Midterm 1 WQ08

Midterm 1 WQ08 KEY

1. Financial intermediaries specialize in the production of money.

FALSE
2. The brokerage function of an FI reduces transaction and information costs between a corporation and individual
which encourages a lower rate of savings than would otherwise exist.
FALSE
3. Privately placed bonds and equity can be traded on the secondary market because of amendments to Regulation
144A.
TRUE
4. Negotiable certificates of deposits are distinguished from fixed time deposits by their negotiability and active trading
in the secondary markets.
TRUE
5. The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets.
TRUE
6. In recent years, the number of commercial banks in the U.S. has been increasing.
FALSE
7. The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and
relatively less credit risk of their assets.
TRUE
8. Life insurance companies also manage private pension plans which include the offer of guaranteed investment
contracts (GICs).
TRUE
9. In group life insurance, lower rates can be offered because of cost economies as a result of mass administration of
plans and reduced selling and commission costs.
TRUE
10. The Insurance Regulatory Information System (IRIS) is a standardized exam to measure the profitability of insurance
companies.
FALSE
11. The policy reserves on the liability side of the balance sheet of a life insurance company are estimated based on
actuarial assumptions to meet the expected future liability commitments on present contracts.
TRUE
12. Activity and performance trends in the investment banking industry are highly correlated with general economic
expansions and recessions.
TRUE
13. Securities firms have equity ratios that are lower than those for commercial banks because their balance sheets
contain a larger portion of liquid assets.
TRUE
14. SEC Rule 415 allows corporations to register their new issues with the SEC up to 2 years in advance.
TRUE
15. National full-line firms provide business service to both retail customers and corporate customers.
TRUE

16. The benefits of greater management attention in load funds do not outweigh the cost disadvantages of the load fee.
TRUE
17. In terms of asset size, the mutual fund industry ranks ahead of the commercial banking industry.
FALSE
18. Daily marking-to-market refers to the process of determining the value of mutual fund shares each per day.
TRUE
19. Finance companies have relied primarily on commercial paper and other debt sources to finance asset growth.
TRUE
20. Finance companies now rely more heavily on bank loans as a source of financing than in 1977.
FALSE
21. Loan shark finance companies prey on desperate, higher-risk customers, charging unfairly exorbitant interest rates.
TRUE
22. A lower level of equity capital increases the risk of insolvency to a financial institution.
TRUE
23. Funding a portion of assets with equity capital means that hedging risk does not require perfect matching of the assets
and liabilities.
TRUE
24. Contingent claims are assets and liabilities that will come into existence at a future time often at the insistence of a
customer or second party.
TRUE
25. Which of the following statements is false?
a.
A financial intermediary specializes in the production of information.
b.
A financial intermediary reduces its risk exposure by pooling its assets.
c.
A financial intermediary benefits society by providing a payments mechanism.
d.
A financial intermediary acts as a broker to bring together funds deficit and funds surplus units.
E
A financial intermediary acts as a lender of last resort.
26. The reason FIs can offer highly liquid and low price-risk contracts to savers while investing in relatively illiquid and
higher price-risk assets is
a.
because diversification allows an FI to predict more accurately the expected returns on its asset
portfolio.
b.
significant amounts of portfolio risk are diversified away by investing in assets that have correlations
between returns that are less than perfectly positive.
c.
because individual savers cannot benefit from risk
diversification.
D
All of the above.
e.
Only a and c above.
27. 56 . The federal government extends a safety net to FIs consisting of
a.
deposit insurance, discount window borrowing, and reserve
requirements.
B
deposit insurance and discount window borrowing.
c.
deposit insurance, unemployment insurance, and discount window
borrowing.
d.
deposit insurance, open market operations, and discount window
borrowing.
e.
deposit insurance protection.

28. Asset transformation consists of

a.
receipt of securities across electronic payments
systems.
B
altering the liquidity and maturity features of funds sources used to finance the FI's asset
portfolio.
c.
granting loans to transform funds deficit units into funds surplus
units.
d.
None of the
above.
e.
All of the above.
29. Why do households prefer to use FIs as middle persons to invest their surplus funds?
a.
Since FIs are very efficient, the middle person's transaction costs are quite low.
b.
To achieve the benefits of diversification.
c.
The FI has can invest in information less costlier than individual
households.
D
All of the above.
e.
Answers b and c.
30. National-chartered commercial banks are regulated by
a.
the FDIC only.
b.
the FDIC and the Federal Reserve
System.
c.
the Federal Reserve System only.
D
the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
e.
the Federal Reserve System and the Comptroller of the Currency.
31. The largest liability in U.S. commercial banks' portfolios as of year-end 2003 was
a.
investment securities.
B
non-transaction accounts
c.
transaction
accounts.
d.
borrowings
e.
cash.
32. The strong performance of commercial banks during the early 2000s is due to
a.
the stability of interest rates during this
period.
B
the ability of banks to shift credit risk from their balance sheets to financial
markets.
c.
the contraction of the number of banks and
thrifts.
d.
the growth in the number of thrifts and credit
unions.
e.
all of the above.
33. A primary advantage of belonging to the Federal Reserve System is
a.
direct access to the federal funds wire transfer network for interbank borrowing and
lending.
b.
the lower reserves required under the Federal Reserve
System.
c.
direct access to the discount borrowing window of the
Fed.
d.
answers a and
b.
E
answers a and c.
34. Losses are higher for lines that are exposed to
a.
long tails and low
inflation.
B
long tails and high

c.
d.
e.

inflation.
short tails and low
inflation.
short tails and high
inflation.
short tails and no
inflation.

35. An annuity is a financial contract that

a.
is used to build up a fund.
b.
pays only fixed returns to groups of
employees.
C
is used to liquidate a
fund.
d.
pays only variable returns to
individuals.
e.
none of the above are correct.
36. The surrender value of an insurance policy is
a.
the expected payment commitment on existing policy
contracts.
b.
a fund established and held separately from the companys other assets.
C
the cash value paid to the policyholder if the policy is surrendered before it
matures.
d.
b and c of the above.
e.
a and b of the above.
37. An insurance company collected $31.0 million in premiums and disbursed $28 million in losses. Loss adjustment
expenses amounted to $5.0 million. The firm is profitable if
a.
if dividends paid to policy holders is $4 million and income generated on investments is $4
million.
B
if dividends paid to policy holders is $10 million and income generated on investments is $14
million.
c.
if dividends paid to policy holders is $6 million and income generated on investments is $2
million.
d.
if dividends paid to policy holders is $10 million and income generated on investments is $4
million.
e.
if dividends paid to policy holders is $4 million and income generated on investments is $2
million.
38. The following is not considered a trading activity of securities firms.
a.
Position trading
b.
Pure
arbitrage
C
Liquid trading
d.
Risk arbitrage
e.
Program trading
39. Creating a secondary market in an asset by a securities firm involves the function of
a.
cash management.
b.
investing.
C
market making.
d.
trading.
e.
investment banking.
40. Which of the following is true?
A
Investment bankers earn fees based on the success of their placements when they underwrite on a bestefforts basis.
b.
Investment bankers earn fees based on the success of their placement when they underwrite on a firmcommitment basis.
c.
With best-efforts underwriting, investment bankers act as principals where they purchase the securities
from the issuer and sell them at a higher price.
d.
Answers a and b.
e.
Answers b and c.
41. Offering bank deposit-like accounts to individual customers by a securities firm involves
a.
the function of
investing.
B
the function of cash management.

c.
d.
e.

the function of market

making.
the function of
trading.
the function of investment
banking.

42. The number of funds and assets size of the mutual fund industry have grown dramatically since 1970 because of the
introduction of
a.
money market mutual funds in
1972.
b.
tax-exempt money market mutual funds in 1979.
c.
special-purpose equity, bond, and derivative funds.
D
All of the above are
correct.
e.
Only two of the above are
correct.
43. Mutual funds that purchase Treasury bills, bank certificates of deposit, commercial paper, and other short-term
securities would be classified as
a.
contractual institutions.
b.
investment institutions.
C
money market funds.
d.
securities
dealers.
e.
PC insurance companies.
44. 12b-1 fees
a.
are determined as a small percentage of the funds investable assets.
b.
are annual fees to cover distribution and marketing costs of the
fund.
c.
have been approved by the SEC.
d.
Two of the above are correct.
E
All of the above are
correct.
45. Open-end mutual funds
a.
requires that NAV consider the amount of discount or premium in the share value.
b.
calculate the NAV based on the total value of assets held divided by the number of shares outstanding.
c.
experience fluctuations in the number of shares outstanding on a daily
basis.
d.
include all of the
above.
E
include only b and c of the
above.
46. The returns obtained by investors of mutual funds include the following except
a.
interest income earned on
assets.
b.
dividend income earned on
assets.
c.
capital gains on assets sold by the
fund.
d.
capital appreciation in the underlying value of the assets held in the
portfolio.
E
tax benefits from tax-exempt status of mutual
funds.
47. In financing their asset growth, finance companies
a.
have relied more on bank loans over time.
B
rely heavily on short-term commercial paper.
c.
use less equity capital than commercial
banks.
d.
do not issue demand deposits, but can issue time deposits.
e.
use very small amounts of long-term debt and
bonds.

48. Which of the following is false?

a.
The fastest growing area of finance companies in recent years has been in the area of leasing and
business loans.
b.
Finance companies saw an increase in leasing activity as a result of the 1981 Economic Recovery Act.
C
Finance companies rely on short-term commercial paper and deposits to finance their
assets.
d.
Finance companies rely on short-term commercial paper and long-term debt to finance their
assets.
e.
Finance companies are now the largest issuers of commercial paper in the U.S.
49. A company that specializes in making installment loans to consumers would best be categorized as a
a.
sales finance
institutions.
B
personal credit institutions.
c.
business credit
institutions.
d.
lease finance company.
e.
factoring company.
50. Which of the following is not a type of finance company?
a.
Sales finance
institutions.
b.
Personal credit
institutions.
c.
Business credit institutions.
d.
A captive finance company.
E
All of the above are types of finance
companies.
51. Finance companies charge different rates than do commercial banks which
a.
tend to be higher than bank rates.
b.
often reflect a more risky borrower.
c.
cause some finance companies to be classified as subprime
lenders.
d.
must meet state usury law
guidelines.
E
All of the above are true.
52. The risk that many borrowers in a particular country fail to repay their loans is
a.
credit
risk.
B
sovereign risk.
c.
currency
risk.
d.
liquidity
risk.
e.
interest rate risk.
53. Unanticipated diseconomies of scope are a result of
A
technology
risk.
b.
interest rate risk.
c.
credit
risk.
d.
foreign exchange
risk.
e.
off-balance sheet risk.
54. An advantage FIs have over individual household investors is that they are able to diversify away credit risk by
holding a large portfolio of loans. This reduces
A
firm specific credit

b.
c.
d.
e.

risk.
systematic credit
risk.
interest rate risk.
market risk.
political
risk.

55. The potential exercise of unanticipated contingencies can result in

a.
technology
risk.
b.
interest rate risk.
c.
credit
risk.
d.
foreign exchange
risk.
E
off-balance sheet risk.
A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 percent annually. It
has assets of $5 million with an average maturity of 5 years earning interest rates of 6 percent annually.
56. To what risk is it exposed?
a.
reinvestment risk
b.
refinancing
risk.
c.
interest rate risk.
d.
Answers a and c.
E
Answers b and c.