is 8.5%.

a)   $712.99

b)   $960.14

c)    $1,123.01

d)   $886.28

e)   $1,000.00

5. The primary function of insurance companies is to

a)   generate fees for the banks that sell insurance products.

b)   sell a variety of consumer investment products.

c)    protect policyholders from adverse events.

d)   assist in the transfer of wealth into the future.

e)   provide contracts that encourage policyholders to save current income.

6. An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share.

If the investment bank can sell the shares for $9.75 per share, what is the profit (loss) to the investment banker?

a)   Profit of $1,000,000.

b)   Loss of $7,500,000.

c)    Profit of $7,000,000.

d)   Loss of $7,000,000.

e)   Loss of $1,000,000.

7. What is the primary function of finance companies?

a)   Protect individuals and corporations from adverse events.

b)   Make loans to both individuals and corporations.

c)    Extend loans to banks and other financial institutions.

d)   Pool the financial resources of individuals and companies and invest in diversified portfolios of assets.

e)   Assist in the trading of securities in the secondary markets.

8. All else equal, the price and yield on a bond are

a)   positively related.

b)   negatively related.

c)    sometimes positively and sometimes negatively related.

d)   not related.

e)   indefinitely related.

9. A college professor is looking to retire in 30 years with $1,000,000. Currently, she has no savings. She believes she can earn 7% on money she saves during this time. Is she starts now, how much will she need to have saved at the end of each to reach her goal?

a)   $11448.65

b)   $10586.40

c)    $11327.45

d)   $9839.83

e)   $33,333.33

10. A zero coupon bond with a face value of $1000 is for sale on the market. If the bond matures in 5 years and the current interest rate is 2%. What is the most you should pay for the bond?

a)   $905.73

b)   $923.84

c)    $887.97

d)   $1000

e)   $883.85

Truth/False (10 points, 2 points each)

1. Commercial banks and finance companies have traditionally served the needs of the residential real estate market.

a)   True

b)   False

2. The movement of an off-balance-sheet asset or liability to an on-balance-sheet item is dependent on the occurrence of a contingent event.

a)   True

b)   False

3. Market making involves creating a primary market in a financial asset.

a)   True

b)   False

4. The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets.

a)   True

b)   False

5. Because of the large amount of equity on a typical commercial bank balance sheet, credit risk is not a significant risk to bank managers.

a)   True

b)   False

Answer 1

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