RE: FINAL EXAM FIN 366



MULTIPLE CHOICE

Part 1

1.       All of the following are the major services of investment banking firms except

a.       making commercial loans

b.       bringing new security issues to market

c.       trading securities

d.       brokerage

 

2.       Full-service brokerage service includes

a.       origination, underwriting, and sales.

b.       registration of securities, storage of securities, and execution of trades.

c.       execution of trades, investment advice, and margin credit.

d.       cash management service, private placements, and security distribution.

 

3.       All of the following were the objectives of the Glass-Steagall Act except

a.       discouraging speculation in financial markets.

b.       limiting bank mergers when the merger might adversely affect competition.

c.       preventing conflict of interest and self-dealing.

d.       restoring confidence in the commercial banking system.

e.       All of the above were the objectives of the Glass-Steagall Act.

 

4.       The Glass-Steagall Act of 1933 separated

a.       insurance from credit.

b.       investment banking from mutual funds.

c.       investment banking from commercial banking.

d.       insurance from mutual funds.

 

5.       Venture capital investments are characterized by all of the following except

a.       Substantial control over management decisions

b.       Low-risk investments with low returns

c.       A share of capital appreciation

d.       Serves as intermediate financing between founders' capital and the IPO

 

6.       The Federal Reserve System has authority over what area of securities trading?

a.       margin trading

b.       insider trading

c.       exchange market trading

d.       registration of the issue

 

7. Which statement is not true about life insurance companies?

a. they have relatively predictable inflows and outflows.

b. their liabilities are long-term in nature.

c. they invest heavily in short-term highly marketable securities.

d. they sell contracts that offer financial protection against premature death and against living too long.

 

8. Which statement is not true about casualty insurance companies?

a. they are subject to federal income tax.

b. they invest heavily in municipal bonds.

c. they have more predictable cash flows related to claims than life insurance companies.

d. they invest in corporate stock.

 

9. Traditionally, pension funds were:

a. government-insured

b. defined contribution

c. fully contributory

d. defined benefit

 

10. Pension funds whose contributions are not large enough to actually cover the benefits to be paid out when all employees retires are termed:

a. unvested.

b. vested.

c. under funded.

d. funded.

 

11. Keogh plans and IRAs are

a. government sponsored retirement programs.

b. noninsured retirement plans.

c. individual retirement programs.

d. pay-as-you-go programs.

 

12. The major investment area of life insurance companies is , while casualty insurance companies hold more of their investments in .

a. corporate stock; corporate stock

b. corporate stock; government securities

c. corporate bonds; municipal bonds

d. mortgages, municipal bonds

 

13. Which one of the following combinations of pension terms offers the greatest protection for the future retiree?

a. under funded, vested, uninsured

b. insured, fully funded, vested

c. unfunded, private, company managed

d. trustee managed, under funded, and vested

 

14. Social security, formally called OASDHI, stands for

a. Office of Aging Survivors, Disabled and Health Insurance

b. Office of Active Standards for the Disabled, Healthy and Infirmed

c. Old Age, Survivors, Disability, and Health Insurance System

d. Old Age Standards for Disability Health Insurance

 

15. Social security is a _________ pension plan.

a. fully funded

b. private

c. pay-as-you go

d. noncontributory

 

16. Which is the ultimate goal of a commercial bank?

a. long-term growth

b. deposit growth

c. bank safety

d. long-term profit maximization

17. Which of the following is not characteristic of small banks compared to large banks?

a. they have proportionally more fixed assets

b. they have proportionally more agricultural loans

c. they have proportionally less capital

d. they have proportionally more deposits

 

18. The major form of organization for commercial banks in the U.S. is the

a. partnership b. bank holding company c. single charter d. branch

 

19. The largest deposit source of funds for commercial banks is

a. time deposits.

b. demand deposits.

c. U.S. Treasury deposits.

d. interest-bearing transaction deposits.

 

20. Small banks tend to have more ________ and fewer ________ compared to large banks.

a. transaction accounts; time deposits

b. borrowed funds; capital stock

c. time deposits; borrowed funds

d. large time deposits > $100,000; transaction accounts

 

21. Bank holding companies are regulated by the

a. Fed b. FDIC c. OCC d. FTC

 

22. A bank expecting interest rates to rise in the future would prefer to make

a. fixed-rate loans

b. long-term, fixed rate loans

c. floating-rate loans adjusted infrequently

d. floating-rate loans adjusted frequently

 

23. Banks invest in treasuries for all the following reasons except

a. they are marketable

b. they are liquid

c. they provide capital

d. they provide income

 

24. All but one of the following is associated with bank loan securitization activity?

a. the bank provides credit enhancements.

b. the bank provides the source of funds for the loan securitization.

c. the bank originates the loans.

d. the value of the securities sold to investors exceeds that of the securitized loans.

 

25. The fastest-growing U.S. bank holding companies can attribute most of their growth to

a. an increasing number of branches.

b. the rapid growth of deposits from the growing number of households.

c. improved technological financial innovation.

d. merger of banks and bank holding companies.

 

 

Part 2

1. Which of the following can be associated with original objectives of the Fed?

a. coordinate an efficient payments mechanism.

b. provide an elastic money supply.

c. serve as lender of last resort.

d. all of the above

 

2. The primary responsibility of the Federal Open Market Committee (FOMC) is to

a. set monetary policy

b. supervise and examine member banks.

c. guarantee excess reserves to National Banks.

d. enforce margin requirements

 

3. The asset of Federal Reserve banks associated with open market operations is

a. Federal Reserve notes.

b. U.S. government securities.

c. loans to member banks.

d. float.

 

4. The Treasury draws most of its checks upon

a. the Comptroller of the Currency.

b. national banks.

c. Federal Reserve banks.

d. its own required reserves

 

5. For what purposes do depository institutions keep deposits in the Federal Reserve banks?

a. for clearing checks

b. to satisfy reserve requirements

c. to earn interest

d. a and b

 

6. Reserve requirements apply to

a. National banks

b. State banks

c. Savings-and-loan associations

d. All of the above

 

7. The Fed’s primary tools of monetary policy include all the following except

a. changing the discount rate.

b. open market operations.

c. adjusting reserve requirements.

d. changes in the Federal Funds rate.

 

8. Which of the following was a responsibility of the early Federal Reserve System?

a. to control the money supply

b. to safeguard the national payment system

c. to establish a more rigorous bank supervisory system

d. all of the above

 

9. The Federal Reserve System established

a. a system for federal chartering of banks.

b. a system for controlling bank note issuance.

c. a source of liquidity for the banking system.

d. the beginning of demand deposit accounts.

 

10. The monetary base will decrease when:

a. banks withdraw currency from the Fed.

b. the Fed makes loans at the discount window.

c. the Fed sells securities on the open market.

d. the Fed buys securities on the open market.

 

11. The velocity of money measures:

a. the rate of growth of the money supply.

b. the relationship between the monetary base and the money supply.

c. the relationship between the money supply and economic activity.

d. all of the above.

 

12. The money supply

a. is exclusively controlled by the Fed.

b. is smaller than the monetary base

c. excludes any interest-bearing deposits

d. none of the above.

 

 

13. An increase in the assets of Federal Reserve banks

a. decreases the monetary base.

b. increases the monetary base.

c. has no effect on monetary base.

d. always decreases another Federal Reserve Bank asset.

 

14. Unemployment should fall if

a. wages increase and people expect prices to rise, too.

b. wages increase and people expect prices to be stable.

c. interest rates rise more than prices are expected to rise.

d. the money supply decreases.

 

15. Monetary policy impacts the economy

a. by affecting real spending directly.

b. by affecting real spending through the financial sector.

c. by changing interest rates and the cost of housing.

d. all of the above

 

16. Which of the following has influenced U.S. banking structure?

a. concern for concentrated financial power

b. historical experience with bank failures and panics

c. states vs. federal authority

d. all of the above

 

17. Regulations provide financial institutions certain benefits such as

a. reducing the chance of failure.

b. increasing the cost of funds.

c. increased labor cost to comply with regulations.

d. increased profit from the added compliance costs.

18. All but one of the following is a purpose of regulating financial institutions:

a. to provide stability of the money supply

b. to serve certain social objectives

c. to reduce barriers to entry

d. to offset the moral hazard incentives to protect the deposit insurance fund

 

19. All but one of the following is associated with bank failure:

a. banks hold illiquid assets and reserves that are but a fraction of total deposits.

b. assets may rise in value more quickly than liabilities when interest rates change.

c. excessive loan losses may erode net worth.

d. asset values fall below the value of liabilities.

 

20. Most of the banks in the U.S. are _________ chartered, __________ of the Federal Reserve System and are insured by the _________.

a. state; members; FDIC-DIF

b. national; members; OCC-DIF

c. state; nonmember; FDIC-DIF

d. national; member; FRB-DIF

 

21. Bank failures are considered to be more important to the economy because

a. failure of a single bank induces fear about the solvency of other banks.

b. they reduce the money supply in the economy.

c. a large number of people in a community lose their liquid wealth.

d. all of the above

 

22. Which bank regulatory agency charters national banks?

a. the Comptroller of the Currency

b. the Federal Reserve

c. the FDIC

d. individual state agencies

 

23. Federal deposit insurance has

a. prevented bank depositor panics, but not bank failures.

b. prevented bank panic and bank failures.

c. prevented bank failures, but not bank depositor panic.

d. not prevented bank depositor panics, but has eliminated bank failures.

 

24. Financial institutions are regulated for the following reason(s):

a. they provide essential financial services to consumers and businesses.

b. there is a need to control the money supply.

c. government has promised to insure deposits.

d. all of the above

 

 

25. The purpose of a bank examination is to

a. verify the bank's financial statements according to generally accepted accounting principles.

b. maintain proper control of the bank by FDIC.

c. promote and safety, soundness, and compliance with regulations.

d. make sure the bank is not taking any risk.

 

 

 

Part 3

1.     Investors in the money markets are generally willing to take which of the following risks?

a.       default risk

b.       interest rate risk

c.       liquidity risk

d.       all of the above

e.       none of the above

 

2.     Small investors are likely to invest in the money market through ____.

a.       directly; commercial paper

b.       locally; their credit union

c.       indirectly; negotiable CDs

d.       indirectly; money market mutual funds

 

3.     Federal Funds are typically

a.       Treasury deposits.

b.       Federal Reserve assets.

c.       commercial bank deposits at the Federal Reserve.

d.       overnight interbank loans settled in immediately available funds

 

4.     Issuers of commercial paper tend to be

a.       large financial and nonfinancial firms

b.       firms with high credit risk

c.       small banks

d.       wealthy individuals

e.       both a and b

 

5.     Which of the following money market securities is backed by specified collateral?

a.       negotiable CDs

b.       banker's acceptances

c.       repurchase agreements

d.       commercial paper

 

6.     The T-bill rate quoted by the Federal Reserve banks is the

a.       bank discount rate.

b.       the true rate.

c.       effective annual rate.

d.       bond equivalent rate.

e.       the primary rate

 

7.     The Wall Street Journal publishes T-bill price (bid/ask) based on the ___________ rate; with the __________ rate provided as the quoted (ask) yield on the T-bill.

a.       bond equivalent; bank discount

b.       effective annual; bank discount

c.       bank discount; bond equivalent

d.       bank equivalent; bank discount

 

8.     Yields on three-month T-bills are more similar to

a.       Two-year Treasury notes rates.

b.       Ninety-day commercial paper rates.

c.       federal funds rates.

d.       Aaa-rated corporate bond rates.

9.     Which of the following do not participate in the money markets?

a.       commercial banks

b.       the Federal Reserve

c.       U.S. Treasury dealers

d.       corporations

e.       All of the above participate in the money markets.

 

10.   The biggest supplier of funds in the capital markets are

a.       financial institutions

b.       state and local governments

c.       federal government

d.       households and non-profit organizations

 

11.              The fastest growing debt sector in the U. S. is

a.       Treasury debt

b.       federal agency debt

c.       mortgage debt

d.       corporate debt

 

12.   The largest investor in municipal bonds are

a.       property and casualty insurance companies

b.       commercial banks

c.       households

d.       mutual funds

e.       pension funds

 

13.              Privately placed securities

a.       have to be registered with SEC.

b.       never trade in the secondary market.

c.       can only be sold to large, sophisticated investors (e.g., financial institutions).

d.       cannot be originally sold to less than 35 investors.

e.       both c and d.

 

14.              In the 1980s, low credit quality businesses were able to first issue their new bond securities in which market?

a.       municipal bond market

b.       junk bond market

c.       investment-grade bond market

d.       secondary market

e.       subprime mortgage market

 

15.              The demand for junk bonds came primarily from

a.       life insurance companies

b.       savings & loans association

c.       pension funds

d.       all of the above

 

16.              Life insurance companies and pension funds buy corporate bonds for which two major reasons?

a.       tax sheltering and high yield

b.       liquidity and high after-tax returns

c.       liability maturity matching and high after-tax returns

d.       low risk and liquidity

 

17.              The most important regulator in the U.S. capital markets is the

a.       Federal Reserve System

b.       Treasury Department

c.       National Association of Security Dealers (NASD)

d.       Federal Deposit Insurance Corporation

e.       Securities and Exchange Commission

 

18.              Which of the following is not associated with characteristics of common stock?

a.       residual claim on income and assets

b.       proxy

c.       cumulative dividends

d.       dual-class stock

 

19.              The term shareholder equity means

a.       a right to dividends.

b.       a contractual relationship with a corporation.

c.       an ownership claim.

d.       a prior claim on income and assets.

 

20.              Security exchanges provide a valuable function in that they

a.       create interest in stocks.

b.       increase the marketability of securities.

c.       provide a legal way to gamble.

d.       supply money to deficit spending units.

e.       both a and d

 

21.              Regulators provide a valuable function for the capital markets because they

a.       try to keep the market participants honest.

b.       try to prevent excessive speculation from destabilizing the market.

c.       make sure all pertinent information about publicly traded securities is disclosed.

d.       all of the above

 

22.              The New York Stock Exchange is a(n) ________ market.

a.       auction

b.       exchange

c.       secondary

d.       all of the above

 

23.              The over-the-counter market trades ______ stocks than exchanges, and exchanges tend to list ________ companies.

a.       less; smaller

b.       less; larger

c.       more; larger

d.       more; smaller

 

24.              The primary federal regulator of stock markets is

a.       the Federal Reserve.

b.       the Federal National Securities Corporation.

c.       the National Association of Securities Dealers (NASD).

d.       the Securities Investor Protection Corporation.

e.       the Securities and Exchange Commission.

 

25.              The federal legislation that made the Securities and Exchange Commission responsible for the broad oversight of securities markets was

a.       The Securities Act of 1933.

b.       The Securities Exchange Act of 1934.

c.       The Investment Company Act of 1940.

d.       The National Securities Company Act of 1932.

e.       none of the above.

 

GENERAL QUESTIONS

 

1. What was the purpose of the Glass-Steagall Act?

 

2. Why are financial markets regulated, and who is the principal U.S. regulator?

 

3. What were the four goals of the Federal Reserve Act? Have they been met today?

 

4. What is market risk? How does this risk affect the operating performance of institutions? What actions can be taken by the FI management to minimize the effects of this risk?

 

5. What is credit risk? Which types of FIs are more susceptible to this type of risk? Why?

 

 

 

 

 

 

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