Banking and Investing Final Flashcard review

liquidity tightens

Interest rates on loans go up

Interest rates on deposits and bonds go up

Decline in employment (growth in unemployment)

Slowing GDP growth

If the fed INCREASES Interst Rate, what will happen?

liquidity expands

Interest rates on loans go down

Interest rates on deposits and bonds go down

Growth in employment (decline in unemployment)

Acceleration of GDP growth

If the fed DECREASES Intrerst Rate, what will happen?

Economic Recession

Historically, an Inverted yield curve has been an indicator of heightened chance of _____ in near future

Periods of low GDP

The Fed would likely consider DECREASING the Fed Funds Rate in  

Quantitative Tightening

In 2017 the Federal Reserve felt confident that everything had fully recovered from the 2008 Housing collapse and recession and began letting its purchased securities mature, and therefore reducing its balance sheet, representing the start of a period of 

Quantitative Easing

In 2020 in response to COVID the Fed greatly expanded its balance sheet in efforts to boost economic conditions, representing the start of a period of 

the net return from both the Bond's coupon and the Bond's Price compared to its Face Value

Which best defines a Bond's Yield?  

Hashes

____are like the fingerprints that make each block of data unique and also link them on the block chain

Atlanta

For the Region we live in, the regional federal reserve Bank is located in

Quantitative Tightening

A period in which the Fed's strategy is to decrease the buying of bonds and securities on the open market and reducing their balance sheet would be considered a period of 

Keys

_____ are used in blockchain technologies to allow users utilize the public technology while protecting their assets and their identity

Cryptos

a decrease in bond yields

The FED announces stricter reserve ratios for banks, what would be the expected effect to bond yields?

5.3%

What is the Yield of the Bond:

A $1,000 Face value bond currently priced at $1,045 and a coupon rate of 6.1%.  The bond has 7-years left to maturity.

an increase in bond yields

If the Fed announced a significant sell-off of Bonds from their balance sheet what would be the likely results to bond yields?

Monetary Policy

The Federal Reserve is responsible for setting

Gold

For much of history, the global supply of money was based on underlying supply and reserves of 

Periods of high Inflation

The Fed would likely consider INCREASING the Fed Funds Rate in 

Increase Reserve Ratio

Reduce the Balance Sheet (Quantitative Tightening)

Increase Fed Funds Rate

In times of an overheated, fast growing economy or heightened inflation, the FED may take on a more restrictive monetary policy.  In times of slow economic growth or high unemployment, the FED may take on a more open/less restrictive monetary policy.  Categorize below how they would use their 3 tools for each scenario

Restrictive Policy:

Decrease reserve Ratio

Increase Balance Sheet (Quantitative Easing)

Decrease Fed Funds Rate

In times of an overheated, fast growing economy or heightened inflation, the FED may take on a more restrictive monetary policy.  In times of slow economic growth or high unemployment, the FED may take on a more open/less restrictive monetary policy.  Categorize below how they would use their 3 tools for each scenario

Open Policy:

$15,750,000

Assume a bank is currently holding deposits of $105,000,000.  If the Federal Reserve mandated a Reserve Ratio of 15%, how much cash must the carry on its balance sheet to remain within the ratio?

there has been a decrease in bond yields

You are skimming some Financial headlines and see, "Spike in Bond Prices" in a title.   what would you expect it to say about bond yields

If interest rates rise, prices of existing bonds on the market will fall

Which statement below is true?

Federal Open Market Committee

The Federal Reserve’s principal monetary policymaking body is known as the 

Increased reserve ratio results in decreased lending by banks and decrease in liquidity into the economy

If the FED increases its reserve ratio, what is the anticipated effect on the economy

Less loans issued by banks and therefore less cash flow into the economy

If the Federal Reserve were to INCREASE the Reserve Ratio requirement for banks, the net effect on the economy would be 

approximately 4.5%

The historical average of the Fed Funds Rate since the 1950's has been

Decentralized

The most fundamental concept behind Cryptocurrency that make it unique compared to other forms of currency is that it is

Quantitative Easing

A period in which the Fed's strategy is to increase the buying of bonds and securities on the open market and grow their balance sheet would be considered a period of 

Fiat Money

Our current paper-currency (aka our $1, $5, 10, $20 bills, etc) is a form of what type of money?

Hot Wallets are online at all times

What differentiates a "Hot" wallet from a "cold" wallet?

12

The Federal Reserve is made up of ______ regional reserve banks located around the country

Maximize Employment, Foster Price Stability

The Federal Reserve is designated by Congress to fullfill its goals (known as the Dual Mandate) that include which of the following (select all that apply):

Maximize Employment

Limit Government Spending

Print Money

Regulate Investment Markets (Wall Street)

Regulate Trade

Foster Price Stability

Mining

_______ is the name given to the activity of verifying and validating crypto transactions within the Blockchain for compensation, using computer processing power to calculate complex calculations

Reserve Requirements

Which "tool" of the federal reserve is used to affect our country's banks ability to give out loans?

0%

In 2020, in response to the COVID epidemic's impact on the Economy the FED changed the Reserve Ratio to ___%, where it still stands today

the mortgage corp

Freddie Mac and Fannie Mae are government-sponsored enterprises that act as a bridge between mortgage lenders and Mortgage Backed Securities buy facilitating the purchase of the loans and putting a "guarantee" on them.  they fill which role?

Checking

Which types of accounts are most likley to be Non-Interest Bearing Accounts

Certificate of Deposit

Which of the following would be considered a “time deposit” to a bank?

90

If a bank has a loan that is more than ____ days past due it should be identified as a Non-Performing Loan

Having too heavily concentrated deposits from High Net-Worth individuals and tech start up companies

Investing in too high a concentration of Long Term Investment Securities, primarily long term Treasury Bonds

Significant reductions in bond prices/value as interest rates were increased at a fast pace.

Which of the following were contributing factors to the fall of Silicon Valley Bank? (choose all that apply)

Treasury Bonds

Mortgage Backed Securities

Municipal Bonds (State and Local)

Which type of investment securities do banks primarily invest in? (choose all that apply)

Federal Reserve Act

This act evolved our central bank into the structure we know today, as well as established the Dual Mandate that drives the central banks decision making and goals.

Investment banks driving up demand for mortgages by purchasing them at high quantities and packaging them into Mortgage Backed Securities

Increased demand for housing as interest rates were lowered significantly in years leading up to the collapse

Rating Agencies being "in the pocket" of investment banks and therefore blindly giving high ratings to risky assets

Relaxed lending practices that allowed banks to issue more loans, but to much higher risk borrowers

Which of the following were factors leading to the 2007-2008 Housing Crisis and subsequent recession?

Encompasses the risk of losses due to adverse movements in prices of financial instruments, including stocks, bonds, currencies, and commodities.

Match the appropriate definition/example to the corresponding Risk that it is describing

Market Risk:

A bank's inability to meet its short-term obligations due to an inability to sell assets or obtain funding at a reasonable cost.

Match the appropriate definition/example to the corresponding Risk that it is describing

Liquidity Risk:

Potential that borrowers may fail to meet their financial obligations

Match the appropriate definition/example to the corresponding Risk that it is describing

Credit Risk:

Arises from fluctuations in central bank rates that can impact a bank's net interest income and the value of its assets and liabilities.

Match the appropriate definition/example to the corresponding Risk that it is describing

Interest Rate Risk:

Character, Capacity, Capital, Collateral, and Conditions

When analyzing a borrowing relationship, which of the following represents the "Five Cs of Credit"?

the effective "spread" that bank is earning between what it pays for funds and what it earns on its loans and investments

What does “Net Interest Margin” effectively measure?

Investment Securities traditionally offer lower levels of risk for a bank

For bank, which of the following is an advantage to utilizing funds to invest in securities rather than to issue loans?

Loans

Cash & Reserves

Liabilities & Equity

Drag and drop the items below into the categories of “Assets” or “Liabilities & Equity”

Assets:

Capital

Borrowed Funds

Deposits

Drag and drop the items below into the categories of “Assets” or “Liabilities & Equity”

Liabilities & Equity:

Commercial Owner Occupied

A bank loans money to a company to purchase property to be used for a new factory line.  This would be considered which categorization of loan?

Brokered

Banks that “borrow” deposits from other banks for short-term boost/support of their liquidity are using ____ deposits.

Intermediary

What word best describes the primary role of a bank?

4.5%

If a bank’s Tier 1 Capital Ratio drops below ___%, they are considered to be at too high of a risk of failure and would likely be taken over by the FDIC.

have not received payments within past 90 days and are considered 90 days past due

Non-Performing Loans are those that____

$350,000,000

A bank has an average bond duration of 3.5 on their Available-for-Sale bond portfolio of $10 Billion.  If the federal reserve increased interest rates by 1% how much "unrealized-loss" might the bank expect on that Bond Portfolio

Loan to Deposit Ratio

Measures liquidity. If it's 85%, the bank has lent out 85% of its deposits. Above 95% is risky (not enough cash on hand); below 70% means the bank isn't lending enough to be profitable.

Stress Tests

Banks perform ____________ to assess their ability to handle various risks and market shifts

Maturity Transformation

The practice of banks using deposits (which can be withdrawn at any time) to issue loans with longer-term commitments is called

$1,275,000

If a bank holds a policy of an 85% Loan To value (LTV)  and a client is requesting funding to purchase a $1,500,000 commercial property, what would be the maximum amount the bank would lend to that borrower.

Liquidity Transformation

If a bank takes a bundle of loans it has issued and sell them as a "security" this is called

Dodd Frank Act

This act was passed after the 2008 recession as a way to reign in loose lending practices at banks through tighter regulation and oversight.

Net Interest Margin

Also called the "spread" this profitability measure is typically above 3% for a healthy regional bank

Loan Loss Reserves

If a loan is on a bank's radar as potentially going into default the bank would make an adjustment to 

Due to the length of the bonds (duration) they have more price movement when interest rates change, increasing the risk of the bonds losing price-value

From a bank's perspective, why are long term bonds (like 10-30 year bonds) potentially more risky than short term bonds?

Glass-Steagall Act

This Act was passed in 1933 as part of the response to the Great Depression, but then was repealed in 1999. Arguments could be made that its repeal had effects that contributed to the housing market crash and Great Recession in 2008.

Loan Loss Reserve Ratio

This is the "rainy day fund" for bad loans. It shows the bank is being proactive and realistic about potential losses in their specific market or region.