FIN4324 Exam 3 Textbook Questions

Smith FSU

Which of the following is NOT one of the five C’s of Credit Risk?

a) Capital

b) Capacity

c) Collateral

d) Career

d) Career

Olivia works in the risk management department of a commercial bank. She has been asked to minimize the interest rate of the bank. Which of the following tools would she NOT use?

a) fixed rate home mortgage loans

b) Interest rate futures contracts

c) adjustable interest rate business loans

d) duration matching

a) fixed rate home mortgage loans

Grace works as a consultant to a regional commercial bank. The bank is interested in increasing its liquidity so that it can meet its depositor’s cash needs. Grace tells the bank it should _____.

a) buy long-term assets

b) be a seller in the Fed funds market

c) sell commercial paper in the primary market

d) go to the Fed’s discount window to secure a discount loan

d) go to the Fed’s discount window to secure a discount loan

Andrew is analyzing the past performance of a commercial bank. He tells Julia, “This bank is run wonderfully! Look, both its ROA and ROE have increased rapidly over the last few years.” Julia is well informed about bank performance. She points out that Andrew should be careful since increases in ROA and ROE could be due to other factors as well. Which one?

a) the bank has taken on much more risk

b) the bank is overpaying its employees

c) the bank has been taken over by bank regulators

d) the bank is losing a large number of customers

a) the bank has taken on much more risk

Large commercial banks are facing FinTech risk due to large banks ____.

a) reacting too slowly to changes in technology

b) focusing far too much attention on low-income countries

c) taking on far too many cash deposits

d) having too many branches in economically disadvantaged rural and urban areas of the United States

a) reacting too slowly to changes in technology

The dual banking system in the United States refers to the fact that banks can either

a) be for profit or not be for profit

b) receive a charter from the federal government or a state government

c) offer checking accounts or only offer saving accounts

d) focus on consumers or focus on businesses as customers

b) receive a charter from the federal government or a state government

Using the accounting equation, bank capital is the difference between _____.

a) Interest rate on savings and interest rate on loans

b) bank assets and bank liabilities

c) bank revenues and bank expenses

d) bank profits and bank losses

b) bank assets and bank liabilities

If banks are labeled “Too Big to Fail” this means that _____.

a) bank regulators will not allow these banks to become insolvent

b) these banks are owned by the US government

c) these banks are well capitalized and can withstand any bank run

d) bank regulators do not need to examine these banks

a) bank regulators will not allow these banks to become insolvent

It is argued that consumers in the United States suffer from a lack of protection due to the fact that bank regulators will often side with banks rather than protecting consumers. This is known as _____.

a) Regulator Capture

b) Too Big to Fail

c) Purchase and Assume

d) Redlining

a) Regulator Capture

The Basel lll Endgame was an attempt to reduce bank’s dependence on ______.

a) internal risk models

b) redlining

c) Regulation Q protections

d) systematic risk

a) internal risk models

Hank is confused about financial market characteristics. To help Hank out, Amy explains that money market instruments are _____, while bond market instruments are _____.

a) issued by corporations only; issued by corporations and governments

b) not taxed; subject to income taxes

c) short-term; long-term

d) issued outside of the US; issued inside the US

c) short-term; long-term

Which of the following is the correct formula for the DRY and IRY?

a

Ye is examining the behavior of the yield on three-month Treasury bills. She notices immediately following the global financial crisis of 2008, the yields _____.

a) increased rapidly due to increases in the rate of inflation

b) fell to almost zero in response to Fed policy and market reactions to the crisis

c) increased significantly as US government budget deficit increased rapidly

d) fell slightly but still remained well above the 5% long-term average

b) fell to almost zero in response to Fed policy and market reactions to the crisis

Tracey works in the financial markets in the UK. In her job, she offers Eurodollar accounts to her customers who live in the UK. Tracey deals with what type of accounts?

a) Bank accounts in the UK that are not denominated in the pound

b) Commercial paper that is denominated in dollars but sold in Europe

c) UK government bonds that are denominated in the pound

d) Debt issued by American companies denominated in pounds and sold in the UK

a) Bank accounts in the UK that are not denominated in the pound

One of the key differences between traditional commercial paper and ESG commercial paper is that issuers

a) do not have to pay interest on ESG commercial paper

b) state clearly what borrowed funds will be used for with ESG commercial paper

c) pay a negative interest rate on ESG commercial paper

d) pay all of the taxes incurred by the buyer of ESG commercial paper

b) state clearly what borrowed funds will be used for with ESG commercial paper

Fannie Mae and Freddie Mac are two government agencies that issue bonds for what purpose?

a) make governement-guarenteed student loans more accessible to more college students

b) allow more people to finance the purchase of a new automobile

c) Increase liquidity in the mortgage market

d) reduce the probability of a bank run by offering deposit insurance

c) Increase liquidity in the mortgage market

From a saver’s standpoint, municipal bonds have the advantage of

a) being default risk free

b) having interest payments not subject to Federal income tax

c) lacking interest rate risk

d) being convertible into equity shares

b) having interest payments not subject to Federal income tax

Sunita is a saver and compares two bonds. The first bond is a corporate bond that pays 5%, while a tax-free municipal bond with the same risks pays 4.25%. Sunita is in the 22% tax bracket. If she wants the bond with the highest after-tax return, which one will she choose and why?

a) the corporate bond, since it will pay 5.78%

b) the municipal bond, since the corporate bonds equivalent tax-free rate is 3.9%

c) the corporate bond, since the municipal bonds equivalent tax-free rate is 3.9%

d) the municipal bond, since it will pay 5.185%

b) the municipal bond, since the corporate bonds equivalent tax-free rate is 3.9%

A call provision in a bond allows the ____ to change the bond by _____.

a) federal government; stating it no longer needs to be repaid

b) issuer; not returning the face value to the holder of the bond at maturity

c) owner; selling it back to the issuer of the bond

d) issuer; buying back the bond before the stated maturity rate

d) issuer; buying back the bond before the stated maturity rate

The current structure of the bond-rating system may have misaligned incentives due to the fact that

a) the bond-rating entities are owned and controlled by the governments

b) the issuers of bonds are the entities that pay for the bond rating

c) the bond-rating firms are nonprofit organizations

d) bond-ratings are never made available to the public

b) the issuers of bonds are the entities that pay for the bond rating

The US bond market was similar during the 2007-2008 crisis and during the beginning of the COVID-19 pandemic that

a) there was no flight to quality

b) the Federal Reserve pursued expansionary monetary policies

c) the level of uncertainty decreased significantly

d) the inflation rate in the United States increased dramatically

b) the Federal Reserve pursued expansionary monetary policies

Preferred stocks are different from common stocks in that preferred stockholders _____.

a) are paid dividends before common stockholders

b) can never earn a capital gain

c) do not own part of the corporation that issued the preferred stock

d) can never purchase of sell shares in the secondary market unlike common stockholders

a) are paid dividends before common stockholders

Historically, NASDAQ has had a larger percentage of listed companies that are from which industry (compared to the NYSE)?

a) Technology

b) Automotive

c) Steel

d) Nonprofit

a) Technology

If a stock pays a dividend of $2, which is expected to grow at 2%, while the discount rate is 6%, then according to the Gordon Growth Model, the price of the stock should be:

a) $50

b) $24

c) $16

d) $2.08

a) $50

Stock prices tend to move with the business cycle due to ______.

a) how changes in household income impact spending and thus corporate profits

b) changes in tax rates that come about as the business cycle changes

c) changes in uncertainty that results from economic expansions

d) how the government budget deficit changes over the business cycle

a) how changes in household income impact spending and thus corporate profits

When owners of a corporation’s stock place more weight on positive information about the corporation than negative information, this is called _____.

a) weak form stock market efficiency

b) confirmation bias

c) noise trading

d) Fischer pricing

b) confirmation bias