Fi 301 - EXAM 3 - MILLS

Money market funds are normally perceived to have ______ interest rates and ______ credit risk.

Low, Low

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

Consumer loans

Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active. T/F

True

When a bank obtains funds through ______, households are not a common provider of the funds.

Repurchase agreement

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be _______ percent.

14.13 = (3,000,000 - 2,947,000) / 3,000,000 * (360/45)

At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ______ the initial interest rate offered on a new adjustable-rate mortgage.

Above

Calculate the duration of a 3-year $1000-par 7% coupon (annual) with 10% YTM.

Mutual funds composed of ______ bonds with high credit ratings allow investors in high tax brackets to avoid taxes while maintaining a low degree of ______.

Municipal, Credit Risk

_________ funds focus on a group of companies sharing a particular characteristic.

Specialty

Mortgages are rarely sold in the secondary market. T/F

False

Equity real estate investment trusts invest: _________

Directly in properties

Obtaining funds through _______ is not a common way for banks to satisfy a temporary deficiency of funds.

Issuing bonds

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

Negotiable CD

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to: _______

The yield earned by investors holding the paper until maturity.

Borrowers who have a lower level of income relative to their periodic loan payments are more likely to default on their mortgages. T/F

True

You enter into an agreement to sell 1-year T-bills one year from now with total par value of $1 million. If you will sell the T-bills for $975,000, what is your profit from the futures position if the 1-year yield one year from now is 5%?

Loss of $125,000

You borrow $500,000 to buy a house with a 15-year mortgage. If the APR is 4%, how much interest will be paid in the first 60 payments?

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 6 day for $5,000,000. What is the yield?

9.14% = (5,000,000-4,925,000) / 4,925,000 * 360 / 60

During a period of rising interest rates, a bank's net interest margin will likely ______ if its assets are ____ its liabilities.

increase, greater than

Which of the following is NOT a money market security

Equity shares

When an investor purchases a 6-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is _____ percent.

6.2% = (10,000 - 9,700) / 9,700 * 360/182

Money market fund assets include all of the following except _______

Stocks

Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand. T/F

False

A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?

20% = .02 * 40 = 0.8, 0.8 / 4 = 0.2

Most studies that assess mutual fund performance find that mutual funds almost always outperform a benchmark market index. T/F

False

Investors who invest in a multifund mutual essentially pay two layers of management fees.

True

The Federal Funds market allows depository institutions to borrow_______

Short-term funds from each other

The main use of bank funds is for ______

Loans

A gap ratio of less than 1.00 suggests that _____

Rate-sensitive liabilities exceed rate-sensitive assets

A bank's uses of funds represent liabilities of a bank. T/F

False

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

Net asset value

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

open-end mutual funds

Because riskier assets offer _____ returns, a bank's strategy to increase its return will typically entail a(n) ________ in the overall credit risk of its asset portfolio.

Higher, increase

Which of the following is a measure for banks to use to assess their exposure to interest rate risk?

Duration & Gap Ratio

If investors sell their mutual fund shares after the net asset value of the fund increases, the investors benefit from:_____

Share price appreciation

You borrow $500,000 to buy a house with a 30-year mortgage. If the APR is 4.5%, what is the monthly payment?

PMT = 2533.45. N = 360, I/Y = 4.5/12, PV = 500,000, FV = 0

In the earlier years of a mortgage, _____

Most of the monthly payment reflects interest.

Macon Bank has interest revenues of $5 million, interest expenses of $4 million, and assets totaling $20 million. Macon Bank's net interest margin is____

5% = (5 million - 4 million) / 20 million

A bank can usually simultaneously maximize its return on assets and minimize credit risk. T/F

False

A mortgage with low initial payments what increase over time without ever leveling off is a ______

Growing Equity

_______ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

Prepayment

Large corporations typically make ______ bids for T-bills so they can purchase larger amounts.

Competitive

A commercial bank can be a lender or a borrower when using repurchase agreements and loans in the Federal Funds market. T/F

True

T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety. T/F

True

Most repo transactions use government securities. T/F

True